Last month, economist William Baumol passed away at the age of 95. His death was universally mourned by the economics community, many of whom shared the view that he had passed before receiving a much-deserved Nobel Prize. One of us had the great privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even in his later years.
Among his many contributions to economics, Baumol is most famously known for his “Cost Disease”, which explains why high-productivity industries raise costs and therefore prices in low-productivity industries. This insight is particularly relevant now, as economic activity has shifted into low-productivity services like healthcare and education, where price increases are devouring public and household budgets, and whose continued low productivity has weighed down U.S. productivity growth overall.
However, a lesser-known work of Baumol’s is equally relevant today, and may also help explain America’s productivity slump. Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work.