Why are college tuition, healthcare, and car repairs eating up bigger shares of our budgets? Alex says it's all about the Baumol effect, a deep economic insight about relative prices that explains why labor-intensive services inevitably become more expensive over time. Tyler isn't buying it. He thinks the Baumol effect is often invoked as an ex-post explanation but can’t make predictions. Further, there’s not enough Kelvin Lancaster in Baumol, Tyler argues—not enough attention to bundle of characteristics that define what a good really is. In this episode, Alex and Tyler debate whether the Baumol effect is profound or overstated. They wrestle with examples ranging from haircuts in India to doggy daycare in Northern Virginia to Soviet-era ballet prices, touching on what poor countries can teach us about service costs and whether we're headed toward a future of AI tutors and robot mechanics. They also explore Staffan Linder's theory of the "harried leisure class"—the idea that as we get richer, we try to squeeze more utility into less time, making even our leisure more goods-intensive and rushed. Link to transcript: https://www.mercatus.org/marginal-revolution-podcast/baumol-effect Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ https://www.mercatus.org/ Timestamps 00:00 Introduction 00:34 Baumol effect overview 03:28 Critique of Baumol and whether it applies to higher education 09:06 Product quality, Lancastrian bundles, and replacement as repair 15:45 Music industry productivity growth 18:52 Rising healthcare costs: Baumol or improved quality? 22:39 Why haircuts are cheap in India 30:44 The difficulty in predicting productivity gains 34:47 Childcare as a clear example of the Baumol effect 37:26 Are repairs getting cheaper or more expensive? 47:18 The Staffan Linder effect
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Favorite Models: Spence on Monopolies, Harberger on Incidence, Solow on Growth
Alex and Tyler put three classic models through their paces. Alex starts with Spence on how a monopolist chooses quality and applies it to how the New York Times’ paywall flipped its audience incentives. Tyler pushes back, arguing that network effects and loyalists matter more than marginal customers. They move to Harberger on tax incidence and the hidden winners and losers of corporate taxes, minimum wages, and congestion pricing. Finally, Solow’s growth model frames a conversation on why some countries catch up and others stall, including what it gets right about China, and what it misses. Together, their debate shows why the best models keep earning their place—not because they’re perfect, but because they still shape how we think even when they’re wrong. Transcript: https://www.mercatus.org/marginal-revolution-podcast/favorite-models-spence-monopolies-harberger-incidence-solow-growth Follow Alex, Tyler, and Mercatus https://x.com/ATabarrok https://x.com/tylercowen https://x.com/mercatus https://marginalrevolution.com/ Timestamps: 00:00 Intro 00:19 Spence's monopoly model 07:08 How Spence applies to NYT and HBO 16:13 Alex and Tyler's approach to writing a textbook 20:43 Harberger's model of who pays tax 24:44 Harberger's model as applied to congestion and minimum wages 33:54 Solow's growth model 42:22 What Solow's model misses
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55:16
In Praise of Commercial Culture
Tyler and Alex revisit Tyler’s 1998 book and trace how commerce disciplines and amplifies creativity. Great artists bargained hard because money buys orchestras and time. “Inspired consumption” means high-quality audiences shape better art. Dynamic, Hayekian competition discovers new genres, while pulp cross-subsidizes the sublime. They disentangle when government support works, why TV improved with entry and subscriptions, how “payola” rhymes with supermarket slotting fees and with Spotify’s algorithmic era, and why some modern art maligned as minimal is, in fact, marvelous. Along the way they touch on reading’s spiky renaissance, textiles as the smartest undervalued collectible, the real story on brutalism (is the DC Metro overrated?), and a sober take on cultural pessimism’s recurring illusions—plus what all this implies for AI-era culture. Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/praise-commercial-culture Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/ Chapters 0:00:00 Why Alex loves the book 00:02:05 The challenge of getting it published 00:04:10 Mozart was motivated by money 00:06:40 Great audiences create great art 00:08:25 Economics of the avant-garde 00:13:39 Good and bad government art funding 00:17:22 Golden era TV 00:20:20 Book publishing and reading 00:26:43 Competition as a dynamic discovery process 00:32:14 The value of modern art and architecture 00:38:53 Payola got a bad rap 00:42:10 Spotify streaming economics 00:46:41 Why cultural pessimism pervades Recorded 1/13/2025
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1:03:43
The Quest to Price Options
In the final episode of Season 1, Alex and Tyler explore one of the most consequential quests in the history of economics and finance: the decades-long search for a formula to price options. From Louis Bachelier's groundbreaking work in 1900 to the eventual triumph of Black, Scholes, and Merton in the 1970s, they trace how brilliant minds across mathematics, physics, and economics gradually unlocked the how to properly price financial instruments like calls and puts. Along the way, they examine how this theoretical breakthrough revolutionized modern markets, sparked the creation of the Chicago Board Options Exchange, and transformed our understanding of uncertainty and risk management. The conversation ranges from the hidden histories of early options traders to how options theory now shapes everything from portfolio insurance to oil well investments to mega-sized chip plants. They close by reflecting on how options theory has become fundamental to modern decision-making far beyond trading floors, revolutionizing how we think about and manage uncertainty across the entire economy. Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/quest-price-options Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/ Chapters 00:00 - The puzzle of pricing options 03:46 - Louis Bachelier's contribution 09:52 - Enter Paul Samuelson 15:05 - Black, Scholes, and Merton 27:05 - Kassouf, Thorp, and cashing in on options theory 32:28 - Other applications of options pricing theory Recorded 4/12/2024
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The New Monetary Economics
In this exploration of the "new monetary economics," Alex and Tyler revisit the ideas of thinkers like Fischer Black, Eugene Fama, and Robert Hall, whose bold views about the Fed and the money supply once seemed detached from reality but now increasingly describe the financial world we inhabit. They explore why traditional measures like the money supply are becoming obsolete, how crypto and stablecoins are reshaping monetary systems, and why AI might emerge as a major consumer—and creator—of cryptocurrencies. They also discuss the paradox of pegged currencies, the lessons of algorithmic stablecoin failures like Terra, and the surprising connections between fiscal and monetary policy in a world of increasingly liquid assets. Finally, they reflect on how the unconventional ideas of new monetary economics, once dismissed as fringe, are now critical for understanding our modern financial landscape. Recorded March 14, 2024 Transcript, video, and links: https://www.mercatus.org/marginal-revolution-podcast/new-monetary-economics Chapters 00:00 - Outlining the ideas of new monetary economics 09:03 - The difficulty of defining the money supply 17:36 - What determines the inflation rate? 22:32 - Crypto's role in validating new monetary economics 26:02 - The role of the Fed in a Modigliani-Miller world 32:09 - Stablecoins and the paradox of pegs 46:11 - The bottom line Stay connected: Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/
Marginal Revolution has been one of the most influential economics blogs in the world for over two decades thanks to its sharp economic analysis and thought-provoking ideas. Now, co-creators Alex Tabarrok and Tyler Cowen are bringing their nerdy winsomeness to your earbuds. Each episode features Alex and Tyler drawing on their decades of academic expertise to tackle whatever economic idea is currently tickling their noggins.
New Zealand