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Do you know how technology has made things faster and cheaper? Driving down the relative price of TVs and food and raising average wages. This means we can buy things for less, and the people who make them can earn more. Pretty cool.

Why have the prices of education and Healthcare continued to rise?

Why are prices in some sectors increasing dramatically even as economy-wide technology and productivity improve?

Some believe that AI can potentially reduce the expenses of education and Healthcare. In this presentation, we would like to argue against this claim.

We conclude that the Baumol effect is the best explanation for rising prices in education and Healthcare.

Baumol effect

In all the industries that have experienced lower prices, as depicted in the above chart, automation has been applied in these industries. Automation brings in higher productivity, producing more products with the same input. Thus the prices go down.

Education & Healthcare are industries where it's difficult to automate or use technology to make the work more efficient.

The Baumol effect, named after economist William J. Baumol can be used to explain.

Let me explain the Baumol effect first.

Here's a simplified explanation: Imagine a theatre performance. It takes the same time and effort for a group of musicians to perform a piece of music today as it did decades ago. However, musicians' wages increase over time to keep up with the rising wages in other industries. This phenomenon is because the software engineer attending the show to entertain himself is now ready to pay more to watch the theatre. The software engineer can pay more because his salary is increasing. His salary is increasing because he uses automation/AI technology to produce more. Hence, the musicians request higher salaries, or they will depart from this concert and seek employment elsewhere.

This means the cost of hiring musicians for performance will also increase, even though the productivity or efficiency of musicians hasn't improved.

Surprisingly, we want teachers to be less productive. I understand if you have a different perspective, but allow me to clarify.

The productivity of a teacher is often measured by average class size.

For example, David Card and Alan B. Krueger find that students who are educated in classrooms with lower student-to-teacher ratios earn more later in life.

Online education often falls short when it comes to serious degree programs.

Many people who register for online courses do not finish those classes. It's almost 5-15% complete course. However, for career-related courses, this doesn't fit.

Which means we want a poor teacher: student ratio.

Despite widespread complaints about the increasing cost of education and Healthcare, adopting AI in other industries may lead to higher salaries, which could result in a willingness to pay higher fees for education, either for themselves or their children.

More recently, Raj Chetty, John N. Friedman, and Jonah E. Rockoff found that better-quality teachers, measured by value-added scores, significantly increase future student earnings. Which means skilled teachers will be more expensive.

India is a software-centric country. Here AI will be adopted faster by various industries. That will lead to an explosion in salaries in these industries.

They will want to pay more for education.

According to our assertion, implementing AI technology will result in a rise in education and healthcare fees.