Ridley: Why our public sector is so unproductive

The enduring lessons of Jevons and Baumol

By Matt Ridley. 

"Agatha Christie once remarked that she had never expected to grow rich enough to own a car or poor enough not to have servants. The reason this strikes us as bizarre today boils down to two names that you hear invoked a lot in the tech industry: Jevons and Baumol. One is shorthand for the expansion of products or professions with rising efficiency, the other for the shrinkage of products or professions with stagnant efficiency.

There’s a pleasing chronological symmetry between these twin ideas: William Stanley Jevons coined the Jevons paradox in 1865; William Jack Baumol described Baumol’s cost disease exactly a century later in 1965.

In his pessimistic book The Coal Question, Jevons forecast peak coal and consequent economic catastrophe for Britain. Energy efficiency would not come to our rescue, he argued. “It is a confusion of ideas to suppose that the economical use of fuel is equivalent to diminished consumption. The very contrary is the truth.” If you double the efficiency of steam engines, you do not burn less coal, you install more engines and soon burn more coal. He was wrong about peak coal, as later pessimists were wrong about peak oil and peak gas, but right about increased consumption.

A modern example: light-emitting diodes (LEDs) use about 15 per cent as much electricity as incandescent bulbs. Do we save that difference? Only at first, then we install more lights, leave them on longer and build things like the Las Vegas Sphere, which uses as much electricity as 50,000 homes.

The tech guru Erik Brynjolfsson points out that: “Pilots became dramatically more productive and effective once jets were invented. Did that mean that we didn’t need as many pilots because now pilots could do more work? No. We consumers decided that we’re going to fly more than ever. So now a lot more people fly. And there’s more demand for pilots.” If supersonic commercial flight eventually takes off, the falling cost of pilots and flight attendants (in the air for less time) will only increase demand for air travel.

The price of a single transistor has fallen over half a century from about $1 to less than a millionth of a cent. So we not only buy more of them but spend more on them. As Alex Danco puts it: “At $1 per transistor, computers made sense for military calculations and corporate payroll. At a thousandth of a cent, they made sense for word processing and databases. At a millionth of a cent, they made sense in thermostats and greeting cards. At a billionth of a cent, we embed them in disposable shipping tags that transmit their location once and are thrown away.”

Drones, space launches and genome sequencing are being Jevonised right now. As for artificial intelligence, “Jevons paradox strikes again,” says Satya Nadella of Microsoft. “As AI gets more efficient and accessible, we will see its use skyrocket, turning it into a commodity we just can’t get enough of.” Aaron Levie of Box says: “Jevons paradox is coming to knowledge work. By making it far cheaper to take on any type of task that we can possibly imagine, we’re ultimately going to be doing far more.” AI will mean more jobs for lawyers, not fewer.

Marc Andreessen muses that it is “like the Daniel Day Lewis character in There Will Be Blood worrying ‘but what will happen, once we’ve satiated their demand for whale blubber?!’ Well, it turns out that there were a lot more useful ways to consume energy than burning the midnight oil.” As the cost of AI tokens collapses, we will use vastly more of them for vastly more uses.

But here’s where the Baumol twin comes in. For every industry that experiences efficiency gains, there’s another that does not. And this latter industry inevitably becomes less affordable. Baumol’s first example was string quartets: violinists are no more productive but you have to pay them more to prevent them running off to become software engineers. The productive industries drive up the labour costs in the rest of the economy. Andreessen jokes that if a hole appears in the wall of your house in California these days it is probably cheaper to glue a flat-screen television over it than hire a builder to repair it: a Jevons-deflated cost beats a Baumol-inflated one.

The big question of our age is can AI drag Baumol-shaded industries back into the sunlight of Jevons? Can it make things like healthcare, education, or government switch from rising costs to falling costs?

I fear not in the case of government because of a bureaucratic version of the Jevons and Baumol effects. As Cyril Northcote Parkinson put it in an article in the Economist in 1955: “Politicians and taxpayers have assumed (with occasional phases of doubt) that a rising total in the number of civil servants must reflect a growing volume of work to be done. Cynics, in questioning this belief, have imagined that the multiplication of officials must have left some of them idle or all of them able to work for shorter hours. But this is a matter in which faith and doubt seem equally misplaced.”

Since 1997, the British public sector has seen zero increase in productivity. That is to say, the average civil servant generates about the same output today as he did three decades ago. Think about this for a second. Thirty years ago fax machines were high-tech, the internet was in its infancy, emails were new, Wi-Fi was scarce, mobile phones were voice-only. How is it remotely possible to be no more productive today than then?

We know the answer. Each email is now copied to a dozen people, each report is pasted and copied till it is twice as long, each Zoom call has five times as many attendees, each mobile call is followed up by three times as many WhatsApp messages – and each day at the desk is interrupted by a training session on transgender anticolonial sustainability. That’s a sort of Jevons-Baumol effect: a Jevol?

Keeping Cool: The Air Conditioner That Changed America

The time price of air conditioning has fallen 98.6 percent since 1952. That ordinary luxury saves lives every summer.

By Gale L. Pooley. He teaches US economic history at Utah Tech University. Excerpt:

"One of the great triumphs of entrepreneurial capitalism is how quickly air conditioning traveled the familiar path from luxury to necessity. What began as an expensive convenience for a tiny elite became, within a generation, affordable to ordinary families. The market did not merely invent comfort — it democratized it.

In their report Time Well Spent: The Declining Real Cost of Living in America, Michael Cox and Richard Alm found that a 5,500-BTU air-conditioning unit cost about $350 in 1952. At the time, entry-level workers earned roughly 83 cents an hour, putting the time price at 422 hours.

Today, Walmart sells a far more efficient 6,000 BTU air-conditioning unit (with a remote control) for only $115. The current hourly wage for limited-service restaurant workers is around $19 an hour, putting the time price at six hours.

The time price has decreased by 98.6 percent. For the time it took US workers to earn the money to buy one unit in 1952, they get 70 today.

If air conditioning saves lives, why don’t more Europeans have it?

Europe’s electricity prices are typically much higher than the US, driven by higher taxes, network costs, renewable energy mandates, and energy import dependence. Customers in the US pay 17 to 19 cents per kilowatt-hour (kWh) compared to 25 to 32 cents in Europe. This means Europeans pay roughly 47 to 68 percent more per kWh than US customers.

Americans are also much richer than Europeans. According to World Bank data, American gross domestic product (GDP) per capita was $84,809 in 2024, while the European Union’s was 25 percent lower at $63,585. That $21,224 difference could buy a lot of comfortable cooling.

The European Union also prioritizes environmental targets over human comfort by imposing strict regulations for heating and cooling, making these amenities much more costly. The commission encourages citizens to use fans instead of air conditioning. Imagine the government doing that in Phoenix and Atlanta in July. Italy, Greece, and Spain even announced temperature limits in public spaces during the 2022 heatwave in an effort to meet these environmental objectives. Spain limited air conditioners to be set no lower than 80°F. No wonder European productivity is 38 percent lower than the US.

Historic preservation laws and strict landlord rules frequently ban exterior window units to maintain aesthetic uniformity.

While air conditioning ownership increases households’ electricity consumption, it may be a small price to pay for comfort and avoiding death.

The problem is not the climate but the policy mindset. Too many European regulators approach energy and technology through the ideological lens of scarcity rather than creative innovation and human flourishing. One reason such policies persist is that the officials who design them are largely insulated from the consequences of their decisions and rarely experience their costs directly. Instead, those costs are borne by millions of ordinary citizens.

Air conditioning is not ultimately a story about cooling. It is a story about knowledge. It transformed oppressive heat into comfort, inhospitable regions into thriving communities, and summer misery into year-round productivity. Coal, copper, and electricity become valuable only after humans discover how to harness them. The history of air conditioning is the history of knowledge triumphing over nature’s constraints.

The ultimate resource is neither energy nor matter. It is the infinite capacity of human beings to learn, create, and discover."

The Equal Pay Madness Just Got Madder

By Alex Tabarrok. 

"In my post Equality Act 2010 I discussed the UK’s absolutely insane wage policy:

In short, supply and demand have been replaced by judges and labor boards with the authority to deem which jobs are “equal” and therefore should be paid equally….No one is alleging that male and female warehouse workers were paid unequally or that male and female retail workers were paid unequally or that there was any direct or indirect discrimination. The only claim is that warehouse workers, who are less likely to be female than retail workers, earn more than retail workers. And since these jobs have been judged “equal,” the company has violated Equality Act 2010.

…The warehouse workers were almost 50% female (47.25%). So females were not barred from the higher paying jobs. The fact that 77.5% of the retail workers were female suggests that retail work has special appeal to females relative to males and thus that there are compensating differentials. Any of the three female plaintiffs could have taken jobs in the warehouse. If the jobs are equal and the warehouse jobs pay more this is, on the plaintiffs’ theory, “puzzling”. [Or, as Ayn Rand would say, blank out.]

In fact, the court case reveals that Next was struggling to fill the warehouse positions and offered any retail employee—including the plaintiffs—the opportunity to switch to warehouse work. On cross-examination, one of the plaintiffs admitted that, given the unpleasant conditions in the warehouse—described by the court as “the drone of machinery,…vibration, alarm sirens and the screeching of machinery, wheels and rollers, continuously present in all areas”—the warehouse job “did not seem particularly attractive” compared to the greater autonomy and more appealing environment of the retail job. The plaintiff added that she would only have considered the warehouse job if it paid “a lot more money.”

Well, here is the update. The outgoing Keir Starmer government is trying to massively expand these laws. The “equal value” framework previously applied only to sex discrimination; under the proposed law, employees could also bring equal-value claims based on race and disability. Remember, these laws have nothing to do with discrimination—they are about demanding, at the point of a gun, that apples and oranges sell for the same price because they’re both fruit.

The new law would also establish an Equal Pay Regulation and Enforcement Unit. As I said, Orwellian.

See also my post, How Britain Become as Poor as Mississippi."

NYC’s socialist movement forcing millionaires to flee the state — leaving Mamdani, DSA in a bind

By Judge Glock. Excerpts:

"A new Citizens Budget Committee report found that New York’s share of millionaires, those earning more than a million dollars a year, declined more than any other state since 2010. 

The state went from having 12.7% of all millionaires in the nation to 8.7%. 

Worse yet, in the more recent years, the state’s highest earners have been leaving much faster than its lowest earners." 

"New York City’s tax rates on the wealthy are already the highest in the nation."

"Economists Joshua Rauh and Ryan Shyu found that a California income-tax hike drove almost 1% of top taxable incomes out of the state in a single year. 

The loss of taxpayers and other changes among the well-off meant the state lost most of the cash it would otherwise have raised from the tax. 

Another study, by Enrico Moretti and Daniel Wilson, looked at how state taxes affected the movement of top scientists, a group that’s not thought to be particularly mercenary or focused on cash. 

They found a 1% increase in after-tax income in a state brought nearly 2% more star scientists into the state — while a tax increase drove them away."

"New York’s high rates explain why the state lost more than $7 billion of annual taxpayer income just to Fairfield County in Connecticut over a five-year span, 2019 to 2023 — and more than $7 billion just to Palm Beach County in Florida." 

Human aspiration is a disposition, not an exhaustible resource. Mokyr showed that civilizations which honor that aspiration grow, and those that suppress it stagnate

See The Lump of Labor Fallacy in the Age of AI by David Hebert.

"In conclusion, the problems with the lump of labor fallacy were settled long before AI arrived. Smith understood that human aspiration is a disposition, not an exhaustible resource. Mokyr showed that civilizations which honor that aspiration grow, and those that suppress it stagnate. The lump of labor fallacy gets the economics wrong because it makes fundamental errors in human nature and economic history.

But wrong ideas with organized constituencies do not stay defeated. The longshoremen’s contract shows what happens when the fallacy wins a political victory. If AI policy follows the same template, the damage will be measured not in port fees but in trillions of dollars of foregone growth and millions of jobs that never get created. The fallacy is intellectually bankrupt. Whether it remains politically solvent is the question that actually matters."

How Trump’s Tariffs Really ‘Work’

He hails Toyota’s investment, but what about the higher costs and manufacturing job losses?

WSJ editorial. Excerpts:

"Toyota may have made the decision for business reasons unrelated to his tariffs."

"The Japanese car maker’s press release lavished praise on Texas’s pro-business environment and included statements from the state’s political leaders (Attorney General Ken Paxton excepted). No mention of Mr. Trump or his tariffs. Toyota says the new plant will provide “flexibility” from “advanced manufacturing technologies,” which may offset the relatively higher labor costs in Texas."

"The U.S. has lost some 75,000 manufacturing jobs since January 2025, including 25,900 in motor vehicle and parts production. Manufacturing jobs have been declining since early 2023, so not all of these job losses stem from Mr. Trump’s border taxes."

"there’s no question his tariffs are raising costs for U.S. manufacturers. At the same time, foreign retaliation has hurt America’s farmers"

"evidence shows that U.S. companies, workers and consumers are picking up most of the tab."

"auto tariffs on Canada and Mexico alone added about $1,600 to the cost of each car made in the U.S. last year."

"tariffs drove a 10.4% increase in the average suggested retail price of a new car."

"Auto dealers—most of which are small businesses—absorbed about 4.5% of the manufacturer’s price increase."

"Dealers have shed 6,100 jobs since Mr. Trump became President."

"New vehicle sales have averaged 15.9 million in the first half of this year, down from the 17 to 18 million in the five years before the pandemic." 

How Government Spending Enriches the Wealthy

Covid relief programs and easy Fed policy inflated the value of assets such as stocks and real estate

By Vivek Ramaswamy. Excerpts:

"When Washington floods the economy with borrowed and freshly printed dollars, the money flows first into assets owned by the wealthiest Americans—stocks, bonds, real estate. Six relief laws pushed roughly $4.6 trillion out the door in the bipartisan response to the pandemic. The Federal Reserve cut interest rates to zero and more than doubled its balance sheet, from about $4 trillion to nearly $9 trillion.

Only some of that money reached working-class Americans. Economists at MIT found that about a quarter of the $800 billion from the Paycheck Protection Program went to workers who would have lost their jobs. Three-fourths landed in the top fifth of households by income, at a cost of $170,000 to $257,000 per job-year saved—a regressive windfall. The student-loan payment pause tells the same story: It has cost well over $200 billion and—because higher earners carry the biggest balances—most of that relief went to white-collar professionals.

As big government pumped money into the economy, assets boomed: The stock market has roughly tripled from its March 2020 low. The wealthiest 10% of households own 89% of all stocks, according to 2021 Federal Reserve data. The top 1% gained more than $6.5 trillion in equity wealth during the pandemic, while the bottom 90% added just $1.2 trillion. The wealth share of the top 1% hit a record high in mid-2021, and American billionaires’ fortunes swelled by roughly 70%."

"Consumer prices peaked at 9.1% in June 2022, with inflation growing at its fastest pace since 1981. Groceries rose 12.2% in a single year and gasoline nearly 60%. As paychecks lagged, real wages fell—down 3.6% over the year ending in June 2022"

"a post-pandemic property tax that hit states like Ohio hard. The only meaningful asset most middle-class Ohioans own is their house, and home prices in Ohio rose over 25% between 2020 and 2022. That paper gain was a financial curse for families intending to stay put: While real income remained flat, tax bills went up. Ohio homeowners absorbed, in 2023, the largest reappraisal shock on record. One analysis found the increase was more than seven times the size of the previous cycle’s, averaging nearly 35%."