presents the eighteenth annual Philip Gamble Memorial Lecture Thomas Piketty Professor Economics the Paris School of Economics and EHESS Prize Yrj Jahnsson Award recipient given by the European Economic Association 2013 Director of the Paris School of Economics 2005 2007 st Breezer golden doodle and friends This is Wednesday We have a quiz in class You should have reviewed the material for Monday on the moodle site You still can For next Monday review the online material and do the quiz Bring it to your discussion section If you have not yet bought the books do it Textbook Annex has both in the new edition Amherst Books has the new edition of Real World Micro and the last edition of Microeconomics This is almost as good Markets the Division of Labor and Capitalism Big points We are more efficient if we work together through division of labor Division of labor requires rules and social structures That is why economics should be a social science of institutions rather than a psychological science studying individuals Today s big thinks Adam Smith Division of labor is source of productivity growth Markets can encourage peaceful exchange competition and efficiency To use markets and division of labor need honesty and trust Smith sees production for use But capitalist production is different production for profit The Adam Smith Problem What institutions will organize society and the division of labor peacefully and productively Adam Smith s Choice Prosperity through markets or conflict and domination The pride of man makes him love to domineer War The propensity to truck barter and exchange one thing for another Compete to get rich Market competition is an alternative to war Compete to get rich by selling more rather than competing by fighting Another alternative Good things about free markets Democracy Empathy Fairness Diversity Markets are democratic Market exchange is voluntary Nobody makes you do it Market competition makes you think of others So you can sell them things Competition forces you to treat people fairly Because voluntary exchanges must make everyone better off Or else why do it Markets allow for a diversity of interests Everyone looks for a niche Everyone is special The social division of labor allows you to specialize using everyone s special gifts Concentrate on what you are good at trade for what others do well In the good old days Jon Lester threw Jason Varitek caught David Ortiz hit Specialization and Exchange shifts out the Production Possibility Frontier Without exchange we can consume only what we produce With exchange we can exchange for what others produce better Comparative advantage English economist David Ricardo 1772 1823 Irish economist Robert Torrens 1780 1864 Without exchange Bob can only consume his home grown marijuana or corn He gives up 1 corn for every 1 ounce of pot Price of corn is 1 ounce of pot Jane is a better corn farmer she grows 2 corn for 1 ounce of pot She pays ounce of pot for every corn Both have downward sloping PPFs because of limited land and labor Corn vs Marijuana Bob 25 20 20 15 15 10 10 5 5 Corn vs Marijuana Jane Corn Corn 25 0 0 1 2 3 4 Marijuana 5 6 7 8 9 10 0 0 0 5 1 1 5 2 2 5 3 3 5 4 4 5 5 5 5 6 6 5 7 7 5 8 8 5 9 9 5 10 Marijuana Corn costs Bob twice as much as it costs Jane Pot is cheaper for Bob and costs Jane more Price of Corn Price of Pot Bob 1 ounce of pot 1 corn Jane ounce of pot 2 corns Because Jane is better at growing corn she gives up more pot for each corn She could get more pot by buying it from Bob Exchange allow Bob to buy corn at Jane s lower prices Growing only marijuana specializing and using the social division of labor to buy Corn from Jane he can get twice as much corn Jane also does better She buys marijuana at Bob s lower prices 1 ounce 1 corn instead of 2 ounces corn Voila The social division of labor Trade is good But this says nothing about the detail division of labor where individuals specialize in a particular task Adam Smith linked them in his pin factory story He acknowledges that the detail division of labor shrinks people s vision and minds Detail Division of Labor is something else entirely These workers do not exchange products through markets They all do one part of a final product Detail division of labor is as important as social division exchange of final products through markets Even with the social division of labor Markets Are NOT PERFECT Some markets make the puppy sad Smith production for use Produce consume or to exchange for things they will consume You hunt to eat or to exchange for things to eat wear or otherwise use Circuit of production end with commodities use values C becomes C barter Commodity for Commodity or CC C becomes M becomes C sell Commodity for money to buy another Commodity C M C Production for use in some societies Feudal Europe Serfs lived on what they produced and exchanged surplus for extras Small artisans produce exchange consume Family farmers live on what they grow or hunt Within families produce to consume Things changed Capitalism came to late medieval Europe 15th C Capitalists control the means of production and hire workers to produce commodities for sale Like slavery capitalists produce for profit not to make useful things Unlike slavery capitalists do not own the workers Capitalist circuit of production starts and ends with money Use money to buy workers labor power to make other commodities for sale for more money M C C M End with more money Goal is profit or surplus value Capitalism is about producing commodities for profit Fundamentally different from personal economy where people produce to consume either directly or with exchange Capitalists produce to make profit Capitalism wage workers are committed to work away from their home and for time unconnected with their own interests This helps make capitalism an expansive system Capitalism is dynamic It transforms production Capitalists are always looking to raise productivity to raise profit Get more C from C Invention and innovation accelerate under capitalism Capitalists who don t innovate die Capitalism is dynamic It pushes to raise productivity Almost no increase in human productivity over 10 000 years before 1700 European Per Capita Income R e 40 000 a l 35 000 I n 30 000 c o 25 000 m e 20 000 15 000 10 000 5 000 0 00 1 00 4 9 10 8 8 20 2 8 30 6 7 40 0 7 50 4 6 60 8 5 70 2 5 80 6 4 90 1 4 00 5 3 Year 10 9 2 20 3 2 30 7 1 40 1 1 50 6 5 0 30 62 0 12 10 18 00 19 00 20 00 US percapita income