WEBVTT

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Prof: I'm going to use
today to actually cover some

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introductory material.

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We will use most of the fifty
minutes.

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The last part of today's
lecture will describe the

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course, its requirements,
and so forth.

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So let's begin.

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Capitalism--we're going to
break the subject today into

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three headings.

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Capital, capitalism,
and course, three

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"Cs"
if you will.

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The--I've chosen,
and I usually do this,

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I've chosen one segment of the
economy as the theme for the

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day,
and today that segment is

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revealed in this slide.

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Calhoun Athletics XXL,
can you interpret the slide?

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Student:  Green
technology.

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Prof: Okay what in
particular?

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Student:
>

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Prof: Okay,
how about Varic bottled water?

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Student:  Like the crop
circles?

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Prof: Okay,
they are indeed crop circles.

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Score one for MBAs.

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They are crop circles,
and all of us who travel from

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east to west across the country
have seen them,

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but we haven't seen them quite
in this density because this

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photograph is taken from space,
it's a NASA image,

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and it's an extraordinarily
elegant display of something

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very simple.

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Now why would center pivot
agriculture interest us from the

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point of view of capitalism?

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The mis-formatted slide here
says capital.

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This is a definition that comes
down to us through the Oxford

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English Dictionary from the
early seventeenth century and

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let me read it in full and then
we'll boil it down to more

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manageable terms:
"Capital is the

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accumulated wealth of an
individual,

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company, or community used as a
fund to carry on fresh

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production;
wealth in any form used to help

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in producing more wealth."

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And there's a shift between
those two meanings.

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The first is a very broad
understanding of capital.

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The second is very close to the
way you would have to think

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about capital in connection with
an economic system called

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capitalism.

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So, let's start with the
broader usage,

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"Capital is accumulated
wealth used as a fund in

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carrying on fresh
production."

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That's a very broad idea.

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It is one which arguably--in
fact I think without much

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argument,
goes back 10,000 years to the

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establishment of agricultural
society,

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and very possibly another
100,000 or 120,000 years to

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organized hunter gatherers using
weapons and tools.

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Does this qualify?

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Is that not capital?

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What do you think?

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Second row purple--
Student:

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>

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Prof: It is capital.

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Sorry, excuse me,
can you hand her this?

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Student:
>

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Prof: Okay,
so the nuts buried in the

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forest floor are accumulated
wealth, so it meets that test.

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Does it meet the next test?

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You need the mic a little
closer to your mouth.

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Student:
>

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Prof: Okay so what is
the squirrel producing with that

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nut?

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Student:  Nothing
material.

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Prof: He's producing
squirrel, and that's not really

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what we mean.

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Hand the mic to somebody else
and we'll just--it's the hot

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potato.

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Just pass it around and
wherever it is when I ask a

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question that's your turn.

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That'll be good.

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The nest is producing
nestlings, and it's a little

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closer to what we mean.

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The beaver dam producing a
working environment for beavers

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to carry out their business;
it's closer.

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Infrastructure if you will.

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The honeycomb that bees use.

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This one is actually the one
that is closest intuitively to

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capital.

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Right?

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The accumulated wealth is the
energy and silk required to

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weave the nest or weave the web,
and the web is indeed an

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instrument for the work of
capturing prey,

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but there's no external product
beyond it,

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so even that is not quite what
we have in mind.

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Now how about seed?

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The seeds used in agriculture.

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Where's the--where's the mic
right now?

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Fess up.

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Come on in guys.

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No, no, no.

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You're not passing it off now.

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Okay, so do you reckon that
seeds like this constitute

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capital?

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Student:  Okay,
I don't really think so,

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no.

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Prof: Okay and why not?

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Student:  Well,
I guess that a seed produces a

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plant,
but it doesn't really--well I

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guess yeah,
maybe the seed produces a

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plant, and then the plant
produces more seeds and it sort

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of keeps generating more and
more seeds.

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Prof: Is that capital?

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Student:  I mean it
doesn't look like it to me.

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Prof: Why not?

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Be exact.

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Student:  Well I guess
that capital is sort of a

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never-ending way of accumulating
more wealth.

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Prof: Does it have to go
on forever?

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Don't capitalists fail?

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Student:  Yeah
capitalists fail,

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but good capitalists don't.

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Prof: Take Mory's,
it's a pretty good example.

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It's a really good example,
actually.

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Okay, mic please.

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In this bucket I've got two
kilograms of seed.

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Would anybody say that it isn't
enough to count as capital?

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If--is one seed,
is that enough to make it

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capital?

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Student:  What kind of
seeds?.

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Prof: It's--
Student:  I said what

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kind of seed is it?

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Prof: Okay,
it is for growing safflower.

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If you elicit information from
me you've got to give me

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something back.

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Student:  I think seeds
in any quantity can be capital

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because each--once you plant it
and if there isn't successful

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pollination--
Prof: Is the voice loud

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enough here?

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Student:
You can always use plants to

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produce more seed.

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In fact, that's what a lot of
farms do and that's what a lot

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of farms get in trouble for
because other companies want to

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control those seeds.

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Prof: Okay,
so there's a patent violation

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issue if I use hybrid seed to
generate more hybrid seed?

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There may be,
there's an argument there.

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Okay, so quantity doesn't
matter at all?

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Yes.

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Student:  I'd say
quantity matters if you're a

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subsistence farmer because if
you just have enough seed to

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feed yourself,
that's not capital that's just

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keeping you alive,
you're not producing any

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further wealth from it.

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Prof: Okay and if I gave
you just this much seed?

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Student:  Well if I'm
not a farmer,

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if I have some other means of
supporting myself that could be

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capital for a side business but
that wouldn't be for a

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subsistence farmer.

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Prof: You think it's
really worth having a business

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over twenty-six safflower seeds?

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Student:  Well no.

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Prof: No,
I don't think so either.

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What I'm driving at here is the
notion of minimum efficient

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scale.

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Capital gets--a resource gets
to be capital only when it's

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aggregated to a scale where it
can be effectively enough

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deployed to compete in an actual
economy.

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Now let's take--that's too big
a note, let's take a dollar.

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Have I just given you capital
or not?

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Student:  Technically
yes, but probably that wouldn't

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allow me to set up a budding
business over here.

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Prof: Okay,
how might it become a piece of

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capital?

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Student:  Well if
somebody else gives me a dollar

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or more.

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Prof: Two dollars is
enough for you to call it

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capital?

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Student:  No,
but if I have more investors

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and they will be giving more
than a dollar.

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Prof: Okay,
so you need some aggregation or

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agglomeration.

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How do we aggregate capital in
an actual economy?

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Student:  IPOs.

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Prof: IPOs are a big way
to do it.

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In general, the joint stock
corporation is a way to do it.

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How do banks aggregate capital?

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Student:  Deposits.

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Prof: Thousands of
little deposits make big funds.

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Okay, so we're getting there
with capital and what I want to

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do now is continue the
agricultural theme and see if we

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can relate what we're talking
about to the generation of

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actual wealth in society.

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This is called a seed drill.

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It is a way of planting
millions of seeds in a very

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systematic, precise,
and cost effective way.

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One characteristic feature of
how capital works is combining

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different factors in the
production of the same thing in

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an extremely intelligent way.

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A way that represents the
accumulated experience of

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society and when you do it well
you succeed, and when you do it

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poorly you fail.

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You can actually fail even when
you do it well,

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but you're very unlikely to
succeed when you do it poorly.

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Now here I want to compare two
very similar technologies,

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this is a peasant farming in
Tibet and the mode of power here

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is a pair of yaks,
and this is a John Deere

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tractor and the spectacular
difference between these two

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things is obvious to us all.

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It is that one of them
is--constitutes a large

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investment of capital.

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In the case of that tractor and
the gear with it well over

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$100,000 must be invested.

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The yaks, well I don't know
what yaks cost in Tibet,

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but less.

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We would say that the John
Deere photograph represents

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something that's capital
intensive and the yak photograph

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represents something which is
labor intensive.

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We would expect a much higher
return in food generated per

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hour of labor invested from the
highly mechanized capital

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intensive story.

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In the history of the world in
the last thousand years is

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essentially the history of
substitution of the right hand

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picture for the left hand;
of capital intensive,

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highly mechanized means of
production in the place of labor

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intensive, low capitalization
means of production.

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Another comparison,
the capital intensivity here,

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the ratio of that watering cans
capital cost to the center pivot

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that might be as much as 500
meters long would be measured in

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the thousands to one,
the tens of thousands,

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the hundreds of thousands
probably;

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enormous difference in the
level of investment.

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Also those of you who are
interested in the environment,

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and all of us should be,
there is a huge difference in

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environmental impact.

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The labor intensive agriculture
essentially leaves the

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environment unchanged,
whereas, this kind of

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agriculture practiced in--
it's now a world--center pivot

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irrigation is a worldwide
technology.

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And in many places it draws so
much water so fast,

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and so much water is lost to
evaporation, that the underlying

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aquifer is rapidly being
depleted.

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Here are two center pivot
photographs, and they too differ

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in capitalization.

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The one on the left is from
Egypt, the one on the right is

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from Iowa, and the difference
between them in the cost of the

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land would be dramatic.

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The market price of highly
productive loam soil in one of

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the three or four richest
agricultural zones in the world

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is much higher than in the
margin of the world's largest

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desert.

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Here's another--I kind of got
carried away with center pivot

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agriculture.

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Here's another slide of the
same kind from the same source,

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and this is in Southern France.

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Who's been to Southern France?

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Pretty great isn't it?

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I have many reservations about
French politics but Southern

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France is one of the nicest
places I've ever been,

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and this summer--we'll meet a
guy here in a month named Paolo

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Zannoni,
who is a robber baron Goldman

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Sachs partner,
and he just built a villa

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overlooking Cannes in Southern
France,

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and I had to be taken away by
security.

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What's striking about this
photograph in comparison with

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the others--
what's the dramatic difference

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between this one and the
Egyptian one,

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and the Iowa one?

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Purple?

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That's not what I'm fishing for
guys.

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Student:  There's other
things in the middle.

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Prof: Okay you got to
talk really--where's--do I have

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the mic?

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Here it is.

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Would you please pass this over
to him?

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Student:  There's other
things in the middle of the

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green and purple circles.

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Prof: Push the on button
and it'll be on.

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Student: Alright,
there's other things in the

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middle of the green and purple
circles.

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Prof: Okay,
and what are the other things?

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Student:  I can't tell
if they're houses or--

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Prof: Well what are all
these little polygons?

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Look at the right margin,
for example.

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They are--take a guess,
they're not soccer fields.

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Who wants to take a guess at
this?

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Yes.

17:59.069 --> 18:01.249
Student:  Pasture.

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Prof: Pasture?

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Okay they might be pasture.

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What they are more
generally--you have the--we'll

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get better at this microphone
thing as we go.

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What they are is very small
farms.

18:17.440 --> 18:23.900
They're farms where the leaps
and bounds trace back perhaps

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800,1,000,1,200 years.

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They were farms which worked
economically when the world was

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less developed in capital
intensive agriculture,

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but they have been rendered
marginal by the transformation

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of world agriculture.

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Now the question for you--are
you ready for a policy question?

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Okay, your name is now Sarkozy,
and the question is,

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should we increase--let's
suppose that 20% of these farms

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are failing a year,
and we're already subsidizing

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them pretty heavily.

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Should we subsidize them more
so that the rate at which they

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close down is diminished?

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Mr.***Sarkozy?

19:24.308 --> 19:27.478
Student:  I would say if
you really want to effectively

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decrease the rate at which
they're failing you'd want to

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encourage consolidation.

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It looks like the problem here
is real fragmentation.

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Prof: Okay,
the problem is fragmentation,

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that's a really good start.

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Now the person immediately to
your right is your political

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consultant,
and she's going to tell you

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whether what you just said is
going to wash in Lyon or not.

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How's the Sarkozy consolidation
program, how's that going to

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play?

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Student:  Can you repeat
the question?

20:10.769 --> 20:15.759
Prof: Okay,
Sarkozy just said these little

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fragments of land are an
extremely inefficient way to do

20:21.468 --> 20:23.128
agriculture.

20:23.130 --> 20:26.890
He/she was right on that point.

20:26.890 --> 20:31.540
She goes on to say that we
should try to capture the scale

20:31.536 --> 20:36.016
economies of big fields by
consolidating agriculture.

20:36.019 --> 20:41.959
Now you are a public official
subject to election.

20:41.960 --> 20:48.190
What--how is that going to read
for you, that statement that we

20:48.190 --> 20:54.420
should announce the Sarkozy
Agricultural Consolidation Plan?

20:54.420 --> 20:58.440
Student:  I don't think
that the public would like it,

20:58.435 --> 21:00.105
like the small farmers.

21:00.108 --> 21:02.368
Prof: The small farmers
would hate it,

21:02.371 --> 21:05.401
and do the small farmers play a
special role in the life and

21:05.403 --> 21:06.743
imagination of France?

21:06.740 --> 21:09.050
Student:  Yes.

21:09.049 --> 21:10.749
Prof: Yes.

21:10.750 --> 21:14.930
Okay so probably it won't
happen and France--

21:14.930 --> 21:19.240
this is a characteristic fact
about all the capitalist

21:19.240 --> 21:23.550
democracies is that pressure
groups play an enormously

21:23.550 --> 21:26.480
important role in actual policy.

21:26.480 --> 21:29.940
The one book,
which is available for purchase

21:29.936 --> 21:32.846
at Labyrinth,
but which isn't actually

21:32.845 --> 21:36.775
required, is Christopher
Buckley's Thank You For

21:36.775 --> 21:38.185
Smoking.

21:38.190 --> 21:40.640
How many of you have read this
book?

21:40.640 --> 21:44.370
Student:  Probably
watched the movie.

21:44.369 --> 21:44.509
Prof: Pardon?

21:44.509 --> 21:46.499
Student:  The movie.

21:46.500 --> 21:48.180
Prof: Oh, the movie!

21:48.180 --> 21:49.300
How many of you have seen the
movie?

21:49.299 --> 21:54.239
Books!

21:54.240 --> 21:59.920
It's all about the biases of
pressure groups and public

21:59.923 --> 22:05.503
relations in the capitalist--in
the largest capitalist

22:05.500 --> 22:08.870
democracy, which is our own.

22:08.868 --> 22:16.158
I just couldn't resist throwing
this one in,

22:16.160 --> 22:21.960
this is the Libyan Desert and
center pivot agriculture plus

22:21.960 --> 22:25.560
maybe something else that
uncles--

22:25.558 --> 22:29.898
observers from the sky found
interesting.

22:29.900 --> 22:37.260
Okay so a general theme here,
Strategy A / Strategy B.

22:37.259 --> 22:40.869
Strategy A is labor intensive
production.

22:40.868 --> 22:43.858
Strategy B is capital intensive
production.

22:43.858 --> 22:49.918
The single biggest story,
and I'm repeating myself here

22:49.923 --> 22:56.673
because it's such a big point,
in recent world history is the

22:56.673 --> 23:01.143
substitution of Strategy B for
Strategy A,

23:01.140 --> 23:06.680
and that happening on an
extremely uneven basis.

23:06.680 --> 23:11.620
It's happening in a big way and
fast some places,

23:11.618 --> 23:14.718
and in a little way and slow
other places,

23:14.720 --> 23:19.760
and that generates an enormous
vertical dimension to the world.

23:19.759 --> 23:25.189
There are income ratios between
households measured in the

23:25.186 --> 23:27.956
millions,
millions to one,

23:27.955 --> 23:33.945
and that provides some of the
interest in the functioning of

23:33.953 --> 23:38.533
capitalism which brings us to
the subject.

23:38.529 --> 23:47.909
Now comparing labor intensive,
the red arrow,

23:47.910 --> 23:50.250
with capital intensive,
the blue arrow,

23:50.250 --> 23:53.840
we have here a very simple
production function where labor

23:53.844 --> 23:56.244
expended is on the horizontal
axis,

23:56.240 --> 23:59.860
and units produced is on the
vertical.

23:59.858 --> 24:02.478
For those of who are actually
taking this course,

24:02.480 --> 24:07.280
these slides I posted them just
before class and so if you--

24:07.278 --> 24:10.868
you can just--you don't have to
write this stuff down.

24:10.868 --> 24:21.018
If you project differences in
rates of return over long

24:21.020 --> 24:24.440
periods,
here I've put 100 production

24:24.443 --> 24:28.783
cycles,
and one curve is increasing at

24:28.778 --> 24:33.448
1%, the red one,
the other is increasing at 4%

24:33.446 --> 24:37.566
per cycle,
and by the end of the period

24:37.565 --> 24:44.325
there is a monstrous difference
in the rate at which they are

24:44.326 --> 24:46.126
accumulating.

24:46.130 --> 24:52.720
In actual fact very small
differences, I've greatly

24:52.720 --> 24:59.310
overstated them in the
production function here.

24:59.308 --> 25:05.168
The difference between 4% and
3%, or between 2.5% and 1%,

25:05.173 --> 25:11.043
are enormously consequential
when projected over time.

25:11.038 --> 25:15.218
And at a given moment in time,
are enormously consequential

25:15.217 --> 25:17.807
from a competitive point of
view,

25:17.808 --> 25:22.418
because if you are not the low
cost producer,

25:22.420 --> 25:28.320
the low cost producer is in a
position where if she has

25:28.316 --> 25:32.936
sufficient scale of operation,
she can drive you out of

25:32.942 --> 25:33.372
business.

25:33.368 --> 25:41.778
Now everything we've said so
far could be true of almost any

25:41.782 --> 25:44.352
economic system.

25:44.348 --> 25:49.648
I put the grass here to suggest
Tang, China.

25:49.650 --> 25:52.900
This was one of the great
periods in Chinese cultural and

25:52.901 --> 25:55.461
economic history,
ending more than a thousand

25:55.457 --> 25:56.267
years ago.

25:56.269 --> 26:02.269
The use of capital,
not necessarily in the highly

26:02.269 --> 26:07.249
intensive form,
but the use of capital in this

26:07.250 --> 26:12.350
economic cycle we're talking
about was a perfectly normal

26:12.351 --> 26:18.181
practice which the Tang Dynasty
would have understood easily.

26:18.180 --> 26:22.610
They were, by the way,
just as inventive as we have

26:22.609 --> 26:26.419
been in the last couple of
hundred years.

26:26.420 --> 26:30.370
What they didn't have was the
ability to go to scale.

26:30.368 --> 26:35.218
Or it could have been as
suggested in this Bruegel

26:35.221 --> 26:38.841
painting,
we could be thinking of Europe

26:38.843 --> 26:43.633
in the fifteenth century or the
sixteenth century before the

26:43.627 --> 26:48.577
capitalist revolution because
there was always the reliance on

26:48.575 --> 26:49.625
capital.

26:49.630 --> 26:54.590
Lower levels of intensivity
because there was less capital

26:54.592 --> 26:55.552
in total.

26:55.548 --> 27:00.338
And it could even have been,
we could even be talking about

27:00.337 --> 27:04.547
an agricultural cooperative in
the Soviet Union,

27:04.548 --> 27:16.618
which used capital in the form
of tractors and land,

27:16.618 --> 27:21.418
and seed, and so on,
but used it in a very different

27:21.423 --> 27:25.383
way than it is used in market
economies.

27:25.380 --> 27:30.430
Two: capitalism.

27:30.430 --> 27:38.890
Let's switch now to the lower
usage here.

27:38.890 --> 27:45.220
It is the use of accumulated
wealth to produce more wealth.

27:45.220 --> 27:52.810
Marx makes a big point of this
wealth, commodity,

27:52.807 --> 27:59.447
wealth--WCW--and sees this as
pathological,

27:59.448 --> 28:05.138
as a distortion of human
values.

28:05.140 --> 28:10.380
And we'll talk through Marx in
about a week or ten days.

28:10.380 --> 28:17.990
The great man--how many of you
have read as many as ten pages

28:17.991 --> 28:20.531
of Marx's writing?

28:20.528 --> 28:24.878
Where do we read Marx at Yale
these days?

28:24.880 --> 28:27.470
Student:  Philosophy.

28:27.470 --> 28:29.080
Prof: Philosophy
department.

28:29.079 --> 28:30.169
Where else?

28:30.170 --> 28:30.780
Student:  Sociology.

28:30.778 --> 28:31.318
Professor Douglas W.

28:31.319 --> 28:32.609
Rae:  Directed studies.

28:32.608 --> 28:35.328
What is directed studies read
of Marx?

28:35.328 --> 28:35.528
Student:
>

28:35.529 --> 28:38.589
Prof: "Communist
Manifesto";

28:38.588 --> 28:40.518
that's great,
you're well prepared for this

28:40.519 --> 28:42.769
class because we're going to
read it next week.

28:42.769 --> 28:46.499
What would you say of Marx as a
writer?

28:46.500 --> 28:51.520
First of all he wrote in
German, but who's got an

28:51.515 --> 28:55.795
editorial opinion about Marx's
writing?

28:55.799 --> 28:59.469
Yes.

28:59.470 --> 29:01.550
Student:  I think--
Prof: You've got to

29:01.549 --> 29:02.399
shout without the mic.

29:02.400 --> 29:03.730
Student:  A very
talented writer.

29:03.730 --> 29:04.920
Prof: A very talented
writer.

29:04.920 --> 29:08.080
I agree;
a very smart guy.

29:08.078 --> 29:14.418
If you were marking a Marx term
paper up, what would you find

29:14.415 --> 29:15.785
fault with?

29:15.788 --> 29:20.388
Student:  A bit
long-winded.

29:20.390 --> 29:24.360
Prof: Very windy and a
little overwrought,

29:24.357 --> 29:25.017
right?

29:25.019 --> 29:30.099
He really wants to hit you in
the face five times with each

29:30.095 --> 29:30.965
thought.

29:30.970 --> 29:37.220
But what we'll discover is
interesting is that Marx,

29:37.220 --> 29:40.290
in the Manifesto,
Marx and Engels,

29:40.285 --> 29:45.665
look at capitalism in a way
very similar to the way we look

29:45.673 --> 29:47.163
at it today.

29:47.160 --> 29:52.670
They emphasize its enormous
productive capacity and they

29:52.673 --> 29:58.593
also emphasize that it is always
on the edge of being out of

29:58.586 --> 29:59.786
control.

29:59.788 --> 30:04.998
Capitalism, as a word,
comes into the English language

30:05.000 --> 30:10.700
in the middle of the 1800s,
and it comes in because of Marx

30:10.701 --> 30:13.161
and people like Marx.

30:13.160 --> 30:19.850
It is a pejorative used to
attack the existing economic

30:19.845 --> 30:20.955
system.

30:20.960 --> 30:26.850
Capitalism is seen not as a
highly productive system but as

30:26.852 --> 30:31.422
an unjust system,
and it's criticized in other

30:31.423 --> 30:35.593
ways which I'll tick off in a
moment.

30:35.589 --> 30:37.479
Anybody recognize this fellow?

30:37.480 --> 30:39.410
Yes.

30:39.410 --> 30:40.070
Student:  J.P.***Morgan.

30:40.069 --> 30:42.109
Prof: It's J.P.

30:42.108 --> 30:46.688
Morgan and does anybody know
who took this photograph?

30:46.690 --> 30:48.750
That's a little hard;
Steichen.

30:48.750 --> 30:50.290
And it's a very famous
photograph.

30:50.289 --> 30:51.889
What's famous about it?

30:51.890 --> 30:56.090
What does--what's striking
about this image?

30:56.089 --> 31:00.299
Student:  His face.

31:00.298 --> 31:03.308
Prof: Does he look
friendly, warm and fuzzy?

31:03.309 --> 31:05.749
No, and he wasn't.

31:05.750 --> 31:07.600
I mean this was a very hard
edge guy.

31:07.598 --> 31:12.358
What seems to be in his left
hand?

31:12.359 --> 31:14.949
Student:  A chair.

31:14.950 --> 31:18.790
Prof: It is a chair--it
is the arm of a chair,

31:18.789 --> 31:23.369
but the reflection makes it
look like he's holding a dagger.

31:23.369 --> 31:26.909
It was no accident.

31:26.910 --> 31:33.510
Steichen was not a fan and this
has been used--this photograph's

31:33.505 --> 31:38.735
been used thousands of times in
a polemical way.

31:38.740 --> 31:44.300
Okay, capitalism as seen in the
nineteenth century.

31:44.298 --> 31:49.878
A disease for which scientific
socialism, that's Marx's term

31:49.880 --> 31:52.150
for Marx, is the cure.

31:52.150 --> 31:57.270
Of course there were twenty or
thirty other brands of socialism

31:57.266 --> 32:00.316
that Marx regarded as
unscientific.

32:00.318 --> 32:05.148
It is a method by which to
steal the labor from the

32:05.153 --> 32:06.993
exploited masses.

32:06.990 --> 32:11.660
The reasoning,
which we'll review in ten days

32:11.660 --> 32:15.440
time,
is that capital can never make

32:15.435 --> 32:20.895
money except by using either
labor now or the accumulated

32:20.900 --> 32:26.570
fruit of labor from the past,
and if capital ends up with a

32:26.568 --> 32:29.888
profit,
that profit must be extracted

32:29.893 --> 32:33.433
from either living or fossilized
labor.

32:33.430 --> 32:37.430
This is not a thought which I
share.

32:37.430 --> 32:42.550
It is a system which undermines
traditional society in all its

32:42.549 --> 32:46.239
forms, and undermines
traditional skill sets,

32:46.243 --> 32:49.773
and that's a perfectly true
statement.

32:49.769 --> 32:53.529
When it happens it is very
coercive.

32:53.529 --> 32:57.589
It is indeed a trademark of the
way capitalism works.

32:57.588 --> 33:02.968
That a skill set which was
competitive and au

33:02.969 --> 33:09.489
courant in 1980 may not
command as much as the minimum

33:09.493 --> 33:11.443
wage in 2009.

33:11.440 --> 33:20.400
This is the kicker for Marx;
it is the claim that capitalism

33:20.404 --> 33:23.594
inevitably will destroy itself.

33:23.588 --> 33:26.738
It will undermine its own
foundations and ultimately

33:26.739 --> 33:27.479
disappear.

33:27.480 --> 33:31.470
We'll evaluate that view.

33:31.470 --> 33:38.680
This slide has cut off the main
part of the--of what's here so

33:38.681 --> 33:42.821
I'll have to remember it for
you.

33:42.818 --> 33:47.808
Capitalism is the name given to
an economic system by its

33:47.808 --> 33:51.488
enemies;
point one by its enemies.

33:51.490 --> 33:58.880
Point two a system which relies
heavily on the private use of

33:58.877 --> 34:02.947
capital;
heavily on the private use of

34:02.945 --> 34:09.105
capital combined with the profit
motive founded on self interest

34:09.108 --> 34:11.258
or family interest.

34:11.260 --> 34:18.820
There are hundreds of
variations on the capitalist

34:18.824 --> 34:24.294
system,
but the essentials are private

34:24.291 --> 34:30.741
deployment of capital,
open acknowledgement of profit

34:30.735 --> 34:35.325
as a motive,
and a sympathetic understanding

34:35.329 --> 34:38.379
of self or household interest.

34:38.380 --> 34:45.640
Another frequent part of the
package is a tolerance for

34:45.641 --> 34:47.391
innovation.

34:47.389 --> 34:53.589
One of the characteristic facts
about historical society is a

34:53.590 --> 34:56.380
resistance to innovation.

34:56.380 --> 35:00.220
And the temptation to resist
change is always there.

35:00.219 --> 35:06.009
It is absolutely always there
and as people grow older they

35:06.010 --> 35:12.100
grow more set in their ways and
expectations and less tolerant

35:12.103 --> 35:14.503
of fresh innovation.

35:14.500 --> 35:18.170
This course.

35:18.170 --> 35:22.430
We're going to start with some
excerpts from the Wealth Of

35:22.425 --> 35:23.415
Nations.

35:23.420 --> 35:28.260
It is available on Class V2
posted under resources.

35:28.260 --> 35:33.600
How many of you have read at
least a chapter of Wealth of

35:33.601 --> 35:34.871
Nations?

35:34.869 --> 35:37.989
Okay, the rest of you are in
for a treat.

35:37.989 --> 35:42.369
Smith is not only a great
writer but a great thinker.

35:42.369 --> 35:47.349
He is a much more complex
thinker than we usually imagine

35:47.351 --> 35:48.421
him to be.

35:48.420 --> 35:55.920
He was not a believer that it's
just fine for the poor to starve

35:55.916 --> 35:57.936
in the streets.

35:57.940 --> 36:00.970
He actually had very
complicated news about that

36:00.972 --> 36:04.912
which are broadly analogous to
the philosopher John Rawls,

36:04.909 --> 36:10.059
and Rawls' difference principle
about what inequalities are

36:10.063 --> 36:11.993
justified,
namely those which

36:11.992 --> 36:13.112
>

36:13.110 --> 36:18.180
ultimately in some way to the
benefit of the least favored

36:18.182 --> 36:20.322
stratum in an economy.

36:20.320 --> 36:24.750
The Manifesto,
already mentioned,

36:24.746 --> 36:31.246
and in both cases we'll leave
out a good bit.

36:31.250 --> 36:33.520
Smith is a very old book.

36:33.518 --> 36:36.538
I recommend to you the Bantam
paperback,

36:36.539 --> 36:43.589
$7.95 of Smith because it has
wonderful little summaries of

36:43.592 --> 36:50.282
each paragraph in italics which
allow speed reading,

36:50.280 --> 36:55.150
which is actually a very useful
thing when a book would take a

36:55.148 --> 36:58.658
week to plow through in a
careful reading.

36:58.659 --> 37:02.049
We'll focus on just three or
four points there,

37:02.047 --> 37:05.877
three or four arguments in
Smith, but they are really

37:05.878 --> 37:08.528
powerful and important readings.

37:08.530 --> 37:12.350
The Constitution of
Liberty is by F.A.

37:12.349 --> 37:15.819
Hayek and we'll just read two
chapters that will be in a

37:15.820 --> 37:17.650
packet, which you will get.

37:17.650 --> 37:25.250
Hayek is the arch-conservative,
a market conservative from whom

37:25.246 --> 37:29.776
most of the conservative
movement--

37:29.780 --> 37:32.000
not not concerned with social
authority--

37:32.000 --> 37:37.970
but the libertarian side of
American conservatism relies

37:37.971 --> 37:41.331
primarily on Hayek,
actually.

37:41.329 --> 37:47.839
Farewell to Alms,
this book, by a guy named

37:47.835 --> 37:52.475
Gregory Clarke,
is a book which says

37:52.481 --> 37:57.971
capitalism: more and better;
pour it on.

37:57.969 --> 38:03.009
As capitalism increases its
reach the world will grow

38:03.010 --> 38:05.240
wealthier and better.

38:05.239 --> 38:09.589
It is a polemical work,
written by an economist,

38:09.590 --> 38:13.420
and you will find things to
argue with even if you more or

38:13.416 --> 38:17.306
less agree with him you will
find many things to argue with

38:17.309 --> 38:21.539
him about and that will be an
important book in the course.

38:21.539 --> 38:27.329
The Mystery of Capital
by Hernando DeSoto is an

38:27.333 --> 38:33.783
argument about why the less
developed countries in the world

38:33.784 --> 38:38.744
are less developed,
and the gist of it is that

38:38.744 --> 38:44.044
formal and enforceable property
rights are a precondition to

38:44.043 --> 38:46.113
capital development.

38:46.110 --> 38:51.940
It's a very powerful piece of
work.

38:51.940 --> 38:55.740
Richard Posner,
The Failure of

38:55.742 --> 39:01.212
Capitalism,
Posner--anybody know who Posner

39:01.208 --> 39:02.038
is?

39:02.039 --> 39:05.839
Tell us loud and clear.

39:05.840 --> 39:07.090
Student:  A judge.

39:07.090 --> 39:10.060
Prof: He's a judge and
he's a judge of what persuasion,

39:10.059 --> 39:10.839
would you say?

39:10.840 --> 39:15.480
He's a very conservative judge,
teaches at The University of

39:15.476 --> 39:18.926
Chicago Law School,
and he has written a very

39:18.934 --> 39:22.634
penetrating analysis of the
current crisis.

39:22.630 --> 39:27.480
It is--I read maybe 20 books
and picked one on this subject,

39:27.480 --> 39:34.070
and this is the clearest and
most honest,

39:34.070 --> 39:37.090
I think, and he doesn't--he
does no ideological distortion

39:37.092 --> 39:38.422
here that I can detect.

39:38.420 --> 39:44.090
It is just a penetrating and
straightforward analysis of what

39:44.090 --> 39:48.250
happened, and for that reason
very useful.

39:48.250 --> 39:52.890
The Bottom Billion by
Paul Collier,

39:52.889 --> 39:57.109
who is a World Bank economist
who teaches at Oxford,

39:57.110 --> 40:02.810
and in this maps out a
diagnosis and a strategy for

40:02.807 --> 40:09.527
using market mechanisms and
capital development to alleviate

40:09.532 --> 40:13.182
most of the world's poverty.

40:13.179 --> 40:18.479
Finally, The White
Tiger, this is fiction,

40:18.483 --> 40:24.563
but there are times when
fiction is better at describing

40:24.561 --> 40:28.431
the real world than nonfiction.

40:28.429 --> 40:35.779
This is a brutally penetrating
novel written from the point of

40:35.775 --> 40:41.545
view of a very poor,
very smart, and in many ways

40:41.554 --> 40:45.894
flawed young man in South India.

40:45.889 --> 40:50.529
It won the Man Booker prize
last year for fiction.

40:50.530 --> 40:56.620
It is, for our age,
it is as good as Dickens and

40:56.617 --> 41:01.667
Zola were for the nineteenth
century.

41:01.670 --> 41:03.820
It's just a brilliant book.

41:03.820 --> 41:04.780
I couldn't put it down.

41:04.780 --> 41:09.290
Ten people told me I had to
read it, and I kept shrugging my

41:09.288 --> 41:13.718
shoulders and that's when I
started, and I read it front to

41:13.719 --> 41:15.629
back in one long day.

41:15.630 --> 41:20.200
It is--if you want to
understand why there are a

41:20.201 --> 41:25.841
billion or two billion people
out there for whom capitalism

41:25.842 --> 41:31.392
looks not like a powerful
mechanism of production but like

41:31.385 --> 41:34.785
an extremely coercive system.

41:34.789 --> 41:41.219
The White Tiger is a
great way to do that.

41:41.219 --> 41:44.839
Chris Buckley's,
Thank You For Smoking,

41:44.842 --> 41:45.972
is optional.

41:45.969 --> 41:50.229
We will also use the case
method and the case method

41:50.231 --> 41:53.491
occupies about a third of the
course.

41:53.489 --> 41:59.489
We will use--the ones in white
are straightforward cases,

41:59.487 --> 42:05.907
the ones in gold we'll have the
people in the room or some of

42:05.913 --> 42:07.523
the people.

42:07.518 --> 42:14.068
Polaroid is the story of the
land camera and a brilliant

42:14.067 --> 42:20.017
technology which ultimately
crashed and burned,

42:20.018 --> 42:24.718
and it's--the case is a hard
business school case about the

42:24.717 --> 42:29.417
attempt to get that business
through its crisis at the time

42:29.416 --> 42:31.276
that it went broke.

42:31.280 --> 42:37.270
Goldman Sachs IPO
terrifically--it's a good HBS

42:37.268 --> 42:41.038
case,
and better yet we'll have Paolo

42:41.036 --> 42:45.876
Zannoni with us to tell the
story from the inside of the

42:45.876 --> 42:47.456
Goldman system.

42:47.460 --> 42:53.930
Wanda Rapaczynski is the story
of getting a business going in

42:53.925 --> 42:58.555
Poland just after the death of
communism.

42:58.559 --> 43:04.929
A Yale-trained business woman
who created something called

43:04.934 --> 43:08.384
Agora S.A.,
which is the largest publishing

43:08.376 --> 43:13.246
company in East Europe,
and how she coped with the

43:13.253 --> 43:18.003
toxic environment,
the toxic business environment,

43:18.003 --> 43:19.683
left over by communism.

43:19.679 --> 43:25.009
Selco India is a microfinance
story.

43:25.010 --> 43:31.200
Cardiothoracic Systems is a
tech story and I'm going to have

43:31.197 --> 43:37.697
the Dean of SOM come and do it
as a business case with you,

43:37.699 --> 43:40.139
which means you're going to
need to wear helmets.

43:40.139 --> 43:43.019
She is an aggressive cold
caller.

43:43.018 --> 43:48.118
By the way, I'm going to make
two kinds of calls in this

43:48.121 --> 43:50.591
course,
cold calls are the kind of

43:50.590 --> 43:53.260
thing I did today where you get
no warning,

43:53.260 --> 43:59.290
and warm calls I'll send you an
email and say heads up about,

43:59.289 --> 44:05.219
and in the second case you've
really got to have something to

44:05.217 --> 44:05.807
say.

44:05.809 --> 44:12.549
Some of the fun in this stuff
is the back and forth between

44:12.545 --> 44:16.025
you and me, and you and you.

44:16.030 --> 44:21.330
The Enron case,
Jim Alexander is an important

44:21.329 --> 44:23.859
guy in this course.

44:23.860 --> 44:25.890
Jim would you just stand up and
wave?

44:25.889 --> 44:32.139
Jim was--Jim is a good friend
of mine who had a career in

44:32.143 --> 44:36.613
investment banking and then at
Enron,

44:36.610 --> 44:41.140
and he was Chief Financial
Officer of Enron,

44:41.139 --> 44:45.389
Global Pipeline & Power,
and he saw what was happening

44:45.391 --> 44:46.811
and got out.

44:46.809 --> 44:52.959
He is referred to as the fly in
the ointment in Smartest Guys

44:52.958 --> 44:57.448
in the Room,
which is the popularized story

44:57.449 --> 44:59.499
of Enron's crash.

44:59.500 --> 45:04.180
He then went on and co-founded
Spinnaker Exploration whose

45:04.177 --> 45:08.527
operating principle was:
think what Enron would do and

45:08.527 --> 45:10.167
do the opposite.

45:10.170 --> 45:17.600
Spinnaker became a public
company and was extremely

45:17.597 --> 45:19.527
successful.

45:19.530 --> 45:22.700
Medley Global Advisors,
this is a case about gathering

45:22.704 --> 45:25.944
business intelligence and
selling it at high prices.

45:25.940 --> 45:30.430
Medley is another Yale-trained
person.

45:30.429 --> 45:34.929
He founded the company and the
case is about his attempt to

45:34.927 --> 45:37.907
sell the company,
which he did,

45:37.911 --> 45:41.551
so he's selling a company
that--

45:41.550 --> 45:47.090
which is posthumously his,
and he actually sold it for

45:47.088 --> 45:52.638
fifty seven million bucks,
and it's a no venture medley

45:52.643 --> 45:56.163
story and he's a very
interesting guy.

45:56.159 --> 46:00.279
Then maybe we'll talk about
Mory's.

46:00.280 --> 46:04.560
I'm chair of a workout
committee which is trying to put

46:04.559 --> 46:08.839
more effective business and it
turns out to be a really

46:08.838 --> 46:10.898
interesting hard case.

46:10.900 --> 46:16.000