WEBVTT

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Prof: Okay,
let's go to work.

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Violating the syllabus,
I've re-titled today's

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discussion "From Marxist
Historicism to Howard Head's

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Tennis Racquet,"
and let's begin with Howard

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Head's tennis racquet.

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Howard Head was an alum of
Harvard College,

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a bright guy,
and a not very good airframe

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engineer.

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He was a second-class designer
of the details of airplanes for

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McDonnell Douglas Corporation,
and he was an avid skier,

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and an avid,
but very untalented,

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tennis player.

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As he tells the story,
there was a night on a bus,

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a motor coach to use his words,
bringing him back to New York

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from Vermont,
from Stowe, and he'd had a

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rough weekend of skiing and he
said,

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"What would happen if we
took the aluminum wafer with

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which we're building airplanes,
and made a ski from it?"

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Sure enough he did that,
and the skiing industry,

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not just the sale of skis but
the total size of the skiing

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market,
was transformed forever because

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skiing now became more fun and
vastly easier.

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Five years later he had the
same--he applied the same

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thought process to tennis
racquets.

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At the time the world market in
tennis racquets had converged on

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the Bancroft wooden racquet,
named for Jack Kramer,

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who died--his obit is in The
Times this morning--

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and everybody was competing on
price and details of quality

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with the wooden racquet.

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There were no rules about how
big a racquet could be.

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It occurred to Head that,
if he substituted in the bow of

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the racquet,
substituted aluminum for wood,

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the structural properties of
aluminum would allow the head of

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the racquet to be much bigger.

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Do any of you play with giant
tennis racquets?

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I know it's a point of pride
among really good players not to

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do that.

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Mine--I retired from tennis
three or four years--mine at my

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retirement was about like that.

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It makes tennis easy,
and it created a mass market

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and it redefined the whole
business.

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Now the idea of creative
destruction, which is usually

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about things more complicated
than skiing and tennis;

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the whole idea of creative
destruction is that the process

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of competing to sell the best
product at the lowest price

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within the given market
framework often does,

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indeed, lead to something like
monopoly,

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or at least oligopoly,
and a point made at length by

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Marxist critics of capitalism.

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As that happens,
it occurs over and over and

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over again,
that somebody like Howard Head

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finds an alternative technology
invariably aimed not at luxury

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markets,
aimed at regular people,

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and very seldom aimed at
corporate or governmental

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buyers,
but again at private sector

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buyers,
and generates with that product

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an entirely new market,
shatters the equilibrium,

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hits it with a hammer.

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And this thought is,
on the one hand,

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antagonistic to Marx.

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That is, it is a way of
refuting Marx's idea about

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monopoly capitalism.

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On the other hand,
it is exactly in the spirit of

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young Marx,
the young Marx we hear in

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The Communist Manifesto
read for today's assignment,

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who saw capitalism as an
enormously productive system

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which was incapable of standing
still,

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which was always leaning
forward into the wind,

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which was, to use Schumpeter's
term,

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nothing more than a mechanism
for economic change.

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According to Schumpeter the
very essence of capitalism is

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that it is a system always in
the process of revising itself.

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It is never capable of standing
still,

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and young Marx certainly
believed just about that same

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thing,
and believed that the

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productive forces--
now remember he's writing in

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1847,1848--
that the productive forces

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associated with capitalism were
unprecedented in world history.

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May I call on one of your
classmates to read the pivotal

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paragraph from that work?

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Student:  "The
bourgeoisie cannot exist without

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constantly revolutionizing the
instruments of production,

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and thereby the relations of
production,

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and with them the whole
relations of society.

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Conservation of the old modes
of production in unaltered form

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was,
on the contrary,

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the first condition of
existence for all earlier

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industrial classes.

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Constant revolutionizing of
production,

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uninterrupted disturbance of
all social conditions,

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everlasting uncertainty and
agitation,

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distinguishes the bourgeois
epoch from all earlier ones.

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All fixed, fast-frozen
relations, with their train of

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ancient and venerable prejudices
and opinions,

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are swept away.

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All new-formed ones become
antiquated before they can

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ossify.

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All that is solid melts into
air;

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all that is holy, is profaned;
and man is at last compelled to

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face, in sober sense,
the real conditions of life,

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and his relations with his
kind."

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Prof: Thank you very
much.

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Marx is there talking about
the--at the time he's writing,

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railroads are just beginning to
transform the European world

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around him.

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Steamships are a generation and
a half into transforming world

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commerce.

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The use of newly efficient
steam engines in manufacturing

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is creating ever cheaper goods.

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The market in world textiles
has driven the price of ordinary

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cotton cloth nearly to zero,
so that nearly everyone in the

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market--
advanced market societies,

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can afford to dress,
more or less,

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the way all of you are dressed.

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That is to say,
whatever, look around.

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But the point is that the
revolutionary transformation of

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the means of production,
and of what is produced and at

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what cost it sells,
is very much on Marx's mind.

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Additionally,
Europe is politically unstable

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in the 1840s.

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And there are five or six nodes
of apparent revolutionary

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activity stretching from Austria
through Germany,

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into tsarist Russia.

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And Marx imagines that his
relatively abstract analysis of

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capitalism is scientific.

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By scientific he means that it
has predictive force.

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That his science of economy and
society is so powerful that it

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allows him to foresee the
future.

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Not to foresee the exact dates
and details of future history,

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but that the broad outlines are
beyond human control.

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There are actually two
assertions here.

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One is that the world's history
is determinate,

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that it is like the machinery
of the heavens,

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it is like the planets
revolving around the sun.

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A good astronomer can readily
predict the phases of the moon,

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the occurrence of eclipses,
all those things,

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and that's science which was in
the past by Marx's time,

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and which he aspired to that
level of confidence.

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We're going to look at his
historicism,

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that is, the double belief that
the world is deterministic and

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that he and his associates can
actually unlock the keys to the

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future,
under six headings.

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The first of which is monopoly
capitalism, and we'll take that

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up momentarily.

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Second is the proposition that,
in the long run,

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the rate of profit for
capitalist enterprises has to

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fall.

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Third the immiseration of the
working class,

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that as profits fall,
so does the wage stream

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available to the working class.

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So both the capitalists and
their adversaries in the

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proletariat face a squeezing
vice which takes their

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discretionary power out of the
system.

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As the vice squeezes,
revolution becomes inevitable.

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That's the fourth point on
the--or the third point on the

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chart.

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The fourth point is Marx's--I'm
a great respecter of Marx's

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brilliance, but the theory of
the universal class is almost

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childlike.

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The idea is that if you search
out the bottom of the bottom of

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the bottom classes than that
class will have the unique

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property that it has no one else
to exploit.

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If it has no one else to
exploit then there won't be

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exploitation,
and since the purpose of the

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state is to defend the interest
of an exploiting class,

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then the state will become
unnecessary and will,

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as the bottom line says here,
wither away.

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Now the many decades of
experience we have lead us to be

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friendly critics toward the top
of this story and unfriendly

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critics toward the bottom
because the story told at the

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bottom is not only false,
but dangerous.

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Monopoly capitalism--you'll
remember that when I was sitting

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with Jim Alexander last class
talking about Adam Smith and the

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conditions under which the
invisible hand remains

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invisible,
I used the Porter Forces

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commonly used in MBA instruction
to define the opposite of each

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of the conditions put forward by
Smith,

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and so I'm using them again
here.

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In a monopoly capitalist
situation, the monopolistic firm

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has eliminated direct
competition or rendered it

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trivial.

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It has caused the erection of
high barriers to entry so that

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as its profits increase and
others say,

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"What a good idea let's
get into that business,"

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it has ways of keeping them
out.

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Or, once they come in,
of punishing them to the point

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of bankruptcy.

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Third, these are products that
are not discretionary;

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they're hard to substitute for.

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You can't have a serious
monopoly in children's games.

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You can't have a serious
monopoly in a given fragrance of

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aftershave lotion or of perfume.

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Serious monopolies are always
in things which people need and

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for which they don't readily
find substitutes.

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The firm is vertically
integrated, and by vertical

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integration I mean,
think about starting--well,

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let's take the laptop in front
of you.

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Starting with the aluminum,
the silica, the metal wires,

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all that stuff;
starting with raw materials

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that are in the earth,
extracting those,

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designing them,
fabricating them,

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marketing the machine,
distributing the machine,

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that whole long trail of
production from raw materials at

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the one end to finished product
in the hands of a buyer at the

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other.

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Vertical integration,
in the extreme,

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means that the corporation
controls that whole sweep.

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The part that reaches from
manufacturing toward the buyer

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is called "forward
integration."

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The part that reaches from the
manufacturer back to raw

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materials is called
"backward

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integration."

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This pattern of integration
gives the company great power

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because there are no suppliers
who can hold up the firm for a

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part of its profits.

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Buyers don't have leverage to
control prices.

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Competitors can't manufacture a
very similar machine 20% cheaper

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and drive down profits.

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And people in substitute
industries don't have any way of

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drawing away customers.

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That's the--I'm
caricaturing--but things which

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more or less fit that
description historically would

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be, for example,
Standard Oil.

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John D. Rockefeller who
controlled--who came into

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control of oil all the way from
exploration and the wellhead.

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Through refining and
distribution,

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he came to control the
railroads,

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which his rivals would need to
use to distribute their product,

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and managed to use the
railroads to impose artificially

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high freight prices on his
competitors so that he was able,

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in effect, to monopolize the
whole industry.

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The--U.S. Steel,
a similar story.

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This would be Andrew Carnegie.

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Microsoft.

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There has been a long debate
about antitrust for Microsoft,

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and it's pretty close to a
monopoly.

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I look around the room and I
see little white Apples

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illuminated everywhere,
and I have one myself.

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My eldest daughter is a
partner-level executive at

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Microsoft and in her house are
Apple computers,

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which I have given her family.

16:26.970 --> 16:34.450
Another story of the same
instance is the regulated

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airlines.

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The regulated airlines,
this is before the late 1970s

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when the airlines were
deregulated, would own a route

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and monopolize it.

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And they would compete not on
the basis of price,

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because they would charge
monopoly prices.

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They would compete on the basis
of food and attractive flight

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attendants--and I'm not going
near that.

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The big pharmaceuticals,
or pharmas,

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are sometimes in monopolistic
or near monopolistic positions

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about drugs and many other
cases,

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though fewer than the
ideological critics of

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capitalism would make you
believe,

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and fewer partly because of
creative destruction.

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As monopolies ossify people
find ways to blow them up.

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Let's talk about that.

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On the left side of this little
diagram we have ways to build a

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monopoly, and on the right side,
ways to burn a monopoly.

17:46.348 --> 17:51.078
And on the vertical we have
market forces and on the

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horizontal, the top horizontal,
we have market forces.

17:56.279 --> 18:00.209
The bottom horizontal we have
governmental forces,

18:00.211 --> 18:05.031
and let's just get ourselves
familiar with the four resulting

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cells.

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Scale and scope, mostly scale;
if there are returns to scale

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so that each widget gets cheaper
to produce as you produce many

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of them,
the firm which is producing the

18:28.628 --> 18:35.268
largest quantities enjoys an
enormous strategic advantage.

18:35.269 --> 18:38.909
Illustrated here,
if number of widgets produced

18:38.914 --> 18:43.514
is on the horizontal dimension
and the marginal cost of the

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last widget is vertical,
being positioned where this

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little green company is
positioned is an enormous

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advantage in comparison with the
little orange firms at the left.

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These are boutique firms doing
very little,

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and the giant producer,
which in the American economy

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for a very long time was General
Motors,

19:08.170 --> 19:09.820
for example.

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It's General Motors and its
immediate competitors in Ford

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and Chrysler.

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Let's--I'll illustrate the
point.

19:18.519 --> 19:24.629
At the time of--the decade
before World War I there were

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1,200 automobile manufacturing
companies in the United States,

19:31.858 --> 19:38.138
and almost all of them got
winkled out by the end of the

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1920s.

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There were about a dozen at the
end of the 1920s.

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We're now approaching--what
number are we going to end up

19:45.743 --> 19:46.193
with?

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Student:  Zero.

19:48.098 --> 19:49.808
Prof: Zero is one real
possibility.

19:49.808 --> 19:52.458
More likely,
I think one,

19:52.457 --> 19:57.197
one and a half,
two, something like that.

19:57.200 --> 20:03.760
But the scale economies in that
kind of business are enormously

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important.

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Creative destruction,
and here we have Schumpeter

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again,
and one way of using Schumpeter

20:16.393 --> 20:22.723
is to take a very long view of
dominant technologies for energy

20:22.720 --> 20:26.790
and production,
and look at how they have

20:26.785 --> 20:28.395
shifted over time.

20:28.400 --> 20:35.210
In this chart--is that legible
for any of you or not?

20:35.210 --> 20:36.630
Not really?

20:36.630 --> 20:37.690
Okay.

20:37.690 --> 20:46.230
The chart begins with
production based on water power;

20:46.230 --> 20:51.120
on mills based on falling water.

20:51.118 --> 20:54.408
It turns out historically that
these were very important.

20:54.410 --> 21:00.590
The first great advances in the
manufacture of textiles occurred

21:00.588 --> 21:05.688
in plants located along the
fault line of rivers,

21:05.690 --> 21:09.170
where it was possible to
extract a great deal of energy

21:09.173 --> 21:12.403
from falling water and drive
mass manufacturing.

21:12.400 --> 21:18.340
Then you have creative
destruction with the emergence

21:18.337 --> 21:22.447
of steam and rail as
alternatives.

21:22.450 --> 21:26.980
Then electricity,
and I won't pause long but the

21:26.977 --> 21:32.367
great battle of the 1890s was
between alternating current

21:32.372 --> 21:35.572
electricity,
controlled by George

21:35.574 --> 21:38.944
Westinghouse,
and direct current electricity

21:38.936 --> 21:43.006
controlled by Thomas Edison,
both of them as corporate

21:43.012 --> 21:43.582
leaders.

21:43.578 --> 21:52.728
Yale didn't fully give up on
direct current technology until

21:52.732 --> 21:54.752
about 1985.

21:54.750 --> 21:58.940
There were dorm rooms were the
lights were actually run on

21:58.938 --> 22:03.348
direct current generated in a
plant over near where the swing

22:03.346 --> 22:04.666
dorms are now.

22:04.670 --> 22:09.080
I'll leave it to sections for
you to parse this out because

22:09.075 --> 22:12.185
it's actually a very interesting
story.

22:12.190 --> 22:16.570
The advantage of direct current
electricity is it can't kill

22:16.565 --> 22:17.005
you.

22:17.009 --> 22:19.299
It doesn't matter how much,
it's not going to kill you.

22:19.298 --> 22:23.428
The disadvantage of direct
current electricity is that as

22:23.429 --> 22:26.599
you put it through a long
transmission wire,

22:26.598 --> 22:30.358
you lose most of it after the
first five miles.

22:30.358 --> 22:36.728
So Edison controlled direct
current electricity,

22:36.728 --> 22:43.638
and wanted to make the
government regulate it in.

22:43.640 --> 22:45.620
So what did he do?

22:45.619 --> 22:48.519
He stressed safety.

22:48.519 --> 22:51.219
And so if Edison had won,
there would have been a

22:51.223 --> 22:54.833
generating plant about every
five miles all over the country,

22:54.828 --> 22:58.108
in every urban neighborhood its
own generating plant.

22:58.109 --> 23:00.549
How did he dramatize that?

23:00.549 --> 23:03.849
Yes.

23:03.848 --> 23:04.508
Student:  The electric
chair.

23:04.509 --> 23:06.529
Prof: The electric
chair, exactly.

23:06.528 --> 23:10.408
He put forward the view that,
well Westinghouse has a great

23:10.413 --> 23:13.163
technology if you want to kill
people,

23:13.160 --> 23:17.870
and actually did demonstrations
on animals and all that sort of

23:17.865 --> 23:19.635
thing,
it was just awful.

23:19.640 --> 23:26.170
Ultimately it was a case where
the unregulated market won.

23:26.170 --> 23:30.100
The government stayed out of
it, and alternating current,

23:30.102 --> 23:33.752
from the point of view of
illuminating our classroom,

23:33.753 --> 23:35.443
is pretty efficient.

23:35.440 --> 23:39.350
Then you get petrochemicals and
digital networks--

23:39.348 --> 23:41.448
this is all very stylized in
this diagram--

23:41.450 --> 23:47.750
but the point is that
monopolies, one after another,

23:47.750 --> 23:50.070
after another,
after another get winkled out

23:50.069 --> 23:52.659
by these changes in the
underlying technology.

23:52.660 --> 23:58.450
New Haven at one time was
arguably the leading

23:58.451 --> 24:04.501
manufacturing city for horse
drawn carriages.

24:04.500 --> 24:08.390
Well, it was over,
and over pretty suddenly.

24:08.390 --> 24:13.030
Regulatory capture.

24:13.028 --> 24:16.798
Regulatory capture means what
it says,

24:16.798 --> 24:20.238
and there's a basic political
science kind of a thesis about

24:20.242 --> 24:23.052
this,
which is that regulatory

24:23.054 --> 24:28.334
agencies get captured by the
companies they regulate.

24:28.328 --> 24:35.868
If I'm a bank or a brokerage,
I'm intensely interested in the

24:35.865 --> 24:41.765
SEC and I develop friendly
relations with it.

24:41.769 --> 24:46.219
I feed information to its
staff, its staff comes to rely

24:46.221 --> 24:46.871
on me.

24:46.868 --> 24:50.938
After spending a cycle of four
or eight years in a politically

24:50.942 --> 24:54.082
appointed position in the
regulatory agency,

24:54.078 --> 24:58.778
it occurs to people that they
might pursue a career in the

24:58.776 --> 25:01.656
industry they've been
regulating.

25:01.660 --> 25:06.520
There gets to be a reciprocal
relationship there,

25:06.519 --> 25:12.599
which allows a dominant firm to
enjoy some advantage from its

25:12.595 --> 25:16.235
relationship with the regulator.

25:16.240 --> 25:23.050
The current crisis in banking
is a little different from this

25:23.051 --> 25:27.141
and it's not really
monopolistic,

25:27.140 --> 25:34.300
but it is not unfair to suppose
that Goldman Sachs has enjoyed a

25:34.300 --> 25:40.890
fruitful relationship to the
Federal government in the last

25:40.894 --> 25:46.254
four or five decades,
and that there have been very

25:46.253 --> 25:50.823
few times when there wasn't a
Goldman Sachs partner in a

25:50.815 --> 25:54.045
position to influence key
decisions.

25:54.048 --> 25:57.208
The more classic story would be
the airlines,

25:57.210 --> 26:01.340
the one I told you where TWA,
Pan Am,

26:01.338 --> 26:05.438
and all the others of that era
had this monopolistic

26:05.441 --> 26:09.061
relationship created by airline
regulation.

26:09.058 --> 26:14.758
What killed them was that
enjoying a monopoly relationship

26:14.763 --> 26:20.673
to the airline regulators
allowed them to be pretty soft.

26:20.670 --> 26:23.470
They didn't have to control
costs;

26:23.470 --> 26:27.650
they could waste $.15 of every
dollar in profits and still look

26:27.648 --> 26:29.468
great to their investors.

26:29.470 --> 26:34.670
When deregulation came the
"legacy"

26:34.671 --> 26:41.761
costs were lethal to many of
these firms because they were up

26:41.762 --> 26:45.132
against,
now, they were up against

26:45.134 --> 26:49.614
airlines like Southwest which
had no legacy costs and ran very

26:49.608 --> 26:50.708
efficiently.

26:50.710 --> 26:55.610
Finally, antitrust.

26:55.608 --> 27:01.988
Antitrust emerges in the states
with the Sherman Antitrust Act

27:01.994 --> 27:05.234
of 1890 and is--
there is a continuous

27:05.227 --> 27:09.137
oscillation in government policy
here and in most other market

27:09.141 --> 27:11.581
economies,
between strict and not so

27:11.584 --> 27:14.864
strict interpretation of what
counts as a monopoly,

27:14.858 --> 27:19.358
and what counts as predatory
monopolistic behavior.

27:19.358 --> 27:24.368
When we get to cases we will
see several specific instances

27:24.365 --> 27:25.225
of this.

27:25.230 --> 27:32.650
Falling rate of profit.

27:32.650 --> 27:37.440
Remember those of you who were
here the first class,

27:37.440 --> 27:44.960
the slides that contrasted
labor intensive production,

27:44.960 --> 27:50.060
and for example,
I had two yaks pulling a plow

27:50.055 --> 27:56.055
in Tibet juxtaposed to a
twenty-ton John Deere tractor

27:56.056 --> 28:01.356
tilling earth in Minnesota,
Iowa or some such place.

28:01.358 --> 28:06.878
On the one side you had
relatively low production per

28:06.884 --> 28:12.524
labor hour and on the other an
enormously high rate of

28:12.516 --> 28:18.846
production per labor hour,
but based on capital outlays

28:18.853 --> 28:24.073
for the equipment like the John
Deere tractor,

28:24.069 --> 28:25.599
well into six figures.

28:25.598 --> 28:40.288
The Marxist idea of how capital
makes money from labor is that

28:40.289 --> 28:45.039
capital--
that labor is a commodity and

28:45.039 --> 28:48.879
the labor theory of value more
or less applies to that

28:48.877 --> 28:49.817
commodity.

28:49.818 --> 28:53.778
How much do you have to pay for
the commodity which he calls

28:53.779 --> 28:56.129
labor power or laboring
powering?

28:56.130 --> 29:01.950
Well you have to pay what it
costs to feed the worker,

29:01.950 --> 29:06.300
to clothe the worker,
to rear his or her children,

29:06.298 --> 29:11.768
you have--the analogy is
imagine you have a plow horse,

29:11.769 --> 29:14.879
what does it cost you to
maintain the plow horse?

29:14.880 --> 29:20.290
Well that same reasoning Marx
applies to the workforce.

29:20.288 --> 29:26.148
You pay wages that are broadly
consistent with that.

29:26.150 --> 29:33.600
In my diagram the laboring
power is represented by the blue

29:33.595 --> 29:40.265
and capital pays labor that much
for its activity.

29:40.269 --> 29:46.549
The total pie represents how
much value is produced by labor

29:46.548 --> 29:51.548
and what's left over is called
surplus value.

29:51.548 --> 29:57.188
The capitalist firm keeps the
surplus value,

29:57.192 --> 30:05.072
by that means exploits labor,
and by that means increases its

30:05.065 --> 30:08.735
wealth to create wealth.

30:08.740 --> 30:16.090
Now that leaves out a lot.

30:16.088 --> 30:19.978
One thing it leaves out is the
fundamentals of supply and

30:19.980 --> 30:21.300
demand for labor.

30:21.298 --> 30:27.328
It doesn't take into account
the idea that labor would be

30:27.333 --> 30:32.723
extremely cheap in this
phase--how many people here

30:32.719 --> 30:37.459
haven't seen the demographic
transition?

30:37.460 --> 30:40.870
Good, because we did it a
couple days ago,

30:40.865 --> 30:43.685
but I never know about
turnover.

30:43.690 --> 30:48.990
Marx is oblivious to that
except how would he answer if I

30:48.992 --> 30:50.132
said that?

30:50.130 --> 30:53.440
He would say,
well no labor is cheaper in

30:53.436 --> 30:58.396
these conditions because the
socially shared expectations for

30:58.397 --> 31:02.787
how well they have to be fed,
clothed, and their children

31:02.790 --> 31:04.900
reared are low in those
conditions.

31:04.900 --> 31:08.270
Village India,
the cost of labor power is

31:08.271 --> 31:12.151
vastly less then it is in
Midtown Manhattan;

31:12.150 --> 31:14.940
that's one issue.

31:14.940 --> 31:19.090
Another issue,
this is the age curve,

31:19.086 --> 31:24.956
and it's just an embellishment
of the demography.

31:24.960 --> 31:29.660
Another is how hard people work;
this is a Breugel sixteenth

31:29.663 --> 31:34.833
century picture of agricultural
labor, which by the evidence

31:34.829 --> 31:37.369
there is not very intense.

31:37.368 --> 31:48.738
The idea that you pay for what
you get in labor is a powerful

31:48.742 --> 31:52.142
one,
and the so-called scientific

31:52.137 --> 31:55.017
management movement of a century
ago,

31:55.019 --> 31:58.649
which grew up around large
manufacturing companies in the

31:58.650 --> 31:59.040
U.S.

31:59.038 --> 32:03.168
and Europe, was that you
develop incentives to make

32:03.171 --> 32:05.321
people work really hard.

32:05.318 --> 32:11.398
The simplest case was Henry
Ford's $5 a day salary,

32:11.400 --> 32:15.410
which was way above market
prices, but allowed him to be

32:15.405 --> 32:19.825
very choosy about his workers,
to demand very intense labor,

32:19.826 --> 32:23.856
and to demand that they allow
him to inspect their lives.

32:23.858 --> 32:27.788
He had what he called
sociologists who went around to

32:27.788 --> 32:32.168
people's houses looking for
alcohol or devices for gambling

32:32.169 --> 32:36.849
and so on but intensity of labor
is another variable that needs

32:36.852 --> 32:38.592
to be thought of.

32:38.588 --> 32:45.638
Now I just made that story
sound really sensible,

32:45.636 --> 32:53.416
I think, but the logic of it
has always escaped me.

32:53.420 --> 32:59.340
The notion that labor is
different from any other

32:59.337 --> 33:05.377
standard for measuring value and
that you can--

33:05.380 --> 33:07.140
you attribute to labor the
whole pie,

33:07.140 --> 33:11.160
but actually you've got to
attribute much of the pie to

33:11.163 --> 33:11.913
capital.

33:11.910 --> 33:16.910
Beyond capital you've got to
attribute much of it to

33:16.910 --> 33:22.500
ownership and to management,
and intellectual property.

33:22.500 --> 33:27.140
Knowhow, the ability to
actually made widgets well and

33:27.144 --> 33:31.964
effectively at low costs,
all that is left out of Marx's

33:31.962 --> 33:32.842
story.

33:32.838 --> 33:37.438
He assumes, he just says,
"necessary labor

33:37.435 --> 33:43.225
time" and draws attention
away from what capitalism is

33:43.230 --> 33:46.270
best at,
which is again and again

33:46.272 --> 33:49.182
revising the way we produce
something,

33:49.180 --> 33:52.240
the way we distribute it,
the way we design it,

33:52.240 --> 33:56.190
the way we design the machinery
that creates it,

33:56.190 --> 33:59.790
even the way we design the
machinery that designs the

33:59.788 --> 34:02.748
product,
all of that is marginalized in

34:02.746 --> 34:04.206
a Marxist analysis.

34:04.210 --> 34:09.960
And for that reason Marxism
does not function well in

34:09.956 --> 34:14.706
analyzing real companies in real
markets.

34:14.710 --> 34:21.600
Now the surplus value that can
be extracted depends on how much

34:21.603 --> 34:24.943
labor is used in production.

34:24.940 --> 34:31.140
As total labor used in
production goes towards zero,

34:31.139 --> 34:34.709
the opportunity to exploit
workers goes away,

34:34.710 --> 34:41.780
and with it profits have to
fall, and from that follows the

34:41.780 --> 34:46.170
evisceration of the working
class.

34:46.170 --> 34:53.660
Look at this bottling plant
where the work is to sit at this

34:53.659 --> 35:00.009
control panel and adjust the
process, plus a little

35:00.007 --> 35:02.037
maintenance.

35:02.039 --> 35:06.939
Have any of you been in a plant
where there were virtually no

35:06.940 --> 35:08.410
workers present?

35:08.409 --> 35:15.009
Can you hand him the microphone?

35:15.010 --> 35:21.670
Student:  It was the
Celestial Seasonings tea factory

35:21.672 --> 35:24.272
in Boulder, Colorado.

35:24.268 --> 35:27.348
It's just machines
putting--sorting leaves,

35:27.347 --> 35:29.177
putting them into bags.

35:29.179 --> 35:33.409
And there are like three or
four workers in this huge room

35:33.405 --> 35:36.885
sitting at this screen adjusting
(inaudible).

35:36.889 --> 35:38.489
Prof: Right, exactly.

35:38.489 --> 35:40.339
Other examples?

35:40.340 --> 35:48.830
In the back,
can we get a mic back to the

35:48.831 --> 35:52.231
very last row?

35:52.230 --> 35:55.990
Student:  I took a tour
of the Tsing Dao Beer Factory in

35:55.994 --> 35:56.484
China.

35:56.480 --> 36:00.060
I mean, it's fairly old,
I mean, the only people working

36:00.059 --> 36:03.769
there were tour guides and
inspectors that were within the

36:03.771 --> 36:05.661
>

36:05.659 --> 36:08.009
Prof: So a very high
degree of automation?

36:08.010 --> 36:08.920
Student:  Yes.

36:08.920 --> 36:14.270
Prof: I was some years
ago in a textile factory in

36:14.266 --> 36:20.566
Turkey, which covered six acres
of interior manufacturing space.

36:20.570 --> 36:25.700
Every square foot of it was
either an aisle between

36:25.695 --> 36:30.635
machinery or machinery,
and virtually all the machinery

36:30.639 --> 36:33.699
was working,
and the cloth was coming out in

36:33.701 --> 36:37.111
bolts like this at ten or twelve
different points,

36:37.110 --> 36:40.450
and automata were throwing it
on conveyer belts,

36:40.449 --> 36:43.979
and conveyer belts were taking
it where it needed to be for

36:43.978 --> 36:46.628
shipping,
and labeling it and having it

36:46.628 --> 36:47.488
ready to go.

36:47.489 --> 36:49.619
When I was there,
there were about six people in

36:49.619 --> 36:52.759
the plant,
all of them technicians and the

36:52.762 --> 36:57.872
story about the plant was that
it could operate that way for as

36:57.869 --> 37:02.809
much as 60 hours and then there
would be a shutdown for a few

37:02.809 --> 37:06.269
hours of maintenance and
adjustment,

37:06.268 --> 37:09.758
and then another 60 hours and
so on.

37:09.760 --> 37:13.780
Another historical example is
the Bonsack Cigarette Machine;

37:13.780 --> 37:18.240
cigarettes were not popular
before the Bonsack Cigarette

37:18.239 --> 37:19.049
Machine.

37:19.050 --> 37:23.240
The Bonsack Cigarette Machine
could make 6,000 cigarettes per

37:23.240 --> 37:25.500
hour,
which--they're now much better

37:25.500 --> 37:28.530
than that,
they're 100,000 an hour--but at

37:28.528 --> 37:31.408
6,000 per hour with zero labor
cost,

37:31.409 --> 37:35.819
it occurred to the people who
formed American Tobacco that

37:35.815 --> 37:39.985
they could make an awful lot of
money if they created a

37:39.990 --> 37:43.840
marketing end,
that would allow them to pump

37:43.838 --> 37:48.348
all those thousands of
cigarettes out into the market.

37:48.349 --> 37:50.389
And they did it,
and did a very good job of it.

37:50.389 --> 37:54.429
At the core of it was this
little piece of technology,

37:54.429 --> 37:59.889
continuous production,
and paper and tobacco leaf go

37:59.887 --> 38:05.037
in one end of the machine,
and cigarettes neatly stacked

38:05.036 --> 38:07.926
in consecutive order come out
the other.

38:07.929 --> 38:23.369
So capital intensivity takes
labor out of the picture.

38:23.369 --> 38:28.379
In effect, the dead who created
the machinery are the producers.

38:28.380 --> 38:33.790
Inevitable revolution in
advanced capitalist societies.

38:33.789 --> 38:39.369
The idea here is that with
falling rates of capital and the

38:39.369 --> 38:44.949
immiseration of the working
class, this system ceases to be

38:44.951 --> 38:46.011
stable.

38:46.010 --> 38:53.400
This is a guy named Georgi
Plekhanov,

38:53.400 --> 38:58.890
and Plekhanov was a Marxist who
was a follower of Lenin's,

38:58.889 --> 39:02.159
and he's famous for having
asked the question,

39:02.159 --> 39:05.059
"If the revolution is
inevitable,

39:05.059 --> 39:07.849
why must we fight and die to
make it happen?"

39:07.849 --> 39:13.539
That's an interesting question,
and it gets the name

39:13.536 --> 39:15.986
Plekhanov's paradox.

39:15.989 --> 39:21.689
And of course the answer to it
is that the revolution wasn't

39:21.693 --> 39:22.953
inevitable.

39:22.949 --> 39:26.689
Where it did happen,
it didn't happen for the

39:26.693 --> 39:28.823
reasons Marx described.

39:28.820 --> 39:33.590
Where were the most advanced
systems where you would expect

39:33.588 --> 39:36.548
the capital intensive
production,

39:36.550 --> 39:40.400
falling rate of profit,
and low wages to labor,

39:40.400 --> 39:41.950
where were those systems?

39:41.949 --> 39:43.289
Let's name a few countries.

39:43.289 --> 39:44.479
Yes.

39:44.480 --> 39:45.580
Student:  UK,
Germany and the U.S.

39:45.579 --> 39:48.689
Prof: UK,
Germany and the U.S.

39:48.690 --> 39:54.160
Those are not the places where
the revolution happened.

39:54.159 --> 39:59.779
It happened most dramatically
in Russia, and then by conquest

39:59.779 --> 40:03.899
in the rest of the Soviet Union,
and Cuba.

40:03.900 --> 40:11.560
This is Fidel on the right and
Che Guevara on the left.

40:11.559 --> 40:15.729
There was--I have a photograph
in my collection at home of

40:15.730 --> 40:19.970
Fidel Castro at the New Haven
train station and a New Haven

40:19.974 --> 40:23.564
policeman looking at him like
he's from Mars.

40:23.559 --> 40:26.779
And it was just after the
revolution when they

40:26.784 --> 40:29.514
hadn't--when the break with the
U.S.

40:29.510 --> 40:32.630
hadn't really hardened,
and he was on a university tour

40:32.630 --> 40:35.920
speaking on college campuses
trying to raise money for the

40:35.922 --> 40:36.792
revolution.

40:36.789 --> 40:43.169
Cuba was not an advanced
capitalist economy and still

40:43.168 --> 40:44.148
isn't.

40:44.150 --> 40:47.630
The best thing you can say
about--I've been twice and have

40:47.628 --> 40:50.008
been a guest of the government
once,

40:50.010 --> 40:54.340
and the best thing you can say
for them is that they actually

40:54.340 --> 40:58.600
have done a splendid job with
rudimentary public health,

40:58.599 --> 41:04.509
so that on the longevity
dimension of the data automation

41:04.510 --> 41:08.380
we looked at,
if you'll screen it up tonight

41:08.375 --> 41:11.415
you'll discover a little green
moon way,

41:11.420 --> 41:13.220
way high side outlier on
longevity,

41:13.219 --> 41:14.809
and that's Cuba.

41:14.809 --> 41:17.379
On the other hand they are dirt
poor.

41:17.380 --> 41:23.090
China, not an advanced
industrial economy when the

41:23.086 --> 41:27.886
revolution occurred;
Venezuela, an oil state,

41:27.893 --> 41:33.133
and whether the revolution has
occurred or not is open to

41:33.128 --> 41:34.248
question.

41:34.250 --> 41:39.640
And this at the height of the
Cold War was the way the chess

41:39.637 --> 41:44.857
board looked,
where red meant Marxist and

41:44.855 --> 41:52.755
pink meant sort of Marxist,
and the game of controlling

41:52.760 --> 42:01.940
emerging market countries was at
the core of Cold War strategy or

42:01.936 --> 42:04.226
very near it.

42:04.230 --> 42:08.240
The theory of the universal
class.

42:08.239 --> 42:17.409
If the aristocracy exploits
serfs in medieval European

42:17.414 --> 42:21.664
society,
and capitalists exploit

42:21.661 --> 42:25.431
proletarians in capitalist
society,

42:25.429 --> 42:31.239
and proletarians come to power,
who are they going to exploit?

42:31.239 --> 42:33.039
There's no one below them.

42:33.039 --> 42:37.829
Since there's no one below them
they are the universal class and

42:37.829 --> 42:39.579
exploitation is over.

42:39.579 --> 42:45.309
Now please.

42:45.309 --> 42:51.409
So the reasoning is like the
eastern division of the American

42:51.405 --> 42:57.395
League, and Baltimore is the
universal class because there's

42:57.400 --> 42:59.940
no one they can beat.

42:59.940 --> 43:08.620
What's at the core of this last
thing,

43:08.619 --> 43:11.429
and it is truly dangerous
reasoning,

43:11.429 --> 43:15.729
is that the universal class,
being in a position superior to

43:15.728 --> 43:20.318
no other class,
brings an end to exploitation,

43:20.324 --> 43:25.694
and since that's true the state
can wither away.

43:25.690 --> 43:37.760
Now it doesn't happen in a
hurry, and behind this is a

43:37.757 --> 43:48.457
really fundamental issue of
principal agency.

43:48.460 --> 43:51.130
Did we talk about principle
agency a few days ago?

43:51.130 --> 43:54.090
Maybe not, well let's just for
simplicity,

43:54.090 --> 43:59.950
let's suppose the people own
the country and the Communist

43:59.945 --> 44:06.105
government is the agent that
they have elected to choose,

44:06.110 --> 44:10.150
or which has chosen itself to
manage the country on behalf of

44:10.152 --> 44:11.032
the people.

44:11.030 --> 44:16.700
The principal agency problem
which occurs in things as small

44:16.699 --> 44:22.369
as a grocery store is that the
employee's agents choose,

44:22.369 --> 44:26.899
instead of serving the purposes
of the owners or the country,

44:26.900 --> 44:30.340
choose to serve purposes of
their own.

44:30.340 --> 44:38.250
The invariable fact about state
socialism was that the people at

44:38.246 --> 44:45.896
the top of the state apparatus
privileged themselves and their

44:45.902 --> 44:50.952
children,
and a new class struggle

44:50.951 --> 44:52.461
developed.

44:52.460 --> 44:57.760
Now, more generally and here
I'm using the work of a

44:57.757 --> 45:01.597
sociologist named Ralf
Dahrendorf,

45:01.599 --> 45:04.639
economist sociologist who died
just a few weeks ago,

45:04.639 --> 45:08.969
and Dahrendorf's point,
which I'm sure is true,

45:08.969 --> 45:13.619
is that you can generate
classes around any process of

45:13.617 --> 45:16.247
production and distribution.

45:16.250 --> 45:22.830
There is nothing final about
the proletariat coming to power,

45:22.829 --> 45:27.929
and there is never a time in
human history when we'll be done

45:27.931 --> 45:33.031
with the possibility that those
who control the direct levers

45:33.032 --> 45:37.032
control them not to the benefit
of others,

45:37.030 --> 45:38.520
but to the benefit of
themselves.

45:38.518 --> 45:43.788
Francis Fukayama,
who famously wrote a book

45:43.793 --> 45:46.353
called--
that had the punch line:

45:46.346 --> 45:50.056
The end of history--
after the Cold War ended--his

45:50.057 --> 45:53.967
view was that capitalist
democracy became,

45:53.969 --> 45:59.459
"the end of history,"
the unchangeable endpoint,

45:59.460 --> 46:01.500
and of course that's not true.

46:01.500 --> 46:06.080
The course of history is not,
contrary to Marx,

46:06.077 --> 46:07.467
determinate.

46:07.469 --> 46:11.819
Marx was not only wrong about
his own ability to understand

46:11.820 --> 46:16.340
the course of future history,
he was wrong about the very

46:16.340 --> 46:21.050
concept that there could be a
deterministic theory which told

46:21.054 --> 46:24.594
us what was going to happen in
the future.

46:24.590 --> 46:29.780
This guy, Schumpeter,
who, I know you hate the way he

46:29.778 --> 46:34.768
writes, but he understood that
point profoundly.

46:34.768 --> 46:37.698
I'm out of time so I'm not
going to elaborate him,

46:37.695 --> 46:40.615
I'll do it at the beginning of
class next time.

46:40.619 --> 46:47.369
The guy who comes to center
stage next time is F.A.

46:47.369 --> 46:50.859
Hayek, whose most famous book
was called,

46:50.860 --> 46:52.140
The Constitution of
Liberty,

46:52.139 --> 46:56.979
and who believed that a market
society had within it the

46:56.976 --> 47:01.106
capacity for enormous creativity
and growth,

47:01.110 --> 47:05.400
and we'll examine that in class
on Wednesday.

47:05.400 --> 47:10.000