Skip to main content

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.

Comments

Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…