Economist Alex Tabarrok recently made an interesting post on Baumol’s cost disease. The concept usually explained by noting that since it doesn’t take any less time to perform a string quartet than it did when Beethoven wrote it, orchestras have no way to save money by taking advantage of advances in productivity and efficiency.
Tabarrok comes at it from the perspective that it is only more expensive to perform a string quartet now because productivity has increased in other industries.
The Baumol effect is easy to explain but difficult to grasp.
Growth in average labor productivity has a surprising implication: it makes the output of slow productivity-growth sectors (relatively) more expensive. In 1826, the average wage of $1.14 meant that the 2.66 hours needed to produce a performance of Beethoven’s String Quartet No. 14 had an opportunity cost of just $3.02. At a wage of $26.44, the 2.66 hours of labor in music production had an opportunity cost of $70.33. Thus, in 2010 it was 23 times (70.33/3.02) more expensive to produce a performance of Beethoven’s String Quartet No. 14 than in 1826.
The focus on relative prices tells us that the cost disease is misnamed. The cost disease is not a disease but a blessing. To be sure, it would be better if productivity increased in all industries, but that is just to say that more is better. There is nothing negative about productivity growth, even if it is unbalanced.
If that is a little hard to understand, he uses a more relatable example to point out that “…over time prices have very little connection to affordability.”
If the price of the same can of soup is higher at Wegmans than at Walmart we understand that soup is more affordable at Walmart. But if the price of the same can of soup is higher today than in the past it doesn’t imply that soup was more affordable in the past, even if we have done all the right corrections for inflation.
So just because a ticket costs more than it did years ago, doesn’t mean it is necessarily less affordable. Granted, it may still be a bit more difficult to get the funds together than in the past. I have had people tell me they were able to see Broadway shows for $15 at one time. While I suspect they may be mis-remembering how much of their weekly salary that $15 represented, it wouldn’t surprise me to learn that tickets today are a greater portion of the weekly salary for that same job today. The production values are likely a lot higher than people saw when they were paying $15 so the ratio of value to money spent is probably fairly good.
Based on Tabarrok’s explanation, the concept that certain artistic expressions are fated to be an increasing burden on society because they can’t be executed with greater efficiency is not valid. Productivity growth in other areas provides the capacity to support those artistic expressions.
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