Baumol’s common cold

Musicians who have had the privilege and pleasure (dubious, in some cases) of discussing the future of professional orchestras with experts of various stripes are all too familiar with Baumol’s Cost Disease. The best description comes from the economist who came up with the concept, William Baumol:

Any economic activity affected by it will tend to rise in cost persistently and at a rate faster than the economy’s rate of inflation, obviously leading to financial pressures for anyone who supplies the product. Orchestral music is a prime example. The reason the problem arises is that orchestras experience little or no labor-saving innovation-no growth in productivity. A Haydn symphony written to be performed by 30 musicians and lasting one-half an hour will require 15 person-hours of human labor for an “authentic” performance, no less than it did a the end of the 18th century. But elsewhere in the economy it takes less and less labor every year to produce a product. The amount of labor needed to produce an automobile declines more than three percent each year, on the average.

This means that if wages rise at more or less the same rate in car production and in orchestras, then clearly, the cost per performance must rise faster than the cost per car, because in car production rising wages are offset by the reduced use of labor per car, while in orchestras there are few such offsets. Thus, orchestra costs are condemned to rise every year, cumulatively, at a rate faster than the average of the economy’s prices; in other words, faster than the rate of inflation.

I’ve been skeptical of the relevance of Baumol’s Disease to the orchestra business for a long time, in part because orchestras have the ability to price their product at below the cost of production, at least in terms of ticket prices. Obviously if orchestras do that, over time their dependence on various forms of contributed income will increase. But that is not, in and of itself, a problem in an a secular economy that is producing increases in wealth: all things being equal, the ability to donate to non-profits increases proportionally to societal wealth and not in the secular increase in wages.

Much to my satisfaction, it turns out that Baumol himself makes much the same point (albeit much more intelligibly) in his 2012 book The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t:

(page 50)… The rise in productivity that makes it possible to create commodities with less and less labor, thereby lowering what consumers pay, has occurred in almost every industry. Even services that seem most impervious to productivity growth have participated indirectly in this process. I frequent use the example of a Mozart string quartet written for a half-hour performance as an example of a service that resists reduction of its labor content. But even an activity like live musical performance has benefited from considerable savings in time expended. In 1790, when Mozart taveld from Vienna to give a performance in Frankfort am Main, the trip required six days of extreme discomfort. (At the time, however, that was considered swift – Mozart wrote that he was surprised at the speed of the journey.) Today, the same trip takes only six hours: 1.5 hours for the airplane flight and 4.5 hours for transit to and from the airport and other preliminaries. Surely this is a marked reduction in the time required for such a musical performance…..

With this expansion of purchasing power at our disposal, we can expect to afford even the sharply rising costs of services such as health care and education without cutbacks in quality or quantity….

(page 51)… The only thing that will change, in terms of the cost to us, is how we will have to divide our money among these items. Because manufactures and agricultural products are growing steadily cheaper in real dollars while health care and education are growing more expensive, we will have to increase the share of money we devote to the latter services….

(page 52)… Yet because output is growing so fast, the total amount of purchasing power left over for other products and services will increase dramatically….

(page 53)… The cost disease, which was a cause for great gloom in Chapter 1, turns out to affect only the way in which we divide up the money we spend. It does not force us to decrease how much we buy. Thus, with no increase in the work we expend, our standard of living will have improved dramatically. …

(page 54)… The rising costs of stagnant-sector products will never leave consumers, as a group, unable to afford to buy them. The implication is clear; We can surely afford it – cars and computers as well as health care and education. The quantity and quality of the cost disease-affected services we obtain in the future will depend on how we order our priorities. If we value them sufficiently, we can have more and better services  at some sacrifice in the rate at which our consumption of manufactures grows. Society does have a choice, but if we fail to take steps to exercise this, our economy could continue to drift toward a world in which material goods are abundant, but many things we consider primary requisites for a higher quality of life are too scarce, especially for the poor.

So –  “we can expect to afford even the sharply rising costs of services such as health care and education without cutbacks in quality or quantity.” And “the cost disease… does not force us to decrease how much we buy.”

In other words, Baumol’s Cost Disease, considered in isolation, is not the orchestra-killing phenomenon that so many observers have believed. That’s not to say it doesn’t exist; it only says that, so long as audiences want to hear professional orchestras in performance, that desire can be accommodated by a growing economy. The real questions are 1) will audiences continue to want to hear professional orchestras; and 2) will the economy generate enough wealth amongst potential donors to pay for those orchestras.

Those are not easy questions. But they’re the right ones to ask. It’s time to abandon the concept of Baumol’s Cost Disease as being terminal to our field. It’s a cold; not end-stage cancer. Let’s work on the real problems.