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The Baumol effect follows from simple but deep microeconomic reasoning. All prices are relative prices, so if some goods are getting cheaper, others must be getting more expensive. Simple. But in transferring our attention about the cause of rising prices from stagnating sectors to progressive sectors, the Baumol effect radically changes our understanding of the causes, consequences, and evaluation of rising prices. Even today, the power of the Baumol effect to explain price changes through different time periods and places is underestimated. Throughout his career, Baumol returned to this simple idea many times, making it a key to his thought and his evolving views on long-term economic development.

Baumol’s impact on the development of managerial theories of the firm is investigated here through the material found in Galbraith’s archives. In 1957, Galbraith published a paper claiming that the impact of macroeconomic policies varies with market structures (competitive versus oligopolistic). That publication prompted Baumol (1958b) to send Galbraith a manuscript dealing extensively with a crucial question of managerial theories of the firm, namely, the trade-off between sales and profits. I argue that Baumol’s critiques and Galbraith’s answers largely explain the way Baumol (1958a, 1959) framed his alternative model of the behavior of corporations. He reasoned in terms of maximization of sales with a profit constraint as their main objective. In return, Business Behavior, Value and Growth fostered the development of Marris’ (1964) and Galbraith’s (1967) theories of the corporation. While Tullock (1978) provides a narrative in which the sales maximization hypothesis has two main branches – Baumol for the one and Galbraith–Marris for the other – the paper demonstrates that these branches are intimately connected.

Telecommunications was traditionally considered a natural monopoly. However, in 1982 AT&T was required to give up its control of local telephone services. As economies of scale and scope pervade telecommunications services, the neoclassical perfect competition model could not be applied as a benchmark for regulation. Baumol’s theory of contestable markets was referenced in the design of the new telecommunications regulation regime that followed the AT&T divestiture.

This chapter analyzes from a partially first-hand perspective Baumol’s contributions to the economics of telecommunications. After the AT&T breakup, a key issue to address was the access to the so-called last mile of copper wire owned exclusively by the local monopolies. Baumol together with his colleague Gregory Sidak claimed it was necessary to provide access to interconnection to all qualified applicants. Baumol and Willig proposed a pricing rule, which they argued ensures efficiency in the allocation of bottleneck input resources. The so-called parity-pricing formula is presented and discussed.

The developments in the telecommunications industry that took place during the last 25 years are pointed out, particularly the role played in them by mobile phones. Interconnection was also a vital element for them, and Baumol’s contributions are still a point of reference in this area. The chapter concludes with some reflections on Baumol’s methodological views based on personal correspondence.

This paper reconstructs the clash between William Baumol’s and Paul Samuelson’s different approaches to the history of economic thought, disguised as a debate on the Marxian transformation problem on the pages of the Journal of Economic Literature in 1974. The published papers were the result of an intense exchange of letters that shows how the debate on the transformation problem is just the surface: the debate originated from the authors’ different approaches to the history of economic thought. Samuelson applied his famous “Whig” history of economics to suggest that Marx had little to nothing to offer to modern theorists, while Baumol was interested in the past authors’ theoretical and moral intentions. Baumol and Samuelson’s Methodenstreit resulted in two different visions of Marx, and there is evidence that they kept their different approaches for their entire career.

William Baumol famously introduced the “cost disease” according to which the relative price of services vis-á-vis manufactured goods keeps rising because of a negative productivity differential between services and manufacturing industries. Empirical evidence strongly supports the predictions of Baumol’s model of “unbalanced growth” as we show in this article. Baumol was convinced that the cost disease need not have fatal consequences for growing economies as they can afford to earmark ever-higher shares of GDP to pay for services like healthcare and education if the overall “pie” keeps growing. Then, consumption of goods may rise as well even if its share in GDP steadily declines. However, income inequality has surged since the 1980s; and the rising price of vital services means that lower-income strata may be increasingly unable to pay for them. In this article, we develop the nexus between the cost disease and rising income inequality and sketch the ensuing challenges for social policy.

William J. Baumol was one of the most prolific economists of his generation, analyzing a broad range of central economic issues addressing real problems of the world. In this essay, we present and critically evaluate Baumol’s research contributions in entrepreneurship economics and point to areas for future research. Baumol contributed an impressive number of important insights, increasing our understanding of entrepreneurship from both a macro and a micro perspective. He also devoted a large part of his writings to discussing public policy, linking his theoretical insights with policy issues in practice. His analyses are rooted in contemporary mainstream neoclassical economics, and one of his main objectives was to integrate the entrepreneur into this tradition. Today, Baumol is best known for his tripartite distinction between productive, unproductive, and destructive entrepreneurship and his associated idea that the institutional framework, “the rules of the game,” will determine how entrepreneurs allocate their time and effort across different – productive or unproductive – activities. An institutional environment that encourages productive entrepreneurship and spontaneous experimentation while disincentivizing unproductive activities becomes, through this insightful lens, the driving force of economic growth. As an economist, Baumol was knowledgeable and well acquainted with earlier scholars and their writings about entrepreneurship. Baumol’s writings were greatly inspired by Joseph Schumpeter’s views on entrepreneurship, and he made several attempts to formalize Schumpeter’s concept of the innovative entrepreneur. Baumol was in all senses an innovative contributor to entrepreneurship economics. His work has inspired the research community of entrepreneurship scholars, but like all great scientists, he also encountered criticism. His effort to integrate entrepreneurship into the mainstream theory of the firm was only partly successful.

William Baumol is best-known as an academic. He was a prodigious researcher and publisher of texts on microeconomic theory, and a highly regarded educator with roles as head of the Department of Economics at Princeton University, director of the C.V. Starr Center for Applied Economics and director of the Berkley Center for Entrepreneurship and Innovation at New York University. Less well-known were his engagements as a corporate consultant, notably for the telecommunications monopoly AT&T. Baumol’s work as an advisor, expert witness and theorist for AT&T spanned three decades from 1966. His relationship with AT&T arguably forms the context within which we can better understand his work on contestability theory, which he developed with a team of economists working for AT&T’s Bell Telephone Laboratories in the 1970s. Contestability theory was later deployed as a policy tool to justify industry deregulation and even advocate for monopolies and oligopolies on the ground that they were optimally efficient industry structures if potential competitors faced low barriers of entry. Baumol’s intellectual contribution to contestability theory was arguably influenced by the Chicago school and by AT&T’s drive toward the technological integration of telecommunications. Contestability was a rebellion against economic orthodoxies concerning competition and government regulation, and the status quo within AT&T which opposed market competition on the ground that it threatened the technological integration of the Bell system. The outcome was a revolution in industrial organization that would pave the way for the emergence of platform business models incorporating multi-sided and two-sided markets as exemplified by Amazon and Uber.

The underlying assumptions of Baumol’s theory of entrepreneurial allocation limits its potential to answer some key questions related to the entrepreneurship allocation. Hence, this paper aims to highlight the inherent limits of Baumol’s theory and suggest a new approach for understanding the entrepreneur-institution relationship and their functions.

This is a conceptual paper with a narrow focus on the literature.

The paper argues that Baumol’s adherence to neoclassic economics assumptions about entrepreneur and institution, such as entrepreneurs as rational choice taker with predetermined goals or institutions as exogenous, limits the potential of his theoretical framework to explain productive entrepreneurship in weak institutional settings. As such, underlying on Austrian economics assumptions about entrepreneur and his/her agency, this paper proposes a reconceptualization of productive entrepreneurship as an outcome of the interaction between entrepreneur and context.

Going beyond Baumol’s main proposition of one-sided influence of institutions on entrepreneurship allocation, this research highlights the influence of individual factors and entrepreneurial action on choosing entrepreneurial paths by entrepreneurs. So, future policies to stimulate productive entrepreneurship should consider these factors and go beyond Baumol’s mere focus on institutional improvement.

Going beyond one-sided influence of institutions on entrepreneurship allocation, this paper suggests an interaction centric approach which considers the role of actors and institutions as the co-creator of each other in the social process and argues that any effort for explaining the entrepreneurship should consider the co-creative nature of the actors and institutions as well as the endogenous nature of institutions. The proposed approach will help expanding entrepreneurship literature through finding answers to some key under-examined questions in the promising research stream of entrepreneurship allocation.

The purpose of this paper is to consider the impact of Baumol’s work on entrepreneurship has had on framing the economic development puzzle.

In many ways, the intuition behind the paper is straightforward. Entrepreneurs allocate their time and attention based on the relative payoffs they face in any given social setting. If the institutional environment rewards productive entrepreneurship, then the time and attention of entrepreneurial actors in the economy will be directed toward realizing the gains from trade and the gains from innovation. If, on the other hand, there are greater returns from the allocation of that time and attention toward rent-seeking and even criminal activity, alert individuals will respond to those incentives accordingly. The simplicity of the point being made is part of the brilliance in Baumol’s article. As with other classics in economics, once stated the proposition seems to be so basic it is amazing that others did not put it that way beforehand.

It has been 25 years since Baumol published his paper in the Journal of Political Economy, and as pointed out, it has had a significant scientific impact. But to put things in perspective, James Buchanan’s “An economic theory of clubs” published in 1965 has accumulated roughly 3,500 citations, F.A. Hayek’s “The use of knowledge in society,” published in 1945 has over 12,000, and Ronald Coase’s “The problem of social cost” published in 1960 has over 28,000 citations. So Baumol’s paper would put him in rather elite company. The great strength of the paper is to focus the attention on the relative payoffs of productive, unproductive and destructive entrepreneurial activity. But one of the most significant disappointments of the subsequent history of this paper is a methodological one. The comparative case study approach that Baumol employed did not result in a renewed appreciation for narrative forms of empirical research in political economy. It could legitimately be argued that the sort of questions about the fundamental institutional causes of economic growth and development can only be captured with these more historical methods. Attempts to force fit this analysis into a set of methodological tools which have already revealed themselves to be inadequate to do justice of the role of institutions and disregard the underlying cultural norms and beliefs that characterize human sociability.

In this paper, the authors will focus on the contribution made by Baumol’s 1990 paper on the field of comparative political economy, and in particular on the literature on transitional political economy. Section 2 places Baumol’s argument in the context of the failure of neoclassical growth theory. Section 3, the authors argue that although the Baumol framing was an improvement over the old comparative economic systems literature, contemporary transitional political economists have failed to fully realize the implications of the institutional revolution. They have therefore been unable to understand the causes of the heterogeneity of outcomes among those countries that transitioned from communism to the market economy in the 1990s. In Section 4, the authors argue that the political economy of transition will gain from a more sophisticated view of the economic process of the market economy, an appreciation of the entrepreneurial function, and a deeper understanding of the role of formal and informal institutions and their effect on entrepreneurship. The authors will illustrate the point with some examples from the recent history of the Russian political and economic transition. Credible commitment problems and the deficiencies of the institutional reforms of the early 1990s were responsible for the failure of reallocating the entrepreneurial talent that existed in the Soviet economy to productive economic activities. The framework can therefore be used to solve the puzzle of why the announced liberalization of Russian markets and privatization of previously state-owned resources led to economic stagnation, the growth of black markets, and the rise of organized crime, instead of economic development through the operations of smoothly operating markets. Section 5 briefly concludes.