Butter, Buildings, and Baumol’s Disease

For centuries, butter makers had an economic disease for which there was no cure.

From the 1700s to 1940, making butter required some cream, a churn, and usually a woman with lots of time and energy to crank or plunge a shaft. When, in 1850, someone invented a double chamber thermometer churn that made the cream the optimal temperature, the process remained the same. Even when some churns got bigger, others got smaller and the people at the Dazey Churn & Manufacturing Company used glass instead of wood, still, little changed. As long as butter making remained labor intensive, it was tough to increase productivity.

Separated by 12 years, still, the churning technique is the same:

Perhaps construction is somewhat similar.

Construction Industry Productivity

Before we start, do take a look at this brief and basic BLS explanation of total factor productivity:

Growing faster than other industries, construction productivity soared during the 1950s and 1960s. Since then though, it has lagged. A 1970s construction worker produced more with the same output than the same person in 2020.

In his new paper with Chad Syverson, newly appointed president of the Chicago Federal Reserve, Austan Goolsbee, asks why. At first he suggests the problem could simply be the numbers. But then he concludes that measurement error cannot be blamed for the stagnation.  After that, he says a lack of capital investment was not the reason. He does hypothesize that the paperwork from a heavy regulatory burden could be one answer, However, saying not entirely, he again qualifies the paperwork solution.

Their conclusion? “Everyone has their pet theory. But everyone has a different pet.”

Our Bottom Line: Baumol’s Disease

As do I.

When an industry experiences rising costs because it cannot keep up with productivity increases elsewhere, it could have Baumol’s cost disease. Demonstrated by Mozart’s String Quartet in G Minor, we always need a cellist, 2 violinists, 2 violists. Whether it’s the 18th century or the 21st, we have the same number of people and the same array of costs. As economist William Baumol explained, it is tough to enjoy the benefits of economies of scale when your production is labor intensive. And yet, because of those economies, when wages rise elsewhere, they nudge up what workers everywhere are paid.

I would like to suggest that, for construction, like the string quartet, we have a labor intensive industry that relies on manual human capital to complete its mission. And like churning butter or playing Mozart (or teaching economics), humans with the same capital have a tough time becoming more productive.

So perhaps, in addition to having a cost ailment, maybe also we have a productivity disease.

Sources and Resources: Thanks to Marginal Revolution for alerting me to the NY Times constuction column. From there, its link to the Goolsbee and Syverson paper came in handy. Next, for an enjoyable read about Baumol’s Disease, I recommend this New Yorker column while for an academic perspective, this paper provides analysis. Then, as for butter, my facts came from slate.com. And finally, superbly, this NY Times column explains the connection between Baumol’s disease and our health care challenges.

Please note that parts of today’s post were previously published at eccnlife.