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The 'cost-disease' and how dominant political thought will create chaos

By Peter Gibilisco - posted Thursday, 28 February 2013


In this article I want to draw attention to a concept developed by William Baumol’s article ‘Health care, education and the cost disease’, which helps to explain why the productivity of disability and aged care support workers is generally ignored. The “cost-disease” concept, first articulated by Baulmol, in his article, can help us explain why health support workers productivity simply doesn’t figure when the economic theories juggle their various measurements. Presumably the productivity of workers doesn’t count. It was Hugh Stretton who drew my attention to Baumol’s article, it exposed a persistent problem that erodes the mechanism of dominant theories of political economy.

William Baumol developed the “cost disease” concept to explain why the dominant political theory ensures that governments face a daunting task in the future. He believes that administrators of government policies that are based on this concept will not be able to acquire the necessary revenue to prevent the collapse of disability and aged care support services. Baumol argues the solution to this cost disease could be simple (even though it poses a problem of a frightening magnitude).

The dominant political theory actually leads to an economic system that is unable to keep up with the rising productivity costs of human services. To instigate a solution to such a problem we must look to increasing the amount of the gross national product dedicated to the supply of efficient and effective activity within the disability and aged care sector. In other words, the prescribed system does not allow for the increasing costs of human services. Therefore, to create a fiscal balance that meets the GNP objectives of such theory, the increase in costs should be met by an increase in productivity. However, due to the taken-for-granted methods of measurement the increase in costs are not met by increased productivity, meaning the cost must be reduced in line with the overall objective to increase GNP.

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According to Baumol, the revenues required from GNP will have to increase threefold by the middle of the twenty-first century, to prevent service activities from falling further behind the remaining productive activity which are deemed worthy of measurement. Baumol acknowledges that there are at least two reasons why (measurement of) growth in productivity has eluded these services.

Firstly, some of them have processes of production that are not easily measured or standardised. Secondly, their production processes are directly related to labour. Short of the deployment of robots to administer care, it has proved extremely difficult to reduce the human labour required in these disability and aged care services.

Compare this with shop-floor of a factory or even the management department of an aged-care facility, where services are provided, wages are increased and labour-saving devices (computers, robotics) are utilised. The thrust toward continual improvement in services in such work-places is therefore considered the “benchmark” for productivity measurement and hence the services that concentrate on human labour must fall behind. However, most services deal with individuals, with individual human actions that require individual human application.

The fundamental error of the concept, the assumption that costs are a disease, lies in the lack of a true measurement of productivity in services that deal with individual human actions in labour intensive services, such as disability and aged care support work. Traditional methods of measurement of such services will rank their productivity at a level of zero. Whereas, for a manufacturer of homogeneous products, goods are carried out on an assembly line and mass-produced. Hence, most of the work is standardised and can be carried out by industrial robots, making labour on such products very cost-effective and productive. In most cases, if repair is the most unproductive procedure, the parts required for repair of the product are readily made available, so the product is spared from having to go through the whole automated process again.

Baumol confirms his critique with a further example that shows that in the telecommunications industry, nominal wages rise at a compounded rate of 4% pa. but the measured rate of productivity rises at 5% pa. This shows the cost of output in the telecommunications industry should actually fall.

Cost-disease threatens the quality of life in the industrialised countries of the world. Baumol's article ‘Health care, education and the cost disease’ analyses the problem shows that if inflation rose to a rate of 4%pa, the costs associated with services will rise at the rate of 6%pa. This would force the tax-base to expand a little faster than the rate of inflation, which would in-turn lead to growing fiscal difficulties.

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Stretton explained to me that Baumol

s 1993 article clarified some of the negative effects dominant in the political theory. Entire countries that imbibe this toxic concept and instigate their own applications of neo-classical economic theory will suffer the consequences. Even though there is no justified method for empirical measurement of human productivity within, say, disability and aged care support services, dominant political theory still believes it is still necessary to measure human productivity in these services. However, when this is compounded by an inadequate method of pricing labour, for instance in the provision of many disability and aged care support services, the books will show that there is a “blow out in costs” from those support services; the claim that we cannot afford is simply a demonstration of an illusion created by our this taken-for-granted “cost disease” concept. It is actually an illusion about money.

Baumol argues that by the middle of the twenty first century, if not much sooner, the cost disease will pose a problem of frightening proportions and the dominant political theory is ill-equipped to deal with it. However, due to the enormous economic threat faced by the Disability and Aged care sector, dominant political theory will concede that the answer lies within the behavioural sphere of self-interest. After all, this is a belief-system (an ideology) in which workers perform at their best when guided by their self-interest. However, this does not address the fact that in disability and aged care support services highly intensive labour is required. It is difficult to measure any productivity growth in such support services, creating a problem in the fact that such personal services are likely to be tormented by persistent rises in the costs of provision. It is essential, if not only for the growth of the economy, to ensure wage growth parallels the cost of living. According to the prevailing methodology, there is a simply no comparable productivity growth in support services. Therefore, expanding the market in the way proposed will presume an ongoing and deeper cost-disease infection within Disability and Aged care support services.

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About the Author

Peter is a person who has Friedreich’s Ataxia a neurological condition that is progressive and has left him confined to a wheelchair, but too uncoordinated to make use of an electric one and with slurred speech, to name a few inherent challenges. Despite this he has shown a command of different abilities completing a Ph.D at the University of Melbourne, recently appointed as an Honorary Fellow of the University of Melbourne. He has just released a book Politics, Disability and Social Inclusion available here http://petergibilisco.com.au/

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