The Handbook of Innovation and Services
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The Handbook of Innovation and Services

A Multi-disciplinary Perspective

Edited by Faïz Gallouj and Faridah Djellal

This Handbook brings together 49 international specialists to address an issue of increasing importance for the world’s post-industrial economies; innovation as it relates to services.
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Chapter 4: The Two-sided Cost Disease and its Frightening Consequences

William J. Baumol


William J. Baumol Since rates of labor-saving productivity growth are uneven, the growth in some activities must be below average (Baumol’s Fourth Tautology). [The AK-47] . . . has become the world’s most prolific and effective combat weapon, a device so cheap and simple that it can be bought in many countries for less than the cost of a live chicken. (Kahaner, 2006) 4.1 Introduction I have repeatedly argued that the rising real prices that constitute the cost disease that is named in my honor cannot force society to give up the patterns of consumption to which it is habituated and that it prefers now, or used to. Neither health care nor education are condemned to deteriorate in quality and decline in quantity by their rising real prices. For the nearly universal phenomenon of rising productivity means we can afford them, indeed, that we can even afford steady expansion in the amounts supplied and consumed, despite their disturbingly persistent and substantial rates of cost increase. But this does not mean that society is unaffected by the cost disease. Over the years, general standards of living have increased, and our material possessions have multiplied. But at the same time, our communities have experienced a decline in the quality of a variety of public and private services, arguably the result mainly of their rising costs. Not just in the United States, but throughout the world, as the wages of the required workmen have risen, streets and subways have grown increasingly dirty. Bus, train and postal...

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