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How markets for goods and labor must adapt to allow development

Published on September 29, 2016   73 min
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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.
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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 in productivity. 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 from specialization. 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 is important because very small businesses cannot use a lot of modern technology, they'll not use modern technology for production, 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 in infrastructure to bring down the cost of exchange and communication. 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 of behavior 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 by difficulties in adjusting norms of behavior.
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How markets for goods and labor must adapt to allow development

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