WEBVTT 00:01.520 --> 00:04.590 Prof: I'm going to use today to actually cover some 00:04.588 --> 00:05.878 introductory material. 00:05.880 --> 00:10.630 We will use most of the fifty minutes. 00:10.630 --> 00:16.630 The last part of today's lecture will describe the 00:16.629 --> 00:21.649 course, its requirements, and so forth. 00:21.650 --> 00:23.880 So let's begin. 00:23.880 --> 00:28.350 Capitalism--we're going to break the subject today into 00:28.352 --> 00:29.762 three headings. 00:29.760 --> 00:33.140 Capital, capitalism, and course, three 00:33.140 --> 00:35.790 "Cs" if you will. 00:35.790 --> 00:42.560 The--I've chosen, and I usually do this, 00:42.560 --> 00:46.990 I've chosen one segment of the economy as the theme for the 00:46.985 --> 00:49.815 day, and today that segment is 00:49.815 --> 00:52.015 revealed in this slide. 00:52.020 --> 00:58.890 Calhoun Athletics XXL, can you interpret the slide? 00:58.890 --> 01:02.020 Student: Green technology. 01:02.020 --> 01:06.090 Prof: Okay what in particular? 01:06.090 --> 01:07.450 Student: > 01:07.450 --> 01:12.120 Prof: Okay, how about Varic bottled water? 01:12.120 --> 01:15.360 Student: Like the crop circles? 01:15.360 --> 01:19.030 Prof: Okay, they are indeed crop circles. 01:19.030 --> 01:21.990 Score one for MBAs. 01:21.989 --> 01:26.469 They are crop circles, and all of us who travel from 01:26.473 --> 01:30.873 east to west across the country have seen them, 01:30.870 --> 01:34.460 but we haven't seen them quite in this density because this 01:34.462 --> 01:38.952 photograph is taken from space, it's a NASA image, 01:38.946 --> 01:46.206 and it's an extraordinarily elegant display of something 01:46.209 --> 01:48.189 very simple. 01:48.190 --> 01:52.430 Now why would center pivot agriculture interest us from the 01:52.427 --> 01:54.617 point of view of capitalism? 01:54.620 --> 01:56.940 The mis-formatted slide here says capital. 01:56.940 --> 02:02.390 This is a definition that comes down to us through the Oxford 02:02.393 --> 02:07.593 English Dictionary from the early seventeenth century and 02:07.587 --> 02:12.517 let me read it in full and then we'll boil it down to more 02:12.520 --> 02:15.720 manageable terms: "Capital is the 02:15.723 --> 02:19.623 accumulated wealth of an individual, 02:19.620 --> 02:23.750 company, or community used as a fund to carry on fresh 02:23.747 --> 02:27.027 production; wealth in any form used to help 02:27.027 --> 02:29.367 in producing more wealth." 02:29.370 --> 02:33.680 And there's a shift between those two meanings. 02:33.680 --> 02:37.880 The first is a very broad understanding of capital. 02:37.878 --> 02:42.398 The second is very close to the way you would have to think 02:42.404 --> 02:46.854 about capital in connection with an economic system called 02:46.848 --> 02:48.018 capitalism. 02:48.020 --> 02:51.490 So, let's start with the broader usage, 02:51.492 --> 02:56.252 "Capital is accumulated wealth used as a fund in 02:56.245 --> 02:59.805 carrying on fresh production." 02:59.810 --> 03:03.400 That's a very broad idea. 03:03.400 --> 03:08.900 It is one which arguably--in fact I think without much 03:08.902 --> 03:12.632 argument, goes back 10,000 years to the 03:12.628 --> 03:16.048 establishment of agricultural society, 03:16.050 --> 03:20.670 and very possibly another 100,000 or 120,000 years to 03:20.669 --> 03:25.379 organized hunter gatherers using weapons and tools. 03:25.379 --> 03:32.449 Does this qualify? 03:32.449 --> 03:35.539 Is that not capital? 03:35.539 --> 03:38.419 What do you think? 03:38.419 --> 03:43.339 Second row purple-- Student: 03:43.342 --> 03:47.022 > 03:47.020 --> 03:48.790 Prof: It is capital. 03:48.788 --> 03:53.848 Sorry, excuse me, can you hand her this? 03:53.848 --> 04:07.698 Student: > 04:07.699 --> 04:10.949 Prof: Okay, so the nuts buried in the 04:10.953 --> 04:15.573 forest floor are accumulated wealth, so it meets that test. 04:15.569 --> 04:18.549 Does it meet the next test? 04:18.550 --> 04:22.380 You need the mic a little closer to your mouth. 04:22.379 --> 04:26.329 Student: > 04:26.329 --> 04:29.099 Prof: Okay so what is the squirrel producing with that 04:29.101 --> 04:29.381 nut? 04:29.379 --> 04:33.069 Student: Nothing material. 04:33.069 --> 04:37.739 Prof: He's producing squirrel, and that's not really 04:37.740 --> 04:38.950 what we mean. 04:38.949 --> 04:45.849 Hand the mic to somebody else and we'll just--it's the hot 04:45.850 --> 04:46.940 potato. 04:46.940 --> 04:51.130 Just pass it around and wherever it is when I ask a 04:51.125 --> 04:53.465 question that's your turn. 04:53.470 --> 04:56.440 That'll be good. 04:56.440 --> 05:03.850 The nest is producing nestlings, and it's a little 05:03.848 --> 05:07.628 closer to what we mean. 05:07.629 --> 05:12.699 The beaver dam producing a working environment for beavers 05:12.701 --> 05:17.001 to carry out their business; it's closer. 05:17.000 --> 05:19.310 Infrastructure if you will. 05:19.310 --> 05:23.530 The honeycomb that bees use. 05:23.528 --> 05:30.688 This one is actually the one that is closest intuitively to 05:30.685 --> 05:31.915 capital. 05:31.920 --> 05:33.470 Right? 05:33.470 --> 05:38.730 The accumulated wealth is the energy and silk required to 05:38.730 --> 05:44.280 weave the nest or weave the web, and the web is indeed an 05:44.281 --> 05:48.431 instrument for the work of capturing prey, 05:48.430 --> 05:53.830 but there's no external product beyond it, 05:53.829 --> 05:57.019 so even that is not quite what we have in mind. 05:57.019 --> 05:59.429 Now how about seed? 05:59.430 --> 06:01.560 The seeds used in agriculture. 06:01.560 --> 06:06.080 Where's the--where's the mic right now? 06:06.079 --> 06:12.339 Fess up. 06:12.339 --> 06:17.179 Come on in guys. 06:17.180 --> 06:19.010 No, no, no. 06:19.009 --> 06:20.029 You're not passing it off now. 06:20.028 --> 06:22.768 Okay, so do you reckon that seeds like this constitute 06:22.771 --> 06:23.291 capital? 06:23.290 --> 06:29.620 Student: Okay, I don't really think so, 06:29.620 --> 06:30.310 no. 06:30.310 --> 06:32.290 Prof: Okay and why not? 06:32.290 --> 06:36.800 Student: Well, I guess that a seed produces a 06:36.798 --> 06:39.508 plant, but it doesn't really--well I 06:39.512 --> 06:41.862 guess yeah, maybe the seed produces a 06:41.860 --> 06:45.180 plant, and then the plant produces more seeds and it sort 06:45.180 --> 06:47.730 of keeps generating more and more seeds. 06:47.730 --> 06:49.900 Prof: Is that capital? 06:49.899 --> 06:55.809 Student: I mean it doesn't look like it to me. 06:55.810 --> 06:57.300 Prof: Why not? 06:57.300 --> 06:58.220 Be exact. 06:58.220 --> 07:01.180 Student: Well I guess that capital is sort of a 07:01.175 --> 07:03.745 never-ending way of accumulating more wealth. 07:03.750 --> 07:05.230 Prof: Does it have to go on forever? 07:05.230 --> 07:07.850 Don't capitalists fail? 07:07.850 --> 07:09.480 Student: Yeah capitalists fail, 07:09.476 --> 07:10.716 but good capitalists don't. 07:10.720 --> 07:16.420 Prof: Take Mory's, it's a pretty good example. 07:16.420 --> 07:19.040 It's a really good example, actually. 07:19.040 --> 07:21.680 Okay, mic please. 07:21.680 --> 07:28.080 In this bucket I've got two kilograms of seed. 07:28.079 --> 07:36.389 Would anybody say that it isn't enough to count as capital? 07:36.389 --> 07:41.409 If--is one seed, is that enough to make it 07:41.413 --> 07:42.643 capital? 07:42.639 --> 07:45.739 Student: What kind of seeds?. 07:45.738 --> 07:48.988 Prof: It's-- Student: I said what 07:48.985 --> 07:49.885 kind of seed is it? 07:49.889 --> 07:54.989 Prof: Okay, it is for growing safflower. 07:54.990 --> 07:57.480 If you elicit information from me you've got to give me 07:57.483 --> 07:58.273 something back. 07:58.269 --> 08:02.039 Student: I think seeds in any quantity can be capital 08:02.043 --> 08:05.823 because each--once you plant it and if there isn't successful 08:05.817 --> 08:10.207 pollination-- Prof: Is the voice loud 08:10.208 --> 08:11.618 enough here? 08:11.620 --> 08:13.000 Student: You can always use plants to 08:13.004 --> 08:13.654 produce more seed. 08:13.649 --> 08:16.519 In fact, that's what a lot of farms do and that's what a lot 08:16.524 --> 08:19.354 of farms get in trouble for because other companies want to 08:19.350 --> 08:20.520 control those seeds. 08:20.519 --> 08:23.659 Prof: Okay, so there's a patent violation 08:23.656 --> 08:27.526 issue if I use hybrid seed to generate more hybrid seed? 08:27.528 --> 08:30.008 There may be, there's an argument there. 08:30.009 --> 08:33.309 Okay, so quantity doesn't matter at all? 08:33.309 --> 08:34.759 Yes. 08:34.759 --> 08:37.289 Student: I'd say quantity matters if you're a 08:37.293 --> 08:40.073 subsistence farmer because if you just have enough seed to 08:40.072 --> 08:42.012 feed yourself, that's not capital that's just 08:42.008 --> 08:43.618 keeping you alive, you're not producing any 08:43.615 --> 08:44.545 further wealth from it. 08:44.548 --> 08:48.338 Prof: Okay and if I gave you just this much seed? 08:48.340 --> 08:51.160 Student: Well if I'm not a farmer, 08:51.158 --> 08:54.068 if I have some other means of supporting myself that could be 08:54.067 --> 08:56.627 capital for a side business but that wouldn't be for a 08:56.634 --> 08:57.754 subsistence farmer. 08:57.750 --> 09:00.490 Prof: You think it's really worth having a business 09:00.493 --> 09:02.133 over twenty-six safflower seeds? 09:02.129 --> 09:04.139 Student: Well no. 09:04.139 --> 09:06.639 Prof: No, I don't think so either. 09:06.639 --> 09:11.339 What I'm driving at here is the notion of minimum efficient 09:11.341 --> 09:11.991 scale. 09:11.990 --> 09:17.270 Capital gets--a resource gets to be capital only when it's 09:17.272 --> 09:22.372 aggregated to a scale where it can be effectively enough 09:22.369 --> 09:26.539 deployed to compete in an actual economy. 09:26.538 --> 09:33.608 Now let's take--that's too big a note, let's take a dollar. 09:33.610 --> 09:42.450 Have I just given you capital or not? 09:42.450 --> 09:47.740 Student: Technically yes, but probably that wouldn't 09:47.738 --> 09:52.218 allow me to set up a budding business over here. 09:52.220 --> 09:54.650 Prof: Okay, how might it become a piece of 09:54.653 --> 09:55.163 capital? 09:55.158 --> 09:57.418 Student: Well if somebody else gives me a dollar 09:57.418 --> 09:57.828 or more. 09:57.830 --> 10:00.340 Prof: Two dollars is enough for you to call it 10:00.336 --> 10:00.816 capital? 10:00.820 --> 10:03.650 Student: No, but if I have more investors 10:03.653 --> 10:06.313 and they will be giving more than a dollar. 10:06.308 --> 10:11.048 Prof: Okay, so you need some aggregation or 10:11.051 --> 10:12.601 agglomeration. 10:12.600 --> 10:17.120 How do we aggregate capital in an actual economy? 10:17.120 --> 10:19.400 Student: IPOs. 10:19.399 --> 10:21.749 Prof: IPOs are a big way to do it. 10:21.750 --> 10:26.130 In general, the joint stock corporation is a way to do it. 10:26.129 --> 10:27.719 How do banks aggregate capital? 10:27.720 --> 10:29.360 Student: Deposits. 10:29.360 --> 10:37.500 Prof: Thousands of little deposits make big funds. 10:37.500 --> 10:43.930 Okay, so we're getting there with capital and what I want to 10:43.927 --> 10:49.807 do now is continue the agricultural theme and see if we 10:49.809 --> 10:55.799 can relate what we're talking about to the generation of 10:55.802 --> 10:59.182 actual wealth in society. 10:59.179 --> 11:04.089 This is called a seed drill. 11:04.090 --> 11:09.060 It is a way of planting millions of seeds in a very 11:09.057 --> 11:13.627 systematic, precise, and cost effective way. 11:13.629 --> 11:18.609 One characteristic feature of how capital works is combining 11:18.610 --> 11:23.250 different factors in the production of the same thing in 11:23.254 --> 11:26.044 an extremely intelligent way. 11:26.038 --> 11:30.538 A way that represents the accumulated experience of 11:30.535 --> 11:36.105 society and when you do it well you succeed, and when you do it 11:36.110 --> 11:37.910 poorly you fail. 11:37.908 --> 11:41.178 You can actually fail even when you do it well, 11:41.182 --> 11:45.452 but you're very unlikely to succeed when you do it poorly. 11:45.450 --> 11:51.680 Now here I want to compare two very similar technologies, 11:51.678 --> 11:59.668 this is a peasant farming in Tibet and the mode of power here 11:59.672 --> 12:04.802 is a pair of yaks, and this is a John Deere 12:04.798 --> 12:10.128 tractor and the spectacular difference between these two 12:10.133 --> 12:13.143 things is obvious to us all. 12:13.139 --> 12:17.679 It is that one of them is--constitutes a large 12:17.684 --> 12:20.114 investment of capital. 12:20.110 --> 12:24.670 In the case of that tractor and the gear with it well over 12:24.668 --> 12:26.908 $100,000 must be invested. 12:26.908 --> 12:32.608 The yaks, well I don't know what yaks cost in Tibet, 12:32.610 --> 12:33.840 but less. 12:33.840 --> 12:39.110 We would say that the John Deere photograph represents 12:39.110 --> 12:44.680 something that's capital intensive and the yak photograph 12:44.678 --> 12:49.648 represents something which is labor intensive. 12:49.649 --> 12:57.949 We would expect a much higher return in food generated per 12:57.947 --> 13:06.097 hour of labor invested from the highly mechanized capital 13:06.097 --> 13:09.007 intensive story. 13:09.009 --> 13:16.139 In the history of the world in the last thousand years is 13:16.139 --> 13:23.269 essentially the history of substitution of the right hand 13:23.269 --> 13:29.169 picture for the left hand; of capital intensive, 13:29.173 --> 13:34.933 highly mechanized means of production in the place of labor 13:34.929 --> 13:40.189 intensive, low capitalization means of production. 13:40.190 --> 13:52.540 Another comparison, the capital intensivity here, 13:52.538 --> 13:58.098 the ratio of that watering cans capital cost to the center pivot 13:58.100 --> 14:03.390 that might be as much as 500 meters long would be measured in 14:03.394 --> 14:06.734 the thousands to one, the tens of thousands, 14:06.732 --> 14:08.442 the hundreds of thousands probably; 14:08.440 --> 14:12.710 enormous difference in the level of investment. 14:12.710 --> 14:16.910 Also those of you who are interested in the environment, 14:16.910 --> 14:20.960 and all of us should be, there is a huge difference in 14:20.960 --> 14:22.870 environmental impact. 14:22.870 --> 14:28.220 The labor intensive agriculture essentially leaves the 14:28.216 --> 14:32.626 environment unchanged, whereas, this kind of 14:32.629 --> 14:37.519 agriculture practiced in-- it's now a world--center pivot 14:37.517 --> 14:40.627 irrigation is a worldwide technology. 14:40.629 --> 14:45.229 And in many places it draws so much water so fast, 14:45.230 --> 14:50.860 and so much water is lost to evaporation, that the underlying 14:50.861 --> 14:54.431 aquifer is rapidly being depleted. 14:54.428 --> 15:01.908 Here are two center pivot photographs, and they too differ 15:01.913 --> 15:04.543 in capitalization. 15:04.538 --> 15:11.588 The one on the left is from Egypt, the one on the right is 15:11.589 --> 15:19.009 from Iowa, and the difference between them in the cost of the 15:19.009 --> 15:22.349 land would be dramatic. 15:22.350 --> 15:28.590 The market price of highly productive loam soil in one of 15:28.586 --> 15:34.826 the three or four richest agricultural zones in the world 15:34.825 --> 15:40.945 is much higher than in the margin of the world's largest 15:40.951 --> 15:42.401 desert. 15:42.399 --> 15:50.059 Here's another--I kind of got carried away with center pivot 15:50.061 --> 15:51.881 agriculture. 15:51.879 --> 15:56.989 Here's another slide of the same kind from the same source, 15:56.990 --> 15:59.900 and this is in Southern France. 15:59.899 --> 16:01.609 Who's been to Southern France? 16:01.610 --> 16:06.540 Pretty great isn't it? 16:06.538 --> 16:11.738 I have many reservations about French politics but Southern 16:11.744 --> 16:16.504 France is one of the nicest places I've ever been, 16:16.500 --> 16:21.370 and this summer--we'll meet a guy here in a month named Paolo 16:21.366 --> 16:26.046 Zannoni, who is a robber baron Goldman 16:26.054 --> 16:30.624 Sachs partner, and he just built a villa 16:30.623 --> 16:34.583 overlooking Cannes in Southern France, 16:34.580 --> 16:37.530 and I had to be taken away by security. 16:37.529 --> 16:44.869 What's striking about this photograph in comparison with 16:44.870 --> 16:48.890 the others-- what's the dramatic difference 16:48.894 --> 16:51.774 between this one and the Egyptian one, 16:51.769 --> 16:53.149 and the Iowa one? 16:53.149 --> 16:59.839 Purple? 16:59.840 --> 17:01.990 That's not what I'm fishing for guys. 17:01.990 --> 17:05.660 Student: There's other things in the middle. 17:05.660 --> 17:09.540 Prof: Okay you got to talk really--where's--do I have 17:09.541 --> 17:10.201 the mic? 17:10.200 --> 17:12.950 Here it is. 17:12.950 --> 17:23.180 Would you please pass this over to him? 17:23.180 --> 17:27.400 Student: There's other things in the middle of the 17:27.400 --> 17:29.400 green and purple circles. 17:29.400 --> 17:31.630 Prof: Push the on button and it'll be on. 17:31.630 --> 17:33.950 Student: Alright, there's other things in the 17:33.946 --> 17:35.806 middle of the green and purple circles. 17:35.808 --> 17:40.188 Prof: Okay, and what are the other things? 17:40.190 --> 17:42.530 Student: I can't tell if they're houses or-- 17:42.529 --> 17:43.589 Prof: Well what are all these little polygons? 17:43.588 --> 17:45.828 Look at the right margin, for example. 17:45.828 --> 17:54.108 They are--take a guess, they're not soccer fields. 17:54.108 --> 17:57.648 Who wants to take a guess at this? 17:57.650 --> 17:59.070 Yes. 17:59.069 --> 18:01.249 Student: Pasture. 18:01.250 --> 18:04.520 Prof: Pasture? 18:04.519 --> 18:05.589 Okay they might be pasture. 18:05.588 --> 18:09.538 What they are more generally--you have the--we'll 18:09.540 --> 18:13.410 get better at this microphone thing as we go. 18:13.410 --> 18:17.440 What they are is very small farms. 18:17.440 --> 18:23.900 They're farms where the leaps and bounds trace back perhaps 18:23.903 --> 18:26.583 800,1,000,1,200 years. 18:26.578 --> 18:32.018 They were farms which worked economically when the world was 18:32.018 --> 18:36.718 less developed in capital intensive agriculture, 18:36.720 --> 18:42.700 but they have been rendered marginal by the transformation 18:42.696 --> 18:45.106 of world agriculture. 18:45.108 --> 18:49.878 Now the question for you--are you ready for a policy question? 18:49.880 --> 19:00.320 Okay, your name is now Sarkozy, and the question is, 19:00.318 --> 19:05.198 should we increase--let's suppose that 20% of these farms 19:05.201 --> 19:08.971 are failing a year, and we're already subsidizing 19:08.970 --> 19:10.310 them pretty heavily. 19:10.308 --> 19:15.438 Should we subsidize them more so that the rate at which they 19:15.441 --> 19:17.791 close down is diminished? 19:17.789 --> 19:24.309 Mr.***Sarkozy? 19:24.308 --> 19:27.478 Student: I would say if you really want to effectively 19:27.478 --> 19:30.338 decrease the rate at which they're failing you'd want to 19:30.335 --> 19:31.785 encourage consolidation. 19:31.788 --> 19:34.708 It looks like the problem here is real fragmentation. 19:34.710 --> 19:37.710 Prof: Okay, the problem is fragmentation, 19:37.709 --> 19:39.559 that's a really good start. 19:39.558 --> 19:47.278 Now the person immediately to your right is your political 19:47.275 --> 19:53.015 consultant, and she's going to tell you 19:53.023 --> 20:01.593 whether what you just said is going to wash in Lyon or not. 20:01.588 --> 20:07.838 How's the Sarkozy consolidation program, how's that going to 20:07.837 --> 20:08.577 play? 20:08.578 --> 20:10.768 Student: Can you repeat the question? 20:10.769 --> 20:15.759 Prof: Okay, Sarkozy just said these little 20:15.755 --> 20:21.465 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