[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:05.62,Default,,0000,0000,0000,,♪[music]♪
Dialogue: 0,0:00:09.09,0:00:13.21,Default,,0000,0000,0000,,- [Alex] We turn now to the second of our\Ninvisible hand properties, the balance of
Dialogue: 0,0:00:13.39,0:00:22.98,Default,,0000,0000,0000,,industries. We're also going to look at\Nthe gales of creative destruction.
Dialogue: 0,0:00:23.16,0:00:27.40,Default,,0000,0000,0000,,Invisible hand property number one says\Nthat the production of any given quantity
Dialogue: 0,0:00:27.58,0:00:32.48,Default,,0000,0000,0000,,of a good will be allocated across the\Nfirms in that industry in a way that
Dialogue: 0,0:00:32.66,0:00:38.57,Default,,0000,0000,0000,,minimizes total costs. But the question is,\Nhow much should be produced in each
Dialogue: 0,0:00:38.75,0:00:42.24,Default,,0000,0000,0000,,industry? So invisible hand property\Nnumber one says, if we're going to be
Dialogue: 0,0:00:42.42,0:00:46.49,Default,,0000,0000,0000,,producing 200 bushels of wheat then we\Ncould be rest assured that if we have a
Dialogue: 0,0:00:46.67,0:00:51.83,Default,,0000,0000,0000,,competitive market, those 200 bushels will\Nbe allocated across the different firms in
Dialogue: 0,0:00:52.01,0:00:57.80,Default,,0000,0000,0000,,a way that minimizes total industry cost.\NBut should we be producing 200 bushels of
Dialogue: 0,0:00:57.98,0:01:04.11,Default,,0000,0000,0000,,wheat, or 500 or 1000? How should wheat \Nbe compared with corn or automobiles or
Dialogue: 0,0:01:04.29,0:01:10.77,Default,,0000,0000,0000,,books? It's the second question about how\Nthe production of goods are balanced
Dialogue: 0,0:01:10.95,0:01:17.23,Default,,0000,0000,0000,,across industries that invisible hand\Nproperty number two is all about. In order
Dialogue: 0,0:01:17.41,0:01:22.16,Default,,0000,0000,0000,,to maximize the value of resources, we\Nwant each industry to produce the right
Dialogue: 0,0:01:22.34,0:01:28.49,Default,,0000,0000,0000,,quantity, not too much wheat and not too\Nlittle wheat, but just the right amount.
Dialogue: 0,0:01:28.67,0:01:35.79,Default,,0000,0000,0000,,And entry or exit is what ensures that\Nlabor and capital move across industries
Dialogue: 0,0:01:35.97,0:01:40.36,Default,,0000,0000,0000,,so the production is optimally balanced\Nand the greatest use is made of our
Dialogue: 0,0:01:40.54,0:01:45.87,Default,,0000,0000,0000,,limited resources. And here to show this\Nwe actually don't need to use any more
Dialogue: 0,0:01:46.05,0:01:50.06,Default,,0000,0000,0000,,techniques, we just need to sort of\Nreinterpret some of the things which we've
Dialogue: 0,0:01:50.24,0:01:55.91,Default,,0000,0000,0000,,already done. Let's take a look. Profit is\Nthe signal that allocates capital and
Dialogue: 0,0:01:56.09,0:02:03.44,Default,,0000,0000,0000,,labor across industries in just such a way\Nthat maximizes total value. So remember,
Dialogue: 0,0:02:03.62,0:02:07.75,Default,,0000,0000,0000,,if price is bigger than average cost, that\Nmeans that profits are above normal. Now
Dialogue: 0,0:02:07.93,0:02:13.40,Default,,0000,0000,0000,,what does above normal profit mean?\NIt means that the output of this industry
Dialogue: 0,0:02:13.40,0:02:18.36,Default,,0000,0000,0000,,is worth more than the inputs.\NThe profit signal is saying:
Dialogue: 0,0:02:18.36,0:02:22.31,Default,,0000,0000,0000,,we want more of this good.\NThis good is worth more
Dialogue: 0,0:02:22.31,0:02:26.44,Default,,0000,0000,0000,,than the labor and capital\Nbeing used to create this good,
Dialogue: 0,0:02:26.44,0:02:32.12,Default,,0000,0000,0000,,therefore produce more of it. So the\Nprofit signals and incentivizes capital
Dialogue: 0,0:02:32.30,0:02:38.86,Default,,0000,0000,0000,,and labor to enter this industry, that is\Nto move from a low value industry to a
Dialogue: 0,0:02:39.04,0:02:44.42,Default,,0000,0000,0000,,high value industry. Similarly, if price\Nis less than average cost, that means
Dialogue: 0,0:02:44.60,0:02:49.39,Default,,0000,0000,0000,,profits are below normal. That means that\Noutput in this industry is worth less than
Dialogue: 0,0:02:49.57,0:02:57.78,Default,,0000,0000,0000,,the inputs. So the loss signal is saying:\Nwe want less of this good. Loss signals
Dialogue: 0,0:02:57.96,0:03:04.39,Default,,0000,0000,0000,,and incentivizes capital and labor to exit\Nthe industry, that is to move from a low
Dialogue: 0,0:03:04.57,0:03:12.28,Default,,0000,0000,0000,,value industry where there are losses to a\Nhigh or a higher value industry. Because
Dialogue: 0,0:03:12.46,0:03:18.62,Default,,0000,0000,0000,,of this entering and exiting, the profit\Nrate in all competitive industries tends
Dialogue: 0,0:03:18.80,0:03:25.18,Default,,0000,0000,0000,,towards the same level. And that is what\Nbalances production across all industries
Dialogue: 0,0:03:25.36,0:03:31.41,Default,,0000,0000,0000,,to maximize the total value of production.\NIf profit were higher in one industry than
Dialogue: 0,0:03:31.59,0:03:36.02,Default,,0000,0000,0000,,in another, that says that the output of\Nthat industry is worth more, therefore we
Dialogue: 0,0:03:36.20,0:03:41.95,Default,,0000,0000,0000,,should have more of that good. And that's\Nexactly what the entry signal does and the
Dialogue: 0,0:03:42.13,0:03:47.83,Default,,0000,0000,0000,,same thing is true for exit. Let's discuss\Nsome implications of following these
Dialogue: 0,0:03:48.01,0:03:52.40,Default,,0000,0000,0000,,profit and loss signals. First,\Nthe elimination principle.
Dialogue: 0,0:03:52.40,0:03:58.30,Default,,0000,0000,0000,,Above normal profits are eliminated\Nby entry and below normal profits
Dialogue: 0,0:03:58.30,0:04:03.00,Default,,0000,0000,0000,,are eliminated by exit. So resources\Nare always tending to move
Dialogue: 0,0:04:03.00,0:04:05.77,Default,,0000,0000,0000,,towards an increase in \Nthe value of production
Dialogue: 0,0:04:05.77,0:04:11.00,Default,,0000,0000,0000,,and entrepreneurs here are key. It's \Nentrepreneurs who move resources from
Dialogue: 0,0:04:11.18,0:04:17.61,Default,,0000,0000,0000,,unprofitable industries towards profitable\Nindustries. Another implication of this is
Dialogue: 0,0:04:17.79,0:04:23.96,Default,,0000,0000,0000,,that above normal profits are always\Ntemporary. To earn above normal profits,
Dialogue: 0,0:04:23.96,0:04:28.64,Default,,0000,0000,0000,,you've got to do something different.\NYou have to innovate.
Dialogue: 0,0:04:28.64,0:04:33.11,Default,,0000,0000,0000,,Joseph Schumpeter, the great Austrian\Neconomist, was very eloquent
Dialogue: 0,0:04:33.11,0:04:36.80,Default,,0000,0000,0000,,on the importance of innovation\Nin a capitalist economy.
Dialogue: 0,0:04:36.80,0:04:40.05,Default,,0000,0000,0000,,He said in the textbooks we say \Nwhat competition is. It's
Dialogue: 0,0:04:40.23,0:04:45.24,Default,,0000,0000,0000,,all about pushing prices down to average\Ncost and creating normal profits. But, “In
Dialogue: 0,0:04:45.42,0:04:50.45,Default,,0000,0000,0000,,capitalist reality as distinguished from\Nits textbook picture, the kind of
Dialogue: 0,0:04:50.63,0:04:55.13,Default,,0000,0000,0000,,competition that counts is competition\Nfrom the new commodity, the new
Dialogue: 0,0:04:55.31,0:05:00.28,Default,,0000,0000,0000,,technology, the new source of supply, the\Nnew type of organization…[competition]
Dialogue: 0,0:05:00.46,0:05:05.09,Default,,0000,0000,0000,,which strikes not at the margins of the\Nprofits and the outputs of the existing
Dialogue: 0,0:05:05.27,0:05:11.72,Default,,0000,0000,0000,,firms but at their very foundations and\Ntheir very lives. This process of creative
Dialogue: 0,0:05:11.90,0:05:18.03,Default,,0000,0000,0000,,destruction is the essential fact about\Ncapitalism.” Great statement from Joseph
Dialogue: 0,0:05:18.21,0:05:24.83,Default,,0000,0000,0000,,Schumpeter. Now the invisible hand is\Nmarvelous but it's not miraculous. The
Dialogue: 0,0:05:25.01,0:05:30.64,Default,,0000,0000,0000,,invisible hand works when we have certain\Ninstitutions. It doesn't always work. In
Dialogue: 0,0:05:30.82,0:05:36.99,Default,,0000,0000,0000,,particular, the invisible hand will not\Nwork if prices do not accurately signal
Dialogue: 0,0:05:37.17,0:05:41.57,Default,,0000,0000,0000,,cost and benefits. If prices don't\Naccurately signal cost and benefits, we
Dialogue: 0,0:05:41.75,0:05:46.01,Default,,0000,0000,0000,,won't get an optimal balance between\Nindustries. And later on when we come to
Dialogue: 0,0:05:46.19,0:05:51.55,Default,,0000,0000,0000,,talk about externalities, we'll present\Ncertain situations when prices aren't
Dialogue: 0,0:05:51.73,0:05:57.68,Default,,0000,0000,0000,,going to be signaling accurately. Second,\Nthe invisible hand works best when markets
Dialogue: 0,0:05:57.86,0:06:02.37,Default,,0000,0000,0000,,are competitive. When markets are not\Ncompetitive, when we have monopoly and
Dialogue: 0,0:06:02.55,0:06:06.54,Default,,0000,0000,0000,,oligopoly, this isn't going to work as\Nwell. And we'll be talking more about this
Dialogue: 0,0:06:06.72,0:06:10.09,Default,,0000,0000,0000,,in future chapters but you can get \Nthe right idea by thinking about the
Dialogue: 0,0:06:10.27,0:06:18.09,Default,,0000,0000,0000,,following. Monopolists and oligopolists\Nwill earn above normal profits but entry
Dialogue: 0,0:06:18.27,0:06:22.78,Default,,0000,0000,0000,,won't push those profits down. That's why\Nthey're monopolists and oligopolists
Dialogue: 0,0:06:22.96,0:06:29.03,Default,,0000,0000,0000,,because entry isn't working. Because those\Nprofits aren't pushed down, we'll have too
Dialogue: 0,0:06:29.21,0:06:34.38,Default,,0000,0000,0000,,little of that profitable good produced.\NWe'll be talking more about this
Dialogue: 0,0:06:34.56,0:06:39.50,Default,,0000,0000,0000,,in future chapters. Again this is just \Na little bit of a reminder that the
Dialogue: 0,0:06:39.68,0:06:44.72,Default,,0000,0000,0000,,invisible hand requires a certain set of\Ninstitutions in order for it to work. So
Dialogue: 0,0:06:44.90,0:06:50.35,Default,,0000,0000,0000,,just to summarize, invisible hand property\None says that the P = MC condition
Dialogue: 0,0:06:50.53,0:06:54.72,Default,,0000,0000,0000,,results in the minimization of total\Nindustry costs. Invisible hand property
Dialogue: 0,0:06:54.90,0:07:01.37,Default,,0000,0000,0000,,two is that entry and exits result in the\Nbest use of our limited resources. The
Dialogue: 0,0:07:01.55,0:07:06.90,Default,,0000,0000,0000,,elimination principle says that above normal \Nprofits are temporary, and indeed to
Dialogue: 0,0:07:07.08,0:07:11.44,Default,,0000,0000,0000,,earn above normal profits a firm must\Ninnovate. And this is where the importance
Dialogue: 0,0:07:11.62,0:07:16.46,Default,,0000,0000,0000,,of creative destruction for a capitalist\Neconomy comes from. If you really want to
Dialogue: 0,0:07:16.64,0:07:20.91,Default,,0000,0000,0000,,profit a lot you've got to do something\Ndifferent. You've got to bring something
Dialogue: 0,0:07:21.09,0:07:24.22,Default,,0000,0000,0000,,new to the table. You have \Nto bring in innovation.
Dialogue: 0,0:07:24.40,0:07:29.00,Default,,0000,0000,0000,,- [Announcer] If you want to test\Nyourself, click “Practice Questions.”
Dialogue: 0,0:07:29.00,0:07:35.70,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click “Next Video.”