The Curse of Material Progress
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A disease, one that threatens to spread throughout our socioeconomic and political systems, is growing. This disease is a cancer that has the potential to stifle future prosperity by misallocating limited resources and stunting productivity. Here, we look at “cost disease,” how it manifests, and why most prescriptions offered by policymakers only further feed the disease to the detriment of our future.
What is Cost Disease?
William Baumol observed that differences in productivity growth in various sectors of an economy can cause the cost of goods/services in those sectors to inflate rapidly over time. He used the example of a string quartet to explain this phenomenon. Violinists today are no more productive than those of a century past; a string quartet still requires four musicians. Yet, despite no improvement in productivity, musicians today are paid significantly more than those in the 19th Century.
On the surface, this appears irrational. But to assemble a quartet, one must still hire musicians. Their compensation is determined, not on the marginal value of their work as musicians, but instead on the opportunity cost lost by not taking more productive jobs. As a consequence, sectors of the economy that are disproportionately labor-intensive will tend to become more expensive relative to those that are not.
For the purpose of this article, I am going to expand the definition of Baumol’s cost disease to include any sector of the economy where demand is inelastic and supply/productivity is artificially restricted. With this expanded definition, four sectors of the economy stand out as afflicted by cost disease: healthcare, higher education, housing, and childcare.
Cost disease is the curse of highly advanced and developed economies. Ironically perhaps, in the United States, healthcare ranks among the most diseased. Beyond…