Cost disease economistWilliam Baumol

Dr. Baumol had a serious malady named after him: Baumol’s cost disease. It’s certainly not what killed him, and he had a doctorate in economics, not medicine. Baumol was considered a candidate for the Nobel Prize in Economics (in both 2003 and 2014) because of what he figured out: the increasing productivity in workers helped drive down the cost of labor — unless that labor is time-intensive and not really subject to improvements in productivity, such as with doctors, barbers, or teachers. They pretty much take the same amount of time to do their jobs as their predecessors did 100 years ago — they’re not seeing massive productivity increases. So while ever-more-efficiently produced products become less expensive, professional services become relatively more expensive. That, Baumol said, helps to explain things like the increasing cost of health care and education.

“What this says is that the quality of life 30 years from now could deteriorate,” Baumol said in 1983, “because many of the services that we associate with quality of life will become relatively more expensive while mass-produced things become cheaper and cheaper.” In fact, he said, “Cost increases are in the nature of the health care beast. Efforts to alter this nature will be fruitless or harmful. The real danger is that the nation, mistakenly thinking it must rein in runaway costs, will curtail valuable health services and render them inaccessible for the less affluent. Well-meaning reformers may take the same misstep in education, law enforcement and other handicraft services.” Indeed, Baumol explained, getting overly reliant on an economy based on services could prove limiting to the economy in general. He also made significant contributions to the theory of entrepreneurship and the history of economic thought, and was the author of more than 80 books and hundreds of journal articles. He spent his career doing research and teaching at Princeton, and was also the Academic Director of the Berkley Center for Entrepreneurship and Innovation at New York University. Dr. Baumol didn’t retire until he was 92; he died at his home in New York City on May 4, at 95.

From This is True for 14 May 2017