Wednesday, October 04, 2006

Nobel Series: William Baumol

William Baumol is an economist at NYU and was the co-author of the intro textbook that I used in college. The main theory of his that I am familiar with and would like to highlight is called "Baumol's cost disease," which sounds more gruesome than it is.

Basically, Baumol's cost disease explains why productivity grows so fast in some sectors while it lags behind in others. In particular, the term refers to the fact that it is difficult to increase productivity in labor-intensive industries, like the arts or education. To use an example from Baumol himself, it takes the same amount of musicians to play a string quartet as it did 300 years ago. Or to use an example from education, the number of students that can be taught by one teacher is the same as it was 50 years ago. In fact, it may even be less now since there is more of a focus on low student-teacher ratios.

Therefore, while other industries like manufacturing clothing and printing books become more productive due to technological innovation, service industries do not due to the fact that they are labor-intensive goods. Therefore, the costs to produce those service goods remains higher than other goods. This could be an explanation for why the prices of medical care and tuition have been increasing so much while the prices of computers and most other manufactures have been decreasing or increasing at a slower rate.

Here is an article from The New Yorker that discusses the application of Baumol's cost disease further and references a newer study that confirms these ideas.

Can you think of any other examples of industries or goods and services that suffer from Baumol's cost disease?


Anonymous said...

An example of Baumol's cost disease would be firemen. It takes the same amount of men to put out a fire that it did 30 years ago. The amount of men is staying constant because it is not like the fires are evolving and becoming more ferocious. Baumol's cost disease can be compared with industries that continue to grow because of innovations in technology. The clothing industry can now produce more clothes than it could before because of the innovations in technology, versus firemen, who need the same number to put out a hopuse fire that they needed 30 years ago.


Anonymous said...

Well after thinking about this I thought that things such as sporting events are another example of this type of Cost Disease. If you think about it. It still takes the same number of people to play football, soccer, basketball, hockey, and other sports as it did when the sports were first invented. Even with inflation where price would go up naturally as time goes by these events are becoming more expensive for consumers as players are being paid more and more for the same job that was being preformed in the original game. This goes with Baumol's cost disease as you can't increase the productivity of a baseball game, it can't be played by one person, or in 1 minute, so these type of things lag behind in the productivity department.

-james c

Anonymous said...

An example of Baumol's cost disease would be the legal proffesion. New technology has not allowed for a decrease in the number of lawyers or judges. Of course things like computers have made them able to do more work easier, but it has not decreased the number of lawyers or judges that it takes to have a trial. Additionally, I think that the need for lawyers is most likely increasing with all the divorce's and sueing that is going on today. Also, I disagree with the firemen example. Although not much has changed in the past 30 years, new technology has increased the ability of people to put out fires. Fire engines have allowed for fewer people to put out a fire easier and more quickly. Before, people basically had to make an assembly line from the water source to the fire. Hoses have replaced buckets, and motor engines have replaced horses. So I think that firemen have become more productive due to new technology.
-Emily Spurlock

Anonymous said...

Similar to "it takes the same amount of people to play in a string quartet as it did many years ago", I thought of another example of Baumol's Cost Disease: painting. Individiual paintings are made by a single artist. Painting can be thought of as labor-intensive in the idea that artists take quite awhile to paint pictures, similar to the artists of a hundred years ago. You can't increase productivity of paintings, unless they are copies. Original paintings are one of a kind. So, painting (or producing paintings) is another example of Baumol's Cost Disease because it goes to show that one of a kind paintings can't be increased by productivity and it still takes only one artist to produce one painting.
-Morgan Hale

Anonymous said...

Thinking of examples of Baumol's cost disease I came up with farming/harvesting crops becuase they are considered to be labor-intensive industries, but with the inventions of new technologies to aid the industries it takes fewer people to farm/harvest crops. An example of a service industry that involves Baumol's cost disease is the mail service because even dating back from the pony express it took multiple mail persons to deliver a letter, and even today to deliver a letter it still takes multiple mail persons.

Anonymous said...

Mr Arjona i forgot my name again sorry, This is Seth Weiland. Im going to get it one day

Anonymous said...

I agree with James, Schulz, Morgan, Seth, and Emily’s examples for Baumol’s court disease. Another example of this principle is the fact that it still takes the same number of doctors and nurses to provide healthcare now than it did in the past. In fact, until computers or machines are able to operate and care for people, the number will stay about the same. The productivity of the medical industry has not really grown over the years even with increased technology. It still takes the same amount of time to input an i.v., give a shot, or change the dressing on a patient. This sector of the work force will always be in high demand, and though the supply may have increased a little, Baumol’s court disease can still be seen here because its work has not become more productive or its technology directly more efficient. It still takes relatively the same amount of doctors and nurses to care for patients as it always has even with new technology and equipment.