On cost disease and “neoliberal” demagoguery


In the 1960s, William Baumol (in his book, co-written with William Bowen, Performing Arts: the Economic Dilemma, as well as in subsequent works) noticed that, almost by definition, the productivity in the “services” that required direct human interaction (e.g. schooling, certain medical procedures, performing arts, etc.) would necessarily lag behind the productivity in other branches.

He then warned that this phenomenon could be exploited by political demagogues bent in de-funding public good provision, since the cost of schooling, medical care, etc. would appear to skyrocket compared to other costs, even if there’s nothing strange or wasteful (“inefficient”) about that.

How right he was!  The political demagogues, the whole “neoliberal” assault on working people, milked the “cost disease” to extremes, and that continues unabated all the way to (locally) Scott Walker, Chris Christie, Michael Bloomberg, and (nationally) to Clinton, W. Bush, and Obama.

So, no and no!  The fact that it “costs” more stuff today than yesterday to get a kid through elementary school or to provide medical care to a patient does not mean that schools and hospitals are necessarily wasteful and teachers and nurses a bunch of greedy monsters.  Make no mistake, schools and hospitals may be wasteful compared to some reasonable standard, but the observed “cost disease” does not imply waste.  It is simply a reflection of the fact that productivity in branches of the economy that can be mechanized and automated more easily well, duh, goes up. So a worker in those branches can produce more of the other stuff in less time while the amount of human time required to school a kid or help a patient in a hospital stays about the same.  So, thus the higher marginal product of labor in the stuff-producing branches drives up labor costs (in stuff- or “real” terms) in schools and hospitals as well.

So, this is not a terminal-fiscal-crisis-oh-my-god-oh-my-god-we-must-starve-the-beast-now, but instead something we usually call progress.

3 thoughts on “On cost disease and “neoliberal” demagoguery

  1. This is a comment left by Robin Chang on my personal blog:

    “As far as differences in levels of healthcare spending, the US spends considerably more as a percent of GDP than Canada. In 1960s, both spent about 5%, and by 2011, the level had become 11% in Canada, and almost 18% in the US. Also, the rate of growth in public spending on healthcare is much faster in the US than in Canada. So there appears to be differences in cost dynamics in single-payer versus employee-delivered ‘systems’ which has a lot to do with administrative complexity of the US system. These seem to me to be social ‘institutional’ factors, which confer upon healthcare services these material properties (‘cost’), not the reverse.”


  2. In my Facebook page, Wojtek Sokolowski wrote:

    “I am not sure about the validity of Baumol’s claim. Many service fields, such as law or health care experienced considerable Taylorization – work being performed by paralegals, nurses, clerks etc. plus computerization that cuts the time professionals need to spend on solving problems. The fact that cost of education or health care skyrocket has less to do with the “cost disease” and more to do with profit expectations. Hospitals and universities invest heavily in real estate and technology and expect returns on those investment at the “market” rates – hence the price inflation. Please also note that services are not subject to foreign competition as mfg is, which eliminates the problem of diminishing rates of return, recently brought up by Brenner.”

    I then wrote:

    Actually, Baumol was very careful to hedge his point by acknowledging that technology could make a difference in various types of “services.” But, as a general principle, the notion is pretty robust — I think. I mean, think about it: If we can produce more stuff per hour of labor time, then each hour of labor time becomes… well… more productive of stuff. Then, if there are certain branches of production that require the direct use of our time to produce a certain outcome (e.g. raise or school a kid, take care of a patient with a certain condition, etc.), and sure our productivity in other areas may help to increase our productivity here, then these areas of production requiring direct human interaction (and no close substitutes to that) will naturally lag.

    Look, direct teaching has been becoming obsolete since, well, at least the early 20th century when some entrepreneur came up with the idea of courses by correspondence, then radio, TV, and now web-based stuff… and yet, there’s something about teaching that keeps resisting the severance of direct human interaction. If in one hour we can produce much more stuff, but not much more teaching than 10 years ago, then this is going to get reflected in the differential evolution of “costs” across branches, etc. That said, one thing is the general principle (and its political misuse to justify anti worker policies), which is what I was referring to, and another thing determining the specific weights of the various reasons why — e.g. — the U.S. health care costs have increased so much.

    Robin Chang just wrote a comment on my blog post about this. Indeed, there’s stuff that needs to be disentangled to explain what happened to schooling and medical care provision in the U.S. (say, compared to other rich countries). And that’s an empirical exercise. Again, that is not what I was trying to say, but just to note that a lot of the demagoguery and attacks on public workers since the 1970s has benefited from the sheer exploitation of a general misunderstood fact that has been clarified since the 1960s.

    Wojtek replied:

    “I agree. I should have written ‘I am not sure about the explanatory power of the Baumol claim in relation to the service industry in the US’. The principle itself seems valid, it just does not explain the service price inflation that we have been witnessing. On that note, I think Veblen’s conspicuous consumption argument has more explanatory power in regard to prices than all neoclassical economic combined. To summarize and paraphrase – wastefulness is a symbol of social status and prices are set with that fact in mind. They are determined by the prospective buyer willingness to pay, which in turn is determined by his/her desire for status. It become obvious when you travel in the Middle East or Asia – prices vay depending who is asking and have no relationship to the cost of producing the item or the prices of similar items next door.”


  3. As if by cue, today’s [yesterday’s] NPR had this NY state story:


    At 2:00, you can hear WNYC’s Jessica Gould refer to how hard it would be for Cuomo to “reign in on education and health care costs.” These remarks suggest that education and health care costs are out of control, suggesting a major inefficiency. It is not explicitly said, but clearly insinuated. People will usually be led to think that the reason is excessive pay and benefits to public workers, etc. There may be inefficiencies, due, as Robin noted above, to the way these “services” are provided and managed publicly in the U.S. But these inefficiencies are actually much smaller than they appear to be if we factor in Baumol’s “cost disease.”


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