science

William Baumol

William Baumol is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand William Baumol rather than just read about it. In short: William Jack Baumol (February 26, 1922 – May 4, 2017) was an American economist. He was a professor of economics at New York University, Academic Director of the Berkley Center for Entrepreneurship and Innovation, and professor emeritus at Princeton University.

Key takeaways

William Baumol belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect William Baumol to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of William Baumol from memory before moving on to harder problems.

Reference excerpt

William Jack Baumol (February 26, 1922 – May 4, 2017) was an American economist. He was a professor of economics at New York University, Academic Director of the Berkley Center for Entrepreneurship and Innovation, and professor emeritus at Princeton University. He was a prolific author of more than eighty books and several hundred journal articles. He is the namesake of the Baumol effect. Baumol wrote extensively about labor market and other economic factors that affect the economy. He also made significant contributions to the theory of entrepreneurship and the history of economic thought. He is among the most influential economists in the world according to IDEAS/RePEc. He was elected a Fellow of the American Academy of Arts and Sciences in 1971, the American Philosophical Society in 1977, and the United States National Academy of Sciences in 1987. Baumol was considered a candidate for the Nobel Prize in Economics for 2003, and Thomson Reuters cited him as a potential recipient in 2014, but he died without receiving the prize.

Early life Baumol was born in the South Bronx. His parents, Solomon and Lillian, were both immigrants from Eastern Europe. Baumol studied at the City College of New York and was awarded his bachelor's degree in 1942. After college, he served in the U.S. Army in World War II and later worked for the Department of Agriculture as an economist.

Education He was initially denied entry to the doctoral studies at the London School of Economics and was instead admitted to the Master's program. After impressing onlookers with his debating skills at Lionel Robbins' seminars, he was within weeks switched to the doctoral program and also admitted to the faculty as an Assistant Lecturer.

Teaching While a professor at Princeton University he supervised some graduate students who would eventually become very well-known economists, including Burton Malkiel, William G. Bowen, and Harold Tafler Shapiro.

Research

Among his better-known contributions are the theory of contestable markets, the Baumol-Tobin model of transactions demand for money, Baumol's cost disease, which discusses the rising costs associated with service industries, Baumol's sales revenue maximization model and Pigou taxes. His research on environmental economics recognized the fundamental role of non-convexities in causing market failures. William Baumol also contributed to the transformation of the field of finance, and published contributions to the areas of efficiency of capital markets, portfolio theory, and capital budgeting.

Entrepreneurship The place of the disruptive innovations and innovative entrepreneurs in traditional economic theory (which describes many efficiency-based ratios assuming uniform outputs) presents theoretic quandaries. Baumol contributed greatly to this area of economic theory. The 2006 Annual Meetings of the American Economic Association held a special session in his name, and honoring his many years of work in the field of entrepreneurship and innovation, where 12 papers on entrepreneurship were presented. The Baumol Research Centre for Entrepreneurship Studies at Zhejiang Gongshang University is named after William Baumol. In 2003, Baumol received the Global Award for Entrepreneurship Research "[f]or his persistent effort to give the entrepreneur a key role in mainstream economic theory, for his theoretical and empirical studies of the nature of entrepreneurship, and for his analysis of the importance of institutions and incentives for the allocation of entrepreneurship." The British news magazine, The Economist published an article about William Baumol and his lifelong work to develop a place in economic theory for the entrepreneur (March 11, 2006, pp 68), much of which owes its genesis to Joseph Schumpeter. They note that traditional microeconomic theory normally holds a place for 'prices' and 'firms' but not for that (seemingly) important engine of innovation, the entrepreneur. Baumol is given credit for helping to remedy this shortcoming: "Thanks to Mr. Baumol's own painstaking efforts, economists now have a bit more room for entrepreneurs in their theories." William Baumol's book, The Microtheory of Innovative Entrepreneurship is the first formal theoretical analysis of the role of innovative entrepreneurs.

Textbooks Baumol wrote several textbooks in economics, including an introductory textbook with Alan Blinder titled Macroeconomics: Principles and Policy. His economics textbook on operations research was internationally well-received:

In the 1960s and 1970s, nearly every economics department offered a course in operations research methods in economics, and the usual textbook used was Economic Theory and Operations Analysis by W. J. Baumol. An entire generation of economics students was familiar with this book ....

Professional and philanthropic interests Baumol was a trustee of Economists for Peace and Security. Baumol was known for his interests in the economics of art, including the economics of the performing arts.

Death Baumol died on May 4, 2017, at the age of 95.

Major publications

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Illustrations

Worked examples

Example 1 — a first encounter with William Baumol

Start with the simplest possible case. Write down what William Baumol claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to William Baumol before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about William Baumol ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of William Baumol

In research: William Baumol appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses William Baumol in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: William Baumol is common in secondary-school and first-year university syllabi. It links to neighbouring topics 1922 births, 2017 deaths, 20th-century American economists, so understanding it makes those chapters shorter.
In everyday life: Look for William Baumol outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

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How to study William Baumol in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what William Baumol means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain William Baumol out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is William Baumol in simple terms?

Why does William Baumol matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study William Baumol?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on William Baumol.