Lecture 2: Capitalism

Lecture 2: Capitalism

UNIT 1: INTRODUCTION Apartheid and its demise: The value of South Africa s old age pension.

UNIT 1: INCOME INEQUALITY In Singapore, the average incomes of the richest and poorest 10% are $67,436 and $3,652 respectively. In Liberia, the corresponding incomes are $994 and $17. Countries are ranked by GDP per capita from left to right.

UNIT 1: INCOME INEQUALITY Countries are ranked by GDP per capita from left to right.

UNIT 1: INCOME INEQUALITY Countries are ranked by GDP per capita from left to right.

UNIT 1: INCOME INEQUALITY Countries are ranked by GDP per capita from left to right.

UNIT 1: INCOME INEQUALITY What are the biggest changes you notice going from 1980 to 2014? Countries are ranked by GDP per capita from left to right.

UNIT 1: INCOME INEQUALITY Countries are ranked by GDP per capita from left to right.

UNIT 1: INCOME INEQUALITY Zoomed in on US & Norway

UNIT 1: INCOME INEQUALITY

UNIT 1: INTRODUCTION 1,000 years ago the world was flat, economically speaking. Today, average people in the UK are six times richer than in India History s hockey stick: Gross domestic product per capita in five countries (1000 2015).

UNIT 1: INCOME INEQUALITY Before we can make a statement like, People in Italy are richer than people in China, but the gap is narrowing, statisticians and economists must try to solve three problems: 1. What do we want to measure? 2. How did prices change over time? 3. What are the differences in prices between two countries? Purchasing power parity (PPP) : A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies

UNIT 1: HISTORY S HOCKEY STICK: GROWTH IN INCOME Why were there leaders and laggards? In the closing years of British rule, a child born in India could expect to live for 27 years. Fifty years on, life expectancy at birth had risen to 65 years. History s hockey stick: Living standards in five countries (1000-2013) using the ratio scale.

UNIT 1: THE PERMANENT TECHNOLOGICAL REVOLUTION Technology is the process that takes a set of materials and other inputs including the work of people and machines and creates an output. Until the Industrial Revolution, technology was updated slowly and passed from generation to generation. By any reckoning, this was probably the most important event in world history - Eric Hobsbawm

UNIT 1: PERMANENT TECHNOLOGICAL REVOLUTION Animal fat lamps produced 20 lm-hr for an hour of work. In Babylonian times the invention of a lamp using sesame oil meant that an hour of work produced 24 lm-hr. This improvement took 7,000 years. 3000 years later, the most efficient forms of lighting provided about nine times as much light per hour of work. Compact fluorescent bulbs introduced in 1992 are about 45,000 times more efficient, in terms of labor time expended, than lights were 200 years ago. The productivity of labour in producing light: Lumen-hours per hour of labour (100,000 years ago to the present).

UNIT 1: THE PERMANENT TECHNOLOGICAL REVOLUTION The speed at which information travelled (1000 to 1865).

UNIT 1: THE PERMANENT TECHNOLOGICAL REVOLUTION The underwater cables which allow the internet to be the global phenomena it has become there 550,000 miles of cable total

UNIT 1: GAINS FROM SPECIALIZATION Specialization : when a country or other entity produces a more narrow range of goods and services than it consumes, acquiring what it does not produce by trade. Why does specialization lead to better and more efficient production? 1. Learning by doing 2. Difference in ability 3. Economies of scale Capitalism enhanced our opportunities for specialization by expanding the importance of both markets and firms.

UNIT 1: GAINS FROM SPECIALIZATION Specialization exists within governments, firms, and in families. What usually determines how household production is divvied up? Firms employ thousands or even hundreds of thousands of individuals, most of them working at specialized tasks Firms thus facilitate a kind of cooperation among specialized producers that increases productivity.

UNIT 1: GAINS FROM SPECIALIZATION When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men s labor as he has occasion for. - Adam Smith Markets are both competitive and cooperative. How do markets create cooperation? Markets accomplish an extraordinary result: unintended cooperation on a global scale.

UNIT 1: GAINS FROM SPECIALIZATION Does the House of Saud control the oil because of its abilities? Do those who control the tungsten supply out of the Congo do so because they are better at mining it? Are Bangladeshi textile workers inherently any better at sewing and stitching than anyone else? The answer, in all of these cases, is pretty obviously, No.

UNIT 1: CAPITALISM DEFINED The capitalist revolution introduced a new economic system called capitalism characterized by a new combination of institutions. What are some examples of non-capitalist economic systems? Most economies today are capitalist, which means private property, markets and firms are the key institutions. There is not an exact definition of capitalism which is widely agreed upon.

UNIT 1: CAPITALISM DEFINED Private property is the way in which our laws and institutions decide who owns what What does it mean to own something? Property rights are not natural, but rather are socially constructed

UNIT 1: CAPITALISM DEFINED Markets are a way of connecting people who mutually benefit by exchanging goods and services through a process of buying and selling Markets allow for increased specialization What other ways are there to transfer goods and services from one person to another? Markets differ from other ways in two key respects: 1. They are reciprocated 2. They are voluntary

UNIT 1: CAPITALISM DEFINED Firms are a way of organizing production with the following characteristics: One or more individuals own a set of capital goods that are used in production They pay wages and salaries to employees They direct the employees (through the managers they also employ) in the production of goods and services The goods and services are the property of the owners Final products are sold with the intention of making a profit Firms are not the only productive organizations in an economy Firms are unique in how quickly they can be born, expand, contract and die As firms became more common, they created a labor market

UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM Capitalism is an economic system that combines decentralization with centralization How does capitalism centralize power? How does it decentralize power?

UNIT 1: CAPITALISM, CAUSATION, AND HISTORY S HOCKEY STICK Question: Did capitalism cause the upward kink we ve seen in per capita income, population, etc.? How do economists and other social scientists test or evaluate such hypotheses? One method is a natural experiment, which is a study exploiting naturally occurring statistical controls Post-WWII Germany is a useful natural experiment for this question

UNIT 1: CAPITALISM, CAUSATION, AND HISTORY S HOCKEY STICK

UNIT 1: VARIETIES OF CAPITALISM Developmental State : A government that takes a leading role in promoting the process of economic development South Korea is a good example of a successful developmental state Divergence of GDP per capita among latecomers to the capitalist revolution (1928-2013).

UNIT 1: VARIETIES OF CAPITALISM Capitalism is not enough to create a dynamic economy Both the richest and poorest countries in the world are capitalist Two sets of conditions contribute to the dynamism of a capitalist system: economic and political. The lagging performances of some capitalist economies, highlight the following problems: Private property may not be secure Markets may not be competitive Firms may be owned and managed by people who survive because of their connections or their privileged birth

UNIT 1: VARIETIES OF CAPITALISM Government policies are also important Markets, private property and firms are all regulated by laws and policies. Innovators depend on their ownership of the resulting profits being protected from theft by a wellfunctioning legal system.

UNIT 1: VARIETIES OF CAPITALISM By creating or allowing monopolies, governments may also take the teeth out of competition. Governments adjudicate disputes over ownership and enforce property rights Government provides essential goods and services Question: Given the importance of government in maintaining a functioning market, what could it mean to have a free market?

UNIT 1: VARIETIES OF CAPITALISM There really is no such thing as a free market. Consider five areas where the rules/laws of the market have to be set in order for a market to function at all: Property Monopoly Contracts Bankruptcy Enforcement the traditional libertarian argument that the state should simply stop interfering with the economy is misguided: it is like saying that the commissioner of baseball should stop interfering with the game by promulgating its rules. - Elizabeth Anderson

UNIT 1: CAPITALISM AS AN ECONOMIC SYSTEM

UNIT 1: VARIETIES OF CAPITALISM So when is capitalism dynamic, broadly speaking? When it combines: Private incentives for cost-reducing innovation Firms led by those with proven ability Public policy supporting these conditions Public policy that supplies essential goods and services Given all the different ways of succeeding or failing at this, no surprise that capitalist economies have coexisted with many political systems.

UNIT 1: CAPITALISM, INEQUALITY, AND DEMOCRACY Dynamic capitalism is a system of winners and losers. Those with wealth in a capitalist society are in a position to perpetuate and even enhance their wealth before passing it on. In many countries capitalism ushered in an era of increasing inequality of wealth Share of total wealth held by the richest 1% (1740 2011).

UNIT 1: CAPITALISM, INEQUALITY, AND DEMOCRACY The advance of democracy in the world. Democracy is a political system, that ideally: 1. Gives equal political power to all citizens 2. Selects political leaders by means of fair elections Democracy comes in many forms It was often violence or the threat of violence that helped gain voting rights and access to education, etc. Is there an inherent tension between capitalism and democracy?

UNIT 1: IMPACTS ON THE ENVIRONMENT Carbon dioxide in the atmosphere (1010-2010) and global carbon emissions from burning fossil fuel (1750-2010)

UNIT 1: IMPACTS ON THE ENVIRONMENT Carbon dioxide in the atmosphere (1010-2010) and global carbon emissions from burning fossil fuel (1750-2010)

UNIT 1: IMPACTS ON THE ENVIRONMENT Northern hemisphere temperature over the long run (1000-2006)

In planetary dimensions, warming of [2 degrees Celsius] is so bad as to have been enshrined as a political threshold not to be crossed. Going to [6 degrees Celsius] is so far outside the realm of anything imaginable, we can simply call it a planetary catastrophe. It would surely be a planet none of us would recognize. - Gernot Wagner and Martin L. Weitzman

UNIT 1: VARIETIES OF CAPITALISM The relationship between democracy and the challenge of environmental sustainability is especially tricky. This is true for two reasons: 1. National costs and global benefits 2. Effect on future generations