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Baumol's cost disease and healthcare

Since the classic work by William Baumol (Baumol and Bowen, Performing Arts: The Economic Dilemma, 1965), serious doubts have been raised about the possibility for services to lead to significant increases in productivity. Baumol and Bowen argued that “the output per man-hour of the violinist playing a Schubert quartet in a standard concert hall is relatively fixed, and it is fairly difficult to reduce the number of actors necessary for a performance of Henry IV, Part I” (1965, p. 500).

That should not be confused, obviously, with lack of productivity in the service sector as a whole, but it should be noted that the quality of the services often improves as a result of higher productivity in manufacturing. For example, improvements in the phonographic, cinematographic, electronic, and telecommunications industries imply that more people have access to Schubert’s quartets and Shakespeare’s plays at lower cost. While the cost of downloading a digital version of Schubert's quartets might be incredibly low, the relative costs of maintaining a full orchestra tend to increase over time, since musicians must be paid.

Note that the problem is not that musicians are paid too much (they aren't believe me), but that their wages tend to grow more or less together with the wages of other workers. That means that the relative costs of orchestras, that cannot reduce the number of musicians per presentation, when compared to car producers, that can reduce the numbers of workers per car produced, must grow over time. The same is true for other services that cannot reduce substantially the number of workers per unit produced without affecting the quality of the product, like education and healthcare. Baumol's new book deals with the effects of the eponymous disease on healthcare, and suggests that there is no problem in spending more on health. Worth reading.


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