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House prices & string quartets

If you want a performance of a Beethoven string quartet, you need four people - exactly as many as in Beethoven's day. In this sense, labour productivity in live music hasn't changed for 200 years. But productivity in most other businesses has increased enormously; four farmers or four manufacturing workers can produce far more than they did in 200 years ago. And higher productivity should mean higher wages: real wages today are 11 times what they were in 1815. This doesn't just mean rising wages in those sectors where productivity has increased, but also in those where it hasn't; if you try to pay a string quartet 19th century wages even the viola player will get the hump and leave. This means that the cost of performing a string quartet, relative to other things, will rise over time - because you're paying the same wages as in other sectors without seeing higher productivity. This is one reason why many people believe the arts need subsidising.

What I've just described is the Baumol effect, named after New York University's William Baumol who first pointed it out in 1966. It's this that explains why school fees are so high; teachers' wages rise over time but their productivity doesn't so much.

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