Effi­ci­en­cy kills

US economist William J. Baumol found out why the efficiency principle is killing the service sector - and ultimately contributing to the COVID-19 mortality rate.

In the midst of the COVID-19 pandemic, our collec­ti­ve hopes and fears are pinned on the effi­ci­en­cy of our health care system. The fact that cri­ti­cal­ly ill relatives would be denied treatment because of over-capacity strikes terror in each and every one of us.

In the report “Die Kran­ken­fa­brik” (The Hospital Factory) broad­cas­ted by ARD in 2014, one can already witness an unnamed hospital in Germany at the limit of its capacity. As impres­si­ve­ly exposed there, the cracks were beginning to show. The reason for this is obvious: the incre­a­sing eco­no­mi­sa­ti­on of services for the common good that has been going on for decades. In accordance with business manage­ment dogma, the rapidly rising costs in this area are countered with savings pro­gram­mes that are “sold” as measures to increase effi­ci­en­cy. However, William Baumol’s theory, titled Baumol’s Cost Disease, reveals that the apo­lo­gists of opti­mi­sa­ti­on and effi­ci­en­cy have sorely missed the crucial dif­fe­rence between commodity pro­duc­tion and services.

Increase in effi­ci­en­cy in the pro­duc­tion of goods is achieved through technical inno­va­ti­on. More goods can thus be produced at the same (or in less) time. Often, less people are also needed to produce them, which further reduces costs. This mechanism is only effective to a limited extent in the provision of services, because it is not machines but people who provide the bulk of the service. Although a hair­dresser, a nurse or a mechanic works according to a different principle, the logic of commodity pro­duc­tion still applies to them. The result is work inten­si­fi­ca­ti­on, fewer staff, falling wages and, crucially, if a certain point is passed, a defective “product” for the service recipient.

William Baumol who died in 2017 coined a poignant image for this. He asks us, how can you make a string quartet or a symphony orchestra more efficient? Well, by per­forming with fewer musicians, or the musicians play faster. Iro­ni­cal­ly, in Austria we have been doing the real expe­ri­ment on this for two years. In the eternally cash-strapped Austrian Armed Forces, the military bands were cut in half. In this case, the audience was only tortured by an amputated Radetzky march, but in the health sector, the “error” pointed out by William Baumol reaches a gravely exis­ten­ti­al dimension.