In the previous video, we saw that acceleration of technological progress in Britain around the middle of
the 18th century has allowed for a dramatic increase in labour force activity.
In turn, this positive labour productivity shock kick started what we now call modern economic growth.
However, we left one question unanswered. What cost?
Technological progress to occur in the first place? It wasn't the full answer to this question.
You will have to wait until at least your second year.
Well, we will discuss the so-called endogenous technological change.
People have got Nobel prises for creating an explanation of this type of technological change,
as those theories can be rather mathematically evolving. We will leave them for the second year.
For now, however, we need simpler, intuitive explanations of what prompted technological progress.
We'll turn to technological progress was the great human drive to do the best you can in a system that rewards effort?
A system which we now call capitalism, the key to understand capitalism is to understand that it really is a system.
One of its elements alone could not have created the drive for better technologies without the other.
So we have three key elements of this system. Private ownership of the production factors.
Capital and labour, which people are free to exchange once people are freely exchanging those factors of production.
They get organised by entrepreneurs and firms which scale up the effort for greater profits.
Note that the system cannot work without freely functioning markets, which send signal to market participants about where to focus their efforts.
The signal that participants receive is typically the price of certain goods.
Once the system has set in and spread across a number of countries, we can begin talking about the capitalist revolution.
This system has spread because it appears to be superior to other economic systems.
For example, socialism superior means that other long periods of time citizens over long periods of time,
citizens living in the system keep voting for the system to remain in place,
whereas citizens living in other parts of the world under any different economic systems keep demanding economic and political change.
Until they live under capitalism. Of course, this does not mean capitalism is faultless.
What I'm saying is that historically capitalism has generated more political
and economic benefits for more people than any other existing economic system.
So. We would like to know if capitalism is indeed as good as advertised.
Does it really cause economic growth? So let me give you some examples.
In 1936, a few years before East Germany was split from West Germany, living standards in two parts of Germany were approximately the same.
Today, after more than 45 years of socialist experimentation in East Germany and after 30 years of economic transition back to capitalism,
is jury has not achieved welfare. The Wolfberry have relative to West Germany from 75 years ago.
My other favourite example is Korea. Before the Korean War in 1956, Korea was one nation.
It is still one nation under two vastly different economic systems.
Socialism prevailed in the north. Well, capitalism won in the south before the war.
North Korea was the more industrialised part of the country.
But let's assume it was at par with South Korea. Today, South Korea is one of the richest countries in the world.
In the north, there are still trying to wake up the socialist dream.
They used to have 70 years ago.
With few exceptions, any country that was toying with socialism have undermined its economic development for decades and with a few exceptions,
countries that embraced capitalism have started catching up with the nations without consider developed.
Take, for example, Japan and Spain. Both are catching up Germany.
Even though they were not always comfortable as countries. Or look at the remarkable growth South Korea had enjoyed over the last five decades.
Even though it started growing from a much lower base in the 1960s.
Today, South Korea is by far the richest country in this group when it took off.
South Korea was three times poorer than Argentina. 60 years later, it managed to turn this around and is now three times richer.
What I'm telling you here seems a bit biased in favour of capitalism.
Does capitalism always work? Is it a recipe for permanent prosperity?
No, it isn't. Capitalism has produced this number of defects, especially in economies without a long history of democracy in young democracies.
Private property tends to be less secure than in older democracies.
If private property is not secure, private agencies don't have enough incentives to do the best they can.
Then all the fruits of their labour might be lost to a mafia tax.
With the economists luckily understand well the impact of property rights on
incentives and study their impact in disciplines such as institution and economics.
Capitalism can produce defects and not generate the expected technological progress.
If markets are not competitive, for example, when mobile phones came into existence in the 1990s,
there was typically a monopolies to help the licence for connecting people over mobile phones.
One provider per country, the prices for a minute on the phone with your girlfriend were mind boggling.
You really have to love her. Call her today.
You talk for free with most numbers within the country and for peanuts with the rest of the world.
The reason is there is competition now. But if markets are not competitive, if government policies are directed as at stifling competition,
market forces will keep alive firms which don't necessarily deserve to live.
Which brings me to my last point. Sometimes it's not the market that gives you the signal to do or not to engage in certain market strategy.
It is the government in some countries, many businesses, business Asians are very close to the government.
Governments secure contracts to companies and prevent market forces from revealing the best and the brightest.
In doing that line of business, of course, if you're on the receiving end of the contract, you become very rich pretty fast.
Boy, you a you like it and you even convince yourself that you even deserve it.
But if you are a firm that wants to enter that business to compete with the politicians friends, you virtually have no chance to ensure it.
This is how capitalism can fail. It fails when private property not is not secure, when markets are not competitive,
and when firms survive, not because they have a superior product or service,
but because the government has served millions to their owners on a silver platter because they were just so well-connected.
That's when capitalism started generating glitches.
And if those glitches become widespread and systemic, voters may start demanding that systemic change.
But this is bordering the nexus between economics and political science and discipline, which economists call political economy.
Back in the strict domain of economics, it is time to conclude what economics is about.
So first we learnt that economics is about how we make the things around us, about how we produce and how we measure what we have produced.
Second, economics is also about how we interact to be able to produce those things.
Those interactions happen not only between individuals, but also between firms, between firms and individuals and between governments and firms.
All these interactions produce consequences for our natural environment.
The environmental footprint will leave on our planet, will improve or hamper the lives of our children in the future.
This is why we're coming to the last point today.
Economics is inherently a study of a dynamic world, a world that moves over time.
A lot of our models, a lot of our theories about the world are going to be stuck pick.
This does not tell you that they're useless. They're just simplifying the interactions that may happen.
Those interactions happened between firms, households and governments. And all of them are living in the biosphere and the physical environment.
Economics has until fairly recently ignored the impact of our economic activity on our environment.
Well, that is about to change. The next video concludes.
What we have understood and what we have to remember about the economy this week.
