WEBVTT 00:01.700 --> 00:06.410 Prof: Okay, today the coming of mass 00:06.408 --> 00:12.128 affluence to the advanced economies, principally the 00:12.125 --> 00:15.035 economies of the west. 00:15.040 --> 00:17.960 Jennifer, speaking of informal property rights, 00:17.961 --> 00:20.821 I thought you owned a chair right up there? 00:20.820 --> 00:25.120 I 'm just kidding. 00:25.120 --> 00:31.950 I'm going to take it in three chunks. 00:31.950 --> 00:35.730 We're going to look at big picture, 00:35.730 --> 00:40.380 causal explanations for the rise of mass affluence, 00:40.380 --> 00:43.560 and for explanations first of its rise, 00:43.560 --> 00:47.360 and second, its rise beginning in Western Europe and North 00:47.362 --> 00:48.032 America. 00:48.030 --> 00:53.130 Second, I'm going to reintroduce the joint stock 00:53.128 --> 00:57.248 corporation into that conversation, 00:57.250 --> 01:02.050 and finally we're going to look at the phenomenon of mass 01:02.045 --> 01:07.265 affluence and the advertising culture of mid-twentieth century 01:07.272 --> 01:08.302 America. 01:08.299 --> 01:14.989 Then on Wednesday we're going to descend to details, 01:14.989 --> 01:20.189 and the challenge for you in preparing for Wednesday is to 01:20.192 --> 01:24.892 imagine a country, and imagine that you somehow 01:24.887 --> 01:30.047 have been granted a fund amounting to 5% of its gross 01:30.046 --> 01:35.496 domestic product, and with that 5% you want to 01:35.498 --> 01:40.308 make whatever changes you can imagine, 01:40.310 --> 01:46.880 will increase the overall wealth of that country as much 01:46.878 --> 01:48.548 as possible. 01:48.550 --> 01:52.140 It's a pragmatic question. 01:52.140 --> 01:57.600 It has a causal side to it, but ultimately it's pragmatic 01:57.596 --> 02:00.906 and it is not one size fits all. 02:00.909 --> 02:04.339 That is, you've got to know something about the country to 02:04.340 --> 02:06.750 know something about what needs doing; 02:06.750 --> 02:14.540 5% of the GDP in Ghana will be spent--will be wisely spent very 02:14.540 --> 02:20.950 differently than 5% of the GDP in Bolivia or Mexico, 02:20.949 --> 02:22.709 or Norway. 02:22.710 --> 02:23.990 Okay. 02:23.990 --> 02:28.330 So the first of the three topics is capitalist takeoff. 02:28.330 --> 02:34.860 The portrait of this corpulent and obviously affluent gent is 02:34.859 --> 02:40.869 Sir Richard Arkwright, who was the creator of the most 02:40.865 --> 02:44.675 efficient early textile machinery, 02:44.680 --> 02:50.520 and who unlike many others about whom Clark talks, 02:50.520 --> 02:54.380 actually profited very handsomely from that work. 02:54.378 --> 02:59.728 By takeoff in the west, and this goes back to the first 02:59.726 --> 03:04.456 day of class, and by Wednesday we'll go back 03:04.457 --> 03:10.747 again to gapminder.org and look at the bubbles moving through 03:10.754 --> 03:11.704 space. 03:11.699 --> 03:14.149 This still photograph, so to speak, 03:14.151 --> 03:18.191 covers a longer time horizon, a 500 year time horizon. 03:18.188 --> 03:26.778 It shows an abrupt northward movement in GDP per capita in 03:26.783 --> 03:35.533 the U.S., lagging a bit in Japan, lagging further in China, 03:35.530 --> 03:39.300 India, and Indonesia. 03:39.300 --> 03:45.010 If we just throw all the countries in the world in a pot, 03:45.008 --> 03:49.028 we get a picture that looks something like this, 03:49.030 --> 03:56.860 where gross GDP is in blue, population in green, 03:56.860 --> 04:00.280 and the one divided by the other in gold. 04:00.280 --> 04:06.820 What we're interested in from here to the end of term really 04:06.820 --> 04:12.920 is in understanding what lies behind these curves and in 04:12.918 --> 04:19.458 thinking about from a given a country's point of view, 04:19.459 --> 04:23.329 or from given class of people in a given country's point of 04:23.334 --> 04:27.944 view, how can we increase the rate at 04:27.942 --> 04:31.362 which things gets better? 04:31.360 --> 04:37.490 Now before I go further some of you are thinking green thoughts. 04:37.490 --> 04:41.840 Wave at me if you're thinking green thoughts and wondering 04:41.843 --> 04:46.413 whether it's really a good idea; I have so many people with so 04:46.410 --> 04:48.380 much money in their pockets. 04:48.379 --> 04:53.279 Sasha tell us. 04:53.279 --> 05:04.039 We got a microphone here? 05:04.040 --> 05:06.890 Student: I think basically the root of all 05:06.887 --> 05:09.137 environmental problems, if you care about the natural 05:09.141 --> 05:10.661 environment, is that there are too many 05:10.656 --> 05:13.056 people, so you have more people who can consume more. 05:13.060 --> 05:16.670 The simple thing to think is that that's bad news for the 05:16.665 --> 05:17.175 earth. 05:17.180 --> 05:20.680 Prof: Okay so you would like to kill off a portion of 05:20.684 --> 05:22.174 the world's population. 05:22.170 --> 05:23.240 Student: Yes. 05:23.240 --> 05:25.780 Prof: Okay very straightforward, 05:25.776 --> 05:27.576 good, clear MBA thinking. 05:27.579 --> 05:38.439 Given a constant world population, if we had it, 05:38.440 --> 05:41.000 would you prefer that that population on average be a 05:41.004 --> 05:45.914 little less affluent then it is, or that I seem to want it to be? 05:45.910 --> 05:49.160 Student: I'm not sure that it's that straightforward 05:49.161 --> 05:52.831 because if people-- societies don't have the means 05:52.831 --> 05:57.081 to advance technology, even though consumption does go 05:57.077 --> 05:59.297 up, you have cleaner technologies 05:59.298 --> 06:03.078 that would be developed with greater economic prosperity, 06:03.079 --> 06:06.389 so I'm not as clear on that one. 06:06.389 --> 06:08.879 Prof: Okay, not as clear. 06:08.879 --> 06:14.179 Now you would acknowledge that as hundreds of millions of 06:14.184 --> 06:19.874 people living in places like China and India come into income 06:19.867 --> 06:24.127 enough to have a family car or even two, 06:24.129 --> 06:27.409 that there's a challenge there? 06:27.410 --> 06:28.860 Student: Certainly. 06:28.860 --> 06:31.860 Prof: Okay, so let's keep the natural 06:31.855 --> 06:35.685 environment in the background as we talk about this, 06:35.690 --> 06:39.320 but let's for the moment focus on economics, 06:39.319 --> 06:42.629 and let's start with a curve like this. 06:42.629 --> 06:46.759 The curve shows low income to the left, 06:46.759 --> 06:51.289 high income to the right, and the frequency of each 06:51.291 --> 06:55.101 income stratum is indicated vertically, 06:55.100 --> 07:00.310 and the red curve is a fairly typical market economy income 07:00.309 --> 07:04.799 distribution with a truncated tail on the left, 07:04.800 --> 07:07.790 and an elongated tail on the right, 07:07.790 --> 07:12.200 with the mean income being much higher than the median because 07:12.199 --> 07:16.029 it is pulled to the right by the very high incomes. 07:16.028 --> 07:21.178 If this chart were drawn to scale that right hand tail would 07:21.177 --> 07:26.587 probably be even more elongated, but wondrously thin out to the 07:26.586 --> 07:27.456 right. 07:27.459 --> 07:34.509 Well the phenomenon of takeoff is the upward shift in that 07:34.512 --> 07:36.372 distribution. 07:36.370 --> 07:40.820 It may change shape a little, bit it's not mainly that it's 07:40.815 --> 07:44.775 changing shape; it's that its mean is drifting 07:44.781 --> 07:47.001 upward and to the right. 07:47.000 --> 07:52.900 If we think about two distributions, 07:52.899 --> 07:57.189 two or three generations removed from one another in a 07:57.185 --> 08:00.935 given society, let's say the United States 08:00.942 --> 08:04.032 1920 and the United States today, 08:04.028 --> 08:09.308 it will often be the case that the difference is so dramatic 08:09.310 --> 08:14.680 that the material condition of people living in the top tenth 08:14.682 --> 08:18.892 then will be about like the top half today. 08:18.889 --> 08:27.849 And you keep that up for ten generations or so, 08:27.850 --> 08:36.000 and you have something like this, where the top decile in, 08:36.000 --> 08:39.340 let's say, 1800, is living in material 08:39.336 --> 08:44.296 conditions that would be equivalent to perhaps the ninth 08:44.296 --> 08:45.826 decile today. 08:45.830 --> 08:49.780 Not the very bottom, but people living relatively 08:49.779 --> 08:51.259 near the bottom. 08:51.259 --> 08:57.509 This is particularly true if you take into account not just 08:57.511 --> 09:00.721 income, but what it is that income can 09:00.722 --> 09:05.752 buy in the way of medical care, comfort and lodging, 09:05.748 --> 09:10.168 quality of diet, and so forth. 09:10.168 --> 09:14.208 There's an enormous explosive change in the background here. 09:14.210 --> 09:17.940 That change is our subject. 09:17.940 --> 09:22.840 Now how you feel about that change is more complicated and 09:22.837 --> 09:27.047 we often hear that money doesn't buy happiness. 09:27.048 --> 09:33.358 The people who say that have evidence of a kind. 09:33.360 --> 09:38.950 None of them volunteer to become poor, and there is 09:38.946 --> 09:45.866 something that money buys that people want, and we'll return to 09:45.873 --> 09:48.893 that from time to time. 09:48.889 --> 09:51.749 But imagine now that there are--just think about an economy 09:51.754 --> 09:56.124 with two people in it, A's income or wealth is 09:56.123 --> 10:01.673 measured vertically, B's is measured horizontally, 10:01.669 --> 10:03.429 and you're Mr. A. 10:03.428 --> 10:09.788 Which of these two outcomes would you prefer on--by one way 10:09.787 --> 10:14.717 of thinking you're maximizing your own income, 10:14.720 --> 10:17.680 you'd like to be there. 10:17.678 --> 10:21.978 If on the other hand, what you're doing is staying 10:21.976 --> 10:26.096 ahead of the Joneses, you'd like to be there. 10:26.100 --> 10:31.450 More generally, if you're just trying to 10:31.452 --> 10:36.672 maximize your own household income, 10:36.668 --> 10:39.748 you will have indifference curves like these horizontal 10:39.750 --> 10:42.660 ones and just seek to climb as high as possible, 10:42.658 --> 10:46.898 and you'll be perfectly content if others climb at the same 10:46.904 --> 10:48.334 rate, or even a higher rate. 10:48.330 --> 10:52.120 On the other hand, you may be calculating the 10:52.115 --> 10:57.355 ratio of your household to other households that you choose to 10:57.364 --> 11:02.274 compare yourself with and the indifference curve will then 11:02.268 --> 11:06.138 become rays from the origin like that, 11:06.139 --> 11:11.979 and you will be trying to swing your position from bottom right 11:11.981 --> 11:13.491 to upper left. 11:13.490 --> 11:19.700 One function is just maximize one variable and the other is 11:19.696 --> 11:25.146 maximize the ratio of two variables, and most people 11:25.153 --> 11:29.223 are--tend to mix these two things. 11:29.220 --> 11:36.480 The--their contentment with their material position is 11:36.476 --> 11:41.676 partly relative and partly absolute; 11:41.679 --> 11:44.459 absolute here, relative there. 11:44.460 --> 11:51.380 If you think about the employees of a firm, 11:51.383 --> 12:00.453 the way they're compensated is--raises both concerns. 12:00.450 --> 12:09.370 Suppose everybody in a law firm is making between $150,000 and 12:09.369 --> 12:17.119 $200,000, and along comes Jim Alexander, ace corporate 12:17.119 --> 12:21.069 lawyer-- Jim Alexander: Never. 12:21.070 --> 12:21.510 Prof: Never, I know. 12:21.509 --> 12:23.149 I'm abusing you. 12:23.149 --> 12:27.509 Never, and--all right Leslie Hough, 12:27.509 --> 12:31.769 ace corporate lawyer, and we really need her and 12:31.774 --> 12:37.044 we've got to pay her $800,000 and we make the offer and she 12:37.039 --> 12:38.219 takes it. 12:38.220 --> 12:43.470 There will be a--if this fact becomes public within the firm, 12:43.471 --> 12:47.761 which is quite likely, everybody else will in some 12:47.759 --> 12:50.909 measure feel impoverished by it. 12:50.908 --> 12:54.378 She's making four times what I'm making; 12:54.379 --> 12:58.249 surely she's not four times better than me, 12:58.246 --> 13:03.216 so the relative and the absolute are always at play. 13:03.220 --> 13:10.010 Now let's look through Clark's explanations--and I spent almost 13:10.011 --> 13:16.371 all of yesterday reviewing Clark, and he's kind of all over 13:16.365 --> 13:17.895 the place. 13:17.899 --> 13:20.069 There's some of everything in this book, 13:20.070 --> 13:27.350 but let's pick out some of his main explanations for economic 13:27.346 --> 13:30.776 takeoff, and for the fact that the 13:30.783 --> 13:35.333 takeoff occurred first and most dramatically in western 13:35.331 --> 13:39.211 countries, and among western countries, 13:39.211 --> 13:42.011 first in the United Kingdom. 13:42.009 --> 13:49.129 His--there's a recurring theme, it's in the beginning, 13:49.129 --> 13:50.479 the middle, and the end of the book, 13:50.480 --> 13:57.050 about his speculative interpretation of wills from 13:57.053 --> 14:03.093 England in late medieval and early modern-- 14:03.090 --> 14:05.990 and right into modern times. 14:05.990 --> 14:12.820 The phenomenon he finds is a fountain of wellborn children 14:12.823 --> 14:19.303 who cannot replicate their parents place in society. 14:19.298 --> 14:22.858 The empirics on this are pretty strong. 14:22.860 --> 14:29.590 That well to do families, by and large, 14:29.590 --> 14:33.560 had more than two surviving children reaching-- 14:33.558 --> 14:35.908 more than two children reaching adulthood, 14:35.908 --> 14:41.368 and indeed, the survival rate among well to do children was 14:41.365 --> 14:46.255 quite a lot higher than the survival rate among other 14:46.256 --> 14:47.476 children. 14:47.480 --> 14:51.500 If you read all the way to the end of the book you discover 14:51.504 --> 14:55.534 that if you compare this with Asian societies such as Japan 14:55.529 --> 14:59.799 and China, the effect is stronger in 14:59.804 --> 15:00.974 England. 15:00.970 --> 15:05.620 From this he adduces several consequences, 15:05.616 --> 15:11.846 the most obvious of which is that many of these wellborn 15:11.851 --> 15:16.161 children will be downward mobiles. 15:16.158 --> 15:18.708 The will marry beneath their class, 15:18.710 --> 15:23.920 they will take up occupations or roles beneath their parents' 15:23.918 --> 15:30.478 class, and Clark is--he's trying to 15:30.482 --> 15:35.442 say two things at once. 15:35.440 --> 15:40.790 One is that the culture--the universalization of culture from 15:40.793 --> 15:45.883 the top could in some measure be promoted by this downward 15:45.879 --> 15:51.389 mobility; that children raised with high 15:51.392 --> 16:00.532 expectations and upbringing may be cultural carriers which would 16:00.530 --> 16:08.510 infuse lower economic strata with a more energetic, 16:08.509 --> 16:11.669 more performance-oriented outlook. 16:11.668 --> 16:16.508 For that there's no evidence in this story, it's just a 16:16.505 --> 16:17.755 speculation. 16:17.759 --> 16:21.709 The other speculation, for which there is also no 16:21.711 --> 16:28.391 specific evidence, is a Darwinian genetics story 16:28.390 --> 16:32.810 in which-- and here Clark is--this is 16:32.813 --> 16:37.123 dangerous territory in the way of politics. 16:37.120 --> 16:43.240 He seems to believe that the genes carried at the top of the 16:43.235 --> 16:49.345 income curve may be better genes than those elsewhere in the 16:49.352 --> 16:53.792 income curve, and that the downward--forced 16:53.789 --> 16:58.839 downward mobility of progeny from that top level gene pool 16:58.842 --> 17:03.632 might upgrade the whole society in a genetic sense. 17:03.629 --> 17:11.199 Anybody want to comment on that thought? 17:11.200 --> 17:13.430 Yes. 17:13.430 --> 17:18.350 Student: I mean, genetically speaking it's just 17:18.351 --> 17:21.901 sort of silly, because traits don't pass 17:21.904 --> 17:23.094 directly. 17:23.088 --> 17:26.138 You aren't a clone of your parents, or even just a 50/50 17:26.135 --> 17:26.575 combo. 17:26.578 --> 17:28.538 In terms of carrying skills downward though, 17:28.541 --> 17:30.141 I mean that makes a lot of sense. 17:30.140 --> 17:33.050 If you're well educated and you bring that down you might 17:33.048 --> 17:34.968 educate your children, values, etc. 17:34.970 --> 17:39.240 Prof: That's precisely my own view, but does anybody 17:39.244 --> 17:41.314 want to defend Clark here? 17:41.308 --> 17:45.908 Student: Well it could be more of a bell curve 17:45.914 --> 17:49.134 situation, if you know what I mean. 17:49.130 --> 17:57.070 The people on the higher end of the income ladder have, 17:57.068 --> 18:02.998 over time, been privy to better situations and better selection 18:03.002 --> 18:07.602 pressures leading to the evolution of skills like 18:07.596 --> 18:11.506 analytical thinking, intelligence skills that are 18:11.511 --> 18:14.721 necessary for the professions that are characteristic of the 18:14.721 --> 18:15.701 higher classes. 18:15.700 --> 18:21.360 Prof: Let's have a vote here. 18:21.358 --> 18:25.408 How many people think it's likely that there is some 18:25.413 --> 18:30.103 validity to--let's start with the cultural story and then go 18:30.102 --> 18:32.092 to the genetic story. 18:32.088 --> 18:35.808 How many people find the cultural story broadly 18:35.808 --> 18:36.778 plausible? 18:36.779 --> 18:42.849 The opposite--implausible? 18:42.848 --> 18:46.798 Okay, and how many find the genetics story broadly 18:46.801 --> 18:47.771 plausible? 18:47.769 --> 18:52.029 Fewer, but a substantial number. 18:52.029 --> 18:56.969 And how many find it implausible? 18:56.970 --> 18:59.650 Okay, I have no idea, and Clark provides not one 18:59.654 --> 19:02.514 shred of evidence with which we could test this. 19:02.509 --> 19:07.699 My own guess is that a few hundred years is a pretty short 19:07.702 --> 19:13.172 time for carrying out the kind of selection process he has in 19:13.170 --> 19:13.990 mind. 19:13.990 --> 19:22.220 It's also the case that the association between 19:22.220 --> 19:27.410 parental--let's call it IQ. 19:27.410 --> 19:30.770 The twin studies actually do confirm this-- 19:30.769 --> 19:33.659 where identical twins are born to Mr. 19:33.664 --> 19:36.164 and Mrs. Smith and raised by Mr. 19:36.159 --> 19:39.869 and Mrs. Jones, in IQ and several other 19:39.872 --> 19:44.142 variables, the association between the identical will be 19:44.135 --> 19:48.625 greater than between them and the siblings belonging to the 19:48.632 --> 19:53.662 new family, so genetics is not wholly out 19:53.662 --> 19:55.712 of the picture. 19:55.710 --> 20:00.140 On the other hand, from a pragmatic point of view, 20:00.142 --> 20:05.842 which is where we're going with all this, the idea of--well what 20:05.842 --> 20:07.382 was Eugenics? 20:07.380 --> 20:09.980 Does anybody--are any of you in a history course, 20:09.980 --> 20:11.120 picked up Eugenics? 20:11.119 --> 20:14.929 Anyone? 20:14.930 --> 20:21.040 Student: Eugenics is an idea that in some form has 20:21.038 --> 20:25.378 existed since ancient times, but really picked up in the 20:25.383 --> 20:28.363 late nineteenth century, and then especially under the 20:28.358 --> 20:30.458 Third Reich, where it was essentially 20:30.463 --> 20:33.423 believed that people at the top tended to have better genes, 20:33.420 --> 20:35.430 or in the case of the Third Reich, a specific racial group, 20:35.430 --> 20:37.710 and therefore you want to maximize the number of people 20:37.710 --> 20:39.780 with certain desirable traits for reproducing, 20:39.779 --> 20:42.079 and minimize the ability of people with undesirable traits 20:42.083 --> 20:44.063 to reproduce, resulting in a better, 20:44.055 --> 20:47.075 stronger, smarter, in the case of the Nazis, 20:47.077 --> 20:48.167 blonder, race. 20:48.170 --> 20:50.580 Prof: Okay, that's the gist of it. 20:50.578 --> 20:57.378 The heart of it, which was most influential, 20:57.380 --> 21:03.200 had to do with trying to prevent people who were mentally 21:03.196 --> 21:11.366 retarded from reproducing, and a lot of that happened. 21:11.368 --> 21:18.688 The vulgar prejudices that lay behind much of it, 21:18.690 --> 21:21.420 it was--much of it was conducted by something called 21:21.424 --> 21:24.484 The Vineland Institute, located near Princeton, 21:24.476 --> 21:28.316 New Jersey; no guilt by association there. 21:28.318 --> 21:32.868 The Vineland Institute published data showing that all 21:32.869 --> 21:36.819 the immigrant groups streaming into the U.S. 21:36.818 --> 21:42.008 in the early twentieth century were inferior to WASPS mentally, 21:42.007 --> 21:45.267 and they were very tough on the Jews. 21:45.269 --> 21:48.489 The Jews are just not bright at all, and they did this by 21:48.489 --> 21:51.819 administering English language questionnaires to immigrants 21:51.823 --> 21:53.493 just after they got here. 21:53.490 --> 21:59.630 The pragmatics of culture are something that's a lot easier to 21:59.631 --> 22:05.371 deal with, and which fits more readily into the humanistic 22:05.369 --> 22:08.189 framework that we share. 22:08.190 --> 22:13.080 After "the fountain," which really doesn't fit into 22:13.080 --> 22:16.590 any of his categories, Clark has three broad 22:16.586 --> 22:17.806 categories. 22:17.808 --> 22:21.878 One is exogenous growth theories--exogenous meaning 22:21.881 --> 22:26.441 economic growth caused by something that is--that has its 22:26.441 --> 22:29.781 origin outside of the market economy. 22:29.778 --> 22:34.458 One of these ideas, which I think he's right about, 22:34.460 --> 22:38.690 he doesn't run with it very far, but the emergence of the 22:38.691 --> 22:42.461 nation's state system, the rule of law, 22:42.463 --> 22:48.473 the existence of well formalized property rights, 22:48.470 --> 22:54.960 all that stuff is pretty powerful, and the western world 22:54.962 --> 23:01.812 was the initial focal point of the Westphalian nation state 23:01.810 --> 23:03.110 system. 23:03.108 --> 23:07.498 Clark is at pains to show that that by itself isn't enough an 23:07.496 --> 23:08.516 explanation. 23:08.519 --> 23:13.129 In general, no one should expect one story to explain the 23:13.132 --> 23:15.852 evolution of capitalist wealth. 23:15.848 --> 23:20.718 This is way too complex a story--way to complex a 23:20.718 --> 23:25.788 phenomenon for simple theories to carry the day. 23:25.788 --> 23:30.568 A special case of that would be wealth-maximizing law as 23:30.567 --> 23:33.607 illustrated a week ago in Ghen v. 23:33.608 --> 23:35.518 Rich or in U.S. 23:35.519 --> 23:35.689 v. 23:35.693 --> 23:40.563 Cosby, or any of hundreds of legal precedence. 23:40.558 --> 23:47.648 Clark also briefly, toward the end of the book, 23:47.650 --> 23:50.930 takes up the work of a guy named Kenneth Pomeranz, 23:50.930 --> 23:54.910 and Pomeranz has a book called The Great Divergence 23:54.913 --> 23:59.093 which asks the question, why did the--well he begins 23:59.092 --> 24:04.182 with the proposition that from a social and economic point of 24:04.184 --> 24:06.814 view, China and Japan, 24:06.809 --> 24:11.809 both look a lot like Europe in about 1800. 24:11.808 --> 24:16.088 There's lots to quibble with in that generalization but it's not 24:16.086 --> 24:16.626 crazy. 24:16.630 --> 24:20.400 Then he says, "Well, Europe takes off 24:20.403 --> 24:25.563 well over a century ahead of those Asian countries," 24:25.559 --> 24:28.229 and he wants to know why. 24:28.230 --> 24:32.540 His thesis is it has to do with natural resources. 24:32.538 --> 24:36.368 In particular, that large population centers 24:36.367 --> 24:41.707 like the cities of England were located close to large energy 24:41.709 --> 24:46.779 resources such as the coal mining areas of the Midlands in 24:46.784 --> 24:49.014 the United Kingdom. 24:49.009 --> 24:54.839 Also of almost equal importance for Pomeranz, 24:54.838 --> 25:01.418 access to vast agricultural land in the form of North 25:01.417 --> 25:05.477 America, and that about 1800 was the 25:05.481 --> 25:11.321 time when the exploitation of the largely empty continent in 25:11.323 --> 25:17.563 the United States was feeding resources into Western Europe. 25:17.558 --> 25:20.488 There's some plausibility in those ideas. 25:20.490 --> 25:26.800 Then Clark talks about multiple equilibrium theories, 25:26.798 --> 25:33.488 and the idea here is--think of time passing that way, 25:33.490 --> 25:36.890 and standard of living or productivity going this way. 25:36.890 --> 25:42.830 The idea is that a country could climb this small hill and 25:42.825 --> 25:46.735 get stuck here, and then there would be some 25:46.744 --> 25:51.094 exogenous shock, some huge event outside the 25:51.088 --> 25:55.628 economic system, which would allow it to pass 25:55.630 --> 26:01.210 from that equilibrium to a new equilibrium on top of the taller 26:01.210 --> 26:01.930 hill. 26:01.930 --> 26:10.070 The world demographic transition is such a story, 26:10.065 --> 26:15.315 and not a crazy story at all. 26:15.318 --> 26:20.748 The notion that the falling death rate created by better 26:20.750 --> 26:24.460 public health, probably more than any single 26:24.460 --> 26:26.480 factor, by clean water, 26:26.480 --> 26:31.890 and elementary vaccinations, but clean water probably above 26:31.894 --> 26:36.034 all else, and the eventual adjustment of 26:36.028 --> 26:42.258 the birthrate to that so that you go from high birthrate, 26:42.259 --> 26:44.959 high death rate, short lives, 26:44.960 --> 26:49.320 to low birthrate, low death rate, long lives. 26:49.318 --> 26:57.928 That by itself is a--is I think without question a powerful 26:57.932 --> 27:06.842 element in the story wherever a nation state society has gone 27:06.843 --> 27:10.113 from poor to rich. 27:10.108 --> 27:15.408 Then the endogenous growth theories, 27:15.410 --> 27:22.240 and these are--the idea here is that something happens inside 27:22.243 --> 27:27.373 the economy that creates a dynamic change, 27:27.368 --> 27:34.728 and that dynamic change leads to mass affluence. 27:34.730 --> 27:40.310 I think there's a lot in this idea which of course is not 27:40.313 --> 27:41.313 Clark's. 27:41.308 --> 27:43.988 Clark is merely cataloguing other people's ideas. 27:43.990 --> 27:48.980 The--does anybody recognize either of these two handsome 27:48.980 --> 27:50.070 gentlemen? 27:50.068 --> 27:53.768 I'd prefer the haircut on the left. 27:53.769 --> 28:03.019 This is Joseph Schumpeter, and this is F.A. Hayek. 28:03.019 --> 28:10.879 Each of them had an idea of about market societies that has 28:10.875 --> 28:15.205 to be central to our thinking. 28:15.210 --> 28:18.710 In Schumpeter's case it was creative destruction, 28:18.709 --> 28:22.869 and I'm told by the teaching fellows that most of you knew 28:22.865 --> 28:25.485 that quite well on the mid-term. 28:25.490 --> 28:32.970 Creative destruction is a way of reshuffling the deck 28:32.972 --> 28:43.012 economically at short intervals, so that, looking back at this 28:43.009 --> 28:46.769 story, so that sitting still on this 28:46.773 --> 28:50.393 hill, is difficult for any given firm 28:50.385 --> 28:55.765 and arguably impossible for society at large once you're 28:55.772 --> 28:59.302 into a capitalist market economy. 28:59.298 --> 29:07.628 One way to diagram that is--this diagram we have, 29:07.630 --> 29:12.280 the capital invested in a given kind of product or production, 29:12.278 --> 29:18.848 rising from left to right, and the productivity of that 29:18.848 --> 29:23.348 capital rising from bottom to top, 29:23.348 --> 29:29.188 and each of these curves is a production function representing 29:29.185 --> 29:34.445 a technology and a way of organizing people and handling 29:34.449 --> 29:35.979 information. 29:35.980 --> 29:42.810 The idea would be that change occurs in the sequence 1, 29:42.808 --> 29:47.918 2,3, 4,5, 6 here where there's a process of climbing to the 29:47.916 --> 29:52.756 right as we go to more capital-intensive production, 29:52.759 --> 29:58.019 more capital per worker, and then while Tal is doing 29:58.015 --> 30:02.075 that, Jennifer is saying, 30:02.079 --> 30:07.069 "Well no, we should reorganize this 30:07.067 --> 30:07.967 entirely. 30:07.970 --> 30:09.590 We should use a different technology, 30:09.588 --> 30:13.508 a different method of attracting investments, 30:13.509 --> 30:17.969 a different method of compensating employees," 30:17.967 --> 30:23.137 and she shifts to the lower end of three and then that gets 30:23.136 --> 30:27.246 carried to here, and then a similar shift to the 30:27.253 --> 30:30.443 blue production function and then up that, 30:30.440 --> 30:36.960 and so a kind of zigzag story of change where people compete 30:36.961 --> 30:43.151 not within one production function but between production 30:43.153 --> 30:50.563 functions and a chaotic pattern of creative destruction occurs. 30:50.558 --> 30:54.178 What makes it creative is that it is ultimately an upward 30:54.182 --> 30:55.932 movement in productivity. 30:55.930 --> 31:02.340 A version of that story is in Clark but he doesn't really 31:02.337 --> 31:08.057 think in the dynamic way that Schumpeter and Hayek, 31:08.059 --> 31:10.119 and others do. 31:10.118 --> 31:15.138 Hayek's story is the one about the creative potential of a free 31:15.138 --> 31:18.208 society, which I think you had a memo to 31:18.212 --> 31:22.972 write about, and the notion there is that 31:22.967 --> 31:26.867 social learning will accrue. 31:26.868 --> 31:30.368 That the society at large will have a higher learning rate than 31:30.368 --> 31:36.148 any individual within it, and that as each of us goes 31:36.147 --> 31:43.827 about her or his work, we are spewing off insights for 31:43.829 --> 31:44.849 others. 31:44.848 --> 31:47.968 Both when we succeed and when we fail. 31:47.970 --> 31:51.420 When we succeed people will copy our ideas. 31:51.420 --> 31:56.380 When we fail people will know an idea not to try, 31:56.381 --> 32:01.551 and that over time society actually smartens up. 32:01.548 --> 32:05.828 If you look at the first chapter in the assignment for 32:05.834 --> 32:09.954 today in Clark, he has all the factors of 32:09.954 --> 32:15.054 growth, as he conceives them, in a very simplified model, 32:15.049 --> 32:17.339 and the residual-- the residual, 32:17.340 --> 32:20.910 which accounts for about half the variance, 32:20.910 --> 32:25.320 it's most natural interpretation is it is social 32:25.317 --> 32:26.347 learning. 32:26.348 --> 32:31.148 It isn't the specific capital embodied in a given workers 32:31.153 --> 32:34.683 education, or in the factory plant and 32:34.681 --> 32:40.221 equipment with which that worker is supplied by an employer, 32:40.220 --> 32:46.260 but in the less tangible forms of social knowledge which the 32:46.261 --> 32:48.721 society is generating. 32:48.720 --> 32:53.260 And Hayek's idea, then, is that over time social 32:53.258 --> 32:57.408 learning makes the whole system smarter, 32:57.410 --> 33:01.380 taken as a whole, and that learning to navigate 33:01.376 --> 33:04.806 unfamiliar information, which arguably, 33:04.811 --> 33:08.631 would be something you're all doing right now, 33:08.630 --> 33:13.830 becomes not only an advantage to the individual but to the 33:13.826 --> 33:15.556 society at large. 33:15.558 --> 33:22.038 Well the most glaring omission in Clark, in talking about the 33:22.040 --> 33:28.740 surge of wealth in the west, is the joint stock corporation. 33:28.740 --> 33:33.700 The joint stock corporation goes back of course many 33:33.695 --> 33:38.235 centuries, but the kind of joint stock 33:38.240 --> 33:44.680 corporation which has become dominant in the world, 33:44.680 --> 33:48.310 goes back only to about the middle of the 1800s. 33:48.308 --> 33:54.838 In the UK it's dated to The Corporation Act of 1862, 33:54.836 --> 33:56.496 in the U.S. 33:56.500 --> 33:59.690 I think you'd probably say somewhere in the 1840s it 33:59.689 --> 34:00.939 becomes important. 34:00.940 --> 34:05.230 You can find legal traces of it much earlier in both cases, 34:05.230 --> 34:09.230 but it gets to be a big deal in the middle years of the 34:09.228 --> 34:10.928 nineteenth century. 34:10.929 --> 34:17.979 As we saw with the reading from Alfred Chandler, 34:17.983 --> 34:25.493 the rise of the large-scale railroad in the U.S. 34:25.489 --> 34:30.459 provoked the creation of the equity and bond markets in New 34:30.463 --> 34:34.763 York, and the feverish development of 34:34.757 --> 34:40.687 joint stock corporations in virtually every field of 34:40.693 --> 34:43.373 endeavor thereafter. 34:43.369 --> 34:51.039 These slides--I'm going to show a series of proprietary slides 34:51.038 --> 34:55.688 constructed by Ibbotson Associates. 34:55.690 --> 35:00.040 Ibbotson Associates is named for Roger Ibbotson at The School 35:00.038 --> 35:01.558 of Management here. 35:01.559 --> 35:09.649 Ibbotson became filthy rich by being the first one to 35:09.652 --> 35:17.592 systematically compile, analyze, and sell long trend 35:17.588 --> 35:22.568 data about stocks and bonds. 35:22.570 --> 35:27.120 It's only because he likes to teach that he bothers to 35:27.123 --> 35:28.073 continue. 35:28.070 --> 35:34.260 The time scale here is 1925 to more or less the present. 35:34.260 --> 35:44.340 The earnings of various classes of assets are-- 35:44.340 --> 35:47.400 I've traced here, beginning in this case with 35:47.404 --> 35:50.404 treasury bills issued by the government, 35:50.400 --> 35:54.290 and as safe as the government is. 35:54.289 --> 36:01.049 Then municipal bonds, government bonds of other 36:01.047 --> 36:04.517 kinds, corporate bonds, 36:04.519 --> 36:12.449 so this would be debt taken on by a corporation and it might 36:12.449 --> 36:15.479 be-- they might be junk bonds if the 36:15.478 --> 36:19.248 corporation is a little risky and they might be blue chip 36:19.251 --> 36:20.331 bonds if not. 36:20.329 --> 36:27.289 Then this is--the blue curve is an amalgam of stock returns, 36:27.289 --> 36:33.839 and in every case we start with $1 in 1925 and keep investing 36:33.840 --> 36:37.600 the money-- the way these charts are 36:37.603 --> 36:42.883 generated is we assume that every dollar of dividend is 36:42.876 --> 36:48.356 plowed back, and that we don't pay any taxes. 36:48.360 --> 36:53.850 This would sort of be Yale that we're charting. 36:53.849 --> 36:58.029 You and I wouldn't quite have the same tax privilege Yale has, 36:58.025 --> 37:01.585 and the most striking thing there is--what's the most 37:01.585 --> 37:04.045 striking thing about that chart? 37:04.050 --> 37:09.700 First of all there is some magic in compound interest, 37:09.697 --> 37:10.547 right? 37:10.550 --> 37:14.620 You can just leave your money to grow, it really does 37:14.617 --> 37:16.257 eventually do that. 37:16.260 --> 37:19.210 How about the blue curve versus the others? 37:19.210 --> 37:32.250 Pretty startling--we've got to get somebody else--yes Tal. 37:32.250 --> 37:33.880 Student: There seems to be a rather large equity 37:33.882 --> 37:34.182 premium. 37:34.179 --> 37:38.039 What I mean by that is that there seems to be excess returns 37:38.043 --> 37:41.583 if you put your money in stocks versus any of the other 37:41.581 --> 37:44.211 categories, treasuries, corporate bonds. 37:44.210 --> 37:47.830 I mean, you're obviously taking on more risk in stocks versus 37:47.831 --> 37:51.121 the other categories, certainly more than treasury 37:51.123 --> 37:53.273 bills, but you could possibly argue 37:53.273 --> 37:56.353 that the difference in risk doesn't seem as great as a 37:56.346 --> 37:58.836 difference in returns over the long run. 37:58.840 --> 38:01.250 Prof: Okay. 38:01.250 --> 38:04.750 What's the--the equity premium is the punch line here, 38:04.748 --> 38:05.538 well said. 38:05.539 --> 38:10.209 What's the standard way one might manage the risk of a 38:10.211 --> 38:11.271 portfolio? 38:11.268 --> 38:12.838 Student: You could diversify. 38:12.840 --> 38:16.350 Prof: Okay, so we wouldn't put all our 38:16.353 --> 38:20.423 money in mining stocks or in-- even in Apple, 38:20.422 --> 38:26.582 which is right now one of the most expensive stocks in the 38:26.583 --> 38:31.953 universe, but the equity premium is huge. 38:31.949 --> 38:36.899 Look here what happens--this is 1925, the Depression is here, 38:36.900 --> 38:41.110 the great crash is here, these people got jolted. 38:41.110 --> 38:45.640 Of course the temptation when that happens to you is to 38:45.637 --> 38:50.247 imagine that it's going to go right to the middle of the 38:50.246 --> 38:54.566 earth, and therefore to sell at this 38:54.570 --> 38:58.720 point, which lots and lots of people 38:58.717 --> 39:04.907 did, and of course the effect was to ruin their wealth. 39:04.909 --> 39:07.489 Let's take another set of these. 39:07.489 --> 39:13.899 We let inflation go unnoticed in that one and here we'll show 39:13.896 --> 39:20.606 inflation by the red curve, and then the T-Bills, 39:20.606 --> 39:26.056 government bonds, large company stocks, 39:26.059 --> 39:32.029 small company stocks and you get a huge premium there. 39:32.030 --> 39:39.500 Now the--back to the question of the accumulation of mass 39:39.498 --> 39:46.318 affluence; the power of large enterprise 39:46.315 --> 39:54.765 to generate enormous wealth over long periods; 39:54.768 --> 39:58.088 this is a seventy-five, eighty, eighty-five year period 39:58.090 --> 40:02.970 we're looking at, but patient--money patiently 40:02.965 --> 40:10.125 invested in joint stock corporations is a solid strategy 40:10.128 --> 40:17.548 for the accumulation of wealth within a given household or 40:17.552 --> 40:21.332 institutional portfolio. 40:21.329 --> 40:26.569 It's not anywhere near the sexiest or the fastest way, 40:26.570 --> 40:32.320 but it is one of the most solid ways, 40:32.320 --> 40:38.670 and the only conclusion I want to get out of this is that in 40:38.670 --> 40:45.340 talking about economic takeoff and the sustained growth in mass 40:45.344 --> 40:49.014 affluence, companies, joint stock 40:49.005 --> 40:52.255 companies with limited liability, 40:52.260 --> 40:54.230 are a big part of that. 40:54.230 --> 40:58.340 Third and last. 40:58.340 --> 41:03.140 With--remember the variable here is gross domestic product 41:03.143 --> 41:04.243 per capita. 41:04.239 --> 41:11.499 Part of that has to do with the propensity to consume. 41:11.500 --> 41:16.780 In the Posner book about what went wrong with the mortgage 41:16.780 --> 41:20.580 markets, Keynes, Lord Keynes is 41:20.581 --> 41:25.261 mentioned, and Keynesian economics, 41:25.260 --> 41:30.930 which are directed to the question of stabilizing mass 41:30.929 --> 41:37.459 demand for products so that the economy keeps going around and 41:37.456 --> 41:41.596 around, is an important element. 41:41.599 --> 41:45.249 Well the joint stock corporation was, 41:45.246 --> 41:49.396 from its birth, really good at selling. 41:49.400 --> 41:52.290 The move, which would be called forward integration, 41:52.286 --> 41:55.566 were not just going to make cigarettes, we're going to sell 41:55.570 --> 41:56.420 cigarettes. 41:56.420 --> 41:59.510 We're not just going to make soap; 41:59.510 --> 42:00.530 we're going to sell soap. 42:00.530 --> 42:01.790 We're not just going to make cars; 42:01.789 --> 42:03.559 we're going to sell them. 42:03.559 --> 42:07.559 That forward integration--I'm going to without comment now 42:07.559 --> 42:11.979 just show you 20 slides from the middle decades of the twentieth 42:11.980 --> 42:16.120 century and then we'll stop briefly and segue to next-- 42:16.119 --> 42:17.469 our next meeting. 42:17.469 --> 42:20.779 Some of these are a little pernicious. 42:20.780 --> 42:23.050 This one is not. 42:23.050 --> 42:40.810 The--a repeated trope is using products to solve marital 42:40.813 --> 42:48.203 problems, and the large glove compartment 42:48.195 --> 42:54.865 on this Mercury will solve the marital problem between these 42:54.867 --> 42:55.657 two. 42:55.659 --> 43:00.839 When my grandfather died and I was seventeen, 43:00.844 --> 43:07.684 I inherited a Mercury from him, it lasted one year before I 43:07.681 --> 43:09.451 crashed it. 43:09.449 --> 43:47.969 "Quiet substance"--a series of Palmolive's here. 43:47.969 --> 43:50.919 They all have to do with men and women. 43:50.920 --> 43:54.970 Women are the sales target. 43:54.969 --> 43:57.629 Does Palmolive soap exist still? 43:57.630 --> 44:32.430 Does anybody still use it? 44:32.429 --> 44:42.049 That's pretty nasty stuff right? 44:42.050 --> 44:43.670 This is rouge not soap now. 44:43.670 --> 45:25.230 45:25.230 --> 45:26.820 You get the gist of it. 45:26.820 --> 45:34.820 In the consumer culture that's embodied in these, 45:34.820 --> 45:39.750 and which is powerfully represented all around us, 45:39.750 --> 45:44.310 we live in a very consumption oriented culture, 45:44.309 --> 45:55.239 is arguably a misleadingly favorable aspect of wealth. 45:55.239 --> 46:00.869 That is, an awful lot--if you think about those ads and how 46:00.871 --> 46:04.991 silly it seems, with seventy years hindsight, 46:04.985 --> 46:09.225 that using Palmolive soap will save your marriage-- 46:09.230 --> 46:13.390 I often guess that it didn't save a single marriage-- 46:13.389 --> 46:19.939 that whole angle of kind of the Hucksterish aspect of a 46:19.940 --> 46:25.090 capitalist society, can give one pause. 46:25.090 --> 46:30.510 Now I'd like you to come to class Wednesday having thought a 46:30.512 --> 46:36.302 little about a country and what 5% of its GDP would amount to in 46:36.304 --> 46:40.824 dollars, and if you need to look that up 46:40.822 --> 46:42.862 you can Google it. 46:42.860 --> 46:47.890 The easiest Google is CIA Factbook, but the World Bank 46:47.893 --> 46:50.653 will give you the data too. 46:50.650 --> 46:54.410 The World Bank or the WTO, there are all kinds of 46:54.407 --> 46:57.537 organizations that produce these data. 46:57.539 --> 47:03.339 Pick a country and think about 5% and think about how you would 47:03.344 --> 47:09.064 deploy the 5% if you wanted to maximize the expected wealth of 47:09.056 --> 47:13.466 that society over, let's say, a twenty-year future. 47:13.469 --> 47:19.099 The reading is the more policy oriented part of de Soto, 47:19.099 --> 47:24.429 and it should in some ways guide and support your thinking, 47:24.429 --> 47:27.439 although you surely want to think well beyond de Soto's 47:27.440 --> 47:28.110 framework. 47:28.110 --> 47:30.500 So I'll see you on Wednesday. 47:30.500 --> 47:36.000