Actually Baumol’s Effect on the liberal mind is exactly nothing, zilch, zero, … . Self-styled thinkers of the Left are constantly going on about workers not being paid enough as they come forward with all kinds of dodgy arithmetic showing how capitalists are making a greedy killing at the expense of their employees. About fifty years ago a couple of economists – William Baumol and William Bowen - explained what happens when wage levels become disconnected from productivity, and here we’ll take a brief look at the result of that. (This post is really an addendum to ‘The Liberal Mind – Wealth Transfer on Steroids’ and its extended comment stream.)
Before going on I would recommend that readers of the collectivist persuasion (liberal, progressive, socialist, communist, statist, …) give this posting a pass since it will only give rise to additional cognitive dissonance where enough is already in residence. The purpose of this post is to familiarize the reader who already intuitively understands the basics of Baumol’s Effect (also known as Baumol’s Disease) but wishes to know its more quantitative details, and attach a label to it for effective communications. I have been remiss in not having posted this much earlier, and thank a reader for his recent nudge.