16609_3.1_000005787159XSmall

Healthcare and Baumol’s Disease

Sep 11, 2011 • Businesses, Demand, Supply, and Markets, Developing Economies, Government, Households, Innovation, International Trade and Finance, Labor, Macroeconomic Measurement, Thinking Economically • 207 Views    1 Comment

Asked why healthcare is relatively expensive while cell phones are not, you could answer, “Baumol’s Disease.”

Described by New Yorker columnist James Surowiecki, to play Mozart’s String Quartet in G minor in 1787 and now, we need 2 violinists, 2 violists, and a cellist. And therein lies our predicament. Because we always need the same amount of land, labor and capital, we cannot increase our productivity.

Like Mozart’s String Quartet in G minor, for medicine and higher education, we need human input that remains relatively constant. In addition, as economist Tyler Cowen explains in The Great Stagnation, with certain tasks, our productivity is even tough to measure. For medical care–is it doctor visits? Cures? Treatments?

Meanwhile, other goods and services are not afflicted by Baumol’s Disease. Cell phones, food, clothing, cars…an endless list of items made around the world are being produced more efficiently.

The bottom line?

We are experiencing a productivity divergence. For many goods and services, through global competition, we enjoy the benefits of productivity growth. Afflicted with Baumol’s Disease and other ailments, government, healthcare and higher education, though, will require more jobs, become increasingly costly and experience less productivity growth.

The Economic Lesson

Defined as more output per labor hour, productivity growth results from more inputs (land, labor and/or capital), better inputs, and/or a more effective combination of inputs.

You can see why productivity matters. As described in a Teaching Company Lecture by Dr. Robert Whapples (#4), greater productivity can fuel economic growth and enhance our purchasing power.

An Economic Question: How might current economic sluggishness relate to a productivity divergence?

Related Posts

  • sullivanj12

    Economic sluggishness is related to productivity divergence because the productivity is slowed down. If the productivity is not growing but staying stagnant, it will lead to productivity divergence.

« »