Industries afflicted with Baumol's Disease have slower productivity growth.

Butter, Health Care and the Spread of Baumol’s Disease

Dec 1, 2012 • Behavioral Economics, Demand, Supply, and Markets, Economic Debates, Economic History, Economic Thinkers, Education, Government, Health Care, Households, Innovation, Labor, Macroeconomic Measurement, Regulation, Uncategorized • 273 Views    No Comments

When butter makers had Baumol’s Disease, for centuries, there was no cure.

From the 1700s to 1940, making butter required some cream, a churn and usually a woman with lots of time and energy to crank or plunge a shaft. When, in 1850, someone invented a double chamber thermometer churn that made the cream the optimal temperature, the process remained the same. Even when some churns got bigger, others got smaller and the people at the Dazey Churn & Manufacturing Company used glass instead of wood, still, little changed. As long as butter making remained labor intensive, it was tough to increase productivity.

Similarly, for teaching a class or examining a patient, human energy plays a central role that a machine cannot replace. Centuries ago and now Mozart’s String Quartet in G Minor requires a cellist, 2 violinists, 2 violists. Whether teaching a class, performing a masterpiece or presenting a lecture, it is tough to increase your productivity.

Our Bottom Line: When an industry–especially one based on labor rather than technology– experiences rising costs because it cannot keep up with productivity increases elsewhere, it is afflicted with Baumol’s cost disease. So, when you say that the US healthcare system is sick, now you can add that it is suffering from a case of Baumol’s disease that many say is incurable.

An interesting quote: Senator Daniel Moynihan (1927-2003) was quoted by Dr, Baumol as having said, “You have now explained to me why the Democratic Party is called the party of tax and spend, because we are financing all the things that are affected by the cost disease and Republicans want to short-change them.”

Sources and Resources: For an enjoyable read about Baumol’s Disease, I recommend this New Yorker column while for an academic perspective, this paper provides analysis. My facts about butter came from slate.com and to consider the speed and spread of contemporary innovation, you could look at Tyler Cowen’s The Great Stagnation through an inexpensive ($3.99) Kindle download and his TED talk. Finally, superbly, this NY Times column explains the connection between Baumol’s disease and our health care challenges.

Labor Intensive Activities Have Low Productivity Growth

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