Baumol's Cost Disease and the Performing Arts

Why the cost of live performances keeps rising faster than other prices, as economists William Baumol and William Bowen explained in 1966.

In 1966, economists William Baumol and William Bowen published a study of the performing arts in the United States. They explained a puzzle: why the cost of live orchestras, theatre and dance kept rising faster than prices in general. Their explanation became known as Baumol’s cost disease.

The idea

In manufacturing, productivity rises over time: machines and new methods let fewer workers make more goods. But some services cannot easily become more productive. Their famous example: performing a Beethoven string quartet requires four musicians and about the same time today as it did two centuries ago.

However, musicians must be paid wages that keep up with wages elsewhere in the economy, or they will leave for other jobs. As wages rise across the economy due to productivity growth in other sectors, the cost of live performances rises too, even though the performances themselves have not become more productive.

Consequences

Rising relative costs: tickets for live performances tend to become more expensive relative to manufactured goods.
Need for subsidies: many orchestras, theatres and opera houses rely on donations, sponsorship and public funding to survive.
Beyond the arts: the same logic applies to education, health care and childcare, where human time is essential. This helps explain why these services have become more expensive relative to goods like televisions and clothing.

Technology’s partial escape

Recording and broadcasting let performances reach millions of people, greatly increasing the productivity of a performance in reaching audiences. Streaming spreads a single recording across the world. But live performance itself still requires the same human time.

The concert and the television

Over several decades, the price of a television has fallen dramatically thanks to technology, while the price of a concert ticket has risen. A musician's performance takes as long as ever, but musicians' pay has had to keep pace with rising wages across the economy. The relative price of live music therefore rises.

Thinking rising costs mean performers are overpaid

The cost disease is not about excessive pay or waste. It arises because wages must keep up with the rest of the economy while productivity in live performance cannot rise much.

Key takeaways

Baumol and Bowen explained in 1966 why live performance costs rise faster than other prices.
Productivity in live performance barely rises, but wages must keep pace with the economy.
This makes the performing arts reliant on subsidies and donations.
The same cost disease affects education, health care and childcare.