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Monday, 8 June 2015

Baumol is (sometimes) wrong: service productivity can improve

A recent article in the Financial Times about the problem of British economic productivity (which has been remarkably poor recently) conveniently summed up one of the possible reasons by fingering services. Services are a rapidly growing part of the British economy and allegedly suffer from what economists call Baumol's disease. This is when the service is highly dependent on people and can't be automated or much improved by the application of technology or other forms of capital equipment.

This has been used by others to explain why the NHS doesn't see strong productivity growth, despite the desperate need for improved productivity. For example, John Appleby of the Kings Fund think tank said this in the BMJ in 2012:

the prices of the inputs to healthcare have tended to rise in line with, or even faster than, costs in the economy as a whole—a reflection of the “cost disease” identified by William Baumol in labour intensive industries where the productivity increases that could offset rising pay costs are hard to achieve.

 The FT's summary of the British productivity crisis summed up the Baumol problem like this
In the 1960s the economist William Baumol noted that the productivity of a live Beethoven string quartet could not be higher than that of 100 years earlier. This effect results in higher productivity growth in manufacturing rather than other sectors. The move towards advanced services sector economies implies slower overall productivity growth in the medium term...
Applied to the NHS this is widely thought to imply that, as long as during and doctoring require people, there is a limit to how much we can improve productivity of healthcare.

But the example in the FT article trigger this though in my head: Baumol is wrong. And not just a bit wrong, very, very wrong.

The key argument is that you can't perform a Beethoven string quartet with fewer than 4 musicians. So how can the productivity improve? QED. But this depends on how you look at productivity.

London's Wigmore Hall is one of the best worldwide venues for chamber music. It seats 545 people. So a string quartet can serve beautiful music to about 500 people in one sitting. To do 1000 people they need to perform 2 concerts; to do 1,000,000 they need to do 2,000 concerts (or a concert every day for the best part of six years). So it looks like Baumol wins. They can't be more productive than that.

Except they can. If the issue is how many people can listen to the music, the modern world has an option not available to Beethoven when he wrote the music: we can record it and broadcast it. A single concert in the Wigmore can be live-streamed to the internet where it is trivial for a million users to listen at the same time (it's not quite the same experience, but then driving a car is less fun than riding a horse, but from most points of view it it is way better for the economy and few people still rely on horses). To me, a million listeners is a productivity improvement of more than a factor of 2,000 for string quartets. Baumol is wrong and by a very big factor.

This doesn't apply directly to the NHS: you can't live-stream a hip replacement (well, you can, but it doesn't get more hip replacements done). But there is plenty of stuff in the NHS where modern technology could be used to greatly improve productivity. We could, for example, use technology to spread good ideas far more quickly. One surgeon finds a better way to do cataract operations very quickly and spreads the methods across the NHS online. Or we create online patient records that hold all of a patient's medical history so no medic has to waste time asking about it every time they see the patient.

But the NHS doesn't do even these obvious things, or at least it doesn't do them across the whole system. It underspends on technology; it uses paper when computers would do a better job; it does boring stuff manually when automating it would free up staff time to care for patients.

Baumol is wrong and the sooner we realise it the faster we will improve NHS productivity.


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