Baumol Cost Curse / Disease

Modern economies are wonderful things. If you really want to re-enact the middle ages, you should eat a healthy portion of your own soil or insects and develop scurvy. Not to mention let go of a few of your personal liberties.

Baumol's thesis concluded that while productivity was rising virtually across the board, the hidden cost was on things that respond little to capital-augmentation. His example is a live-orchestra. It took 250 people to perform a concert in 1750 and it still does today. Now, I have always laughed off this concept because compact disks and MP3s have made the marginal cost of listening to this performance virtually zero. But in 1993 Baumol resurrected his thesis by applying it to health care, and this was published in my favorite journal:

If you think about health care, you will start to realize that good health care is a function of personal relationships -- services. These relationships cannot be augmented by machines the same way that you can get more widgets from a worker by giving them a row of widget stamping machines and training them to monitor and maintain the machine. For pressure ulcers (bed sores), as one example, the patient needs to be clean, dry, and massaged on a routine basis (the sore develops local gangrenous material as a result of damp skin that has insufficient blood flow, a similar to trench foot anywhere there is contact between your body and the bed). All attempts to mechanize relief to this problem seem to fail.

In medicine you need highly skilled people to do tasks that are difficult to scale. Like someone who learns to play a violin, a proper nurse is a very talented artist. Because the increases in productivity here are small, the cost of the level of service rises in proportion to the opportunity costs.

Market advocates might respond that when the opportunity cost gets high enough, the incentive to find a capital-based solution will be so great as to create the needed innovation, but I am not particularly comfortable with necessary but not sufficient arguments. Similar to the market response to the energy crisis, the rising price of oil creates a necessary but not sufficient incentive to innovate alternative energy solutions.

I will continue to work on this idea and most likely post additional comments on it. I would love your thoughts!