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The Cure For The Common Cost Disease

A big hats off to Joe Patti over at Butts In The Seats for posting an absolutely terrific article on 12/3/2012 that casts a pragmatic eye on Baumol’s cost disease. And if there’s ever a topic in this field that is all but assured to raise hackles and inspire heel entrenchment, it’s Baumol’s cost disease.

pillsIf you’re not up on the epidemic, here’s the quick and dirty description: it denotes an unsustainable business model for businesses that don’t benefit from an increase of labor productivity to offset increases in labor costs. The common example is it takes the same number of musicians to perform Beethoven’s Fifth Symphony is it did 100 years ago so the business of orchestra’s have no way to control costs by means of improved efficiency such as the auto industry employs.

Throughout the Season of Discontent, Baumol’s cost disease has entered the equation to one degree or another in every economic crisis driven labor dispute in addition to serving as a cornerstone for cries of new model restructuring.

Patti’s article is useful in that it picks itself up from the gutter of circular logic that defines most discussions on this topic to make two particularly useful points.

It simply isn’t fair or accurate to say that the field doesn’t benefit from efficiency.

In some respects, I think that non-profit performing arts have done a great job of employing technology to keep their costs under control…in comparison with the movie industry where technology has resulted in sky rocketing costs.

Pounding a square efficiency peg into a round artistic hole is a slippery slope.

Right now the focus seems to be on how much of the product can be trimmed back before people notice and become concerned with the drop in what they value.

While this is translating into seeing how many musicians an orchestra can cut before people figure the music is suffering, you see the same thing manifesting in other areas of your life as well. Just try to buy a half gallon of ice cream these days. You will find it is 1.75, maybe 1.5 quarts.

The field would do itself some good by abandoning the cult of Baumol’s cost disease and its apocalyptic dogma that purports regulating expense structures by way of blunt force governance.

In the end, there will never be a shortage of meaningful topics centered around balancing costs against artistic activity. However, the solutions will remain out of reach if we fool ourselves into thinking that in order to remain competitive, we have to make supposedly difficult decisions to give our audience less, charge them the same, and try to fool them into thinking nothing has changed.

7 Responses to The Cure For The Common Cost Disease

  1. Lisa Hirsch December 10, 2012 at 9:49 am #

    I had a revelation about the supposed cost disease a couple of weeks ago, but I keep forgetting to put up a blog post about it.

    In a nutshell, of course there have been gains in performance efficiency. They’re just not in the number of players required, where, if anything, you need more players for so many post-1900 scores than for Beethoven.

    Here’s an obvious example: the first scheduled performances of Tristan und Isolde, in 1865, were cancelled after something like 50 or 60 orchestral rehearsals because the orchestra wasn’t up to the music. Performing Tristan today doesn’t take 50 orchestra rehearsals, and in fact it’s hard for me to imagine that any 20th or 21st century score takes anything like that.

    That’s a gain in efficiency, but it comes in the area of player skill.

    • Drew McManus December 10, 2012 at 10:54 am #

      that’s a good observation, especially from the longtail point of view. I’ve heard similar examples from musicians over the years that point out technology based improvements and/or a general increase in skill levels that allow organisations to accomplish equal gains in artistic quality through reduced rehearsal services (either few serves and/or shorter length).

      The cost disease response to this is usually something along the lines of “yes, but those improvements aren’t enough to offset the gap between gains in efficiency and overall labor costs.”

      I don’t believe that is applied universally throughout the field (for example, pr service orchestra benefit more from this than salary groups) and I have yet to see a comprehensive study on it in order to determine actual cost savings.

      But it would make for a fascinating research project.

  2. Bruce Hembd December 10, 2012 at 5:59 pm #

    Without getting too specific, this blade can perhaps cut both ways – it may not be necessarily excluded to a management group and their attempts to cut costs.

    In my neck of the woods, a concessionary measure with contract negotiations appears to be that musicians are given more allowances with leaves and absences in order to counterbalance an agreed-to wage that falls below Union scale.

    The end result are pro groups that at times look and sound more like pick-up bands. There is a cascading effect on the local freelance market too, with an overall effect on quality across-the-board.

    I call it “cannibalism by proxy.”

  3. Eric Edberg December 11, 2012 at 11:37 am #

    There was a fascinating discussion (“Why Arts? Why Indy?”) with Michael Kaiser and representatives of several Indianapolis arts organizations at the University of Indianapolis last night. This issue was the first question raised, and although Kaiser didn’t use the term “Baumol’s cost disease” he described the phenomenon using the Beethoven 5 illustration. He asserted that looking at things through this lens causes many board members to see arts organizations as wasteful, and that this is incorrect, so we have to show board members a different perspective. It’s just the nature of the arts–although Lisa makes a great point. As Kaiser said, when you have fixed real earned income potential combined with rising costs, you have to make up the difference through audience and donor development, and he expanded on ways to do this throughout the evening. It was refreshing to hear someone realistic about the challenges facing arts organizations who is also optimistic and lacking in the defeatism we see so widely (including, evidently, in the Indianapolis Symphony development office, something I’ve posted about recently).

    • Drew McManus December 11, 2012 at 5:31 pm #

      those are good observations Eric and it never ceases to amaze me that stakeholders need to told that a labor driven income/expense gap exists and (as of now) one of the most effective ways to address it is by means of unearned income.

      But it’s the optimism you observed that I find most interesting. In hindsight, most of the discussions I can recall on this have always been from very pessimistic points of view and it doesn’t take long for defeatism and resentment to begin setting in (among all stakeholders).

  4. paulhelfrich December 11, 2012 at 11:52 am #

    I have always found Baumol & Bowen’s work to be a useful tool for understanding the basic economic issue of the field: that costs exceed earned revenue, and that the gap tends to increase over time, as expectations for higher salaries and fees grow faster than the organization’s ability to charge that back to the marketplace in the form of higher prices.

    Rather than “cost disease,” I’ve always preferred the term “the income gap.” And the next point, and this is key, is that the gap must be closed by contributed income.

    Organizations that are in trouble are usually there because unable to raise enough contributed income to close the gap. Whether that is because they simply aren’t doing enough to raise more money, or because their ambitions and budget have truly exceeded the community’s capacity to provide support, varies from situation to situation and is always a subject of great debate (to put it mildly).

    I don’t know that there’s a whole lot to be gained by arguing about technological efficiencies. Sure, my office can now generate a whole lot more everything with modern systems than it could in the 1930s. It has to – there were four concerts a year then, now there are over 70. Sure, development departments now have a whole range of sophisticated tools at their disposal – they have to, compared to the early 20th century when a small group of donors could take care of everything. Sure, orchestra marketing departments have all manner of things in their tool kit that their counterparts of 50 years ago couldn’t dream of. But 50 years ago, you could sell most of the tickets you needed to sell with one season brochure mailing. All our gains in efficiency, on the administrative end, have been offset by equal or greater increases in the level of competition for the public’s attention.

    Meanwhile, on the artistic side of the organization, where most of the costs lie, we are still marking bowings by hand and spending a similar amount of time to rehearse as we did 50 years ago.

    I think the basic premises of Baumol and Bowen’s study are as sound as they ever were. The key question has always been: so what do we do about it?

    • Drew McManus December 11, 2012 at 5:27 pm #

      That’s a good point about getting overly mired in the details; on one hand I would be interested to see some studies produce verifiable figures just so we have an idea of what the end game really is. On the other hand, the question about how to accommodate the increase in costs is one groups tend to do an excellent job at deflecting.

      What tends to be destructive is when stakeholders look at the issue as a zero sum game where the solution is to simply set the expense levels back a decade or so with the intent to make subsequent growth a fraction of previous levels.

      Your observations about the root of troubles having more to do with lack of unearned income foresight is easily one of the more painful topics this field does an excellent job at sidestepping because in order to have a legitimate examination of potential versus achievement, you first have to examine the latter.

      As an aside, we could have a good conversation about bowings. I still believe we’ll see the full scale implementation of digital sheet music in our lifetime :)

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