Schafer: Orchestra's disease is economic

There's quite a list by now of factors that led the Minnesota Orchestra to lock out the musicians union in October, from changing tastes in music to the hangover from a deep recession.

But at the dispute's core is a fundamental problem long known to economists as "Baumol's cost disease."

The concept comes from economist William Baumol, whose groundbreaking work studying the arts in the 1960s with a Princeton University colleague led to his simple observation that productivity gains in the performing arts are all but impossible to achieve.

When Wolfgang Amadeus Mozart finished his String Quartet No. 19 in 1785, his well-known "Dissonance" piece, it took four skilled players to perform it. It still does.

Baumol was looking at productivity, which is the measure of the output a worker produces. That can be a car part or a frozen pizza or a musical performance.

On the goods-producing side of the economy, investments in technology and other capital items, along with factors like increasing skill, have driven productivity gains for generations.

On the services side it's a lot harder. A kindergarten teacher may now use an iPad to prepare for teacher conferences, but she can only handle so many 5-year-olds. A barber has a battery-powered clipper but still may see about the same number of heads in a day as his great-great-grandfather did. The unit of labor required for those service outputs stubbornly stays about the same.

The result for an orchestra manager is relentlessly increasing wage costs for a labor force producing the same output. That's a cost disease.

It isn't a special Minnesota Orchestra problem, either, as orchestras around the country have found themselves dealing with labor conflict and financial distress, including the lockout in October by the St. Paul Chamber Orchestra of its unionized musicians.

There is evidence of the cost problem in the financial results of the Minnesota Orchestra. In 1981 the orchestra's earned revenue from ticket sales and other sources was about 106 percent of total salary and benefits. By 1991 that had fallen to 76.5 percent, and in 2011, the last year fully disclosed at this point, earned revenue amounted to just 42 percent of salary and benefits.

In a conversation with CEO Michael Henson, he acknowledged both the cost-disease problem as well as the ways that leading orchestras like Minnesota's adapted over that 30-year period, by, among other things, becoming much more adept at fundraising.

In 1981 earned revenue at the Minnesota Orchestra was 2.3 times bigger than contributed revenue. Thirty years later, contributed revenue was actually larger.

The economic issues that Tim Zavadil said are top of mind for musicians are labor utilization -- free weeks in the schedule -- and brand leverage.

Zavadil leads the union's negotiating team, and he said the orchestra's players question whether opportunities to capitalize on recent critical acclaim have been squandered. The group can be a classical music version of a sleek new Apple product, he said, and sold at premium prices.

It's true that developing new business opportunities could be a way around the cost-disease problem, at least up to a point.

V.V. Chari is the founding director of the Heller-Hurwicz Economics Institute and an economics professor at the University of Minnesota, and he said that, although widely accepted as theory, cost-disease research has not always been conclusive.

Chari said one reason is that accurately measuring the output of a nonprofit like an orchestra isn't as easy. One question might be how to best account for the Minnesota Orchestra's donors, who are clearly contributing money for something they highly value.

But on the other hand, he said, "if you restrict yourself to the Minnesota Orchestra performing at Orchestra Hall in front of an audience of a thousand people, that particular service may have to become more expensive and attract fewer people."

Baumol himself grew more optimistic about the future of cost-diseased industries, arguing that all the wealth created by growing productivity in goods production will enable the public to afford specialized services, even though they keep costing relatively more and more.

If we just relax and grasp the big picture, we can go on happily buying health care, haircuts, college degrees and orchestra tickets.

Gary Krueger, an economics professor at Macalester College, said Baumol's argument may have some merit, but that doesn't mean there's an easy way forward for organizations confronting a cost-disease problem.

"In the short term I would not know what to advise [the orchestra's board]," he said. "Other than cut costs."