Baumol's cost disease explains Japan's cheap goods and pricey services — and what's valuable in the AI era

oran_ge · x · 2026-10-10

The author uses Baumol's cost disease to explain why goods are cheap but services expensive in Japan.

In 1966, Baumol noticed a string quartet takes four players and 30 minutes, same as in Mozart's era: zero productivity growth while the rest of the economy multiplied its efficiency dozens of times — so live performance keeps getting pricier.
The root cause: goods can go on an assembly line, services can't. Chips get 40% faster yearly; a barber still cuts one head at a time.
Japan is the purest sample: bento, drugs and magazines are cheaper than in China, but massage, renovation, moving, paperwork all price at developed-world levels.

The author extends this: it explains why software has lost its value — productivity is commoditizing it — and offers a lens for predicting what will retain value in the AI era.

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Baumol's cost disease explains Japan's cheap goods and pricey services — and what's valuable in the AI era

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