What is Baumol disease? Can artificial intelligence cure “Baumol disease”?

liu, tempo Date: 2021-09-27 13:00:29 From:ozmca.com
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At present, artificial intelligence has become one of the hottest topics in the field of science and technology and economy. The reason why it is popular is mainly because it is bringing or will bring subversive revolution to the economy and society. To explore the development of artificial intelligence from the perspective of economics, we mainly start with the substitution of artificial intelligence for labor force, which will inevitably involve the famous problem of “Baumol disease“.


Baumol, an American economist, constructed a two sector unbalanced growth model in 1967. The model successfully explained the changes of industrial structure and economic growth trend of major economies in most of the 20th century. Baumol divides the macro-economy into the progressive sector with positive labor productivity growth rate and the stagnant sector without labor productivity growth rate, and obtains under several key assumptions: with the passage of time, the unit product cost of the progressive sector will remain unchanged (here refers to labor cost), while the unit product cost of the stagnant sector will continue to rise. Therefore, If consumers’ demand for the products of the stagnant sector is not completely price elastic, the rising unit product cost of the stagnant sector will urge consumers to reduce their demand for the products of the sector, which will eventually lead to the shrinking and disappearance of the stagnant sector.


Assuming that there is no price elasticity in the product demand of the stagnant sector, although the unit product cost of the stagnant sector continues to rise, there will still be a continuous inflow of labor to the sector, so that the sector will not shrink, but will gradually absorb a large number of labor, which is due to the continuous transfer of labor from the progressive sector to the stagnant sector, Therefore, the economic growth rate of the whole country will gradually become zero, which is the famous Baumol cost disease and growth disease, referred to as Baumol disease for short.


Baumol also pointed out that the progressive sector mainly refers to the manufacturing industry, while the stagnant sector refers to the service industry, including education, municipal services, performing arts, catering, entertainment and leisure. Baumol pointed out, for example, that in the performing arts market, it took four people to play Mozart’s Quartet 300 years ago, but it still needed four people to play the same song 300 years later, Labor productivity has never changed.


Baumol disease theory is concise and can also explain the high cost of service industry in market economy countries. However, the hypothesis of Baumol’s theoretical model in 1967 is too simple. For example, there are only two departments, the service industry is only the final product, and the open economy is not considered. Therefore, some subsequent scholars expanded and tested Baumol disease from the theoretical and empirical levels respectively. The theoretical research is mainly the expansion of Baumol disease model. Based on the previous research, Baumol (1985) expanded the model into a three sector model in order to overcome the limitation of treating the whole service industry as a stagnant sector, and introduced the progressive stagnant sector in addition to the progressive sector and stagnant sector.


In addition, Ngai and Pissarides (2007) theoretically extended Baumol disease more generally. On the basis of Baumol, they assumed that there were n departments, and each department had different labor productivity growth rates. Baumol (1985), Ngai and Pissarides (2007) obtained basically the same conclusion as Baumol (1967) after model expansion. Oulton (2001) assumes that the service industry is no longer the final product sector, but the sector that provides intermediate input for the secondary industry. Therefore, it comes to the same conclusion as Baumol in the change of industrial structure – the labor force continues to flow from the secondary industry to the service industry, but at the same time, it comes to a conclusion different from Baumol in terms of economic growth – the final economy will not stagnate.


In terms of empirical test, a class of studies believe that Baumol disease exists in major developed countries. Baumol (1985) used the historical data of the United States from 1947 to 1976 to conduct empirical test and found that the actual output share of the progressive sector and the stagnant sector in the United States was quite stable during this period. Therefore, with the rise of relative prices, the expenditure of the stagnant sector service industry and the share of labor force increased sharply. Nordhaus (2008) and hartwing (2011) found that both the United States and the European Union had Baumol cost disease and growth disease by using the data of the United States and the European Union from 1948 to 2001.


Baumol disease


Another kind of research found that developed countries such as the United States do not have Baumol cost disease and growth disease. Triplett and Bosworth (2004) found that the average labor productivity of the service production industry increased by 2.3%, while that of the tangible product production industry was only 1.8%, using the data of the United States from 1995 to 2001. They believed that there was no Baumol disease in the United States. Timmer et al. (2007) conducted an empirical analysis using the EU KLEMS database and found that the labor productivity of service industry in Greece, Ireland and the Netherlands has accelerated since 1995. Their empirical results also confirmed that there is no Baumol disease in these countries.


From the two sector model proposed by Baumol (1967) to the three sector model, and then to the general N sector model, the key assumption in the above research is the difference in the progress rate of labor productivity between different sectors, which is also the focus of debate among different scholars. However, with the development of science and technology, the service industry gradually began to divide on a large scale, Under the large-scale application of ICT technology, the labor productivity of some service industries increases rapidly, and its growth rate even exceeds the growth rate of manufacturing labor productivity as a progressive sector, such as finance, telecommunications, commercial circulation and other industries.


At the same time, some service industries still have slow labor productivity progress and rising costs, such as domestic services, beauty salons, medical diagnosis, education and so on. According to Baumol’s example, in the field of educational services, it took a semester to teach a course of economic principles 30 years ago, but it still took a semester to teach the same course 30 years later.


30 years ago, it took a hairdresser 20 minutes for men to have a haircut, 30 years later, the same Barber Service still needs a barber for 20 minutes. It can be seen that the labor productivity of these traditional service industries has made slow progress, so these traditional service industries still belong to the typical stagnant sectors described by Baumol. Of course, driven by technology, the scope of these traditional sectors may be narrowed.


No matter when Baumol put forward the theory, or in recent decades, Baumol disease appears more or less in many market economy countries, especially in developed countries. For example, the maintenance cost of many electrical appliances or equipment is higher than the replacement cost, because maintenance is a traditional service industry, and the production of a new product belongs to manufacturing industry. Another example is that ordinary cleaners can generally and easily afford family cars, because the work of cleaners belongs to the traditional service industry, while automobile production belongs to the manufacturing industry.


However, the author believes that the emergence and development of artificial intelligence will completely change the basis of Baumol disease.


Because artificial intelligence can learn by itself and even analyze, think and judge like human beings, those traditional jobs that can only be completed by labor can be easily and efficiently completed by artificial intelligence now or in the future. At present, there have been AI journalists, AI translators, AI financial contract analyzers, AI fund managers, driverless cars, etc. Moreover, artificial intelligence is developing at an unprecedented speed. In the near future, it may not be doctors who provide us with diagnostic services, but artificial intelligence robots, which can accurately and quickly complete the inspection and diagnosis of service objects.


In terms of educational services, it will no longer be teachers who teach students, but artificial intelligence teachers. This kind of artificial intelligence education can provide teaching services anytime and anywhere according to the personality of different students. Perhaps before long, the article being written by the author can be completed by artificial intelligence, with faster speed and more in-depth analysis, Various services that people go to the municipal hall will also be replaced by artificial intelligence. Therefore, in the future, professional posts such as bank cashier, catering counter, welcome reception, mall sales service personnel, teachers, doctors, financial analysts, accountants and lawyers may be replaced by artificial intelligence on a large scale.


Through these examples, it can be seen that artificial intelligence has replaced not only modern service industries with high labor productivity growth rate, such as finance and accounting, but also industries with slow or stagnant labor productivity growth, such as education, medical treatment, catering, performing arts, etc. Therefore, the emergence of artificial intelligence has led to a sharp increase in labor productivity in all industries, and many industries will not even have labor force. That is to say, in the era of artificial intelligence, no industry is the stagnant department or gradual stagnant Department referred to by Baumol, which completely subverts the foundation of Baumol’s disease.


After artificial intelligence replaces labor on a large scale, due to the continuous and rapid growth of labor productivity in all service industries and manufacturing industries, according to Baumol’s reasoning, the unit cost of products and services will continue to decline, and the macro-economy will no longer tend to stagnation, but will continue to grow. Therefore, the development and wide application of artificial intelligence will eradicate Baumol’s disease.


Artificial intelligence not only cures Baumol’s disease, but also brings some new problems that need to be studied and solved, such as how to solve the problems of unemployment and income distribution after artificial intelligence replaces labor in a wide range. Similarly, the development of artificial intelligence will also make some economic theories face new development and rewriting.


For example, according to the above analysis, the wide application of artificial intelligence will not only lead to a significant increase in unemployment, but also promote sustained and rapid economic growth, that is, the coexistence of sustained and rapid economic growth and rapid unemployment rate will change the classical economic theory, At this time, the problem of unemployment and income distribution may become a problem to analyze. When the problem of income distribution is solved, people may no longer pay attention to the problem of unemployment.

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