This is Marcel Fafchamps
from Stanford University.
And today, I'd like to talk to you
about how markets for goods and labor
must adapt to allow development.
Successful development requires shifts
from home-based production
to market exchange,
which allows gain from specialization,
and it also requires
shifts from production
in very small and informal enterprises
to large and modern firms,
which allows important increases
So just to explain a little bit more,
gains from specialization come
from people performing single tasks
at which they become very good.
This goes back all the way to Adam Smith
who had a beautiful example of that
in his pin factory parable
where he said that
when people manufacture pins,
they're going to be
much more productive if,
instead of every worker
manufacturing the pin
from beginning to finish,
they basically specialize in a task
and they get very good at that task.
Well, that's again from socialization.
And in home-based production,
people do many, many, many tasks
over the course of a day,
think about, you know,
what farming households do
in a poor developing economy,
they will fetch water,
they will collect firewood,
they'll look after their children,
they'll work in the fields,
prepare food, process food,
look after the elderly and so on,
and even cut my hair.
So all those things they'll be doing
over the course of a day
or this work over the course
of a weekend.
You know, they can do those things
but they're not necessarily
very good at it.
I don't think I'm going to get
the same haircut from my sister
as I would get from Vidal Sassoon.
So that's the idea of gains
And for people
to be willing to specialize,
they must face a large enough
body of consumers
who are going to be
accessing their services.
That's why you need to be able
to access a large number of people
and that's achieved through the market,
through market exchange.
The role of large and modern firms
because very small businesses
cannot use a lot of modern technology,
they'll not use modern technology
you know, their equipment
is going to be very small
and very old fashioned,
and they don't use modern technology
for accessing consumers,
for marketing their products,
for warehousing, for transportation
and all that.
So to access increases in productivity,
you need to produce it
on a larger scale.
And that's only feasible
if there are larger
modern oriented firms.
Now these different modes
of production and exchange
cannot happen on their own.
They require improvement
to bring down the cost of exchange
If you want to expand market exchange,
you need to bring people together,
so you need to build roads,
you need to build telephone lines
and make it possible for them
to sell their products
and access consumers broadly.
But you also need different norms
to allow efficient form of exchange
either across end producers,
or if it's within a firm,
across employers and employees.
And so shifts in a stretch of production
are sanctioned for development,
but they can be held back
in adjusting norms of behavior.