Baumol’s curse
Have you ever wondered why the costs of your brand-new TV or computer keep going down, but healthcare and education costs keep going up?
Below is a chart to motivate your thinking a bit more:
This anomaly is known as Baumol’s cost disease. Baumol was an economist who in 1960s was trying to understand the economics of arts. He noticed that while musicians did not get more productive with time, they still made more money than their historical counterparts.
For example, a string quintet composed by Mozart still needs five musicians for a performance, the same as in 1787. However, the modern musicians make much more money.
Productivity increases when the goods and services can be produced via fewer inputs. In manufacturing sector, the increased automation has required increasingly less labor. When fewer workers are needed in the manufacturing sector, the number of people in the service sectors grows like what happened when people moved from farming to manufacturing during industrial revolution.
We have seen this dramatic change in the United States since the end of World War II when most workers were involved in manufacturing.
A rise in productivity in manufacturing pushes up the manufacturing wages and to compete with a finite pool of employees the wages of service sector employees are pushed up as well. Hence a plumber or a barber will cost you more in say Western Europe than South Asia. Offshoring is also an indirect offshoot of this phenomenon.
The so called Baumol disease is pronounced in labor intensive sectors such as health care, education and performing arts. The implications are profound and explain why healthcare and education sectors are so hated yet so difficult to disrupt.
I was thinking about Baumol cost disease once again when reading about the Chinese crackdown on after-school education sector. Here is an excellent thread summarizing it in case you are not familiar with it.
Of the two sectors I believe education is much more vulnerable to disruption. Healthcare has too many vested interests , regulatory impediments, and misaligned incentives. It is possible but very difficult to disrupt. Three deep pocketed players: Amazon, Warren Buffet and JPM tried to solve it together actually but then gave up.
The first wave of ed-tech was dominated by MOOCs. But I suspect the next wave will overhaul the entire pedagogical approach. The current education system not only ossifies the chasm between haves and have-nots but also inhibits the creativity of students. Current teaching methods focus on cookie cutter approach and are not customized to the strengths and weaknesses of students.
The current educational system is a business of conveying credentials via “signaling effect”.
When you go to Netflix the algorithm automatically personalizes your feed. Amazon personalizes your shopping page when you login. If entertainment and shopping can be personalized why can’t educational system be personalized to each student’s strength? I do not have the answers but the implications of such an approach to education could be revolutionary with massive productivity unlock.
How will it happen and when will it happen is anybody’s guess.