Part I · Chapter 2 · Machinery · lesson 4
Why some things get cheaper and some never do
11 min
Builds on What a price is transmitting
Part I · Chapter 2 · Machinery · lesson 4
11 min
Builds on What a price is transmitting
A television costs a fraction of what it cost forty years ago, and it is enormously better. A haircut costs several times what it cost forty years ago, and it is exactly the same haircut.
The barber is not greedy and the television factory is not generous. Something structural separates these two, and once you can see it you will see it in almost every complaint anyone has about the cost of living.
Productivity is output per hour of work. It grows in some activities and barely grows at all in others, and the difference between them is enormous.
An hour in a chip fabrication plant produces vastly more computing than an hour did in 1985. An hour of cutting hair produces one haircut, as it did in 1985, and as it did in 1885. The scissors are better. The hour is not.
Uneven productivity growth explains why televisions get cheaper. It does not yet explain why haircuts get more expensive. If nothing about barbering changed, why does the price rise?
Because the barber's wage is not set by barbering. It is set by what that person could earn doing something else.
When factories, logistics and software get more productive, the people working in them get paid more, because they are producing more and firms compete for them. A barber who could retrain into one of those jobs now has a better alternative than they had last year. To keep them cutting hair, barbering has to pay more. And since an hour still produces one haircut, the whole of that rise lands on the price of a haircut.
Predict
The pattern is not random. Productivity growth is hard to come by wherever the work has one or more of these properties.
The human presence is the product. Care, teaching, live performance, a haircut. Doing it faster is doing it worse, which puts a floor under the hours.
Every case is different. Diagnosing a leak in an unfamiliar house, repairing an old building, resolving a dispute. Variation defeats the standardisation that productivity growth normally comes from.
Physical space is the input. Land near a city centre cannot be manufactured. No process improvement makes more of it.
Trust and liability sit in the loop. Anything where a human has to be accountable for the outcome carries an irreducible human cost, whatever the machine does.
Now look at the list of things people say have become unaffordable — housing, childcare, education, healthcare, dentistry, tradespeople, restaurants — and notice how tightly it maps onto that list of properties. The complaint is real and the mechanism is not mysterious.
Not the same thing
How much a currency unit buys, across everything, compared with a previous date.
What one thing costs in terms of another thing, with the currency cancelled out.
Which is which? Put each one on a side.
A television costs one twentieth of the haircuts it used to
The same basket of shopping costs more than it did last year
An hour of a plumber's time now costs what four hours cost when measured in televisions
Productivity growth makes cheaper output possible. It does not make cheaper prices happen. Something has to force the gain out of the margin and into the price, and that something is competition.
A firm that halves its costs and faces four hungry rivals ends up cutting price, because the first one to do it takes the volume. A firm that halves its costs and faces nobody keeps the difference. Same productivity gain, entirely different outcome for the buyer.
Two separate things have to be true before a buyer sees a lower price.
Someone has to work out how to make the thing with fewer hours. And someone has to be in a position to take business away from anyone who does not pass the saving on.
Where both hold, prices fall for decades. Where only the first holds, margins rise for decades. Which one you are looking at is usually the more interesting question, and it is answered by asking how easily a new competitor could appear.
Check
Three things worth carrying out of this lesson.
The first is that "everything is getting more expensive" is usually two claims wearing one coat: the currency buys less, and the things that resist automation have become dearer relative to the things that do not. Those have different causes and different remedies, and conflating them makes both arguments worse.
The second is that an economy getting richer will tend to make services feel expensive, not because anything went wrong but because the alternative uses of an hour got better. That is an uncomfortable consequence of good news.
The third is that productivity growth and competition are separate ingredients, and asking which one is missing is a fast way to understand a market you have never looked at before.
There is a variant of this that shows up in personal decisions.
If an activity you do yourself has fixed productivity — cleaning, commuting, queueing, assembling flat-pack furniture — its cost in your own time does not fall as your earning capacity rises. The cost rises, because the hour is worth more.
That is the same mechanism from the inside, and it explains a common pattern: things people happily did for themselves earlier in a career get paid for later, with no change in preferences at all. It is a change in the opportunity cost of an hour, which is the first lesson of this track wearing a different hat.