Baumol was wrong

One of the truisms in the very small field of arts economics is what’s come to be known as “Baumol’s Curse.” This was first described in a 1996 book by Baumol  (at the time, an economist on the faculty at Princeton) and a colleague, William Bowen, called Performing Arts: The Economic Dilemma.

Baumol’s own description of Baumol’s Curse can be found in an interview he did with Paul Judy for Harmony:

Any economic activity affected by it will tend to rise in cost persistently and at a rate faster than the economy’s rate of inflation, obviously leading to financial pressures for anyone who supplies the product. Orchestral music is a prime example. The reason the problem arises is that orchestras experience little or no labor-saving innovation—no growth in productivity. A Haydn symphony written to be performed by 30 musicians and lasting one-half an hour will require 15 person-hours of human labor for an “authentic” performance, no less than it did a the end of the 18th century. But elsewhere in the economy it takes less and less labor every year to produce a product. The amount of labor needed to produce an automobile declines more than three percent each year, on the average. This means that if wages rise at more or less the same rate in car production and in orchestras, then clearly, the cost per performance must rise faster than the cost per car, because in car production rising wages are offset by the reduced use of labor per car, while in orchestras there are few such offsets. Thus, orchestra costs are condemned to rise every year, cumulatively, at a rate faster than the average of the economy’s prices; in other words, faster than the rate of inflation.

I’ve never found this to be particularly insightful. First of all, it applies to any industry that is dependent to an above-average extent on any particular economic input. Consider, for example, what the price of oil does to airlines, or the price of health insurance does to GM in the US versus GM in Canada. It certainly applies to any number of entities in the non-profit sector, most notably schools and colleges.

Secondly, does it really matter? If orchestras were for-profit ventures, it certainly would. The price a business can charge for its products is not dependent on its costs, but rather on its market. So if its costs go up faster than average, and at the same time it is unable to change its price (or, more accurately, to increase its revenue), then it’s going to be in trouble at some point.

But orchestras (and non-profits in general) have other ways to increase revenue, most notably by fundraising. As Flanagan states in his report:

One way to cover increasing costs per unit of output is to raise prices, and a major conclusion of Baumol and Bowen’s analysis was that prices of arts performances would continue to rise relative to prices in the goods-producing industries. Unless they find alternative sources of funding their expenses, the arts and other low-productivity-growth industries face the “curse” or “disease” of increasing relative prices, a development that tends to discourage patronage.

Of course, other methods of addressing the cost disease, including private philanthropy and government support, can mitigate the need for price increases. Moreover, whether or not the increasing relative price of the symphonies and other performing arts discourages attendance depends on how the population’s taste for symphony music changes as incomes increase. After all, the productivity increases that support higher wages produce higher incomes and changing expenditure patterns. If tastes for classical music increase sufficiently rapidly with real income growth, the effects of higher prices might be countered.

It’s also true that some non-profits don’t sell services at all. Does Baumol’s Curse affect public libraries? Running a library is quite labor-intensive, but that obviously doesn’t affect the price that libraries charge patrons (generally zero, of course) or the demand for their product. It might affect the ability of public entities to keep libraries open over time, of course – but only if one assumes that government revenues are not affected by productivity increases in economy as a whole, which is probably not the case. (Yes, I know that most libraries are not private non-profit enterprises, but substitute “philanthropy” for “government revenues” and the analysis is unchanged.)

Besides, orchestral labor costs are only about half of most orchestras’ expenses. Is the other half affected by Baumol’s Curse? I don’t know, although it’s interesting that the Flanagan report found that, on average, orchestras’ artistic expenses increased at a slightly slower rate over time than did non-artistic expenses. If that’s true of orchestras, it’s probably true of their competition in the performing arts/entertainment business as well. Broadway musicals have improved productivity by replacing string sections with machines, for example – but there are no robotic stage hands, truck drivers, ushers, house managers, or production company executives.

I’ve always believe that, in the end, what will determine the future of orchestras is whether or not anyone will want to hear us – not how much we cost. Baumol’s Curse, while an interesting theoretical artifact, is simply not what lawyers call “on point.”

Comments

[Matthew]

Baumol and Bowen were entirely concerned with manpower. They would probably say that libraries aren't very affected by the cost-disease, since it's conceivable that technological advances—digitization and computer searching, or automated sorting of materials—could allow libraries to operate pretty much as they do with reduced manpower. (Same with the related idea about airlines—at some point, alternative energy technologies become cheap enough/desirable enough that oil costs would no longer be a factor.) Actually, despite its origin in studies of arts management, the cost-disease does apply to any manpower-driven industry—education and health-care economics have increasingly concerned themselves with Baumol and Bowen.

I think Baumol was basically on to something, but it's interesting that Baumol himself later came up with some factors that could theoretically alleviate the cost-disease, based around the economic benefits of technological advances in non-arts industries being increasingly available to spend on the arts. (In a way, this ties in with your criticism of Flanagan's treatment of the importance of community context.)

Your point about artistic vs. non-artistic salaries is an interesting one—it could be interpreted either way vis-á-vis the plausibility of the cost-disease. On the one hand, it seems to contradict it, but on the other hand, it could be that non-artistic staff are primarily coming from an overall economy dominated by industries not affected by the disease, and thus require higher salaries in order to switch industries.

In music specifically, a lot of criticism of the cost-disease points to recording as a way to increase production without increasing manpower. Personally, I think the discrepancy between live performance and recordings still means those are two different industries (although certainly one can subsidize the other—witness major orchestras starting their own labels), but I can imagine broadcast technology of sufficient fidelity that a symphony orchestra would be able to enjoy the technology-based savings. That does raise the question: if orchestras have potential world-wide audiences, how many orchestras will the market bear?

Your last point is exactly right—the worry is that, at some point, performance becomes so expensive that an interested audience is nonetheless priced out. Can orchestras reach the point where their endowments will cover the costs of all their operations?

[Robert Levine]

"Your last point is exactly right—the worry is that, at some point, performance becomes so expensive that an interested audience is
nonetheless priced out. Can orchestras reach the point where their endowments will cover the costs of all their operations?"

More accurately, could orchestras cover the cost of giving concerts solely from endowments and contributed income? In theory they could; it all depends on how much they spend on doing so and how much they'd save by not having to sell tickets. There have been orchestras that spent more on marketing than they earned in ticket sales; I played in one once.

[Rob]

The length of a symphony remains static but the amount of rehearsal does not. I think the productivity of a modern orchestra is that it could play a major program well every week on fewer rehearsals. But would anyone come?

[Robert Levine]

"The length of a symphony remains static but the amount of rehearsal does not. I think the productivity of a modern orchestra is that it could play a major program well every week on fewer rehearsals. But would anyone come?"

That's the core question. How can productivity be an issue if there are unused services already and demand less than the existing ability to meet it?