On William Baumol’s thought of cultural economics
William Baumol is the recipient of the 2003 International Entrepreneurship and Small Business Research Award.Throughout his career, Baumol has urged the industry to focus on the important role of entrepreneurship in economic renewal and growth.At the same time, he insists, economists will continue to use their usual toolbox when the analysis extends to entrepreneurship.Baumol can therefore be described from the inside as a revolutionary.In this article, we introduce and discuss Baumol’s contributions to the field of entrepreneurship and small business economics, particularly from a growth perspective.In addition to placing his work in these areas in the broader context of his total contributions, we emphasize Baumol’s finding that growth cannot be explained by the accumulation of the various factors of production themselves;It takes human creativity and productive entrepreneurship to combine inputs in a profitable way.Thus, an institutional environment that encourages productive entrepreneurship and human experimentation becomes the ultimate determinant of economic growth.He was the “inventor” of the disease of cost, an idea that created the field of cultural economics.According to Blaug (2001:123), “The economics of culture or art, as it used to be called, could be said to have been created almost from scratch 30 years ago by the book of Baumol and Bowen (1966).”William Baumol is Harold Price Professor of entrepreneurship and academic Director of the Berkeley Center for Entrepreneurship and Innovation at New York University’s Stern School of Business.Senior Economist and Professor emeritus at Princeton University.Professor Baumol’s main areas of research include economic growth, entrepreneurship and innovation, industrial organization, antitrust economics and regulation, and the economics of the arts.He is the author of more than 40 books and has published more than 500 articles in professional journals and newspapers.His most recent books include Cost Disease: Why Computers Are Getting Cheaper and Health Care Isn’t, 2012;Economics: Principles and Policy, 12th edition (with Alan S. Blinder), 2011;Micro Theory of Innovation and Entrepreneurship, 2010;The Invention of enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times, 2010;Economics: Principles and Policy, 11th edition (with Alan S. Blinder), 2008;Growth Mechanisms for entrepreneurship, Innovation, and free enterprise economies (with Eytan Sheshinski and Robert J. Strom), 2007;Good capitalism, bad Capitalism, and the economics of growth and prosperity (with Robert E.Litan and Carl J. Schramm), 2007;Layoffs in the United States: Reality, Causes, and Consequences (with Alan S. Blinder and Edward N. Wolff), 2003;The Free Market Innovation Machine: An Analysis of capitalism’s Growth Miracle, 2002;And global trade and Conflict of National Interests (with Ralph E. Gomory), 2000.Professor Baumol is past president of the American Economic Association, the Association of Environmental and Resource Economists, the Eastern Economic Society, and the Atlantic Economic Society.His honors and awards include 12 honorary degrees and membership of the National Academy of Sciences, American Philosophical Society, Accademia Nazionale Dei Lincei (Italy), and the British Academy of Sciences.In May 2009, two Chinese universities, Wuhan University and Zhejiang Gongshang University, named their entrepreneurship research centers in Baumol’s honor.Professor Baumol was born in New York City on February 26, 1922.He received a BACHELOR’s degree in social science from New York City College in 1942 and a doctor of Philosophy from The University of London in 1949.Having taught at New York University for more than 36 years and At Princeton University for 43 years, he is now professor emeritus and senior Research Economist.The Birth of William Baumol’s idea of cultural economics and its Definition of disease — every cultural economist should know what it is talking about — here is the story of its birth, according to Baumol himself:”John D. Rockefeller III and August Heckschel of the Twentieth Century Foundation decided it was time for the United States to do something to encourage the arts.So they decided they were going to have a two-pronged operation.One is a panel of good, reliable businessmen who can show that art is not a communist gay conspiracy.And then they want to do serious research.They talk to a lot of people, and somebody tells them there’s a crazy economist at Princeton who’s interested in art.Okay, this is wrong art.I’m interested in painting and sculpture.So they called me and I told them how I would choose someone to study it……And then the next day they called me and said, ‘We want to give you those instructions.’I said,’ I’m very busy.I can’t do it.’They called again, and I said,’ OK, I’ll do it on one condition.Here is a young assistant professor whose work I have great confidence in.If he would do it, you would pay him…’They agreed, and Bill Bowen came in and took over the whole thing, as you can imagine.He’s a real pleasure to work with.So we started looking at it, and he laid out all the things that had to be covered, how they should be covered.And then we started getting all these statistics about the budget.Then one night, at 4:00 a.m., I woke up and said I knew why these fees were going up!I got up, wrote some notes, went back to sleep.That’s literally what happened.””(Kruger 2001: 217-18).The productive nature of sleep seems to recur in science: A French mathematician named Andre Lichnerowicz once said that a sleeping mathematician is no different from a working mathematician.This is very close to how Baumore’s son Daniel describes his father: “On long trips, he would sit in the back of the car, blind to the world, and when we pulled into the station he would announce, ‘I just finished that article'” (New York Times, 2017).Many people try to show that there are many ways to “cure” or at least mitigate the disease of cost in art.I still believe Baumol was right.Of course, Beethoven’s string quartet could be played by one pianist, saving three musicians — or even not at all.That would indeed be more cost-effective — and perhaps not as many people would be interested in a Beethoven or Mozart quartet!But we all get sick from time to time, and Baumol’s 1983 prediction was based on the same idea: “Many of our services related to quality of life will become relatively more expensive, while mass-produced things will become cheaper and cheaper…Cost increases belong to the nature of health care products.Efforts to change this nature would be futile or harmful “(see also Towse 1997).His paper on “Art Investing as a Floating Garbage Game” (Baumol 1986) has collected more than 490 citations (as of 17 May 2017).I don’t think many of the papers published in the PAPERS and proceedings of the American Economic Review would do any better.Many of us will never get 490 citations for any paper.That paper opened a new field of research and was the first to use artwork for repeat sales.Baumol shows that, contrary to what most of us think, investing in the arts does no better than investing in finance: on average, its real return is very close to zero.The reason, he argues, is that art provides aesthetic pleasure, which compensates for the fact that your stocks are kept in a safe, even though at the time you can still see them and reap some psychological rewards.Today, even that’s gone, because your stock is buried in computer memory — what a waste!Baumol published several papers on the Soviet performing arts,Together with his wife Hilda, he published papers on musical composition in Mozart’s Vienna and Beethoven’s patronage (Rubinstein et al. 1992, Baumol and Baumol 1994, 2002,Oates and Baumore 1972) he also taught woodcarving at Princeton University at a young age of 20 and was probably one of the first to dabble in computer painting.1 In 1999, he received a Doctorate in liberal Arts from Princeton University — a title not many Princeton economists, as far as I know, have received.There are many other awards and honorary degrees.In 2016, he became a Distinguished Fellow of the International Association for Cultural Economy.Five of his ten papers (between 1947 and 1952) appeared in Econometrics, The Review of Economic Research, the Journal of Political Economy and the Quarterly Journal of Economics.He also published two books during those years, including his famous Economic Dynamics (1951).In 1952, he was 30.Still, he had to wait until 1955 to publish his first paper in the American Economic Review, followed by two more in 1956, a catch-up effect.Then there is the long list of papers now known as “top five journals”.While we must admit that times are more difficult today, he continued to do so for the rest of his life, publishing some 500 papers and 30 books 2 on almost every economic topic:Macro and micro, monetary theory (such as Gary Becker), industrial organization (who is the root of Robert Williger’s idea of “contestable markets”), trade, economics of education, economics of health, innovation and entrepreneurship, copyright, economic growth, evolutionary economics, and the history of economic thought.He also dabbled in operations research: warehouse location problems, linear programming, integer programming (as early as 1960, when the field was in its infancy), finance (in 1963 he published a paper on portfolio selection in management science) and more.The only topic he did not touch on was econometrics.Baumol taught at Princeton University for 43 years and at New York University for 36 years.Here are two things his pre-2006 NYU students had to say about him: “Great guy.Study and get an A, or don’t study and get A B “;”The professor.Baumol is the best professor.Although he is an excellent economist, he is not pretentious at all.What a lovely person!He gave economists a good name.”William baumol, bring about economic thoughts and his comic figure, no doubt, ballmer is one of the most prolific economists, many of his other areas (including the jazz composer, and as early as 2001 the consequences of terrorism) interested in, and in the journal of the American philosophical association and other journals published paper magazine and energy method.All this while he continued to paint, sculp and listen to Mozart and Beethoven while visiting his former Puerto Rican home, where he was a prominent member of the Puerto Rican Economic Association.Baumol’s sales maximization Model Baumol’s sales maximization refers to the maximization of total revenue.This does not mean selling a lot of output, but an increase in currency sales (measured in rupees, dollars, etc.).Sales can be increased to the point of profit maximization where marginal cost equals marginal revenue.If sales increase more than that, currency sales may increase at the expense of profits.But an oligopoly wants its money sales to grow, even if it earns a minimum profit.Minimum profit is an amount less than maximum profit.Minimum profit is determined based on the company’s need to maximize sales and maintain sales growth.Minimum profit requirements come in the form of retained earnings or new capital in the market.A simple representation of Baumol’s sales maximization model is shown in the figure, where the total cost curve is represented by TC curve and the total revenue curve is represented by TR.The total profit curve is represented by TP curve.The minimum profit constraint is represented by line MP.In the model, firms at the level of OQ output maximize their profits, as reflected by the highest point H on the TP curve.But in baumol’s model, firms aim to maximise their sales rather than profits.The sales maximization output of an enterprise is represented by OK.The total income in terms of ZL here is the maximum of the highest point of the TR curve.We can see that sales maximization output OZ is higher than profit maximization output OQ.But as we all know, maximizing sales is constrained by minimum profit.Let’s assume that the minimum profit level of a firm is represented by line PP’.It is interesting and necessary to observe that output OZ does not maximize sales while satisfying the minimum profit constraint, because the minimum profit OP is not covered by total profit ZS.For the maximization of sales subject to the minimum profit constraint, “that is, the firm should produce an output level that not only covers the minimum profit, but also achieves the maximum gross income consistent with it.In our representation of the Baumol model, this level is represented by the OD output level, where the minimum profit DC (=OP) is consistent with the DE amount of the total revenue calculated at DE/OD prices (i.e., total revenue/total output).It can be pointed out that in Baumol’s sales maximization model, profit maximization output (OQ) will be less than sales maximization output OD, and the price is higher than the price under sales maximization.The reason why prices are lower under sales maximization is that total revenue and total production are equally high, whereas under profit maximization, total production is much lower compared to total revenue.However, baumol’s sales maximization model is often criticized for the following main reasons :(1) it does not show how to achieve equilibrium in an industry where all firms are sales maximizers.Baumol did not establish a relationship between the company and the industry.(2) Another weakness of the model is that it ignores the interdependence of oligopoly prices.(3) The model ignores not only actual competition, but also potential competitive threats from rival oligopolies.(4) Rosenberg criticized Baumol for using profit constraints to maximize sales.Despite these criticisms, maximizing sales is an important goal of business companies in today’s business world.