It may not seem like an honor to have a term like "cost disease" named after you, but William Baumol's new book The Cost Disease is one of the more concise, enlightening economics books I've read recently.
Baumol's thesis is that certain service sectors, most notably healtchare and education, are doomed to outpace inflation because they are so dependent on labor.
Is there hope for education costs coming down? Will Harvard and other universities with massive endowments decide to subsidize higher education? Unlikely. But disruption tends to not come from incumbents, so we wouldn't look there anyway.
Perhaps education cost disruption comes from something like online education. As Alex Tabarrok writes, online education gives teachers massive leverage.
In 2009, I gave a TED talk on the economics of growth. Since then my 15 minute talk has been watched nearly 700,000 times. That is far fewer views than the most-watched TED talk, Ken Robinson’s 2006 talk on how schools kill creativity, which has been watched some 26 million times. Nonetheless, the 15 minutes of teaching I did at TED dominates my entire teaching career: 700,000 views at 15 minutes each is equivalent to 175,000 student-hours of teaching, more than I have taught in my entire offline career.[1] Moreover, the ratio is likely to grow because my online views are increasing at a faster rate than my offline students.
Teaching students 30 at a time is expensive and becoming relatively more expensive. Teaching is becoming relatively more expensive for the same reason that butlers have become relatively more expensive–butler productivity increased more slowly than productivity in other fields, so wages for butlers rose even as their output stagnated; as a result, the opportunity cost of butlers increased. The productivity of teaching, measured in, say, kilobytes transmitted from teacher to student per unit of time, hasn’t increased much. As a result, the opportunity cost of teaching has increased, an example of what's known as Baumol’s cost disease. Teaching has remained economic only because the value of each kilobyte transmitted has increased due to discoveries in (some) other fields. Online education, however, dramatically increases the productivity of teaching. As my experience with TED indicates, it’s now possible for a single professor to teach more students in an afternoon than was previously possible in a lifetime.
I don't think online universities will ever adequately replace attending a university in person for certain things (socialization, live human feedback, and the signaling value of a degree from an actual university have tangible value), but I've taken several online courses and for certain subject matters they are more than adequate at transmitting knowledge.
Baumol argues that we shouldn't panic as much about the rising costs in healthcare and education because we're saving a lot of money in areas which aren't as dependent on labor, but that doesn't mean we shouldn't take a hard look at how to keep the costs in both of those areas down.
In healthcare, consumers are so removed from the actual cost side of the equation that it doesn't function much like an efficient marketplace at all. I see the doctor, I pay my copay of $15, and then when the bill comes out I have no idea whether I was given a good deal or not, I just hope my insurance covers as much of it as possible.
As for the value of what I receive from the healthcare industry, it's extremely difficult to gauge. Early in life, it tends to be very binary what I want. Cure my sinus infection. Fix my broken leg. Reconstruct my ACL. At the end of my life, the value equation shifts dramatically; still difficult to value, but in a completely different way. How do you quantify the value of an additional month of life? An additional year? Three years? And can you assign the proper amount of credit to the physician for
One reason Baumol's Cost Disease is more prevalent than it would otherwise be is that wages tend to be sticky. This was hammered home recently in the story of Hostess, which, in the face of declining sales, asked their worker unions to accept pay cuts, which the unions refused. That the executives had awarded themselves pay raises or that the root of the issue is really that no one eats Ding Dongs and Twinkies anymore doesn't negate the point that wages rarely go down in the real world, as they might in a truly efficient marketplace. I've actually never been at a company where any employees were asked to take a pay cut. Generally companies just freeze the salary of low performers, and that's enough of a signal that folks move on.
I find new-fangled labor marketplaces like TaskRabbit and Zaarly intriguing mostly as economic experiments in true wage elasticity. Companies don't generally try to ask people to work for lower wages, that's not a good signal in the recruiting marketplace. Rather, they'll approach it by trying to squeeze more work out of people at the same salary, which is a more subtle approach.
Low end disruption n the tech labor marketplace can happen, though it's most likely if initiated by the laborers themselves. In practice we call these people interns.
