Baumol's Cost Disease: Why Goods Are Cheap and People Are Dear

Chinese people who have lived abroad for a long time often share a heartfelt observation upon returning to China: life there is incredibly convenient. Ordering food delivery, hiring a courier, fixing a pipe, moving furniture — with just a tap on your phone, the world moves for you in half an hour… and it costs very little. The American middle class does not order takeout often; a more common practice is to call the restaurant to order, and then drive over to pick it up themselves. This is not out of a love for physical labor, but because delivery fees are simply too expensive. Services like haircuts or plumbing cost several times, or even over ten times, what they do in China.

If you earn $200,000 a year in the U.S., the convenience of your daily life is probably not as high as someone earning 200,000 RMB a year in China.

Does this mean the RMB is heavily undervalued and the USD is heavily overvalued? Who is actually the developed nation now?

Before rushing to declare a victory, let’s recalculate from a different perspective: what if you are not the consumer of takeout, but the delivery courier?

In China, a courier earns about 5 to 7 RMB per delivery, while a new high-end smartphone costs 7,000 RMB. This means they have to complete about a thousand deliveries to buy a good phone. In the U.S., a delivery worker earns about $7 to $10 per delivery including tips; a smartphone costs $1,000, so they only need to run a hundred or so deliveries.

This is, of course, just one piece of the puzzle, but if your goal is to “deliver takeout to save up for a phone,” doing it in the U.S. is clearly much easier.

The logic here is that how convenient your life feels depends not only on how high your absolute income is, but also on how cheap other people’s time is.

This is not a matter of culture, institution, demographics, who works harder, or even fairness: expensive services in the U.S. are inevitable, and China is heading in the same direction.

Any society that undergoes economic growth and becomes wealthy will inevitably experience a world where goods become cheaper and people become dearer. Consequently, your subjective feeling might be: “How is it that as the people around me get richer, my life becomes less convenient?”

“世纪图表”背后的双重世界 #

Let us first look at the destiny of various consumer prices in the United States.

American economist Mark J. Perry created a famous chart [1], which is updated annually and has come to be known as the “Chart of the Century” —

The chart above tracks the nominal price changes of various consumer goods and services in the U.S. between 2000 and 2025. At first glance, it looks as if modern civilization has been split in two —

On the one side, goods are getting cheaper. For instance, for televisions — adjusting for quality increases like higher resolution and better picture — prices dropped by 98%. The costs of software, toys, and cell phone services have also fallen sharply; clothing has barely risen, and new car prices rose by 24.7%, which is far below the overall inflation rate of nearly 90%.

On the other side, services are getting much more expensive: hospital services rose by 271%, college tuition rose by 194%, college textbooks rose by 180%, and childcare rose by 152%…

On one hand, material goods are overwhelmingly abundant; on the other hand, the burden in many key areas of life has grown heavier.

In fact, this is not contradictory. This is a very rigid law of modern economics called “Baumol’s Cost Disease.”

什么是鲍莫尔成本病？ #

The theory of Baumol’s Cost Disease was first proposed by American economists William J. Baumol and William G. Bowen in 1965 [2].

Their original inspiration came from the performing arts. Let us look at a classic example: Beethoven’s String Quartet No. 14.

When this piece was first performed in 1828, it required four professional musicians to play for 40 minutes. Fast forward two centuries to 2026: for the same piece, you still need four people to play for 40 minutes. You cannot mechanize this; this is the only way to perform it to give the audience an authentic live music experience.

Yet, during the same period, the outside world experienced explosive productivity growth. Today, an industrial worker, aided by machines, software, and global supply chains, can produce vastly more goods than in the past. Having created so much wealth, their wages naturally rise. The benefit of increased productivity is that workers’ wages go up while product prices go down, making things affordable for everyone, right?

But then a paradox arises: what about those four musicians?

Their productivity has not increased at all, so theoretically their wages shouldn’t rise. However, if their wages do not rise, they will leave the profession. Thus, to keep them in the theater, we must passively raise their wages. The same applies to doctors, teachers, nannies, gardeners, and plumbers.

Baumol divided the economy into two sectors [3]: the “progressive sector” — including manufacturing, software, and logistics — where productivity rises, unit costs fall, and wages rise; and the “stagnant sector” — including arts, healthcare, education, and haircuts — where productivity is hard to increase, yet wages must still rise in tandem with the rest of society.

The result is that the relative cost of the stagnant sector — which is primarily driven by labor wages — is destined to rise inexorably. You notice that services have become incredibly expensive. This is Baumol’s Cost Disease.

医疗与教育为何成为预算黑洞？ #

The impact of Baumol’s Cost Disease on society is profound.

First, in terms of consumption habits, people increasingly prefer “replacing over repairing.”

Decades ago, when clothes were torn, you would find a tailor to mend them; when appliances broke down, you would hire a technician to fix them. Now, when most things break, it is more economical to replace them with new ones — this is not wasteful, it is cost-effective. If a car gets dented, replacing the door with a new one does not cost much — new doors are stamped out by massive scale machines in factories — but hiring a mechanic to hand-hammer a dent flat is prohibitively expensive. In reality, if the damage is even slightly severe, insurance companies will simply write you a check to buy a new car and scrap the old one.

Second, healthcare and education have become budget black holes.

Decades ago, medical care and schooling were not free either, but in most people’s memory, they were certainly not the deep source of middle-class anxiety they are today.

In 2024, U.S. healthcare spending reached approximately $5.3 trillion, accounting for 18% of GDP — a heavy burden for both the government and citizens. But do not assume healthcare is cheap in China. According to the National Health Commission, China’s total health expenditure in 2024 was 9.09 trillion RMB, accounting for 6.7% of GDP — but it is growing very rapidly.

While there are industry protections, rent-seeking, inefficiencies, and rising demand as living standards improve, the most fundamental reason is Baumol’s Cost Disease [4]. A doctor’s time spent face-to-face with a patient, or a teacher’s energy spent grading essays — you cannot use machines to increase their efficiency a hundredfold. Today’s hospitals can cure diseases that were untreatable in the past, and today’s teachers are highly qualified, but because medical care and education still require a real person’s time, these two sectors remain stagnant.

Consequently, because stagnant sectors appear increasingly expensive and occupy a larger share of budgets, social labor and expenditure will flow more and more into these sectors.

This makes the entire economy look as if it is slowing down, as if it has caught a disease.

While Chinese investments are concentrated in manufacturing and highly specialized fields, Americans are handing over more and more of their money to doctors, lawyers, universities, and public services. Looking from the outside, one might wonder if the U.S. is severely ill.

But that is the destiny of an affluent society.

现代社会的稀缺：从“物”到“人” #

We must clarify a misunderstanding. When we say Baumol’s Cost Disease makes healthcare and education increasingly expensive, we do not mean that society as a whole can no longer “afford” these services, or that society has become poorer. Quite the contrary, in his later years, Baumol particularly emphasized [5] that it is precisely because society as a whole has become extremely wealthy that people can afford these increasingly expensive services.

This is like a household that used to earn 10,000 RMB a month and spent 1,000 RMB on education (10%); now, because they earn 30,000 RMB a month, they have more than enough for appliances and daily goods, so they are willing to spend more on education, spending 6,000 RMB a month on tutoring for their child (20%). The proportion of education has indeed increased, and its absolute price is more expensive, but their life is still richer than in the past.

The reality is that today’s poor do not suffer more than the poor of the past; their suffering is just structured differently.

In the past, people were cheap and goods were expensive. A poor person might not have been able to afford a high-quality coat, but they could easily find someone to run an errand for them. In wealthy modern societies, goods are cheap and people are dear. Today’s poor can easily buy large high-definition TVs, smartphones, decent-looking clothes, and ultra-processed food, but they cannot afford good doctors, top-tier schools, premium lawyers, or quality care.

In this sense, perhaps Baumol’s Cost Disease should not be called a “disease” at all; it is simply a phase that society must inevitably go through.

Modernization did not eliminate scarcity; it merely shifted scarcity from goods to people.

In this light, your sense of “wealth” depends largely on how much of other people’s service time you can command.

An interesting rule of thumb is that the larger the wealth gap in a place, the more delicious the restaurants and the more attentive the service. People put so much effort behind the scenes to craft a dish for you, only for you to take a few bites and leave — how much should this experience be worth? Someone went to great lengths to transport lychees to Chang’an just for the imperial concubine’s brief smile; think of the scale of that luxury.

Conversely, in universally affluent places, no one is willing to put in that much effort for someone else’s meal, so restaurants tend toward standardization or pre-packaged meals.

Developed countries typically handle low-end service work by employing migrant workers, but now there seems to be a new hope: AI.

AI 能治好这块心病吗？ #

Can AI cure Baumol’s Cost Disease?

There is a concept of the “scaling of the service industry.” The reason goods become cheaper is because you can apply leverage — you can design once and sell infinitely. People are expensive because they are non-replicable. If we use machines to replace humans in service roles, wouldn’t we achieve the scaling of the service industry, making services cheap?

To some extent, yes. A significant portion of the services we enjoy is essentially information provision, which is highly replicable. For example, cooking procedures, contract drafting, customer service Q&A, medical diagnosis, and even surgical execution — machines can do these things very well, sometimes even better than humans. Other services involve coordination and management, like insurance claims, which involve subjective judgment but can still be significantly accelerated by machines.

But some service sectors absolutely require human presence. An AI diagnosis might be flawless, but who will help the patient weigh the pros and cons, who will comfort them, and who will sign off to take responsibility for any misdiagnosis? AI can tirelessly explain a problem a hundred times, but you still need a human teacher to tell the student: “Stop pretending, you just didn’t study.” A caregiver looking after an elderly person versus a caregiver using robots to look after a hundred elderly people — the former is care, the latter is husbandry.

Therefore, I do not believe AI will replace all services, nor should it. Perhaps the role of AI is to free humans from replicable, compressible, and automatable tasks so they can engage in responsibility, trust, judgment, companionship, aesthetics, and ethical trade-offs — the essence of true service.

Baumol’s Cost Disease ultimately makes genuine human time even dearer.

如何在“人贵”时代赚钱？ #

How can one make money from Baumol’s Cost Disease? First, please note: Baumol’s Cost Disease describes high cost, and high cost does not equate to high profit.

Healthcare is expensive, but doctors are not automatically ultra-wealthy; education is expensive, but no one gets rich by being a professor; elder care is expensive, but we do not see everyone rushing to become nannies. Baumol’s Cost Disease states that wages in the stagnant sector will be dragged upward by the progressive sector, but it does not grant the stagnant sector the power to command excess profits.

However, Baumol’s Cost Disease does offer a strong defensive advantage. As long as there is real demand for the service, your income remains stable and will never be too bad. But this is just defense; with this defensive foundation, you can indeed take action to thrive.

The best way is to connect with a virtual component, applying leverage to make your skills replicable. A designer should not just sell design hours; they should allow their designs to be mass-produced. A teacher should not just deliver a single class; they should productize their curriculum, question banks, training systems, and feedback mechanisms. A doctor should not just see patients; they should build organizational capabilities around clinical processes, follow-up systems, and patient education.

Separating judgment from execution is your leverage.

The second method is to provide certification and liability backing. Let AI generate the diagnoses, contracts, or engineering blueprints, but you review them, sign your name, stamp them, and assume the responsibility.

As long as you make those “micro-decisions” along the way — ensuring the content fits the real-world context and matches your personal brand — your commitment is worth gold.

The third method is to build a service platform. In the pre-AI era, much of human service time was not spent on providing the core service itself, but on filling forms, customer acquisition, compliance, logging, and payments. Platforms can reduce these back-office frictions, standardizing and automating all auxiliary tasks.

By improving efficiency, you earn the right to monetize the platform.

The fourth method is to go luxury if you insist on one-on-one services. In this case, you must offer truly luxurious services. You are no longer selling mere skills and time, but status, trust, and results that far exceed the industry average. Private doctors, elite tutors, and top-tier consultants all operate under this logic.

Perhaps your service is only 20% better than AI’s, but some people will be willing to pay 200% more for it.

The fifth method — and one that service industries in developed nations have used for decades — is “rent-seeking.” The reason the licensing exams for doctors and lawyers in the U.S. are so incredibly difficult is neither because the professions genuinely require such extreme test-taking skills, nor because society does not need more of them. Rather, it is to restrict entry and maintain a high rent-seeking water level.

That is a water level far higher than what Baumol’s Cost Disease alone would demand.

终局：物便宜则人贵是个好事 #

Whether in the U.S. or China, the grand historical trend is clear: the share of agricultural employment drops sharply with industrialization, eventually requiring only 1% of the population; industrial employment declines with automation, eventually becoming a minority; the vast majority of workers find employment in the service sector. It is precisely because of Baumol’s Cost Disease that their wage levels have kept pace with the times, allowing them to share in the fruits of modernization.

If service convenience merely means someone is selling their own time at a low price, we should not look back on that convenience with nostalgia.

Did you know that in Chinese history, there was an era when scholars refused to treat people as beasts of burden? Records from the Song Dynasty [6] show that scholars like Wang Anshi, Sima Guang, and Cheng Yi insisted on riding donkeys or horses well into their old age, resolutely refusing to use sedan chairs carried by other humans. Even in the deep mountains where the roads were treacherous and others urged them to take a sedan chair, they refused, preferring to walk with a cane. This was not a pretense of purity; under Tang and Song administrative rules, except for the highly revered, “all officials enter and leave riding horses” [7].

Why? In the words of Wang Anshi: “I have never dared to replace a beast with a human.”

It was only during the Southern Song Dynasty, when Jiangnan’s rainy and slippery roads made horse riding dangerous, that Emperor Gaozong permitted court officials to use sedan chairs. In the Ming Dynasty, it was originally restricted to metropolitan officials of the third rank and above, before restrictions gradually eased. By the Qing Dynasty, sedan chairs became the primary mode of transportation for officials from the first to the seventh rank.

Wang Anshi and his contemporaries would surely say: people should not be used this way; people should be dear.

They would say Baumol’s Cost Disease is a wonderful thing.

注释 #

[1] https://www.aei.org/carpe-diem/chart-of-the-day-or-century-2/ ; for the updated version, see https://humanprogress.org/time-pricing-mark-perrys-latest-chart-of-the-century/

[2] Baumol, William J., and William G. Bowen. “On the Performing Arts: The Anatomy of Their Economic Problems.” The American Economic Review 55, no. 1/2 (1965): 495–502.

[3] Baumol, William J. “Macroeconomics of Unbalanced Growth: The Anatomy of Urban Crisis.” The American Economic Review 57, no. 3 (1967): 415–426.

[4] Hartwig, Jochen. “What Drives Health Care Expenditure? Baumol’s Model of ‘Unbalanced Growth’ Revisited.” Journal of Health Economics 27, no. 3 (2008): 603–623.

[5] Baumol, William J. The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t. New Haven: Yale University Press, 2012.

[6] In the Song Dynasty record Shao Shi Wen Jian Lu, it is noted that after Wang Anshi resigned as chancellor and lived in Mount Zhong, he “only rode a donkey.” When someone urged him to take a sedan chair, he replied: “I have never dared to replace a beast with a human.” The same volume notes that Sima Guang “disliked sedan chairs and would ride a horse even in the mountains.” Er Cheng Wai Shu records that Cheng Yi “never rode in a sedan chair since his youth” and when urged to ride one while traveling in Shu, he said: “I cannot bear to ride it; it is clearly replacing a beast with a human.”

[7] Jianyan Yilai Chaoye Zaji (Collection of Court and Country Records since Jianyan Period), First Series, Volume 3, “Officials’ Sedan Chairs” section clearly states: “Historically, all officials entered and left riding horses. In the beginning of the Jianyan period, because the bricks in Weiyang were slippery from rain, the Emperor said to the ministers: ‘君臣一体，朕不忍使群臣奔走危地。可特许乘轿。’ (The monarch and his subjects are of one body, and I cannot bear to let the ministers run in dangerous places. Sedan chairs are specially permitted.)” It further notes that under the old system of the Eastern Capital (Kaifeng), only women rode in carriages, and only elder, highly respected ministers or close imperial relatives were permitted by special decree to use sedan chairs, which was considered an “extraordinary honor.”