Baumol’s new book on the cost disease

It is self-recommending, here are a few points of relevance:

1. There has been a clear cost disease in most kinds of education and many kinds of medicine, but I blame institutions and laws as much as the intrinsic nature of the product.

2. I do not see the arts as subject to the cost disease very much at all.  As for the “live performing arts,” the disease seems to afflict the older and less innovative sectors, such as opera and the symphony.  There is plenty of live music these days, it is offered in innovative ways, and much of it is free.

3. Even “the live performing arts” can be broken down into underlying characteristics, many of which show a great deal of recent innovation.  For instance the supply of “musical immediacy” has been non-stagnant through YouTube, which often gives you a better glimpse of the performer than you get through nosebleed seats and giant screens.  YouTube isn’t “live,” but there is no particular reason to break down the analysis at that level and certainly it is not a sacred category for consumers.

4. In many sectors of the arts, especially music, consumers demand constant turnover of product.  Old music becomes “obsolete” — for whatever sociological reasons — and in this sense the sector is creating lots of new value every year.  From an “objectivist” point of view they are still strumming guitars with the same speed, but from a subjectivist point of view — the relevant one for the economist – they are remarkably innovative all the time in the battle against obsolescence.  A lot of the cost disease argument is actually an aesthetic objection that the art forms which have already peaked — such as Mozart — sometimes have a hard time holding their ground in terms of cost and innovation.

5. In general “cost disease” sectors do not remain constant over time.  Agriculture has been unusually stagnant for the last twenty or so years, but it is hardly obvious that this trend will continue for the next century to come and it certainly was not the case for the period 1948-1990, quite the contrary.

6. The stagnancy of one sector may depend on the stagnancy of other sectors in non-transparent ways.  “Live music” may seem like it doesn’t change much, but lifting the embargo on Cuba would boost the quantity and quality of my consumption of spectacular concert experiences, as would a non-stop flight to Haiti.

You can buy the book here.

Addendum: Matt Yglesias comments.


Ag has not been stagnant. Instead two things have happened.

1) Demand has switched to more costly alternatives (e.g.: organic)

2) Mandates have switched increasing amounts of ag production to fuel production.

This. +1

Surely so energetic a traveler as you can find ways to go to Cuba. I've done it, perfectly legitimately. Just look for someone licensed to organize what's called "people-to-people cultural exchange." You actually meet some Cubans and no, they are not robots who spew party slogans, and you are not kept to carefully controlled activities.

But hurry. Rubio doesn't like this program, and is fighting it. apparently he heard that some people went and had a good time.

Taking the audience to the performers is inefficient. Making it possible for Cuban performers and bands to tour the U.S. is much more difficult, and it's not just because of the U.S. embargo, though the embargo limits the amount of money which can be applied from the U.S. end.

What's with the small type. It's only your site.

Somewhere in the book (dont have it here) he says that though cost disease exists, it is no problem that in 2030, 60% of GDP will be spent on healthcare, because according to him GDP will keep growing at 2% (or words to that effect).

The problem I see is that if 60% of GDP is for a sector that does not show any increase in productivity, productivity growth in the remaining 40% of the economy must be much higher, on the order of 5% using the above assumptions.

I just don't see how he can state that the lack of productivity increase in health care is not a major problem - but then, I have conflict of interest.

I think the argument is that the magnitude of the 'cost disease' is directly related to the divergence in productivity rates. The 60% figure was a simple extrapolation. But suppose the typical person (a very simple representation of the argument), in the first period, spends 8 hours on labor in "progressive" activities, 8 hours on "stagnant" activities, and 8 hours leisure. Leisure represents wealth. Now suppose that productivity is such that his time spent to generate the same output of progressive goods is cut in half each period. No productivity increase in stagnant activities. Then in period 2 he spends 4 hours in progressive, 8 hours in stagnant, and 12 leisure . He is 4 hours "richer." then in the next period it is: 2 hours in progressive, 8 hours in stagnant, and 14 in leisure. He is richer each period measured in leisure hours. But he is spending an increasingly high percentage of his day in stagnant activities.

I've always found it peculiar they couldn't come up with a better neologism than "cost disease" to describe this phenomenon.

I don't get your point concerning music. The Rolling Stones' music is basically the same as 30 years ago yet their concerts are more expensive now than then?

Is a concert of a new band as expensive? If I want a wine that is 30 years old I pay a premium. But there is new stuff produced every year, and for a reasonable price. That batch that is 30 years old and expensive was inexpensive 29 years ago.

And to be more precise, it is 40+ years. There may be a premium to watch old guys leaping about on stage, or to be transported back to your youth. Music is possibly tertiary.

This is all driven by the rise in inequality. Some percentage of people have more money (and the same or less amount of free time) and are willing to pay a chunk of it to go to concerts. The same thing happened for baseball tickets in the 1990s.

Even in opera, there have been tentative moves towards trying to rectify the problem. The Met has taken some baby steps towards broadcasting live performances in movie theaters, IIRC. Certainly one can argue that that's simply redefining the art, and that the "true art" of being in person with the top opera companies is more expensive, I suppose.

In assessing monopoly power we don't just ask about market power but also about the existence of relevant substitutes and the elasticity of those substitutes. . Something similar is appropriate for the cost disease. The test isn't simply are there sectors with low productivity growth. The question is if there are areas with both low rates of substitution and productivity growth. In the presence of the regulations in healthcare and tax-funded education with shrinking class sizes we are actively preventing or dis-incentivizing people from using substitutes.

The pleasures of live music performance are compromised by all the youtube-bound digital filming that goes on.

I don't think the picture on agricultural productivity is as clear as you imply, but people can make up their own minds:


Other than that, Mrs. Lincoln, how was the play?

Well it gave him a splitting head-ache

The unionized musicians in both the Minneapolis and St. Paul orchestras are in wage negotiations right now. Management wants a wage decrease, pointing out that there is no shortage of quality musicians looking for work.

No offense intended, but does every comment that "Matt" or "Ezra" makes that is even remotely associated with a post here have to be linked, no matter how insipid?

Just asking.

I am totally agree with your thoughts. Keep doing these type of work.

Please stop the over-use of "self-recommending" -- especially here, when you note the thesis is mostly garbage!

I disagree that newer music and other forms of entertainment aren't subject to the cost disease.
It still takes 120 minutes to put on a two hour show, whether you are Mozart, Elvis or Bieber.

Don't confuse the high costs of established artists against the low costs of newer artists (which has always been true thru the centuries). The cost disease compares the price of an hour's entertainment time against alternatives. (Economics is not how we price things in general; economics is how we price _scarce_ goods. As the price of hard goods decreases, the comparative cost of time increases.)

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