Given that knowledge constraints (i.e. total knowledge increases) are relaxed over time, per capita output consistently increases. What does that imply for relatively [sic] prices? Relative prices should change with every new product that comes to market. In other words, in a non-stationary economy, prices should be in constant flux – only products where changes in the marginal rate of substitution vis-à-vis all other goods (including newly emerged products) matches the changes in the opportunity costs of producing that good will remain unchanged.
It has been observed that productivity levels within and across industries show a remarkable degree of heterogeneity, such that even within industries the cost of producing products rarely converge. This has a number of interesting consequences, not the least of which is Schumpeter’s concept of creative destruction. One interesting consequence is that more productive firms compete away other firm’s factor inputs, not only impacting those firms productivity but also raising their opportunity costs.
In fact, inter-industry factor input competition raises the opportunity costs of lower productivity industries, and to the extent that their products continue to be demanded, constitute a rising floor of costs. Thus, we would expect that in industries with demonstrated low productivity and high or rising demand, such as health care and education, to see prices rising well above the level of inflation. Heterogeneous productivity, thus guarantees “inflation” in certain products.
For background see: "William J. Baumol ... 'Macroeconomics of
Unbalanced Growth: The anatomy of urban crisis', 1967, AER.", or google "Baumol's Cost Disease." |
