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UMass Amherst ECON 103 - Class 3 Division of labor and capitalism Fall 2014

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Slide 1Slide 2Slide 3This is WednesdayIf you have not yet bought the books, do itSlide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Corn costs Bob twice as much as it costs JaneSlide 22Slide 23Slide 24Detail Division of Labor is something else entirely!Slide 26Slide 27Slide 28Slide 29Slide 30Capitalism is about producing commodities for profitSlide 32Capitalism is dynamic. It pushes to raise productivitySlide 34Slide 35Slide 36Slide 37Capitalist expansion creates problemsSlide 39Slide 40Slide 41Slide 42presents the eighteenth annualPhilip Gamble Memorial LectureThomas PikettyProfessor Economics, the Paris School of Economics and EHESSPrize “Yrjö Jahnsson” Award recipient given by the European Economic Association, 2013Director of the Paris School of Economics, 2005-2007Capital in the 21st CenturyThursday, October 2  5:00 pm – Lecture  Reception to followStudent Union Ballroom, Student Union BuildingBreezer (golden doodle) and friendsThis 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 CapitalismBig pointsWe are more efficient if we work together through division of laborDivision 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 profitThe Adam Smith ProblemWhat 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 richMarket competition is an alternative to warCompete to get rich by selling more rather than competing by fightingAnother alternative?Good things about free marketsDemocracyEmpathyFairnessDiversityMarkets are democraticMarket exchange is voluntaryNobody makes you do itMarket competition makes you think of othersSo you can sell them thingsCompetition forces you to treat people fairlyBecause voluntary exchanges must make everyone better off. (Or else why do it?)Markets allow for a diversity of interestsEveryone looks for a niche.Everyone is specialThe 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 FrontierWithout 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 ½ ounce of pot for every corn.Both have downward sloping PPFs because of limited land and labor.0 1 2 3 4 5 6 7 8 9 100510152025Corn vs. Marijuana: BobMarijuanaCorn0 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 100510152025Corn vs. Marijuana: JaneMarijuanaCornCorn costs Bob twice as much as it costs JanePrice of Corn Price of PotBob 1 ounce of pot 1 cornJane ½ ounce of pot 2 cornsPot is cheaper for Bob, and costs Jane more!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 betterShe buys marijuana at Bob’s lower prices; 1 ounce/1 corn instead of 2 ounces/corn.Voila! The social division of laborTrade 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 PERFECTSome markets make the puppy sad.Smith: production for useProduce 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 C-C’) C becomes M becomes C’ (sell Commodity for money to buy another Commodity, C-M-C’).Production for use in some societiesFeudal 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 moneyUse 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 profitFundamentally different from personal economy where people produce to consume (either directly


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