Baumol’s Disease (Baumol’s Cost Disease; Baumol Effect; Baumol’s Curse)
Entry in progress—B.P.
Wikipedia: Baumol’s cost disease
Baumol’s cost disease (also known as the Baumol Effect) is a phenomenon described by William J. Baumol and William G. Bowen in the 1960s. It involves a rise of salaries in jobs that have experienced no increase of labor productivity in response to rising salaries in other jobs which did experience such labor productivity growth. This goes against the theory in classical economics that wages are always closely tied to labor productivity changes.
The rise of wages in jobs without productivity gains is caused by the necessity to compete for employees with jobs that did experience gains and hence can naturally pay higher salaries, just as classical economics predicts. For instance, if the banking industry pays its bankers 19th century style salaries, the bankers may decide to quit and get a job at an automobile factory where salaries are commensurate to high labor productivity. Hence, bankers’ salaries are increased not due to labor productivity increases in the banking industry, but rather due to productivity and wage increases in other industries.
The original study was conducted for the performing arts sector. Baumol and Bowen pointed out that the same number of musicians are needed to play a Beethoven string quartet today as were needed in the 1800s; that is, the productivity of Classical music performance has not increased. On the other hand, wages of musicians (as well as in all other professions) have increased greatly since the 19th century when not adjusted for inflation.
In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually getting more productive due to technological innovations to their tools and equipment. In contrast, in some labor-intensive sectors that rely heavily on human interaction or activities, such as nursing, education, or the performing arts there is little or no growth in productivity over time. As with the string quartet example, it takes nurses the same amount of time to change a bandage, or college professors the same amount of time to mark an essay, in 2006 as it did in 1966.
Baumol’s cost disease is often used to describe the lack of growth in productivity in public services such as public hospitals and state colleges. Since many public administration activities are heavily labor-intensive there is little growth in productivity over time because productivity gains come essentially from a better capital technology. As a result growth in the GDP will generate little more resources to be spent in public sector. Thus public sector production is more dependent on taxation level than growth in the GDP.
Wikipedia: William Baumol
William Jack Baumol (born February 26, 1922) is a New York University economics professor (although he is also affiliated with Princeton University) who has written extensively about labor market and other economic factors that affect the economy. He also made valuable contributions to the history of economic thought. He is among the most influential economists in the world according to IDEAS/RePEc.
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, and Pigou taxes. His research on environmental economics recognized the fundamental role of non-convexities in causing market failures.
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. “On the Performing Arts: the anatomy of their economic problems”, with W.G. Bowen, 1965, AER. (American Economic Review—ed.)
Wikipedia: Daniel Patrick Moynihan
Daniel Patrick “Pat” Moynihan (March 16, 1927 – March 26, 2003) was an American politician and sociologist. A member of the Democratic Party, he was first elected to the United States Senate for New York in 1976, and was re-elected three times (in 1982, 1988, and 1994). He declined to run for re-election in 2000. Prior to his years in the Senate, Moynihan was the United States’ ambassador to the United Nations and to India, and was a member of four successive presidential administrations, beginning with the administration of John F. Kennedy, and continuing through that of Gerald Ford.
OCLC WorldCat record
Performing arts - the economic dilemma : a study of problems common to theater, opera, music and dance
Author: William Jack Baumol; William G Bowen
Publisher: New York : The Twentieth Century Fund, 1966.
Edition/Format: Book : English
OCLC WorldCat record
A Remission from Baumol’s Disease: Ways to Publish More Articles
by Alice Vandermeulen
Article
Language: English
Publication: Southern Economic Journal, Oct., 1968, vol. 35, no. 2, p. 189-191
Database: JSTOR
New York (NY) Times
METRO MATTERS; Yanks Win! City Loses! Or, 1977 Repeats Itself
By Sam Roberts
Published: August 16, 1993
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He (Senator Moynihan—ed.) diagnoses rising government costs as symptomatic of Baumol’s Disease (named for its discoverer, William J. Baumol of New York University): To maintain a contemporary standard of living, the relative cost of services performed by workers in education, law, health care and other jobs that demand a high degree of personal involvement must be much higher than in the past. Vital but low-profit industries migrate to government, which is blamed for overspending.
OCLC WorldCat record
The Cost Disease and Government Growth: Qualifications to Baumol
Author: J Stephen Ferris; Edwin G West
Edition/Format: Article : English
Publication: Public Choice, Oct., 1996, vol. 89, no. 1/2, p. 35-52
Database: JSTOR
Summary: Changes in real world wage movements across sectors account for about a third of the rise in the cost of U.S. government services between 1959 and 1989, while relatively slower productivity in the public sector acccounts for the remaining two-thirds. Even though it is slower, however, the productivity record still is positive even in the labor intensive government sector. Consequently Baumol argues that the public’s likely future objection to necessary increases in the share of expenditures over the next 50 years will betray a fiscal illusion unless policymakers take pains to dissolve it. But slower productivity may be equally due to the structural organization. Removing public monopolies, reducing bureaucracies, and undertaking privatization in education for example, are other policy options that could radically change the productivity record. Meanwhile in his recent calculations of dramatic government expenditure increases expected in the next half century, Baumol omits reference to the marginal welfare cost of public funds, which on our estimates, will increase at least ten times to reach 1.71 by the year 2040.
Google Books
Baumol’s cost disease: the arts and other victims
William J. Baumol, Ruth Towse
E. Elgar, 1997 - Art - 527 pages
‘Baumol is probably recognised more for his contribution to the economics of the performing arts than of scholarly communications. His observation of information technology is rarely cited when it should be. Even his sometime co-author, William G. Bowen, seems unaware of Baumol’s diagnosis of the cost disease in academic libraries. Hopefully, the present volume will help remedy this gap.’ - Albert Henderson, Publishing Research Quarterly
’...there is value in having a set of significant and widely dispersed papers in one volume and the collection will clearly be a useful addition to reading lists on courses in cultural economics. . .’ - Alan Hutton, The Economic Journal
Baumol’s Cost Disease is the inevitable escalation of the real costs that occur in labour-intensive industries like the arts, health care and education. The labour costs in these industries tend to increase at the same rate as other industries, but their scope for utilizing labour-saving technical progress is either small or non-existent. The book opens with an introduction by Ruth Towse in which there is an overview of William Baumol’s work. In this discussion Ruth Towse examines Baumol’s work in the context of the development of the economics of the arts. The volume is then divided into parts and begins by introducing William Baumol’s work through several autobiographical essays. This is followed by some of his early contributions to cultural economics and the cost disease. William Baumol’s leading macroeconomic work on the ‘unbalanced growth model’ is also included and the debate about it at its inception. In parts three and four some of the more empirical papers on the arts are presented as well as essays on policy implications for the arts. Following this are chapters on the theatre and publishing as well as historical studies of the arts and the implications of the cost disease for libraries, health care and education. This book contains William Baumol’s contribution to cultural economics and spans over 30 years of writing on the subject, much of which is not widely available. It provides a real insight into the development of Baumol’s analysis and his perception of the problems of the arts and other labour-intensive sectors.
New York (NY) Times
View: Why College Costs So Much
By KENNETH A. SHAW and DAN A. BLACK
Published: April 8, 2001
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“I understand,” the president answers soothingly. “But we have made enormous economies recently.” Then she coughs gently into a tissue. “Excuse me,” she demurs, “but there’s a case of Baumol’s disease going around.”
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According to its namesake, William J. Baumol, any service that is inherently labor intensive - education, law, social work, health care - will experience a productivity gap when compared to “hard” industries. That is, the cost of delivering these services goes up, not down, over time.
Dr. Baumol, director of the C.V. Starr Center for Applied Economics at New York University, likes to explain the disease by using Mozart as an example. In the centuries since the composer’s death in 1791, playing one of his quartets for string still requires four instruments and four players and the same number of minutes. No way has ever been found to make this process more efficient, even though huge gains in industrial productivity have occurred during the same time.
OCLC WorldCat record
The Wolf Report and Baumol’s Curse: The Economic Health of American Symphony Orchestras in the 1990s and Beyond
Author: D J Dempster
Edition/Format: Article : English
Publication: HARMONY -DEERFIELD- no. 15, (2002): 1-24
Database: British Library Serials
New York (NY) Times
Economic Scene; Information technology may have been what cured low service-sector productivity.
By Hal R. Varian
Published: February 12, 2004
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Way back in 1967, the noted economist William Baumol diagnosed what has subsequently become known as Baumol’s disease. He argued that most services were, by their nature, labor-intensive. Indeed, the perceived quality in service industries often depends on how much labor is involved.
No one cares how many workers it takes to build the cars we drive, but the teacher-student ratio is viewed as a critical determinant of the quality of our schools. Or to use one of Mr. Baumol’s most striking examples: even after 300 years it still takes four musicians to play a string quartet.
As Mr. Baumol pointed out, this is bad news for economic growth. As economies mature, consumption shifts more and more toward services. If productivity growth in services is inherently sluggish, economic growth must inevitably slow.
Polyphonic.org
The Wolf Report and Baumol’s Curse: The Economic Health of American Symphony Orchestras in the 1990s and Beyond
Douglas J. Dempster
September 11, 2007
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Baumol’s Curse
Part of the reason for interpreting these industry trends in a most pessimistic fashion has to be found outside the data themselves. William Baumol and William Bowen published their classic analysis of the economics of the performing arts in 1966. Among many observations, their most important insight was to explain a feature of the economics of performing arts organizations that they referred to as the “income gap,” but which has since come to be called “the cost disease,” “productivity lag,” or sometimes just “Baumol’s Curse.” The Curse foresees that “performing organizations typically operate under constant financial strain—that their costs almost always exceed their earned income,” and that “rising costs will beset the performing arts organization with absolute inevitability.”
While Baumol and Bowen’s explanation is elaborate, the underlying idea is simple enough. Orchestral musicians have supremely specialized talents that have been developed, typically, over a lifetime of training. Nonetheless, as Baumol and Bowen observe, over time, orchestras draw from the same talent pool as universities, hospitals, software developers, automobile manufacturers, or the mining industry, for that matter. Some professions are more remunerative than others, but Baumol and Bowen’s insight was that the cost of talent in any one of these industries is affected by the comparative cost of talent in other industries. Electrical engineers don’t, of course, compete with bass players in orchestral auditions. But in the long run of an economy, the orchestral industry competes with other industries in attracting talented, young people who have a choice of professions.
Washington (DC) Post
Washington Sketch
The autumn of Larry Summers
Tuesday, December 14, 2010
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After that, the valedictory was appropriately scholarly. Summers spoke about “global fora” and “the canonical good” and “Moynihan’s corollary to Baumol’s disease.” But more than brainy, he was bullish.
Washington (DC) Post
Self-esteem problem
GEORGE F. WILL
Thursday, January 20, 2011
It takes a worried man to sing a worried song, and in a recent speech that seemed like Larry Summers’s swan song, the president’s now-departed economic adviser warned that America is “at risk of a profound demoralization with respect to government.”
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And the pathologies of expanding government are becoming worse because of two concepts Summers mentioned in his valedictory - Baumol’s Disease, and Moynihan’s Corollary to it.
William J. Baumol, Princeton economics professor emeritus, said that in certain economic sectors - e.g., labor-intensive service industries - productivity will increase, if at all, more slowly than in the rest of the economy. The late senator Daniel Patrick Moynihan’s corollary was that such services - e.g., teaching, nursing, the performing arts - tend to migrate to the public sector.
Moynihan noted that if you want a string quartet, you must hire four musicians with four instruments, just as in Chopin’s day. “Productivity,” said Moynihan, “just hasn’t changed much. And when it does - e.g., playing the Minute Waltz in 50 seconds - it doesn’t seem to work right.” Actually, lopping 10 seconds off the waltz subtracts from musicians’ productivity.
Moynihan noted a danger to his party in the tendency for the “stagnant services” to become government services: “The Democratic Party is identified with this very public sector in which relative costs are rising. By contrast, the Republican Party is identified with the private sector where relative costs are declining.”