Baumol's disease Prize?

So Monday they'll announce the Sveriges Riksbank Prize (aka Nobel). Both The Guardian and Tyler Cowen at Marginal Revolution Blog bet on William J. Baumol, who was nominated for his work on entrepreneurism. Baumol would be a worthy winner for the 'Nobel.' But that's not his best work, in my view, since it relies on the same mainstream flawed supply-side stories to explain economic growth. But Baumol's Disease is an important insight, and one of the few regularities in economics treated like a scientific law and named after the economist that observed it, together with Okun's Law, Thirwall's Law, the Prebisch-Singer Effect, the Balassa-Samuelson Effect, and Kaldor-Verdoorn's Law.

PS: Baumol's contributions are extensive, from money demand, to history of ideas (including this paper on Say's Law, which is named after an economist, but is not a regularity and it's not really a law), to the analysis of productivity, including work with Marxist author Ed Wolff.

Save a PhD student

Well okay, there are other more urgent crises, but it is worth noticing that PhDs increasingly end up as adjuncts, with significantly diminished job opportunities. And that at a time that tuition is skyrocketing (in part as a result of Baumol's disease), and making 'non-profit' organizations quite wealthy. And yes it does seem that "adjuncts are keeping the system afloat, and work in indentured servitude." See the full info-graphic here.

Health spending and life expectancy

A brief follow up on the post on Baumol's Disease and healthcare costs. It's obvious that something else is also going on in the US, since the costs are much higher than in other countries with similar results. Graph below show spending on health as a share of GDP and life expectancy in 4 countries.

Note that the US spending almost 7% of GDP more than the next, and does not do better as a result. A broader public healthcare system as in the other 3 is part of the explanation. Data comes from Index Mundi.

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.