August 11, 2009

Baumol's cost disease

This post should open a series of posts explaining "basic concepts" of economics of music as I understand them and often told in words that don't sound very "economics" but still seem understandable to me.
As you can read in Wikipedia, Baumol&Bowen cost disease in the performing arts (or simply Baumol's cost disease) is an effect first described by William J. Baumol and William G. Bowen in 1966 in their book "Performing Arts: The Economic Dilemma".
The idea is that as times go by and technological change happens in the world - the relative cost of producing performing arts rises, relative real wages in performing arts industry decline and the gap between performing arts and the rest of the economic world in terms of profits, costs and wages, widens. The original study analyzed unique data from 18th and 19th century account books for major British theaters and US major orchestras and compared it to then modern data to prove the point.
For the representative music consumer of today (either a "big-record-label-cd-buyer", "local-radio-station-listener", "mtv-viewer", or a "brave-downloader", "pirate", "conscious-consumer-going-to-all-the-indie-concerts" type) this concept might seem ancient history, since the industry seems to be build on CD sales and rapid changes of heroes. But I think now is exactly the time to look back on the economics of performance arts because, as TechDirt usually mentions, now is the time when concerts matter much more than anything else. Again.
So I'll try to make a short review of several papers about the Baumol's cost disease and say what I think of them here.

The original "cost disease"

One of the features of all performing arts is that labor is the main output of the industry. The most used examples of that say: it takes as much time for a string quartet to play a Mozart composition as it did in Mozart times; and it takes as much time to perform a Hamlet monologue as it did in Shakespeare times. While in any "usual" industry rapid technological change drops down marginal production costs, the production costs in performing arts are less driven by technology and decline much slower. Hence the "cost disease": relative cost of performing arts product rises.
The numbers showing that can be found in the original Baumol and Bown work, or in a wiki-linked chapter from "A handbook of cultural economics" by James Heilburn (pdf!).


There are many objections to this scenario! Most are summed up in a Tyler Cowen paper "Why I Do Not Believe in the Cost-Disease". The main idea behind the "no-to-the cost-disease" is that we underestimate the technological change in music industry, limiting it only to the performing part. And we also underestimate the "performing" nature of "usual" industries, forgetting that the technological change itself is sort of a product of "performing art" of science.

I'd like to add two comments on that. First is "anti-cost-disease": not only the introduction of multimedia resources is a technological change, the actual performance now reaches much more listeners in the audience than it did in the Mozart times. Now that we have all the sound-enforcing techniques the concerts can be performed at stadiums instead of small rooms. And the streaming capabilities bring even more people to a single performance. The second one though is "pro-cost-disease": as I already mentioned, now the multimedia part of the business often becomes a free good and only advertises the live performances. Even when CD is not free, you can clearly see by major musicians income statements that live performances generate a huge proportion of their income, so the economics of live performances is still very important.

Whether the cost disease effect holds for the pop part of music industry, where the CD sales still count (or whether it DID matter when CD sales were still important) is a subject of careful calculations. And if one wants to make it she\he has not only to get access to the relatively recent data on major record labels and major artists accounts (which is hardly possible now), but also think hard on how to separate all the effects of technological change in the data: bigger venues, CD's, radio, streaming services, file sharing, merchandise (why not? it's still the part of the industry!) etc.

How it may have shaped the pop music world

The non-econometric attempt to map the cost disease concept to the "real world" (and not to the classic performing arts which many observers think is dying, but it's not, but I think I should write about it later) is presented in a Larry DeBoer paper "Is Rock'n'Roll a Symptom of Baumol's Disease?". DeBoer suggests that even though the Baumol's cost effect didn't shape the style of the popular music it might have affected the size of an average band to get through to the stardom. He also notes that although record-labels could cross-subsidies the big bands, the genre was to die out because any good band needed (and still needs) a period of growth and polishing the skills by live performances, which became too costly. I find the quotes of music critics of the time the best support for this hypothesis and would like to double-quote one here:
The decline of the dance band and jazz medium is due largely to the fact that a big orchestra simply costs too much to operate. Most of the big bands in existence today are balancing on the edge of financial collapse - which is all right with me (Miller, 1947, p.40).

What's the equilibrium?

There are said to be two equilibria within this concept. The bad one: beloved live music costs us more and more until it dies out completely leaving the world numb and sad. The good one: while the live music still costs us more and more, everything else becomes almost free and we're able to spend all of our money and time for music; we also start making our own music, paintings etc. because we have too much free time, the world climbs to enormous heights of artistic productivity.

Both ways seem bizarre, but if you ask me I vote for the second scenario. Who could think 25 years ago, when I was born, that when I grow up I would have enough time to ramble about things that are not my work and even try to compose my own music in a free time?

My final comment: reverse causality

When I was still a student, my teachers would always tell me to think of "reversed causality". It was like a mantra. It means basically, that each time you think that one thing is driven by another you should stop and think again, why not the other way?

So here the pattern is: the shift in overall productivity in "non-art" industries makes "art" industries too costly, so the prices go up. My other version of the pattern is: while life overall becomes cheaper and easier, our demand for art grows and hence the prices for everything concerning "art" industries becomes more expensive, including costs for the "material" (for example venue rentals etc.). If I thought of research project on this topic, I'd certainly tried thinking "demand-side" first.

And I almost forgot: there's a world outside the music

The same concept may be seen in research papers concerning virtually any industry where labor is an output (or a large part of an output). So even though we talk here about music and arts in general, the right statement might be "while the goods-production side of economy goes cheaper, services-and-ideas side becomes more expensive. at the same time our demand for the scarce resource of human labor grows as we can get all the simple things for no labor at all".

The end. Please comment if you're still with me!

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1 comment:

Anne said...

Nice summary. This topic indirectly came up today when we discussed the choice of music given a limited budget. A DJ was far cheaper than live musicians.... but the latter make it more special....