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PROFESSOR: Hi everyone.

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So I am Esther Duflo.

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I am the other person who
teaches this class.

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You had Abhijit for
the first class.

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I am going to start by doing
a bit of housekeeping.

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Keeping in mind that maybe
some people are going to

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arrive, so it is your
responsibility to inform

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everybody else of what
I said today.

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00:00:45,200 --> 00:00:48,070
I got some requests of
clarifying what was the

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requirements for this
class, so I'll just

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go through it once.

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So we are going to post
essay topics.

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For 10 topics.

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And we are going to give
three or four choices.

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You can also make
your own essays.

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Whatever it is.

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00:01:05,600 --> 00:01:08,070
You do have a chance to
write up to 10 essays.

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But you don't need to
write that many.

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You are going to be graded
out of the best five.

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So you can write any between
one and ten.

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And if you have one you're not
going to have a very high

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grade but--

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Any between five and ten and
then we'll just take

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the best five, OK?

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I think the syllabus said seven
and Abhijit said five,

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so I went for the
easier thing.

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So that's one thing.

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00:01:36,430 --> 00:01:40,890
The syllabus also said that we
might not grade all of them

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but, actually, we are going
to grade all of them.

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00:01:42,730 --> 00:01:50,350
So I would suggest that you do
the first one so that you get

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used to it.

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00:01:52,560 --> 00:01:56,560
Traditionally, it has been the
case that when students can

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decide how to arrange their
deadlines, they think that

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00:02:03,460 --> 00:02:05,600
it's efficient to set all the

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00:02:05,600 --> 00:02:08,340
deadlines late in the semester.

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I can tell you by experience
that it's actually exposed not

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to be such a good idea.

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So if I were you, I would
arrange things to do as many

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of them early as possible
so you don't get

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panicked by the end.

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So that's one.

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00:02:22,300 --> 00:02:27,090
The other component of the
requirement for this class is

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to do the readings.

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00:02:30,050 --> 00:02:37,670
And so to be prepared to
discuss in the class.

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One way in which we're going
to ensure that you're doing

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the reading is a very,
very short pop-quizes

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every once in awhile.

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It also means you have
to come to class.

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It's not a class that's
very difficult.

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But one thing that it requires
is that you actually come.

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And so we're going to have those
at any random times.

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Very simple.

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2, 3, 4 questions just to check
that you've actually

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read the thing.

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And today the questions for the
first topic were already

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posted on Stellar.

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So you already have access to
them as well as the deadline

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for the first thing.

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And that's it.

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Other than that, I think I gave
a version of this spiel

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in 14.74 yesterday.

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There are two development
classes.

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If you're wondering which one
you should be in, this one is

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going to be more based
on the readings and

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discussion and lectures.

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And the other one's going to go
more in the detail of the

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techniques of papers and
solving the models and

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replicating empirical
papers, et cetera.

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So this one's a better
introduction and the other one

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is better if you already have a
fair amount of economics and

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econometrics.

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So that's the trade off.

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Other than that, obviously, the
themes that are going to

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be covered are going to
be pretty similar.

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So my sense is, probably, that
you don't want to take both at

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the same time.

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Although you could think of
taking them both in sequence.

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Then you would do 73
first, 74 second.

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I don't recognize any 74
students, but you shouldn't

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want to take 74 and then 73.

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That would be a bit boring.

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So you're welcome to shop a
little bit for some time and

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then decide what's
more appropriate.

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You're welcome to take both but
I would have warned you

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that there will be some overlap
between the two.

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That's it for housekeeping so if
you have questions, that's

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a good time.

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I'm happy to answer questions by
email also but chances are

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that if you have a question on
the logistics, a lot of people

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share it as well.

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Any questions?

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No.

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00:05:00,720 --> 00:05:04,030
The class is being recorded,
that's for OpenCourseWare.

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00:05:04,030 --> 00:05:07,440
But don't worry about saying
anything embarrassing.

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That would be edited out.

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I'm the only one--

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and Abhijit--

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is going to be the only ones who
are being recorded on tape

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saying things embarrassing.

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I'm assuming if you say
something extremely smart we

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can keep it though.

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AUDIENCE: [LAUGHTER]

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PROFESSOR: So there
is no danger.

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Feel free.

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00:05:20,930 --> 00:05:23,090
Just ignore them.

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And hopefully, the idea is that
if it works well, it will

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be one of these classes that
people can take on their own

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down the line.

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Anything else?

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Any questions?

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No questions?

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When you speak, at the
beginning, if you at least

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would state your name so
that I can possibly

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get to know who are.

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I can address you
by your name.

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That would be nice.

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And otherwise, we're
ready to roll.

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Shall we dive in?

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Let's dive in.

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So, in the video that you saw
last time, you saw quite a few

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people who were maybe trapped in
some kind of poverty trap.

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So for example, there was this
farmer who, before he was

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given fertilizer, had
very low yield.

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And because he had
very low yield he

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didn't have much money.

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Because he didn't have much
money, he couldn't buy

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fertilizer and, therefore,
he continued to

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have very low yield.

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And what the Millennium Village
Project did is to give

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him the fertilizer.

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And the hope was, that with this
first gift of fertilizer,

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his yield would increase by a
sufficient amount that, down

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the line, he would be able to
buy his own fertilizer.

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And grow more and more maize.

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And then, progressively, maybe
start feeding his children

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better and buying them books
and all of those things you

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want to think about.

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So in that video, the Sachs and
Jolie video that you saw

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last time, this argument that
there might be these poverty

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traps keep coming over
and over again.

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So for example, in the Kennedy
story with the farmers, you

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see it in the schools.

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The schools don't have computers
so the kids cannot

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really learn well.

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You start putting computers
and kids can learn better.

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They will then make
more money.

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They will then be able to buy
computers for their schools,

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et cetera, et cetera.

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So one of the things that we
are going to do a lot of in

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this class is to try to
understand when there are such

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poverty traps and
when, in fact,

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maybe it's not so obvious.

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And for that, we have to
understand what creates the

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conditions for such poverty
traps to emerge.

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So what I want to do today--

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we are going to delve in on one
example of one particular

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poverty trap and how
that could work.

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Which is going to be the fact
that we are physical,

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biological bodies.

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But what we're going to go
over as a mechanism, it's

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going to carry us during
the entire class.

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We are going to have to be
looking for the same type of

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conditions.

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So I want to start with
a story of someone

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that actually I met.

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I met some guy called
Pak Solhin.

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Pak means mister.

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Mister Solhin.

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So people in Indonesia don't
really have a first

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name and last name.

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They just have a name.

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And so, for example, Mrs.
So-and-so is Ebu--

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I would be Ebu Esther,
for example.

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So this guy is Pak Solhin.

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And I met him in a village
in Indonesia--

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in Java, which is one of the
richest parts of Indonesia.

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This is the main island, most
densely populated--

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in the summer of 2008.

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In the summer of 2008, I was--

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probably for you it's already
ancient history, it's before

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the great collapse of the
world economy and stuff.

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00:09:28,400 --> 00:09:32,520
--One of the key events at the
time, for the developing

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countries in particular,
was that the food

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prices were very high.

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Basically since 2005, food
prices have increased

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enormously in the world for
reasons that are not fully

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understood.

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And then they collapsed
again when the whole

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economy went berserk.

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The world economy went away,
the food prices also

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collapsed, and they have started
to increase again.

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Part of the hunger that
you see now--

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in Egypt, Tunisia, et cetera,
all over the Middle East--

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part of it is fueled by a
re-increase in the food prices

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which are almost reaching
the 2008 level.

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For people in urban areas,
this has, of course,

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immediately threatened
their livelihood.

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00:10:19,080 --> 00:10:22,430
Because they don't
produce food.

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They buy food.

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00:10:24,260 --> 00:10:26,850
So as soon as the food prices
increase, that immediately

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affects them.

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00:10:28,660 --> 00:10:36,510
So the beginning of 2008,
2007 you observed this

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kind of food riots--

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nothing like we are seeing
now in Egypt--

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but dis-content in various
urban areas.

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And generally, people were
wondering what was happening

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to food prices.

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What people have been thinking
is that there are several

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00:10:54,020 --> 00:10:55,980
factors that are responsible
for the

217
00:10:55,980 --> 00:10:57,850
increase of the food prices.

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One is there are many more
people in China and India

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00:11:02,840 --> 00:11:04,430
making more money.

220
00:11:04,430 --> 00:11:08,080
And as they are making more
money, not only they eat more

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but, more that that,
they eat more meat.

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And it turns out that to produce
1,000 calories of

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00:11:15,130 --> 00:11:18,560
meat, you need much more
grain than to produce

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00:11:18,560 --> 00:11:20,430
1,000 calories of grain.

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That may sound strange, but it
turns out that the cow is not

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00:11:23,110 --> 00:11:27,240
a very efficient way to
transform the calories from

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00:11:27,240 --> 00:11:29,790
grain into calories
that we eat.

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The cow has started by using
a lot of it, et cetera.

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00:11:32,420 --> 00:11:35,130
So to produce 1,000 calories
of cows, you need much more

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00:11:35,130 --> 00:11:37,070
than 1,000 calories
worth of grain.

231
00:11:37,070 --> 00:11:39,510
So as China and India is
becoming richer and eating

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00:11:39,510 --> 00:11:44,550
more meat, then there is a
demand for more grains.

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00:11:44,550 --> 00:11:45,410
That's one.

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00:11:45,410 --> 00:11:49,550
The second thing that is
happening is bio-fuels.

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With the increase in the world
prices of fuel there is more

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00:11:57,881 --> 00:12:02,290
and more demand for bio-fuels,
so entire strips of Brazil

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have been covered into
maize that is being

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00:12:04,740 --> 00:12:06,800
used to make ethanol.

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00:12:09,410 --> 00:12:15,730
A third thing is oil is actually
an input into the

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production of food.

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00:12:18,790 --> 00:12:21,240
Because oil is a very important
input into the

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00:12:21,240 --> 00:12:23,090
production of fertilizer.

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00:12:23,090 --> 00:12:25,730
So as the price of oil increase,
the price of

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fertilizer increase,
and therefore the

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00:12:27,710 --> 00:12:29,650
price of food increases.

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00:12:29,650 --> 00:12:33,850
So all of these factors are
fundamental forces which

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00:12:33,850 --> 00:12:38,300
explains why, after the short
dip right after the crisis,

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00:12:38,300 --> 00:12:40,520
the food prices again
started to increase.

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So that's the backdrop
of my visit to

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this village in Indonesia.

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And I met this guy.

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00:12:50,240 --> 00:12:51,950
And he was all alone.

253
00:12:51,950 --> 00:12:57,110
He has a small, dingy,
little house.

254
00:12:57,110 --> 00:13:01,450
And he was a bit depressed,
or very depressed.

255
00:13:01,450 --> 00:13:02,700
And why was he depressed?

256
00:13:02,700 --> 00:13:05,820
Well he was depressed because
he was all alone at home.

257
00:13:05,820 --> 00:13:10,890
And he was all alone at home
because his wife had gone to

258
00:13:10,890 --> 00:13:14,920
the city to start working
as a maid.

259
00:13:14,920 --> 00:13:21,440
His oldest son had also gone to
the city to start working

260
00:13:21,440 --> 00:13:26,680
as an apprentice on a
construction site.

261
00:13:26,680 --> 00:13:31,400
And the two young kids were
with the grandparents.

262
00:13:31,400 --> 00:13:34,950
So he was all alone, he didn't
have anything in his house, he

263
00:13:34,950 --> 00:13:38,480
didn't do all that much,
and he wasn't happy.

264
00:13:38,480 --> 00:13:41,280
So the question is, why
did that happen?

265
00:13:41,280 --> 00:13:43,300
Why was he not working?

266
00:13:43,300 --> 00:13:47,390
And what he explained to me
is that he was not working

267
00:13:47,390 --> 00:13:50,180
because he didn't have a job.

268
00:13:50,180 --> 00:13:55,040
And he didn't have a job because
when the fertilizer

269
00:13:55,040 --> 00:14:01,230
prices increased, the farmers
that used to employ him

270
00:14:01,230 --> 00:14:05,120
decided that they had to do
something to cut costs.

271
00:14:05,120 --> 00:14:07,240
They weren't very sure whether
they were going to be able to

272
00:14:07,240 --> 00:14:12,000
sell their outputs and they were
facing those increases in

273
00:14:12,000 --> 00:14:13,000
expenditure.

274
00:14:13,000 --> 00:14:16,510
So they decided they
had to cut costs.

275
00:14:16,510 --> 00:14:19,270
And so they could have done
one of two things.

276
00:14:19,270 --> 00:14:20,520
What could they have done?

277
00:14:23,605 --> 00:14:23,790
Yeah?

278
00:14:23,790 --> 00:14:27,928
AUDIENCE: They could have cut
wages or cut the number of

279
00:14:27,928 --> 00:14:28,870
people employed.

280
00:14:28,870 --> 00:14:29,320
PROFESSOR: Right.

281
00:14:29,320 --> 00:14:31,980
They could have cut wages or
they could have cut the number

282
00:14:31,980 --> 00:14:33,615
of people who worked for them.

283
00:14:33,615 --> 00:14:35,700
So of course, if they had
cut wages, he still

284
00:14:35,700 --> 00:14:37,310
would have a job.

285
00:14:37,310 --> 00:14:40,020
But instead, they
cut employment.

286
00:14:40,020 --> 00:14:41,730
And why did they cut employment

287
00:14:41,730 --> 00:14:43,650
rather than cut wages?

288
00:14:43,650 --> 00:14:48,620
Well his theory was that if they
had cut wages, his wages

289
00:14:48,620 --> 00:14:51,720
would've been so low that he
would not have been able to

290
00:14:51,720 --> 00:14:53,250
buy enough food--

291
00:14:53,250 --> 00:14:57,450
especially as the food prices
were rising at the same time--

292
00:14:57,450 --> 00:15:00,830
with the equivalent of one day
of wage that would have been

293
00:15:00,830 --> 00:15:04,750
too little to sustain himself
to be strong enough to

294
00:15:04,750 --> 00:15:07,980
actually work for a whole day.

295
00:15:07,980 --> 00:15:11,670
So seeing that, the employer,
instead of cutting the wage

296
00:15:11,670 --> 00:15:15,130
and therefore making him unable
to work, then you give

297
00:15:15,130 --> 00:15:19,790
a wage of someone, let's
say, 1,000 rupiahs--

298
00:15:19,790 --> 00:15:25,420
1,000 rupiahs is not enough to
get yourself energetic for a

299
00:15:25,420 --> 00:15:26,290
full day of work.

300
00:15:26,290 --> 00:15:29,300
So you've spent your 1,000
rupiahs but the person can't

301
00:15:29,300 --> 00:15:30,510
feed himself for
a day of work.

302
00:15:30,510 --> 00:15:33,412
You get nothing out of him,
so there's no point.

303
00:15:33,412 --> 00:15:34,662
Yes?

304
00:15:36,820 --> 00:15:38,760
AUDIENCE: The question that came
to my mind was, is there

305
00:15:38,760 --> 00:15:40,060
any truth to his theory?

306
00:15:40,060 --> 00:15:43,406
Did you find any other examples
that would back up

307
00:15:43,406 --> 00:15:47,537
that that's the reason why the
farmer, that he used to work

308
00:15:47,537 --> 00:15:50,700
on his land, decided to cut
jobs instead of wages?

309
00:15:50,700 --> 00:15:51,480
PROFESSOR: Right.

310
00:15:51,480 --> 00:15:53,250
What you're asking
is whether--

311
00:15:53,250 --> 00:15:57,420
that's fine-- whether maybe
it's a plausible theory.

312
00:15:57,420 --> 00:15:59,370
But is there any truth to it?

313
00:15:59,370 --> 00:16:02,800
We're going to spend a fair
amount of time on this very

314
00:16:02,800 --> 00:16:08,290
question, not on Tuesday,
but starting Thursday.

315
00:16:13,290 --> 00:16:17,645
In terms of the empirical truth
of his theory, in terms

316
00:16:17,645 --> 00:16:26,160
of the biological soundness
of it, it

317
00:16:26,160 --> 00:16:29,470
sounds plausible a priori.

318
00:16:29,470 --> 00:16:34,300
That you need to start with a
certain number of calories

319
00:16:34,300 --> 00:16:35,480
just to get going, right?

320
00:16:35,480 --> 00:16:41,690
Your body needs maybe 1,000
calories just to survive.

321
00:16:41,690 --> 00:16:44,915
So the first thousand calories
that you're consuming are not

322
00:16:44,915 --> 00:16:50,310
very useful to you to help you
to actually start exercising.

323
00:16:50,310 --> 00:16:53,190
Then, once you are alive,
the next calories

324
00:16:53,190 --> 00:16:55,100
will start being useful.

325
00:16:55,100 --> 00:16:59,140
So a priori, maybe
there was some

326
00:16:59,140 --> 00:17:01,050
plausibility to this theory.

327
00:17:01,050 --> 00:17:02,690
That's only one theory.

328
00:17:02,690 --> 00:17:08,250
So that means that he
lost his job so he

329
00:17:08,250 --> 00:17:09,910
couldn't do much of anything.

330
00:17:09,910 --> 00:17:11,470
He was not doing nothing,
otherwise I would

331
00:17:11,470 --> 00:17:12,079
not have met him.

332
00:17:12,079 --> 00:17:13,170
He would be dead.

333
00:17:13,170 --> 00:17:15,950
But he was doing things that
was not taking too

334
00:17:15,950 --> 00:17:17,460
much effort for him.

335
00:17:17,460 --> 00:17:21,800
For example, he was sitting next
to the bank of a lake and

336
00:17:21,800 --> 00:17:23,329
he was fishing.

337
00:17:23,329 --> 00:17:25,069
He was getting a little
bit of rice from

338
00:17:25,069 --> 00:17:26,530
the government program.

339
00:17:26,530 --> 00:17:30,600
He was getting a little bit
of meals from his brother.

340
00:17:30,600 --> 00:17:33,700
But he was not really
living a full life.

341
00:17:33,700 --> 00:17:34,950
He was sort of surviving.

342
00:17:38,090 --> 00:17:40,470
So at the heart of
his theory--

343
00:17:40,470 --> 00:17:42,780
and I think your question of
whether this is true or not is

344
00:17:42,780 --> 00:17:45,570
a very interesting question
which certainly came to my

345
00:17:45,570 --> 00:17:47,660
mind when I was talking
to him--

346
00:17:47,660 --> 00:17:50,460
but at the heart of this
theory was this purely

347
00:17:50,460 --> 00:17:51,926
biological mechanism.

348
00:17:51,926 --> 00:17:54,350
And then on top of this
biological mechanism, other

349
00:17:54,350 --> 00:17:56,170
things crept up.

350
00:17:59,000 --> 00:18:01,890
One is the fact that he was not
doing anything, and that

351
00:18:01,890 --> 00:18:04,770
his kids were gone.

352
00:18:04,770 --> 00:18:08,980
That made him depressed so
then it gave him very low

353
00:18:08,980 --> 00:18:10,940
energy to actually
you do anything.

354
00:18:10,940 --> 00:18:14,230
So even if his theory was
wrong, he sort of became

355
00:18:14,230 --> 00:18:16,550
trapped in a poverty trap that
may have been more of a

356
00:18:16,550 --> 00:18:17,860
psychological one.

357
00:18:17,860 --> 00:18:20,850
Because he was there, sitting
all alone in his hut, unable

358
00:18:20,850 --> 00:18:24,530
to do anything, thinking that
he was worthless, therefore,

359
00:18:24,530 --> 00:18:27,930
in some sense, becoming
worthless.

360
00:18:27,930 --> 00:18:32,810
There are other parts of his
stories where we start seeing

361
00:18:32,810 --> 00:18:34,160
other bits of poverty trap.

362
00:18:34,160 --> 00:18:37,980
For example, what happened
with his kid.

363
00:18:37,980 --> 00:18:43,420
So the kid who had to drop out
of school to start working as

364
00:18:43,420 --> 00:18:47,860
a construction worker was
actually a bright kid.

365
00:18:47,860 --> 00:18:51,560
So that's another place
where you see now an

366
00:18:51,560 --> 00:18:53,690
inter-generational
poverty trap.

367
00:18:53,690 --> 00:18:58,460
Where because the parents are
poor, the kid has to drop out

368
00:18:58,460 --> 00:19:01,140
of school because he has to go
to work and therefore himself

369
00:19:01,140 --> 00:19:03,235
will probably make less
money down the line.

370
00:19:03,235 --> 00:19:06,370
And that's another thing where
we have to ask exactly the

371
00:19:06,370 --> 00:19:09,940
same question you were
asking before.

372
00:19:09,940 --> 00:19:13,640
Is it an isolated example?

373
00:19:13,640 --> 00:19:17,050
Or is it something that
is generalized.

374
00:19:17,050 --> 00:19:20,420
That it's actually something
like the inability to work for

375
00:19:20,420 --> 00:19:25,310
the parents, or the lack of
income, that forces kids to

376
00:19:25,310 --> 00:19:26,840
stay out of school that
could have otherwise

377
00:19:26,840 --> 00:19:28,340
have gotten an education.

378
00:19:28,340 --> 00:19:31,140
That's another place where we
can find, potentially, a

379
00:19:31,140 --> 00:19:32,100
poverty trap.

380
00:19:32,100 --> 00:19:34,380
Where the kid got
some schools.

381
00:19:34,380 --> 00:19:36,970
He got a few years of school but
maybe not enough for it to

382
00:19:36,970 --> 00:19:39,560
be sufficient for him to
actually get a good

383
00:19:39,560 --> 00:19:40,810
job down the line.

384
00:19:45,500 --> 00:19:48,120
And for himself, he couldn't
work as a construction worker

385
00:19:48,120 --> 00:19:51,180
because he was too weak for the
basic jobs which require

386
00:19:51,180 --> 00:19:53,840
some strength, and too unskilled
for the better jobs,

387
00:19:53,840 --> 00:19:56,305
and too old to be an apprentice
like his kid.

388
00:19:56,305 --> 00:19:59,470
He was kind of trapped.

389
00:19:59,470 --> 00:20:09,080
So what is happening in this
story that you would think--

390
00:20:09,080 --> 00:20:12,600
even if we accept the biological
mechanism, which I

391
00:20:12,600 --> 00:20:16,490
want to go back into in
detail in a moment--

392
00:20:16,490 --> 00:20:19,260
something else could
have happened.

393
00:20:19,260 --> 00:20:21,520
So for example--

394
00:20:21,520 --> 00:20:27,045
if we're thinking that his
being out of a job is a

395
00:20:27,045 --> 00:20:28,930
temporary phenomenon--

396
00:20:28,930 --> 00:20:32,630
maybe he could have gotten a
loan to sustain his family so

397
00:20:32,630 --> 00:20:37,910
that the kid could at least stay
in school until the time

398
00:20:37,910 --> 00:20:40,380
for him to graduate.

399
00:20:40,380 --> 00:20:42,150
Then at least you wouldn't
have that

400
00:20:42,150 --> 00:20:43,530
inter-generational trap.

401
00:20:48,130 --> 00:20:51,580
So at the heart of it, we have
this biological phenomenon and

402
00:20:51,580 --> 00:20:57,790
then other things sort of creep
in that maintain him in

403
00:20:57,790 --> 00:21:01,880
this position that creates
the poverty trap.

404
00:21:01,880 --> 00:21:04,530
So what I want to do now
is go through the

405
00:21:04,530 --> 00:21:06,120
biological story in detail.

406
00:21:06,120 --> 00:21:13,190
And then we're going to see how
the other things add up,

407
00:21:13,190 --> 00:21:16,156
creep in, and create
that trap.

408
00:21:22,000 --> 00:21:25,490
So let's go through the
biological poverty trap.

409
00:21:25,490 --> 00:21:27,240
I should say that it's
one of the most

410
00:21:27,240 --> 00:21:29,005
ancient ideas in economics.

411
00:21:29,005 --> 00:21:30,320
A very old idea .

412
00:21:30,320 --> 00:21:35,680
It dates at least
from the 1950s.

413
00:21:35,680 --> 00:21:39,500
And this is an old
idea exactly in

414
00:21:39,500 --> 00:21:42,940
this form of the biology.

415
00:21:42,940 --> 00:21:46,440
So the idea is that the first
few calories that you get to

416
00:21:46,440 --> 00:21:50,980
consume are used by your
body just to survive.

417
00:21:50,980 --> 00:21:53,770
So they don't make you strong.

418
00:21:53,770 --> 00:21:56,740
And then, when you start eating
enough to survive, the

419
00:21:56,740 --> 00:21:59,060
next calories start giving
you strength.

420
00:21:59,060 --> 00:22:04,310
So that's when you can start
working out or you can work.

421
00:22:04,310 --> 00:22:07,130
So someone who is very poor,
like Pak Solhin, may not have

422
00:22:07,130 --> 00:22:11,770
enough to eat to be very
productive but if he could eat

423
00:22:11,770 --> 00:22:14,890
more, then he would
become productive.

424
00:22:14,890 --> 00:22:18,160
So at the heart of this is this
idea of what they call a

425
00:22:18,160 --> 00:22:20,610
capacity curve.

426
00:22:20,610 --> 00:22:24,630
And a capacity curve has
something like this shape.

427
00:22:24,630 --> 00:22:32,570
It relates how much effort you
can exercise to how much

428
00:22:32,570 --> 00:22:36,850
income you have, and, of course,
how much income you

429
00:22:36,850 --> 00:22:40,300
have is supposed to be related
to how much you consume.

430
00:22:40,300 --> 00:22:44,846
So what is the assumption that
is underlying the fact I have

431
00:22:44,846 --> 00:22:46,380
put income here on the x-axis?

432
00:22:48,980 --> 00:22:49,475
Yep?

433
00:22:49,475 --> 00:22:51,350
AUDIENCE: The more money you
have the more you eat.

434
00:22:51,350 --> 00:22:51,760
PROFESSOR: Right.

435
00:22:51,760 --> 00:22:53,980
The more money you have
the more you eat.

436
00:22:53,980 --> 00:22:56,890
So for example, the simplest
case would be, all

437
00:22:56,890 --> 00:22:58,940
you have, you eat.

438
00:22:58,940 --> 00:23:01,060
Of course, we know that it's not
true because you also need

439
00:23:01,060 --> 00:23:03,050
to take care of your
basic needs.

440
00:23:03,050 --> 00:23:04,240
You need to clothe yourself.

441
00:23:04,240 --> 00:23:06,210
You need to pay your children's
school fee.

442
00:23:06,210 --> 00:23:08,410
Maybe you need something
for your housing.

443
00:23:08,410 --> 00:23:13,300
So maybe you will only consume
a part of your income.

444
00:23:13,300 --> 00:23:16,110
But maybe some fraction
of what you have,

445
00:23:16,110 --> 00:23:18,910
you're going to eat.

446
00:23:18,910 --> 00:23:22,120
So that creates a relationship
between the income you have

447
00:23:22,120 --> 00:23:25,930
today and how much
you get to eat.

448
00:23:25,930 --> 00:23:30,190
So instead of income here, we
could have calories consumed.

449
00:23:30,190 --> 00:23:34,050
And one first big question that
we'll have to answer next

450
00:23:34,050 --> 00:23:37,850
time is, how steep is this
relationship between how much

451
00:23:37,850 --> 00:23:42,380
income people have and how
much they are eating.

452
00:23:42,380 --> 00:23:45,040
Here we are assuming that there
is some relationship and

453
00:23:45,040 --> 00:23:47,640
it's formidably steep enough.

454
00:23:47,640 --> 00:23:49,960
So whenever you have income,
you start eating.

455
00:23:53,970 --> 00:23:58,910
And what we have here on the
left, on the x-axis is the

456
00:23:58,910 --> 00:24:00,770
work capacity.

457
00:24:00,770 --> 00:24:05,540
So how many bushels of wheat
are you able to harvest or

458
00:24:05,540 --> 00:24:08,505
something like that.

459
00:24:08,505 --> 00:24:13,280
How many trenches can you dig.

460
00:24:13,280 --> 00:24:15,870
So the work capacity,
you think of

461
00:24:15,870 --> 00:24:17,910
it as physical output.

462
00:24:17,910 --> 00:24:20,550
But of course, there could be
a relationship between this

463
00:24:20,550 --> 00:24:24,530
physical output and your
income tomorrow.

464
00:24:24,530 --> 00:24:28,260
Because, for example, you could
be paid by the piece.

465
00:24:28,260 --> 00:24:31,150
So if you're paid by the piece,
however many bushel of

466
00:24:31,150 --> 00:24:33,850
wheat you harvest, you
get that much income.

467
00:24:33,850 --> 00:24:36,492
That creates the work capacity
and your income tomorrow are

468
00:24:36,492 --> 00:24:38,310
related one for one.

469
00:24:38,310 --> 00:24:39,150
Right?

470
00:24:39,150 --> 00:24:42,390
So here we have income
today, work capacity.

471
00:24:42,390 --> 00:24:44,340
And instead, we could
have income

472
00:24:44,340 --> 00:24:48,960
today and income tomorrow.

473
00:24:48,960 --> 00:24:51,560
OK?

474
00:24:51,560 --> 00:24:54,380
Now why is this shaped
the way it is?

475
00:24:54,380 --> 00:24:56,545
What does the shape represent?

476
00:24:59,315 --> 00:25:02,261
AUDIENCE: The left part is the
part where your body is just

477
00:25:02,261 --> 00:25:03,243
able to survive.

478
00:25:03,243 --> 00:25:06,189
And then afterwards he gets a
chance to actually make more

479
00:25:06,189 --> 00:25:09,150
money tomorrow because
[INAUDIBLE].

480
00:25:09,150 --> 00:25:09,410
PROFESSOR: Exactly.

481
00:25:09,410 --> 00:25:12,490
So the left part is the first
part where you're just getting

482
00:25:12,490 --> 00:25:14,900
enough to survive.

483
00:25:14,900 --> 00:25:18,230
You are just eating
enough to survive.

484
00:25:18,230 --> 00:25:20,330
So the first few calories are
good because they keep you

485
00:25:20,330 --> 00:25:22,870
alive so you can actually
move about.

486
00:25:22,870 --> 00:25:25,760
But after that it just keeps you
at this kind of low level.

487
00:25:25,760 --> 00:25:27,260
Right?

488
00:25:27,260 --> 00:25:32,470
And then you start having, maybe
1,200, 1,500 calories.

489
00:25:32,470 --> 00:25:36,080
And then suddenly, it's a good
breakfast you're eating before

490
00:25:36,080 --> 00:25:38,940
going out for your run.

491
00:25:38,940 --> 00:25:45,140
It shoots up and then, why does
it flatten out again?

492
00:25:45,140 --> 00:25:45,614
Yeah?

493
00:25:45,614 --> 00:25:47,510
AUDIENCE: Because after a while
you're satisfied and it

494
00:25:47,510 --> 00:25:48,940
levels out once [INAUDIBLE].

495
00:25:48,940 --> 00:25:49,320
PROFESSOR: Right.

496
00:25:49,320 --> 00:25:51,490
After a while it satisfy
and it levels out.

497
00:25:51,490 --> 00:25:54,550
And if we had continued the
curve, what would happen?

498
00:25:54,550 --> 00:25:55,410
It would really go down.

499
00:25:55,410 --> 00:25:59,130
Just think of post-Thanksgiving
slump and

500
00:25:59,130 --> 00:26:03,130
she probably gets a deep
down going line.

501
00:26:03,130 --> 00:26:08,510
So that creates this kind of
funny shape between you're

502
00:26:08,510 --> 00:26:11,410
income today and your work
capacity and, therefore,

503
00:26:11,410 --> 00:26:14,080
between your income today and
your income tomorrow.

504
00:26:14,080 --> 00:26:18,370
Or it could be within a week or
something like that, right?

505
00:26:18,370 --> 00:26:22,700
Which seems to have a reasonable
biological sense.

506
00:26:22,700 --> 00:26:33,180
Now what happened when the
price of food went up?

507
00:26:33,180 --> 00:26:35,180
What does it do to the
work capacity?

508
00:26:39,420 --> 00:26:39,860
Yeah?

509
00:26:39,860 --> 00:26:42,500
AUDIENCE: I suppose it goes down
because those people have

510
00:26:42,500 --> 00:26:45,380
to spend more of their
income on food and

511
00:26:45,380 --> 00:26:47,060
then buy less food.

512
00:26:47,060 --> 00:26:48,030
PROFESSOR: Exactly.

513
00:26:48,030 --> 00:26:58,775
So what happens when the price
of food goes up is that, in

514
00:26:58,775 --> 00:27:01,440
terms of bushels of wheat,
that's the same thing.

515
00:27:01,440 --> 00:27:06,250
But in terms of actual income
that the bushel of wheat

516
00:27:06,250 --> 00:27:08,130
transform into-- how
much income-- that

517
00:27:08,130 --> 00:27:10,330
creates a jump down.

518
00:27:10,330 --> 00:27:17,980
Because to go from income to
work capacity, to create from

519
00:27:17,980 --> 00:27:22,710
income today to calorie,
that's more expensive.

520
00:27:22,710 --> 00:27:26,900
So the curve shifts down because
for every dollar that

521
00:27:26,900 --> 00:27:31,320
you spend, or rupiah that you
spend on food, that's fewer

522
00:27:31,320 --> 00:27:35,840
calories and, therefore, that
shifts down whatever you are

523
00:27:35,840 --> 00:27:39,050
able to achieve in terms
of capacity, right?

524
00:27:39,050 --> 00:27:43,050
So if we have it in the form
of income to work capacity,

525
00:27:43,050 --> 00:27:48,796
the prices of food going up
makes the curve going down.

526
00:27:48,796 --> 00:27:49,768
Yeah?

527
00:27:49,768 --> 00:27:52,198
AUDIENCE: Could you also, if
you were talking about

528
00:27:52,198 --> 00:27:54,142
students, instead of saying the
word capacity, I'd put the

529
00:27:54,142 --> 00:27:56,669
way you pay attention?

530
00:27:56,669 --> 00:27:59,002
Would they pay more attention
if they ate more?

531
00:27:59,002 --> 00:28:01,432
Or is it just physical spending
that [INAUDIBLE]

532
00:28:01,432 --> 00:28:01,920
PROFESSOR: Right.

533
00:28:01,920 --> 00:28:05,030
Here, if we're thinking of Pak
Solhin, we are thinking about

534
00:28:05,030 --> 00:28:05,860
physical [INAUDIBLE].

535
00:28:05,860 --> 00:28:08,650
But if we're thinking about
Pak Solhin's children, for

536
00:28:08,650 --> 00:28:10,340
example, it could well be their

537
00:28:10,340 --> 00:28:11,920
capacity to focus in class.

538
00:28:11,920 --> 00:28:14,190
And it could easily have
the same shape.

539
00:28:14,190 --> 00:28:17,950
In fact, there are other thing
that competes also for

540
00:28:17,950 --> 00:28:18,780
calories for children.

541
00:28:18,780 --> 00:28:22,480
For example, whether or not they
have intestinal worms.

542
00:28:22,480 --> 00:28:26,270
And the intestinal worms also
shift your work capacity, your

543
00:28:26,270 --> 00:28:27,790
attention capacity,
down because they

544
00:28:27,790 --> 00:28:28,760
are eating your food.

545
00:28:28,760 --> 00:28:32,100
Therefore, that tends to make
the kids anemic and less

546
00:28:32,100 --> 00:28:33,660
likely to be listening.

547
00:28:33,660 --> 00:28:34,370
That's exactly right.

548
00:28:34,370 --> 00:28:34,830
Yeah?

549
00:28:34,830 --> 00:28:38,151
AUDIENCE: And so increase in
food prices, does that cause a

550
00:28:38,151 --> 00:28:40,226
shift or a stretch?

551
00:28:40,226 --> 00:28:42,475
PROFESSOR: It specifically
causes shift and a--

552
00:28:45,140 --> 00:28:49,480
how would you call it,
west-southwest, right?--

553
00:28:49,480 --> 00:28:51,060
It is both a shift
and a stretch.

554
00:28:51,060 --> 00:28:59,010
Which is, it will take more of
your income today to have you

555
00:28:59,010 --> 00:29:00,440
switch to the--

556
00:29:00,440 --> 00:29:01,700
think of it going this way.

557
00:29:04,370 --> 00:29:08,420
And alternatively,
what happens when

558
00:29:08,420 --> 00:29:11,220
the wages go down?

559
00:29:11,220 --> 00:29:13,540
That's another thing
we can look at.

560
00:29:13,540 --> 00:29:15,240
What happens to the
work capacity?

561
00:29:15,240 --> 00:29:20,790
Not to the work capacity, but if
we put income on the y-axis

562
00:29:20,790 --> 00:29:24,260
now and the wages go down?

563
00:29:27,026 --> 00:29:27,948
AUDIENCE: It shifts lower.

564
00:29:27,948 --> 00:29:30,970
PROFESSOR: It again will do the
same thing because now the

565
00:29:30,970 --> 00:29:35,740
same work capacity will
translate into less income.

566
00:29:35,740 --> 00:29:39,640
So what was happening in
Indonesia in 2008 was, on the

567
00:29:39,640 --> 00:29:44,040
one hand, food prices
were going up.

568
00:29:44,040 --> 00:29:48,540
On the other hand, farmers were
stressed out because the

569
00:29:48,540 --> 00:29:50,400
input prices were going up.

570
00:29:50,400 --> 00:29:53,020
So at the same time they wanted
to reduce the wages

571
00:29:53,020 --> 00:29:54,410
when the prices were
increased.

572
00:29:54,410 --> 00:29:59,640
And both of these phenomenon
create this southwest shift in

573
00:29:59,640 --> 00:30:00,709
the capacity curve.

574
00:30:00,709 --> 00:30:01,198
Yeah?

575
00:30:01,198 --> 00:30:02,909
AUDIENCE: Why didn't the farmers
just increase the

576
00:30:02,909 --> 00:30:06,090
prices they were selling the
crops at [INAUDIBLE]?

577
00:30:06,090 --> 00:30:08,260
PROFESSOR: That's an excellent
question, so why didn't the

578
00:30:08,260 --> 00:30:09,730
farmer just increase
the prices?

579
00:30:09,730 --> 00:30:14,860
The thing is that with the
agricultural cycle, you

580
00:30:14,860 --> 00:30:19,490
produce and then-- so you put
your fertilizer in the ground,

581
00:30:19,490 --> 00:30:21,810
then you put your crop
in the ground and

582
00:30:21,810 --> 00:30:22,490
then you wait around.

583
00:30:22,490 --> 00:30:25,190
Then the crop comes and
you try to sell it.

584
00:30:25,190 --> 00:30:29,130
And you're exactly right, the
fact that the input prices

585
00:30:29,130 --> 00:30:31,260
have gone up while the demand,
in principal, would

586
00:30:31,260 --> 00:30:32,010
not have gone up.

587
00:30:32,010 --> 00:30:37,790
It would have meant that the
food prices sold by the farmer

588
00:30:37,790 --> 00:30:39,580
would probably go up.

589
00:30:39,580 --> 00:30:42,570
But what happened is that they
weren't very sure whether or

590
00:30:42,570 --> 00:30:45,790
not the food prices were going
to go up by the time they sold

591
00:30:45,790 --> 00:30:49,400
their food in proportion
to the input prices.

592
00:30:49,400 --> 00:30:53,820
So the situation that prevailed
in 2008 is a lot of

593
00:30:53,820 --> 00:30:55,900
volatility.

594
00:30:55,900 --> 00:30:59,050
The prices were high but they
were also increasing.

595
00:30:59,050 --> 00:31:01,755
And that was true for the input
prices and that was true

596
00:31:01,755 --> 00:31:03,400
for the output prices.

597
00:31:03,400 --> 00:31:06,590
And when you were talking to
the farmer, everybody felt

598
00:31:06,590 --> 00:31:09,320
that they were holding the
short end of the stick.

599
00:31:09,320 --> 00:31:11,195
The farmers were saying,
well, yes, the

600
00:31:11,195 --> 00:31:12,350
food prices will increase.

601
00:31:12,350 --> 00:31:14,480
But we don't know whether it
will increase enough to cover

602
00:31:14,480 --> 00:31:17,100
our input prices.

603
00:31:17,100 --> 00:31:20,830
Moreover, the farmers found
it difficult to

604
00:31:20,830 --> 00:31:22,290
get loans, for example.

605
00:31:22,290 --> 00:31:25,530
So even if they know that the
prices are going to go up for

606
00:31:25,530 --> 00:31:28,380
that input in the future, in the
meantime, they still have

607
00:31:28,380 --> 00:31:29,670
to buy the fertilizer.

608
00:31:29,670 --> 00:31:32,350
So they sort of had
to cut costs now.

609
00:31:32,350 --> 00:31:34,060
So this is a little bit
what was happening.

610
00:31:34,060 --> 00:31:36,520
It's a mismatch between the
price you have to pay for the

611
00:31:36,520 --> 00:31:38,100
fertilizer today.

612
00:31:38,100 --> 00:31:41,780
And you're going to realize
the output in the future.

613
00:31:41,780 --> 00:31:44,150
So that creates this uncertainty
plus the fact that

614
00:31:44,150 --> 00:31:46,650
you need to finance it
one way or the other.

615
00:31:46,650 --> 00:31:52,310
Which is why, at that time,
there were two things going on

616
00:31:52,310 --> 00:31:55,530
which were both against
the poor guy.

617
00:31:55,530 --> 00:31:57,870
So this is what we have with
the capacity curve.

618
00:32:03,555 --> 00:32:11,582
So we've had this reasoning for
food but let's think a bit

619
00:32:11,582 --> 00:32:14,390
about other reasons--

620
00:32:14,390 --> 00:32:19,010
forget that we are talking about
physical work capacity.

621
00:32:19,010 --> 00:32:24,560
Think about other reasons why
there might be a relationship

622
00:32:24,560 --> 00:32:28,610
between your income today
and an income at some

623
00:32:28,610 --> 00:32:30,360
point in the future.

624
00:32:30,360 --> 00:32:35,170
Think of the next generation,
think of next month, or

625
00:32:35,170 --> 00:32:37,090
anything like that.

626
00:32:37,090 --> 00:32:42,010
Can you think of other reasons
why this kind of funnily

627
00:32:42,010 --> 00:32:46,370
shaped curve might appear?

628
00:32:46,370 --> 00:32:49,410
So food might be one.

629
00:32:49,410 --> 00:32:52,965
What would be other reasons why
this funnily shaped curve

630
00:32:52,965 --> 00:32:54,215
might appear?

631
00:32:57,526 --> 00:32:58,013
Yeah?

632
00:32:58,013 --> 00:33:00,460
AUDIENCE: Over the long
term, maybe education.

633
00:33:00,460 --> 00:33:03,400
PROFESSOR: So let's go through
the education one.

634
00:33:03,400 --> 00:33:06,138
Why do you think--

635
00:33:06,138 --> 00:33:11,008
AUDIENCE: Before, the less long
you can afford to keep

636
00:33:11,008 --> 00:33:12,469
you're children in school.

637
00:33:12,469 --> 00:33:17,339
And so their income capacity
isn't as low as yours was.

638
00:33:17,339 --> 00:33:20,504
But the richer you are, the more
schooling you can get and

639
00:33:20,504 --> 00:33:22,230
the higher income you
can [INAUDIBLE].

640
00:33:22,230 --> 00:33:23,290
PROFESSOR: So this is right.

641
00:33:23,290 --> 00:33:25,720
That there is probably a
relationship between how long

642
00:33:25,720 --> 00:33:28,500
you can keep the
kid in school--

643
00:33:28,500 --> 00:33:30,620
because if there are school fees
you might or might not be

644
00:33:30,620 --> 00:33:32,100
able to afford them.

645
00:33:32,100 --> 00:33:36,410
Or there might also be an
opportunity cost for the child

646
00:33:36,410 --> 00:33:37,310
to be in school.

647
00:33:37,310 --> 00:33:40,710
Like Pak Solhin's son couldn't
afford to be in school because

648
00:33:40,710 --> 00:33:42,100
he had to work.

649
00:33:42,100 --> 00:33:45,360
So I think it's not very
controversial to say there

650
00:33:45,360 --> 00:33:49,560
might be a relationship between
your income today and

651
00:33:49,560 --> 00:33:52,120
how long your kid will
stay in school.

652
00:33:52,120 --> 00:33:55,310
And then, there is probably a
relationship between how long

653
00:33:55,310 --> 00:33:58,870
your kids can stay in school
and their income.

654
00:33:58,870 --> 00:34:01,320
Which will create a relationship
between your

655
00:34:01,320 --> 00:34:05,140
income today and the income
of the child.

656
00:34:05,140 --> 00:34:07,830
So that creates a relationship
of some form or another.

657
00:34:07,830 --> 00:34:11,510
But what would be necessary for
this relationship to have

658
00:34:11,510 --> 00:34:14,570
this S-shape?

659
00:34:14,570 --> 00:34:18,989
So what you have explained, I
think and I think most people

660
00:34:18,989 --> 00:34:19,659
would agree--

661
00:34:19,659 --> 00:34:21,880
we can ask around-- but I think
what you have explained

662
00:34:21,880 --> 00:34:25,575
clearly is that we might expect
through education--

663
00:34:25,575 --> 00:34:28,179
a relationship between
income today and

664
00:34:28,179 --> 00:34:30,080
income of the children.

665
00:34:30,080 --> 00:34:33,909
Now what else do you need for
that relationship to have this

666
00:34:33,909 --> 00:34:36,066
funny shape?

667
00:34:36,066 --> 00:34:37,542
AUDIENCE: At the start, you
need to invest more.

668
00:34:37,542 --> 00:34:42,954
So like if they just learn to
fifth grade, or if they just

669
00:34:42,954 --> 00:34:45,168
learn to second grade, it isn't
going to make that much

670
00:34:45,168 --> 00:34:45,906
of a difference.

671
00:34:45,906 --> 00:34:48,612
But as they finish middle school
and high school, it's a

672
00:34:48,612 --> 00:34:50,826
much steeper curve.

673
00:34:50,826 --> 00:34:55,254
But then, going to college
versus Ph.D. levels off.

674
00:34:55,254 --> 00:34:55,780
PROFESSOR: Yeah.

675
00:34:55,780 --> 00:35:00,500
Sadly, going to a Ph.D usually
leads to a drop in income

676
00:35:00,500 --> 00:35:02,950
compared to having gone
to a Master's.

677
00:35:02,950 --> 00:35:05,880
Especially if you choose
the Master's properly.

678
00:35:05,880 --> 00:35:08,040
But this is exactly
that, which is we

679
00:35:08,040 --> 00:35:09,470
need one more thing.

680
00:35:09,470 --> 00:35:12,140
What you're saying
is exactly right.

681
00:35:12,140 --> 00:35:12,985
What's your name?

682
00:35:12,985 --> 00:35:13,835
AUDIENCE: Yousef.

683
00:35:13,835 --> 00:35:14,260
PROFESSOR: Yousef.

684
00:35:14,260 --> 00:35:17,060
But what she told us is you
need one more thing.

685
00:35:17,060 --> 00:35:20,950
You also need for the benefits
of the first few years of

686
00:35:20,950 --> 00:35:24,240
education to be relatively
low.

687
00:35:24,240 --> 00:35:27,010
And that's an empirical question
that goes back to the

688
00:35:27,010 --> 00:35:30,580
plausibility question that
you were asking earlier.

689
00:35:30,580 --> 00:35:34,860
Is it the case that the first
few years of education are

690
00:35:34,860 --> 00:35:38,181
useless, or not very useful?

691
00:35:38,181 --> 00:35:40,380
Or is it the case that every
year of education

692
00:35:40,380 --> 00:35:42,810
is a year of education.

693
00:35:42,810 --> 00:35:47,750
And there will be an S-shaped
based on education if the

694
00:35:47,750 --> 00:35:49,970
first few years of education
are not that useful.

695
00:35:49,970 --> 00:35:53,260
And [INAUDIBLE], if in fact,
even the first few years of

696
00:35:53,260 --> 00:35:55,100
education are that useful.

697
00:35:55,100 --> 00:35:57,130
I'm not going to answer
this question now.

698
00:35:57,130 --> 00:36:00,820
But we are going to answer it in
due course, whether or not

699
00:36:00,820 --> 00:36:01,880
this is the case.

700
00:36:01,880 --> 00:36:05,660
You see that this is not
something that we can just

701
00:36:05,660 --> 00:36:07,600
think of in the abstract.

702
00:36:07,600 --> 00:36:09,780
We have to find out.

703
00:36:09,780 --> 00:36:11,700
There could be reasons
the other way.

704
00:36:11,700 --> 00:36:14,050
You could feel, for example,
that the first years of

705
00:36:14,050 --> 00:36:16,190
education are amazingly useful
because this is when

706
00:36:16,190 --> 00:36:17,760
you learn to read.

707
00:36:17,760 --> 00:36:19,930
And once you know how to read,
who cares about all of these

708
00:36:19,930 --> 00:36:22,040
things that I'm trying to teach
you because you can

709
00:36:22,040 --> 00:36:24,060
teach yourself everything
you need to know.

710
00:36:24,060 --> 00:36:27,010
Or you could think that
education is not useful unless

711
00:36:27,010 --> 00:36:28,190
you have a secondary degree.

712
00:36:28,190 --> 00:36:30,910
Because that's what opens
the door to you for

713
00:36:30,910 --> 00:36:33,920
various formal jobs.

714
00:36:33,920 --> 00:36:34,600
Right?

715
00:36:34,600 --> 00:36:37,230
It could easily cut one
way or the other.

716
00:36:37,230 --> 00:36:40,390
I don't know if you guys
have an insight.

717
00:36:40,390 --> 00:36:42,390
For example, what
is your view?

718
00:36:42,390 --> 00:36:46,210
Do you think that this is likely
that the first few

719
00:36:46,210 --> 00:36:48,836
years of education are
not so useful or--

720
00:36:48,836 --> 00:36:51,266
AUDIENCE: I think the first
few years are very useful

721
00:36:51,266 --> 00:36:52,724
because some people
learn to develop,

722
00:36:52,724 --> 00:36:54,182
like, love for reading.

723
00:36:54,182 --> 00:36:57,584
And actually realize that they
can learn things by reading

724
00:36:57,584 --> 00:36:59,060
[INAUDIBLE].

725
00:36:59,060 --> 00:37:02,085
PROFESSOR: So for example, you
think that, the first few

726
00:37:02,085 --> 00:37:03,930
years of education
are very useful.

727
00:37:03,930 --> 00:37:06,350
So there would be a relationship
between income

728
00:37:06,350 --> 00:37:07,650
today and income
of my children.

729
00:37:07,650 --> 00:37:10,820
But it wouldn't have this shape
if that is the case.

730
00:37:10,820 --> 00:37:13,050
In fact, it might have a
completely opposite shape

731
00:37:13,050 --> 00:37:17,890
where it's more like an inverted
L as opposed to an S.

732
00:37:17,890 --> 00:37:19,400
So education would be one.

733
00:37:19,400 --> 00:37:23,920
What would be another
possibility for this funnily

734
00:37:23,920 --> 00:37:27,170
looking shape to appear between
income today and

735
00:37:27,170 --> 00:37:28,670
income at some point
in the future?

736
00:37:28,670 --> 00:37:31,580
Is it on my income in the future
or the income of my

737
00:37:31,580 --> 00:37:34,480
children or my income
next year?

738
00:37:34,480 --> 00:37:37,520
What would be other sources
of such shapes?

739
00:37:40,534 --> 00:37:42,830
Yeah?

740
00:37:42,830 --> 00:37:45,216
AUDIENCE: Access in knowledge
of, like, the job market.

741
00:37:45,216 --> 00:37:48,965
In the sense that if you were
raised in a family that's a

742
00:37:48,965 --> 00:37:51,084
higher income and so, therefore,
your parents would

743
00:37:51,084 --> 00:37:53,162
teach you more from a younger
age and would allow you to

744
00:37:53,162 --> 00:37:55,000
have a higher income.

745
00:37:55,000 --> 00:37:55,285
PROFESSOR: Right.

746
00:37:55,285 --> 00:38:00,850
So for example, for access
to the job market, it is

747
00:38:00,850 --> 00:38:07,270
possible-- if I can rephrase
what you are saying-- that

748
00:38:07,270 --> 00:38:11,260
people who live in a village,
their horizon is the village.

749
00:38:11,260 --> 00:38:12,850
Where they are growing
whatever.

750
00:38:12,850 --> 00:38:17,120
They are growing stuff and they
are making some income.

751
00:38:17,120 --> 00:38:19,240
But they don't have the
perspective in mind that they

752
00:38:19,240 --> 00:38:21,330
could go to the city where
there a number

753
00:38:21,330 --> 00:38:23,530
of other jobs available.

754
00:38:23,530 --> 00:38:25,840
So in that case, for people who
have very little money and

755
00:38:25,840 --> 00:38:30,030
live in the village, well, their
children will again also

756
00:38:30,030 --> 00:38:32,790
live in the village and have
very little money.

757
00:38:32,790 --> 00:38:39,340
If suddenly something opens the
possibility to go to the

758
00:38:39,340 --> 00:38:42,850
city-- for example, someone
comes into some money, gets

759
00:38:42,850 --> 00:38:46,820
the option to buy a train
ticket, goes to the city and

760
00:38:46,820 --> 00:38:48,510
figures out the options there.

761
00:38:48,510 --> 00:38:52,420
Then suddenly you have access
to a number of other

762
00:38:52,420 --> 00:38:56,560
opportunities, potentially
much more rewarding, that

763
00:38:56,560 --> 00:38:58,130
would potentially create
this S-shape.

764
00:38:58,130 --> 00:39:01,836
Where the fact of being poor
means that you live in a

765
00:39:01,836 --> 00:39:02,900
relatively restricted
environment.

766
00:39:02,900 --> 00:39:04,240
You stay there.

767
00:39:04,240 --> 00:39:09,170
And then when you become just a
bit richer, that opens this

768
00:39:09,170 --> 00:39:12,770
opportunity that helps you
you become much richer.

769
00:39:12,770 --> 00:39:13,740
That's a very nice example.

770
00:39:13,740 --> 00:39:14,730
Yeah?

771
00:39:14,730 --> 00:39:18,442
AUDIENCE: Another option is
savings which depends on how

772
00:39:18,442 --> 00:39:19,432
much income you have.

773
00:39:19,432 --> 00:39:22,650
Because the more you save, the
more you invest and the higher

774
00:39:22,650 --> 00:39:24,135
income producing activities.

775
00:39:24,135 --> 00:39:26,362
So the poor people have
no money to save so

776
00:39:26,362 --> 00:39:27,600
they're stuck there.

777
00:39:27,600 --> 00:39:30,570
But as they get more income you
can afford to save more

778
00:39:30,570 --> 00:39:34,530
and invest more and it pushes
your future earnings.

779
00:39:34,530 --> 00:39:34,830
PROFESSOR: Right.

780
00:39:34,830 --> 00:39:38,150
So saving is a very interesting
example.

781
00:39:38,150 --> 00:39:42,010
Again you could say-- well,
suppose for example, that

782
00:39:42,010 --> 00:39:45,610
people saved some fixed fraction
of their income.

783
00:39:45,610 --> 00:39:49,130
Then if I have more income
today I will save more.

784
00:39:49,130 --> 00:39:51,500
Therefore, I will invest more,
therefore, I will be richer in

785
00:39:51,500 --> 00:39:52,970
the future.

786
00:39:52,970 --> 00:40:01,400
Now if it was a fixed fraction
of my income, again, I would

787
00:40:01,400 --> 00:40:04,340
definitely see a relationship
between income today and

788
00:40:04,340 --> 00:40:07,090
income tomorrow just because
I save more.

789
00:40:07,090 --> 00:40:11,110
But if it's a fixed fraction of
my income, what else do I

790
00:40:11,110 --> 00:40:16,100
need for this S-shape to come?

791
00:40:16,100 --> 00:40:17,000
Yes?

792
00:40:17,000 --> 00:40:19,362
AUDIENCE: You need for poor
people to not be able to save

793
00:40:19,362 --> 00:40:20,358
this fraction.

794
00:40:20,358 --> 00:40:22,848
Because they, for instance,
spend their money on food or

795
00:40:22,848 --> 00:40:24,840
things that they need
to buy today.

796
00:40:24,840 --> 00:40:28,326
And so are either a fraction
of [INAUDIBLE]

797
00:40:28,326 --> 00:40:32,970
income or it's just lower
for poor people.

798
00:40:32,970 --> 00:40:33,170
PROFESSOR: Right.

799
00:40:33,170 --> 00:40:36,560
So the first possibility for
an S-shape to appear due to

800
00:40:36,560 --> 00:40:39,770
savings is that actually people
do not save a fixed

801
00:40:39,770 --> 00:40:41,360
fraction of their income.

802
00:40:41,360 --> 00:40:45,190
Is that for some reason, the
poor save less than the rich.

803
00:40:48,530 --> 00:40:52,530
So if that's the case-- and
let's talk through whether we

804
00:40:52,530 --> 00:40:54,790
have reasons to think that
the poor would save

805
00:40:54,790 --> 00:40:56,140
less than the rich--

806
00:40:56,140 --> 00:40:59,550
but let's first take it as given
for a moment, and let's

807
00:40:59,550 --> 00:41:01,950
assume the poor save
less than the rich.

808
00:41:01,950 --> 00:41:04,130
And if that's the case--

809
00:41:04,130 --> 00:41:06,710
assume the poor save nothing--

810
00:41:06,710 --> 00:41:10,280
then if you're very poor, you
have no income tomorrow coming

811
00:41:10,280 --> 00:41:11,820
out of investments.

812
00:41:11,820 --> 00:41:14,630
And then if you start saving
when you become a little

813
00:41:14,630 --> 00:41:18,040
richer and that money is
invested, that starts creating

814
00:41:18,040 --> 00:41:21,200
some return for that money and
you get into this steeper part

815
00:41:21,200 --> 00:41:22,300
of the S-shape.

816
00:41:22,300 --> 00:41:25,770
So that's a first mechanism
through which savings could

817
00:41:25,770 --> 00:41:28,390
create a relationship between
your income today and your

818
00:41:28,390 --> 00:41:31,120
income tomorrow that would
have this S-shape.

819
00:41:31,120 --> 00:41:34,530
Now what we do have to explain
is why is it the case that the

820
00:41:34,530 --> 00:41:37,025
poor would be able to save
less than the rich?

821
00:41:37,025 --> 00:41:40,920
And that is something that, I
think, we all have in mind.

822
00:41:40,920 --> 00:41:42,730
Say, yes, of course, the
poor don't save because

823
00:41:42,730 --> 00:41:44,460
they have no money.

824
00:41:44,460 --> 00:41:47,930
But one thing I want you to keep
in mind is that the poor

825
00:41:47,930 --> 00:41:50,000
have no money but they
have a present

826
00:41:50,000 --> 00:41:51,470
and they have a future.

827
00:41:51,470 --> 00:41:54,520
So unless they think that they
will have more money tomorrow

828
00:41:54,520 --> 00:41:58,020
or unless, for some reason, they
are extremely impatient,

829
00:41:58,020 --> 00:42:00,270
then the poor should want
to save as well.

830
00:42:00,270 --> 00:42:01,930
Because, of course, today
they have very

831
00:42:01,930 --> 00:42:02,670
little money for food.

832
00:42:02,670 --> 00:42:05,580
But tomorrow they'll have very
little for food as well.

833
00:42:05,580 --> 00:42:09,000
So we need to go a little
further than to say, well, of

834
00:42:09,000 --> 00:42:11,010
course the poor save because
they have no money.

835
00:42:11,010 --> 00:42:12,040
Right?

836
00:42:12,040 --> 00:42:13,830
Again, let's not go into
the details of that.

837
00:42:13,830 --> 00:42:16,640
I think there are good reasons
to think that the poor would

838
00:42:16,640 --> 00:42:18,385
be less able to save
than the rich.

839
00:42:18,385 --> 00:42:21,570
And we're going to have
a whole set of

840
00:42:21,570 --> 00:42:23,200
lectures about that.

841
00:42:23,200 --> 00:42:27,600
But just keep in mind that it's
not so obvious that the

842
00:42:27,600 --> 00:42:30,359
poor would be less
likely to save.

843
00:42:30,359 --> 00:42:31,750
Another--

844
00:42:31,750 --> 00:42:32,980
sorry, you wanted to talk.

845
00:42:32,980 --> 00:42:33,865
AUDIENCE: [INAUDIBLE]

846
00:42:33,865 --> 00:42:35,706
access to healthcare
and medicine.

847
00:42:35,706 --> 00:42:35,934
PROFESSOR: Right.

848
00:42:35,934 --> 00:42:37,010
So let's go to health.

849
00:42:37,010 --> 00:42:38,830
Let's finish saving
and then I'll go

850
00:42:38,830 --> 00:42:40,380
back to you for health.

851
00:42:40,380 --> 00:42:43,790
Another reason why there might
be a relationship between

852
00:42:43,790 --> 00:42:45,480
income today and income
tomorrow of

853
00:42:45,480 --> 00:42:46,730
this form due to savings.

854
00:42:51,340 --> 00:42:54,350
Suppose that the poor and the
rich saved both a proportion

855
00:42:54,350 --> 00:42:55,470
of their income.

856
00:42:55,470 --> 00:42:58,220
There could still be a
relationship like that.

857
00:42:58,220 --> 00:42:58,927
Yeah?

858
00:42:58,927 --> 00:43:02,743
AUDIENCE: The rich could be able
to invest their savings

859
00:43:02,743 --> 00:43:03,700
more effectively.

860
00:43:03,700 --> 00:43:04,340
PROFESSOR: Exactly.

861
00:43:04,340 --> 00:43:07,930
It could be that the rich have
access to better investment

862
00:43:07,930 --> 00:43:09,390
opportunity.

863
00:43:09,390 --> 00:43:13,080
For example, it could be that
the bank is just not

864
00:43:13,080 --> 00:43:15,500
interested in very small
saving accounts.

865
00:43:15,500 --> 00:43:17,580
And in fact, it's the case
that the banks are not

866
00:43:17,580 --> 00:43:19,680
interested in very small
saving accounts.

867
00:43:19,680 --> 00:43:22,890
Because as soon as you're a bank
and you take the saving

868
00:43:22,890 --> 00:43:25,900
of someone, the government is on
your back to make sure that

869
00:43:25,900 --> 00:43:27,490
you don't run away
with the saving--

870
00:43:27,490 --> 00:43:30,830
which is a good idea--
but that costs money.

871
00:43:30,830 --> 00:43:33,300
So maintaining a saving account
for someone costs some

872
00:43:33,300 --> 00:43:34,800
amount of money.

873
00:43:34,800 --> 00:43:37,470
And regardless of the size of
the account, it still costs

874
00:43:37,470 --> 00:43:40,590
the same money because you need
to do all the paperwork.

875
00:43:40,590 --> 00:43:43,680
So as a result, if you come to a
bank with your five rupiahs,

876
00:43:43,680 --> 00:43:45,450
the bank is going to say, thank
you, but I don't want

877
00:43:45,450 --> 00:43:48,020
your five rupiahs.

878
00:43:48,020 --> 00:43:50,910
Whereas, if you come with your
5,000 rupiahs they're, sure,

879
00:43:50,910 --> 00:43:54,820
I'm going to put it in this very
nice account for you with

880
00:43:54,820 --> 00:43:56,290
a nice return.

881
00:43:56,290 --> 00:43:59,050
So that's one reason
right there.

882
00:43:59,050 --> 00:44:02,565
That the poor might have to save
under the mattress where

883
00:44:02,565 --> 00:44:04,025
the money might disappear.

884
00:44:04,025 --> 00:44:05,850
Where it might be stolen.

885
00:44:05,850 --> 00:44:08,200
And so the return on
saving for the poor

886
00:44:08,200 --> 00:44:08,875
might be very low.

887
00:44:08,875 --> 00:44:10,900
It might even be negative.

888
00:44:10,900 --> 00:44:14,990
Whereas, the return for the rich
might be higher, either

889
00:44:14,990 --> 00:44:20,690
because they have access to this
savings account or they

890
00:44:20,690 --> 00:44:25,170
can, for example, start
a small business.

891
00:44:25,170 --> 00:44:28,160
For example, when you want to
start a small business, is it

892
00:44:28,160 --> 00:44:31,300
worthwhile starting a tiny
business with almost nothing?

893
00:44:31,300 --> 00:44:31,730
Maybe not.

894
00:44:31,730 --> 00:44:34,820
Maybe it needs to be large
enough for it to be

895
00:44:34,820 --> 00:44:36,360
worthwhile.

896
00:44:36,360 --> 00:44:38,680
So even if the poor and the
rich were to save the same

897
00:44:38,680 --> 00:44:41,310
amount proportionally, there
might still be something

898
00:44:41,310 --> 00:44:44,290
related, not to how much they
save, but what's the

899
00:44:44,290 --> 00:44:47,730
productivity of those savings.

900
00:44:47,730 --> 00:44:49,480
You were talking about
health care.

901
00:44:49,480 --> 00:44:50,980
Why don't you tell us what
you're thinking about

902
00:44:50,980 --> 00:44:51,656
healthcare.

903
00:44:51,656 --> 00:44:55,086
AUDIENCE: So at lower incomes
you can't really

904
00:44:55,086 --> 00:44:56,030
buy a lot of medicine.

905
00:44:56,030 --> 00:44:58,870
And maybe you can reach a point
where you can start

906
00:44:58,870 --> 00:45:01,354
buying medicines or
buying healthcare.

907
00:45:01,354 --> 00:45:05,286
And maybe towards the end when
you have higher income, it

908
00:45:05,286 --> 00:45:09,186
levels off because you don't
encounter the health problems

909
00:45:09,186 --> 00:45:12,162
that you might at low incomes
in the first place.

910
00:45:12,162 --> 00:45:12,658
PROFESSOR: Right.

911
00:45:12,658 --> 00:45:15,095
So healthcare might be another
source of that.

912
00:45:15,095 --> 00:45:19,720
For example, if you're very
poor, you might not be able to

913
00:45:19,720 --> 00:45:26,240
purchase very simple, relatively
cheap technologies

914
00:45:26,240 --> 00:45:28,500
that prevent you from
getting sick.

915
00:45:28,500 --> 00:45:30,890
It could be a covering
for your water.

916
00:45:30,890 --> 00:45:33,610
It could be a water filter.

917
00:45:33,610 --> 00:45:37,930
It could be a bed net to put on
top of your kids when they

918
00:45:37,930 --> 00:45:40,160
sleep so that they don't
get malaria.

919
00:45:40,160 --> 00:45:44,550
So all of these things might
all be like some fixed

920
00:45:44,550 --> 00:45:46,980
investment that, if you
can't afford them, you

921
00:45:46,980 --> 00:45:48,590
can't afford them.

922
00:45:48,590 --> 00:45:51,370
And then you are getting sick
more, therefore you are less

923
00:45:51,370 --> 00:45:56,060
productive, therefore you make
less money, et cetera.

924
00:45:56,060 --> 00:46:03,620
So that's another source where
we would have this S-shape.

925
00:46:03,620 --> 00:46:06,720
Then we again have to think
about these goods as things

926
00:46:06,720 --> 00:46:08,860
that are a little bit lumpy.

927
00:46:08,860 --> 00:46:11,070
Like a bed net, for example.

928
00:46:11,070 --> 00:46:13,360
Or a water filter.

929
00:46:13,360 --> 00:46:15,690
That you can either afford
or not afford.

930
00:46:15,690 --> 00:46:18,450
So if you have enough money you
afford it and then you can

931
00:46:18,450 --> 00:46:19,530
be generally healthier.

932
00:46:19,530 --> 00:46:22,430
You don't lose all your calories
to diarrhea and other

933
00:46:22,430 --> 00:46:24,350
nice things like that.

934
00:46:24,350 --> 00:46:27,310
And if you're poor you would
be sick all the time.

935
00:46:27,310 --> 00:46:29,760
Or paying for the doctors,
for example.

936
00:46:29,760 --> 00:46:33,640
So for example, if someone is
sick and very poor they might

937
00:46:33,640 --> 00:46:34,860
not be able to pay
for the doctor.

938
00:46:34,860 --> 00:46:37,540
Then they'll stay sick so
they can't earn money.

939
00:46:37,540 --> 00:46:41,810
And again, a doctor visit is one
big lump investment which

940
00:46:41,810 --> 00:46:44,030
you may or may not be
able to afford.

941
00:46:44,030 --> 00:46:47,810
That would be another source
of an S-shape like that.

942
00:46:47,810 --> 00:46:50,160
So the reason why I went through
all of these examples

943
00:46:50,160 --> 00:46:55,830
is that we are going to have a
lot to say about the exact

944
00:46:55,830 --> 00:46:58,890
story that Pak Solhin told
me about the food.

945
00:46:58,890 --> 00:47:02,140
Whether this was a real story
in this case or whether it's

946
00:47:02,140 --> 00:47:07,190
some stuff that he was telling
himself to explain the

947
00:47:07,190 --> 00:47:09,670
situation he was in but, really,
there was something

948
00:47:09,670 --> 00:47:11,990
else behind his problems
like depression or

949
00:47:11,990 --> 00:47:14,280
something like that.

950
00:47:14,280 --> 00:47:18,690
But the first time it was
formalized was in this context

951
00:47:18,690 --> 00:47:19,820
of nutrition.

952
00:47:19,820 --> 00:47:22,820
And it's very natural to think
of it in the context of

953
00:47:22,820 --> 00:47:25,960
nutrition but it could apply.

954
00:47:25,960 --> 00:47:30,290
And a very important part of the
discussion that I want you

955
00:47:30,290 --> 00:47:34,920
to keep in mind is that it's not
enough for there to be a

956
00:47:34,920 --> 00:47:38,870
relationship between income
today and income tomorrow.

957
00:47:38,870 --> 00:47:40,750
To create a poverty
trap it needs to

958
00:47:40,750 --> 00:47:42,670
have this funny shape.

959
00:47:42,670 --> 00:47:46,400
And I want to discuss why.

960
00:47:46,400 --> 00:47:49,380
So the way that we are going to
think of it is we are going

961
00:47:49,380 --> 00:47:55,070
to think about what
is the dynamic of

962
00:47:55,070 --> 00:47:58,170
someone's income over time.

963
00:47:58,170 --> 00:48:09,370
So let's start with this picture
which brings inherited

964
00:48:09,370 --> 00:48:11,760
income on the x-axis--

965
00:48:11,760 --> 00:48:14,510
so think of it as
income today--

966
00:48:14,510 --> 00:48:17,950
and income from work.

967
00:48:17,950 --> 00:48:21,600
What I have plotted here
is this S-shaped curve.

968
00:48:21,600 --> 00:48:24,030
Think of it, for example, as
coming from nutrition.

969
00:48:24,030 --> 00:48:27,290
But any of the examples that you
talked about if you don't

970
00:48:27,290 --> 00:48:29,520
like the nutrition one.

971
00:48:29,520 --> 00:48:33,920
And the line that goes through
the diagonal is

972
00:48:33,920 --> 00:48:35,170
the 45-degree line.

973
00:48:36,810 --> 00:48:41,560
So why is the 45-degree line
relevant and interesting here

974
00:48:41,560 --> 00:48:45,760
is that, , on the 45-degree
line, income today is the same

975
00:48:45,760 --> 00:48:46,720
as income tomorrow.

976
00:48:46,720 --> 00:48:49,460
Right, so we're going
to make use of it.

977
00:48:49,460 --> 00:48:53,020
Now I want to try and look at
the dynamic of someone's

978
00:48:53,020 --> 00:48:54,730
income over time.

979
00:48:54,730 --> 00:49:00,190
So suppose someone got this
little income, y prime 0.

980
00:49:00,190 --> 00:49:03,160
Where do I read their income
in period one?

981
00:49:10,132 --> 00:49:10,630
Yep?

982
00:49:10,630 --> 00:49:13,660
AUDIENCE: It would be going
from curvy line to the

983
00:49:13,660 --> 00:49:14,680
45-degree line horizontally.

984
00:49:14,680 --> 00:49:16,156
PROFESSOR: Exactly.

985
00:49:16,156 --> 00:49:21,170
So to go from income y prime 0
to y1, I go on the vertical

986
00:49:21,170 --> 00:49:22,660
line up to the curve.

987
00:49:22,660 --> 00:49:27,410
That tells me this is what
someone who starts his life

988
00:49:27,410 --> 00:49:32,800
with some income, yi0, can make
his decision about how

989
00:49:32,800 --> 00:49:37,190
much to eat, creates some
calories, creates some work

990
00:49:37,190 --> 00:49:39,770
capacity, goes to work,
generates an income that he

991
00:49:39,770 --> 00:49:40,650
takes home.

992
00:49:40,650 --> 00:49:43,490
That's the income that we
have on the curvy line.

993
00:49:43,490 --> 00:49:47,450
And then I want to say, well,
that becomes y1, right?

994
00:49:47,450 --> 00:49:51,570
And then y1 is going to become
the y0 of tomorrow.

995
00:49:51,570 --> 00:49:54,370
So to find it, I'm doing exactly
what you're saying

996
00:49:54,370 --> 00:49:56,220
which is I'm going
horizontally to

997
00:49:56,220 --> 00:49:59,130
the 45-degree line.

998
00:49:59,130 --> 00:50:00,840
And I could go down again.

999
00:50:00,840 --> 00:50:03,440
So from y0, I go to y1.

1000
00:50:03,440 --> 00:50:06,480
Then horizontally
on the 45-degree

1001
00:50:06,480 --> 00:50:09,320
line gives me y1 again.

1002
00:50:09,320 --> 00:50:10,710
And then how do I find y2?

1003
00:50:13,240 --> 00:50:17,320
I go vertical again,
that gives me y2.

1004
00:50:17,320 --> 00:50:20,510
I go horizontal again to
the degree line and I

1005
00:50:20,510 --> 00:50:22,200
continue like that.

1006
00:50:22,200 --> 00:50:23,450
And where will I end up?

1007
00:50:27,640 --> 00:50:29,642
AUDIENCE: Where the two
curves intersect.

1008
00:50:29,642 --> 00:50:32,120
PROFESSOR: I will end up at
the intersection of the

1009
00:50:32,120 --> 00:50:35,680
45-degree line and the
S-shape curve, right?

1010
00:50:35,680 --> 00:50:37,900
At the first intersection.

1011
00:50:37,900 --> 00:50:42,550
Now what if I start with
a higher income.

1012
00:50:42,550 --> 00:50:47,500
If I start with the income
y 0 double prime.

1013
00:50:47,500 --> 00:50:49,680
I go vertical to the curve.

1014
00:50:49,680 --> 00:50:52,600
That gives me y1 double prime.

1015
00:50:52,600 --> 00:50:56,830
I have to go horizontally
to find it when it

1016
00:50:56,830 --> 00:50:58,840
becomes income tomorrow.

1017
00:50:58,840 --> 00:51:00,830
Again vertically, et cetera.

1018
00:51:00,830 --> 00:51:06,920
And I again end up at the
intersection of the 45-degree

1019
00:51:06,920 --> 00:51:09,530
line and the S-shape curve
but now it's a higher

1020
00:51:09,530 --> 00:51:11,220
intersection.

1021
00:51:11,220 --> 00:51:18,195
Now what happens if I start at
the sixth point in the middle

1022
00:51:18,195 --> 00:51:19,445
over there?

1023
00:51:21,890 --> 00:51:24,122
Which way will that go?

1024
00:51:24,122 --> 00:51:25,600
AUDIENCE: That will go down.

1025
00:51:25,600 --> 00:51:26,560
PROFESSOR: That will go down.

1026
00:51:26,560 --> 00:51:30,730
If I go to the sixth point,
I go vertical

1027
00:51:30,730 --> 00:51:33,130
then left then down.

1028
00:51:33,130 --> 00:51:39,100
So what is the key point after
which I will start going to

1029
00:51:39,100 --> 00:51:41,620
the high point?

1030
00:51:41,620 --> 00:51:42,083
Yeah?

1031
00:51:42,083 --> 00:51:44,861
AUDIENCE: Where it intersects
the 45-degree line again.

1032
00:51:44,861 --> 00:51:47,930
PROFESSOR: So the intersection
from below.

1033
00:51:47,930 --> 00:51:54,780
So at this point P where the
capacity curve intersects the

1034
00:51:54,780 --> 00:51:57,010
45-degree line from below.

1035
00:51:57,010 --> 00:52:00,440
Anything to the right goes
to the high steady state.

1036
00:52:00,440 --> 00:52:03,830
Anything to the left goes
to the low steady state.

1037
00:52:03,830 --> 00:52:08,900
So this possibility that there
are two steady states

1038
00:52:08,900 --> 00:52:12,790
depending on where you start
from is the formalization of

1039
00:52:12,790 --> 00:52:14,450
the poverty curve.

1040
00:52:14,450 --> 00:52:19,080
Which is anybody who is poorer
than the unstable equilibrium

1041
00:52:19,080 --> 00:52:20,330
over there--

1042
00:52:24,460 --> 00:52:28,780
if someone starts with exactly
this income, where do they go?

1043
00:52:28,780 --> 00:52:31,400
If someone starts with exactly
the intersection of the

1044
00:52:31,400 --> 00:52:34,860
45-degree line and the S-shape
curve, do they go down or do

1045
00:52:34,860 --> 00:52:36,272
they go up?

1046
00:52:36,272 --> 00:52:37,660
They just stay there.

1047
00:52:37,660 --> 00:52:41,800
So it is also a steady state but
it's a very unstable one.

1048
00:52:41,800 --> 00:52:43,965
If anything happens, any
small perturbation.

1049
00:52:43,965 --> 00:52:45,540
If they go slightly
to the left, they

1050
00:52:45,540 --> 00:52:46,785
go all the way down.

1051
00:52:46,785 --> 00:52:50,410
If they go slightly to the
right, they go all the way up.

1052
00:52:50,410 --> 00:52:53,100
So we call that an unstable
statistic.

1053
00:52:53,100 --> 00:52:56,460
So there is one unstable
statistic and two stable ones.

1054
00:52:56,460 --> 00:52:59,130
And those two stable ones is
what we're talking about.

1055
00:52:59,130 --> 00:53:01,206
They could be a poverty trap.

1056
00:53:01,206 --> 00:53:01,699
Yes?

1057
00:53:01,699 --> 00:53:06,140
AUDIENCE: Why are they moving
toward that 45-degree line?

1058
00:53:06,140 --> 00:53:08,810
PROFESSOR: Can someone
explain that?

1059
00:53:08,810 --> 00:53:11,490
You want to know why we are
going horizontal to the

1060
00:53:11,490 --> 00:53:12,450
45-degree line?

1061
00:53:12,450 --> 00:53:12,900
Yeah.

1062
00:53:12,900 --> 00:53:15,200
Can someone explain that once?

1063
00:53:15,200 --> 00:53:16,810
And then I'll re-explain
it as well.

1064
00:53:19,756 --> 00:53:22,702
AUDIENCE: Because yesterday's
income is going to be your

1065
00:53:22,702 --> 00:53:24,175
today's income.

1066
00:53:24,175 --> 00:53:26,465
And your today's income
is going to be

1067
00:53:26,465 --> 00:53:27,612
your tomorrow's income.

1068
00:53:27,612 --> 00:53:31,540
So if we start with a value
zero, so that value

1069
00:53:31,540 --> 00:53:33,504
can come from work.

1070
00:53:33,504 --> 00:53:38,440
It's going to be tomorrow's
[INAUDIBLE].

1071
00:53:38,440 --> 00:53:43,076
So if you get the income from
work, the y-value of that will

1072
00:53:43,076 --> 00:53:47,224
be your incurred income
tomorrow.

1073
00:53:47,224 --> 00:53:50,040
So you have to go to
the 45-degree line.

1074
00:53:50,040 --> 00:53:51,290
PROFESSOR: Exactly.

1075
00:53:53,230 --> 00:53:56,800
The reason why we are using the
horizontal line is that--

1076
00:53:56,800 --> 00:53:59,930
so from y0, I know
that I go to y1.

1077
00:53:59,930 --> 00:54:03,470
And then I want to know,
from y1 where do I go?

1078
00:54:03,470 --> 00:54:06,470
For that I need to put
y1 on the x-axis.

1079
00:54:06,470 --> 00:54:09,730
And the 45-degree line allows
me to do that because the

1080
00:54:09,730 --> 00:54:14,190
45-degree line is where the
vertical is equal to the

1081
00:54:14,190 --> 00:54:15,350
horizontal.

1082
00:54:15,350 --> 00:54:19,350
So I'm going right to find y1
on the horizontal line which

1083
00:54:19,350 --> 00:54:22,170
helps me to find it
on the x-axis.

1084
00:54:22,170 --> 00:54:24,580
And then I know that from
y1, I go to y2.

1085
00:54:24,580 --> 00:54:27,300
And then again horizontal, and
then again vertical, and then

1086
00:54:27,300 --> 00:54:28,620
again horizontal.

1087
00:54:28,620 --> 00:54:29,830
That makes sense?

1088
00:54:29,830 --> 00:54:32,400
Is it clear for everybody?

1089
00:54:32,400 --> 00:54:35,440
It would be better if we were
all on the same page.

1090
00:54:35,440 --> 00:54:38,650
That we have that here.

1091
00:54:38,650 --> 00:54:39,530
This is not obvious.

1092
00:54:39,530 --> 00:54:41,850
It's not meant to be obvious.

1093
00:54:41,850 --> 00:54:42,920
Yeah?

1094
00:54:42,920 --> 00:54:44,375
AUDIENCE: [INAUDIBLE]

1095
00:54:44,375 --> 00:54:47,285
y0 or y1--

1096
00:54:47,285 --> 00:54:49,710
PROFESSOR: So, the first
one you mean?

1097
00:54:49,710 --> 00:54:51,165
AUDIENCE: Oh, is that
because that's the--

1098
00:54:51,165 --> 00:54:52,620
PROFESSOR: That's the
capacity curve.

1099
00:54:52,620 --> 00:54:53,680
Exactly.

1100
00:54:53,680 --> 00:54:56,600
Your y0 is what you
start from.

1101
00:54:56,600 --> 00:54:59,330
And then the curve gives us
what is the relationship

1102
00:54:59,330 --> 00:55:01,090
between income today and
income tomorrow.

1103
00:55:01,090 --> 00:55:04,220
So think of it with
the food example.

1104
00:55:04,220 --> 00:55:06,460
You start with some income.

1105
00:55:06,460 --> 00:55:08,930
You decide how much to eat--
let's say you eat

1106
00:55:08,930 --> 00:55:10,440
80 percent of it--

1107
00:55:10,440 --> 00:55:11,410
you eat it.

1108
00:55:11,410 --> 00:55:13,110
That gives you some strength.

1109
00:55:13,110 --> 00:55:14,500
You go work.

1110
00:55:14,500 --> 00:55:15,800
That gives you some wage.

1111
00:55:15,800 --> 00:55:17,390
That's your income from work.

1112
00:55:17,390 --> 00:55:19,370
AUDIENCE: And then, when we're
determining the distance

1113
00:55:19,370 --> 00:55:25,557
between y0 and y1, is that
determined just by the

1114
00:55:25,557 --> 00:55:29,430
distance from the curve
to the 45-degree line?

1115
00:55:29,430 --> 00:55:30,020
PROFESSOR: Exactly.

1116
00:55:30,020 --> 00:55:32,390
So y0 goes to y1.

1117
00:55:32,390 --> 00:55:35,655
Do you understand the first
vertical step here right?

1118
00:55:35,655 --> 00:55:38,380
y0 goes to y1 for the
first vertical step.

1119
00:55:38,380 --> 00:55:44,930
And then we're looking for y1 on
the vertical axis, but now

1120
00:55:44,930 --> 00:55:46,580
we need to find a way
to put it back on

1121
00:55:46,580 --> 00:55:47,970
the horizontal axis.

1122
00:55:47,970 --> 00:55:51,420
And the 45-degree line helps us
to do that because on the

1123
00:55:51,420 --> 00:55:55,910
45-degree line the vertical
distance is the same as the

1124
00:55:55,910 --> 00:55:57,650
horizontal distance.

1125
00:55:57,650 --> 00:56:01,520
So the horizontal line is just
a trick to help us find where

1126
00:56:01,520 --> 00:56:06,260
is y1 on the horizontal axis,
which helps us go to y2.

1127
00:56:06,260 --> 00:56:07,270
That make sense?

1128
00:56:07,270 --> 00:56:09,470
So from y0, I go to
y1 vertically --

1129
00:56:09,470 --> 00:56:11,360
that's just a capacity curve.

1130
00:56:11,360 --> 00:56:14,980
Then the horizontal line
is just to the left.

1131
00:56:14,980 --> 00:56:17,050
Now what is the new y0?

1132
00:56:17,050 --> 00:56:19,410
The new y0 is y1.

1133
00:56:19,410 --> 00:56:22,820
And then again, we go
vertically to y2.

1134
00:56:22,820 --> 00:56:24,920
Horizontally to find it on
the horizontal axis,

1135
00:56:24,920 --> 00:56:26,693
vertically, et cetera.

1136
00:56:26,693 --> 00:56:27,659
Yeah?

1137
00:56:27,659 --> 00:56:30,080
AUDIENCE: What's the
unit of time--

1138
00:56:30,080 --> 00:56:33,840
PROFESSOR: The unit of time is
whatever we think is the right

1139
00:56:33,840 --> 00:56:36,820
unit of time depending on the
problem we're looking at.

1140
00:56:36,820 --> 00:56:40,450
So, for example, if it is food,
that might be the date.

1141
00:56:40,450 --> 00:56:42,940
If it's the income of your
children, that may be a

1142
00:56:42,940 --> 00:56:45,250
generation.

1143
00:56:45,250 --> 00:56:48,890
In some sense, once we have
decided what problem we are

1144
00:56:48,890 --> 00:56:52,320
looking at, the unit of time
doesn't really matter.

1145
00:56:52,320 --> 00:56:55,510
We adjust to it.

1146
00:56:55,510 --> 00:56:56,486
Yeah?

1147
00:56:56,486 --> 00:56:57,706
AUDIENCE: How did you determine
which states were

1148
00:56:57,706 --> 00:56:59,910
stable and which ones
were not stable?

1149
00:56:59,910 --> 00:57:03,825
PROFESSOR: Well, look at it,
and for any point, you're

1150
00:57:03,825 --> 00:57:07,780
figuring out whether or not
you're going to stay here.

1151
00:57:07,780 --> 00:57:11,160
Whether things tend to bring you
back here or things tend

1152
00:57:11,160 --> 00:57:12,670
to pull you away from it.

1153
00:57:12,670 --> 00:57:15,585
Think of it, for example,
as magnets.

1154
00:57:15,585 --> 00:57:21,100
Either they cling together or
they are trying to go away.

1155
00:57:21,100 --> 00:57:28,830
Or think of it as a stick.

1156
00:57:28,830 --> 00:57:33,060
Does it stay vertical or
does it fall down?

1157
00:57:33,060 --> 00:57:36,600
Suppose that we start with
income and the first income we

1158
00:57:36,600 --> 00:57:38,530
are getting is y3.

1159
00:57:38,530 --> 00:57:40,132
That's going to pull you.

1160
00:57:40,132 --> 00:57:42,490
You're going to go vertical
a little bit, horizontal a

1161
00:57:42,490 --> 00:57:43,470
little bit, et cetera.

1162
00:57:43,470 --> 00:57:44,710
That's going to pull
you exactly

1163
00:57:44,710 --> 00:57:47,550
at that first statistic.

1164
00:57:47,550 --> 00:57:49,180
Right?

1165
00:57:49,180 --> 00:57:52,150
So now, if you start from the
first statistic and something

1166
00:57:52,150 --> 00:57:54,930
slightly pushes you away from
it, it is going to bring you

1167
00:57:54,930 --> 00:57:56,000
back to it.

1168
00:57:56,000 --> 00:58:00,150
If you are a little bit richer
than the first statistic,

1169
00:58:00,150 --> 00:58:02,940
you're going to, again, go back
to the first statistic.

1170
00:58:02,940 --> 00:58:06,520
If you're slightly richer,
it's pulling you down.

1171
00:58:06,520 --> 00:58:10,340
If you're slightly poorer,
it's pulling you up.

1172
00:58:10,340 --> 00:58:12,770
Now, if you're looking at the
one that's here on top, that's

1173
00:58:12,770 --> 00:58:13,840
the same thing.

1174
00:58:13,840 --> 00:58:16,570
At the very top, if you're
slightly poorer, it's pulling

1175
00:58:16,570 --> 00:58:17,880
you up towards it.

1176
00:58:17,880 --> 00:58:19,630
If you're slightly richer,
it's pulling you

1177
00:58:19,630 --> 00:58:21,020
down towards it.

1178
00:58:21,020 --> 00:58:24,440
Now if you look at the one where
the line intersects from

1179
00:58:24,440 --> 00:58:27,510
below, if you're exactly
at it, you stay at it.

1180
00:58:27,510 --> 00:58:29,870
But if you're slightly poorer,
where do you go?

1181
00:58:32,980 --> 00:58:36,060
All the way down.

1182
00:58:36,060 --> 00:58:38,840
If you're slightly richer,
all the way up.

1183
00:58:38,840 --> 00:58:40,290
So that one is not stable.

1184
00:58:40,290 --> 00:58:42,990
So basically, you follow your
arrows wherever they are going

1185
00:58:42,990 --> 00:58:44,680
to take you.

1186
00:58:44,680 --> 00:58:45,930
OK?

1187
00:58:48,100 --> 00:58:49,650
Any more question?

1188
00:58:49,650 --> 00:58:50,365
Yeah?

1189
00:58:50,365 --> 00:58:52,305
AUDIENCE: What are the
axis labels for it?

1190
00:58:52,305 --> 00:58:55,700
Like income from work.

1191
00:58:55,700 --> 00:58:58,596
I thought we were trying to
connect on a time scale--

1192
00:58:58,596 --> 00:59:00,770
PROFESSOR: Right, so it
doesn't really matter.

1193
00:59:00,770 --> 00:59:03,300
Think of it as income today
versus income tomorrow.

1194
00:59:03,300 --> 00:59:07,380
Or income that you inherited
versus income

1195
00:59:07,380 --> 00:59:08,940
that you create yourself.

1196
00:59:08,940 --> 00:59:11,060
Whatever scales we are
talking about.

1197
00:59:11,060 --> 00:59:18,430
So in the food example, it would
be the income you had at

1198
00:59:18,430 --> 00:59:20,660
the end of today.

1199
00:59:20,660 --> 00:59:24,420
And then, that would be
inherited income you inherited

1200
00:59:24,420 --> 00:59:25,910
from yesterday.

1201
00:59:25,910 --> 00:59:28,570
And then the income from work
would be the income of the end

1202
00:59:28,570 --> 00:59:29,070
of the day.

1203
00:59:29,070 --> 00:59:31,990
So here the scale would
be one day.

1204
00:59:31,990 --> 00:59:36,450
In the education example, you
would go from your income to

1205
00:59:36,450 --> 00:59:38,120
what your children will make.

1206
00:59:38,120 --> 00:59:39,240
That's a whole generation.

1207
00:59:39,240 --> 00:59:43,660
So the time scale, it depends
on the problem.

1208
00:59:43,660 --> 00:59:46,990
I think in the food example,
it's useful to think of a day.

1209
00:59:46,990 --> 00:59:50,154
In the health example
it might be a month.

1210
00:59:50,154 --> 00:59:52,338
AUDIENCE: Why is there a
tendency to move to the

1211
00:59:52,338 --> 00:59:53,900
intersections?

1212
00:59:53,900 --> 00:59:55,800
PROFESSOR: Well, that's where
the arrows are pulling you,

1213
00:59:55,800 --> 00:59:57,400
aren't they?

1214
00:59:57,400 --> 01:00:00,250
Because the closer of
the intersection

1215
01:00:00,250 --> 01:00:03,794
is where you are--

1216
01:00:03,794 --> 01:00:07,080
first, you go from wherever
you start to the curve.

1217
01:00:07,080 --> 01:00:09,790
And then the curve is
trying to go back to

1218
01:00:09,790 --> 01:00:11,100
the 45-degree line.

1219
01:00:11,100 --> 01:00:13,080
So the closer you are
to the intersection,

1220
01:00:13,080 --> 01:00:14,340
the less you move.

1221
01:00:14,340 --> 01:00:15,880
Which is why this
is, everything

1222
01:00:15,880 --> 01:00:18,610
pulls you back there.

1223
01:00:18,610 --> 01:00:19,810
--Not all the intersections.

1224
01:00:19,810 --> 01:00:21,280
No, it's the stable ones.

1225
01:00:21,280 --> 01:00:23,503
The one to the left and the
one to the right, not the

1226
01:00:23,503 --> 01:00:24,470
middle one.

1227
01:00:24,470 --> 01:00:26,093
Which you have a tendency
to go away from.

1228
01:00:30,260 --> 01:00:33,974
Any other questions
on how this works?

1229
01:00:33,974 --> 01:00:34,461
Yeah?

1230
01:00:34,461 --> 01:00:36,896
AUDIENCE: How do you guys
actually gather the data to

1231
01:00:36,896 --> 01:00:37,383
[INAUDIBLE]?

1232
01:00:37,383 --> 01:00:38,850
PROFESSOR: So that's an
excellent question.

1233
01:00:38,850 --> 01:00:41,052
Right now, I've just
asserted that it's

1234
01:00:41,052 --> 01:00:42,710
the form of the curve.

1235
01:00:42,710 --> 01:00:47,340
And then we have to go back to
the question that a neighbor--

1236
01:00:47,340 --> 01:00:49,590
whose name I don't know-- asked
earlier, which is what

1237
01:00:49,590 --> 01:00:55,240
is, actually, the shape
of the curve?

1238
01:00:55,240 --> 01:00:56,990
And that's a key question.

1239
01:00:56,990 --> 01:01:00,230
That's going back to the
questions we were asking in

1240
01:01:00,230 --> 01:01:02,930
the case of education,
for example.

1241
01:01:02,930 --> 01:01:05,460
Is the relationship between
income today and income

1242
01:01:05,460 --> 01:01:10,120
tomorrow due to education?

1243
01:01:10,120 --> 01:01:12,820
Is it really of this shape or
is it of another shape?

1244
01:01:12,820 --> 01:01:15,680
That's what we have to
assert empirically.

1245
01:01:15,680 --> 01:01:17,730
And it's going to have
to be gathered on a

1246
01:01:17,730 --> 01:01:19,530
case-by-case example.

1247
01:01:19,530 --> 01:01:21,500
So for example, for food.

1248
01:01:21,500 --> 01:01:26,830
To create this shape, to know
what is the form of the shape,

1249
01:01:26,830 --> 01:01:29,030
we are going to need
to know two things.

1250
01:01:29,030 --> 01:01:32,640
We need to know what is the
relationship between how much

1251
01:01:32,640 --> 01:01:36,380
income you have and how many
calories you consume.

1252
01:01:36,380 --> 01:01:38,430
And what is the relationship
between the calories you

1253
01:01:38,430 --> 01:01:40,480
consume and your
work capacity?

1254
01:01:40,480 --> 01:01:42,910
And the product of the two
will be that curve.

1255
01:01:42,910 --> 01:01:44,480
And the shape it has--

1256
01:01:44,480 --> 01:01:47,920
God knows, I mean, actually even
we know, but we're going

1257
01:01:47,920 --> 01:01:50,030
to cover that next time.

1258
01:01:53,080 --> 01:01:57,550
So this is assuming that
the capacity curve

1259
01:01:57,550 --> 01:01:58,350
indeed has this shape.

1260
01:01:58,350 --> 01:02:01,870
Then we can see how the poverty
trap can emerge.

1261
01:02:01,870 --> 01:02:05,500
Now, if instead, the capacity
curve had this shape--

1262
01:02:08,520 --> 01:02:12,720
think of your example
of education.

1263
01:02:12,720 --> 01:02:17,400
And think that, in fact, the
first few years of education

1264
01:02:17,400 --> 01:02:22,090
are very valuable and the next
years you guys are kind of

1265
01:02:22,090 --> 01:02:25,650
wasting your time-- not to speak
of me-- and the next

1266
01:02:25,650 --> 01:02:27,410
years of education are
not so valuable.

1267
01:02:27,410 --> 01:02:30,710
What is really important is
to learn how to read.

1268
01:02:30,710 --> 01:02:32,675
Imagine that's the case.

1269
01:02:32,675 --> 01:02:35,140
Then it means that the
relationship between income

1270
01:02:35,140 --> 01:02:39,250
today and income tomorrow
is not as steep anymore.

1271
01:02:39,250 --> 01:02:42,500
It starts very high and
then it tapers off.

1272
01:02:42,500 --> 01:02:45,080
And so we can play the same
game again that we were

1273
01:02:45,080 --> 01:02:46,450
playing before.

1274
01:02:46,450 --> 01:02:51,670
We can say, well, let's draw
the diagonal line.

1275
01:02:51,670 --> 01:02:55,050
Let's start with some
income, a1.

1276
01:02:55,050 --> 01:02:57,470
To find out income tomorrow
what do we do?

1277
01:03:00,040 --> 01:03:01,470
We go vertical.

1278
01:03:01,470 --> 01:03:03,180
We find income, a2.

1279
01:03:03,180 --> 01:03:06,280
Then we have to go horizontal to
the 45-degree line to find

1280
01:03:06,280 --> 01:03:07,920
it on the horizontal line.

1281
01:03:07,920 --> 01:03:11,550
We go vertical again to
find it on the curve.

1282
01:03:11,550 --> 01:03:13,380
Horizontal again,
vertical again.

1283
01:03:13,380 --> 01:03:16,430
Where do we end up?

1284
01:03:16,430 --> 01:03:17,210
q.

1285
01:03:17,210 --> 01:03:20,200
Now suppose we had started
above q, where

1286
01:03:20,200 --> 01:03:21,850
would we end up?

1287
01:03:21,850 --> 01:03:22,530
q.

1288
01:03:22,530 --> 01:03:25,350
Suppose we had started anywhere
in between, where

1289
01:03:25,350 --> 01:03:26,706
would we end up?

1290
01:03:26,706 --> 01:03:27,640
q.

1291
01:03:27,640 --> 01:03:29,960
So there is no poverty
trap, in this case.

1292
01:03:29,960 --> 01:03:33,030
If there is only one
intersection because the

1293
01:03:33,030 --> 01:03:36,150
returns are first high and then
low, then there won't be

1294
01:03:36,150 --> 01:03:36,960
a poverty trap.

1295
01:03:36,960 --> 01:03:40,570
It doesn't mean that there is no
relationship between income

1296
01:03:40,570 --> 01:03:41,520
today and income tomorrow.

1297
01:03:41,520 --> 01:03:42,870
There is one.

1298
01:03:42,870 --> 01:03:45,950
But the point is, that
relationship is first steep

1299
01:03:45,950 --> 01:03:47,690
and then tapers off.

1300
01:03:47,690 --> 01:03:54,830
So for example, imagine that
the only type of businesses

1301
01:03:54,830 --> 01:03:56,640
that you can run are businesses

1302
01:03:56,640 --> 01:03:58,340
that you can run yourself.

1303
01:03:58,340 --> 01:04:03,060
That for some reason, you are in
a business where you can't

1304
01:04:03,060 --> 01:04:04,360
really have employees.

1305
01:04:04,360 --> 01:04:05,590
Imagine.

1306
01:04:05,590 --> 01:04:09,080
So in that case, your first
investment will be quite

1307
01:04:09,080 --> 01:04:10,890
valuable, right?

1308
01:04:10,890 --> 01:04:14,420
But then, eventually, you can't
really add much more

1309
01:04:14,420 --> 01:04:16,865
because you won't have
enough time to sell

1310
01:04:16,865 --> 01:04:18,630
all of these things.

1311
01:04:18,630 --> 01:04:27,220
So your first dollars invested
will have a very high return.

1312
01:04:27,220 --> 01:04:29,140
And then less and less
and less and less.

1313
01:04:29,140 --> 01:04:31,590
And so in that case, everybody
will end up at the same place.

1314
01:04:34,260 --> 01:04:41,385
An example that could make it
clear, is going back to our

1315
01:04:41,385 --> 01:04:47,800
Kenyan farmer from the MTV
video, Kennedy fertilizer.

1316
01:04:47,800 --> 01:04:50,670
If you put fertilizer
on your crop--

1317
01:04:50,670 --> 01:04:52,860
well when you put just
a little bit, the

1318
01:04:52,860 --> 01:04:55,130
effects are very high.

1319
01:04:55,130 --> 01:04:57,990
But when you start putting more,
eventually, the soil

1320
01:04:57,990 --> 01:05:00,210
can't absorb it so the
effects are less and

1321
01:05:00,210 --> 01:05:01,820
less and less high.

1322
01:05:01,820 --> 01:05:05,960
So even if you don't have enough
to put on your entire

1323
01:05:05,960 --> 01:05:08,930
field to start with, you could
imagine that you would first

1324
01:05:08,930 --> 01:05:12,110
put it in the most productive
part of your field.

1325
01:05:12,110 --> 01:05:14,760
Because the first unit of
fertilizer you are putting is

1326
01:05:14,760 --> 01:05:16,640
very high return.

1327
01:05:16,640 --> 01:05:18,910
The second, you need less
because you're going to the

1328
01:05:18,910 --> 01:05:22,980
place of your field that is
less productive anyway.

1329
01:05:22,980 --> 01:05:24,690
At the third, you
need even less.

1330
01:05:24,690 --> 01:05:27,040
The fourth is really not that
productive because, now, you

1331
01:05:27,040 --> 01:05:28,950
end up putting more where
you started from

1332
01:05:28,950 --> 01:05:30,420
in the first place.

1333
01:05:30,420 --> 01:05:33,400
So that's not really
helpful anymore.

1334
01:05:33,400 --> 01:05:36,260
So in that case, the returns
don't have this S-shape.

1335
01:05:36,260 --> 01:05:39,725
They have this inverted
L-shape.

1336
01:05:39,725 --> 01:05:43,360
So in that case, there
is no poverty trap.

1337
01:05:43,360 --> 01:05:46,050
And so that is where the
question that you were asking

1338
01:05:46,050 --> 01:05:46,670
is essential.

1339
01:05:46,670 --> 01:05:49,510
Which is, how do we know what
the shape of this curve?

1340
01:05:49,510 --> 01:05:52,020
Because the shape of this curve
is going to crucially

1341
01:05:52,020 --> 01:05:54,890
determine whether or
not we have a trap.

1342
01:05:54,890 --> 01:05:57,690
And what I want you to remember
is that that's more

1343
01:05:57,690 --> 01:05:59,840
than a relationship
between income

1344
01:05:59,840 --> 01:06:01,070
today and income tomorrow.

1345
01:06:01,070 --> 01:06:03,870
It has to be this relationship
of this shape.

1346
01:06:06,850 --> 01:06:08,740
So that's the first thing, which
is if the relationship

1347
01:06:08,740 --> 01:06:09,480
is inverted--

1348
01:06:09,480 --> 01:06:14,420
L-shaped like that, which
is the canonical case in

1349
01:06:14,420 --> 01:06:17,730
economics, most of our
economics model--

1350
01:06:17,730 --> 01:06:19,630
what you learn in 14.01--

1351
01:06:19,630 --> 01:06:22,090
has production function
of this form.

1352
01:06:22,090 --> 01:06:24,870
Where this production function,
which we called,

1353
01:06:24,870 --> 01:06:27,030
have decreasing returns.

1354
01:06:27,030 --> 01:06:31,160
Where the first unit invested is
very profitable and then it

1355
01:06:31,160 --> 01:06:33,320
becomes less and less
profitable.

1356
01:06:33,320 --> 01:06:38,090
We've already discussed a number
of reasons why the

1357
01:06:38,090 --> 01:06:40,590
returns might not would
always be decreasing.

1358
01:06:40,590 --> 01:06:43,480
For example, we discussed the
case of calories where there

1359
01:06:43,480 --> 01:06:46,120
might be an increasing zone and
then a decreasing zone.

1360
01:06:46,120 --> 01:06:48,740
We discussed education might
or might not be that way.

1361
01:06:48,740 --> 01:06:52,020
We got an interesting example
about businesses where you

1362
01:06:52,020 --> 01:06:55,160
might not have a very profitable
opportunity for

1363
01:06:55,160 --> 01:06:59,440
your business if you don't
have enough money.

1364
01:06:59,440 --> 01:07:02,840
We discussed savings, which may
or may not have this form.

1365
01:07:02,840 --> 01:07:05,580
Where nobody wants your
small savings.

1366
01:07:05,580 --> 01:07:07,980
So there are reasons
why it may not

1367
01:07:07,980 --> 01:07:09,880
always be inverted L-shaped.

1368
01:07:09,880 --> 01:07:14,820
But if it is inverted L-shaped
there won't be a poverty trap.

1369
01:07:14,820 --> 01:07:16,790
--You might be very bored with
me repeating the same thing

1370
01:07:16,790 --> 01:07:19,360
for the fifth time now, but
the reason why I insist is

1371
01:07:19,360 --> 01:07:22,590
that this is a confusion that
we hear over and over again

1372
01:07:22,590 --> 01:07:24,690
among policy makers.

1373
01:07:24,690 --> 01:07:28,220
In the policy discourse,
whenever they're thinking of a

1374
01:07:28,220 --> 01:07:29,840
double feedback loop--

1375
01:07:29,840 --> 01:07:34,270
for example, kids who have
less education, make less

1376
01:07:34,270 --> 01:07:38,200
money, and parents who have
less money send their kids

1377
01:07:38,200 --> 01:07:39,380
less to school.

1378
01:07:39,380 --> 01:07:40,620
Immediately, people think, ha!

1379
01:07:40,620 --> 01:07:43,520
If there is a double feedback
loop like that, that creates a

1380
01:07:43,520 --> 01:07:44,700
poverty trap.

1381
01:07:44,700 --> 01:07:46,370
And the point is, that that's
not sufficient.

1382
01:07:46,370 --> 01:07:48,500
That's necessary but that's
not sufficient.

1383
01:07:48,500 --> 01:07:51,260
Because if the double feedback
loop gives you a nice inverted

1384
01:07:51,260 --> 01:07:53,620
L-shape, eventually, everybody
will end up

1385
01:07:53,620 --> 01:07:55,400
nicely in the same place.

1386
01:07:55,400 --> 01:07:57,140
OK?

1387
01:07:57,140 --> 01:08:03,010
So there is more, which is, here
is another case where we

1388
01:08:03,010 --> 01:08:06,070
have an S-shaped curve.

1389
01:08:06,070 --> 01:08:11,215
But the S-shaped curve is a
little different, it's a

1390
01:08:11,215 --> 01:08:12,390
little higher.

1391
01:08:12,390 --> 01:08:14,540
So why would it be a little
higher, for example?

1392
01:08:14,540 --> 01:08:20,640
Why has it moved up compared
to what we had before?

1393
01:08:20,640 --> 01:08:21,890
Why could it have moved up?

1394
01:08:27,024 --> 01:08:30,510
Go back to the food example.

1395
01:08:30,510 --> 01:08:31,160
Sorry?

1396
01:08:31,160 --> 01:08:32,426
AUDIENCE: Lower food prices.

1397
01:08:32,426 --> 01:08:33,270
PROFESSOR: Lower food prices.

1398
01:08:33,270 --> 01:08:35,706
So for example, the productivity
of the land might

1399
01:08:35,706 --> 01:08:38,770
have gone up.

1400
01:08:38,770 --> 01:08:42,149
Maybe the government came and
built some irrigation dams and

1401
01:08:42,149 --> 01:08:43,740
the productivity of
land has gone up.

1402
01:08:43,740 --> 01:08:48,229
So to produce the same amount of
food you need less effort.

1403
01:08:48,229 --> 01:08:52,024
So the work capacity translates
into a higher

1404
01:08:52,024 --> 01:08:52,750
income for moi.

1405
01:08:52,750 --> 01:08:56,529
So for whatever reason,
the curve shifts up.

1406
01:08:56,529 --> 01:08:59,660
So then what happened--

1407
01:08:59,660 --> 01:09:02,189
we gave some person
some income, y0.

1408
01:09:04,950 --> 01:09:08,695
We find y1 by going vertical.

1409
01:09:08,695 --> 01:09:14,160
We find it again on the
horizontal line, y1.

1410
01:09:14,160 --> 01:09:17,140
Going back to y2, horizontal
again.

1411
01:09:17,140 --> 01:09:18,080
Et cetera, et cetera.

1412
01:09:18,080 --> 01:09:19,330
Where do we end up?

1413
01:09:24,220 --> 01:09:25,830
At the intersection.

1414
01:09:25,830 --> 01:09:28,310
And now there's only
one intersection.

1415
01:09:28,310 --> 01:09:32,194
So wherever we start, we are
going to end up at the same

1416
01:09:32,194 --> 01:09:33,320
intersection.

1417
01:09:33,320 --> 01:09:36,998
In that case, is there going
to be a poverty trap?

1418
01:09:40,750 --> 01:09:41,689
No.

1419
01:09:41,689 --> 01:09:43,550
In that case there is no poverty
trap because, again,

1420
01:09:43,550 --> 01:09:45,310
there is one statistic.

1421
01:09:45,310 --> 01:09:48,771
So an S-shape is not even a
sufficient condition for a

1422
01:09:48,771 --> 01:09:50,050
poverty trap.

1423
01:09:50,050 --> 01:09:53,840
It is necessary but it's
not sufficient.

1424
01:09:53,840 --> 01:09:57,365
Let's find another example,
which is this one.

1425
01:09:57,365 --> 01:10:00,830
Where in fact, now it's
the opposite.

1426
01:10:00,830 --> 01:10:03,600
There was some flood
and the land is now

1427
01:10:03,600 --> 01:10:05,500
completely washed out.

1428
01:10:05,500 --> 01:10:07,230
So people are very
unproductive.

1429
01:10:07,230 --> 01:10:10,680
They have to work very hard
to produce very little.

1430
01:10:10,680 --> 01:10:12,000
So what happened to
my poor S-shape?

1431
01:10:19,200 --> 01:10:22,830
It's shifted to the
southwest, right?

1432
01:10:22,830 --> 01:10:31,480
So now if I start from y0--

1433
01:10:31,480 --> 01:10:33,030
quite high-- where do I go?

1434
01:10:36,420 --> 01:10:38,340
So I go up, but then
it's not enough.

1435
01:10:38,340 --> 01:10:41,690
The 45-degree line
is to the left.

1436
01:10:41,690 --> 01:10:43,700
I have to go left, down
again, down again,

1437
01:10:43,700 --> 01:10:44,760
down again, and again.

1438
01:10:44,760 --> 01:10:49,220
I'm going to end up at the
single intersection where I'm

1439
01:10:49,220 --> 01:10:52,290
always pulled up, which
is a very low income.

1440
01:10:52,290 --> 01:10:56,210
So in a sense, there is no
poverty trap here either.

1441
01:10:56,210 --> 01:10:58,790
Because it's not that if you're
poor, you'll stay poor,

1442
01:10:58,790 --> 01:11:00,120
and if you're rich,
you'll stay rich.

1443
01:11:00,120 --> 01:11:01,696
Regardless, you're
going to be poor.

1444
01:11:01,696 --> 01:11:02,530
AUDIENCE: [LAUGHTER]

1445
01:11:02,530 --> 01:11:05,030
PROFESSOR: So you could think
it's a universal poverty trap

1446
01:11:05,030 --> 01:11:06,920
or you can think that's
just the way is.

1447
01:11:06,920 --> 01:11:14,190
Because if you ignore the right
side, we almost are in

1448
01:11:14,190 --> 01:11:17,120
the inverted L-shape except
there are stuff that are a

1449
01:11:17,120 --> 01:11:19,470
little bit irrelevant
to the right.

1450
01:11:19,470 --> 01:11:21,290
The reason why they are
irrelevant is that,

1451
01:11:21,290 --> 01:11:24,900
eventually, everybody's
becoming poor anyway.

1452
01:11:24,900 --> 01:11:28,010
So again, we don't have
a poverty trap.

1453
01:11:28,010 --> 01:11:30,240
So let's look at those
three examples.

1454
01:11:30,240 --> 01:11:34,110
That's an example with
a poverty trap.

1455
01:11:34,110 --> 01:11:36,790
That's an example that
doesn't have one.

1456
01:11:36,790 --> 01:11:39,710
That's another example that
doesn't have one.

1457
01:11:39,710 --> 01:11:43,290
What is different between the
one example with the poverty

1458
01:11:43,290 --> 01:11:45,290
trap and the one which
doesn't have one--

1459
01:11:45,290 --> 01:11:45,570
or two?

1460
01:11:45,570 --> 01:11:46,270
Yes.

1461
01:11:46,270 --> 01:11:47,900
Can you tell me your name?

1462
01:11:47,900 --> 01:11:48,310
AUDIENCE: Zachary--

1463
01:11:48,310 --> 01:11:48,570
PROFESSOR: Zachary.

1464
01:11:48,570 --> 01:11:51,485
AUDIENCE: --it crosses the
45-degree line twice.

1465
01:11:51,485 --> 01:11:52,810
PROFESSOR: Exactly.

1466
01:11:52,810 --> 01:11:54,536
Well, twice or--

1467
01:11:54,536 --> 01:11:55,410
AUDIENCE: Three times.

1468
01:11:55,410 --> 01:11:56,896
PROFESSOR: Three times.

1469
01:11:56,896 --> 01:12:02,500
It crosses the 45-degree
line once from below.

1470
01:12:02,500 --> 01:12:08,960
So the rule is that you're going
to have a poverty trap

1471
01:12:08,960 --> 01:12:10,280
if the capacity curve--

1472
01:12:10,280 --> 01:12:13,745
or whatever is the curve between
the income from work

1473
01:12:13,745 --> 01:12:15,420
and the inherited income--

1474
01:12:15,420 --> 01:12:20,960
crosses the 45-degree line,
at least once, from below.

1475
01:12:20,960 --> 01:12:23,640
That is, there is at least one
unstable equilibrium where

1476
01:12:23,640 --> 01:12:25,562
you're crossing from below.

1477
01:12:25,562 --> 01:12:30,290
And that is necessary for
having a poverty trap.

1478
01:12:30,290 --> 01:12:34,760
So what you need, in other
words, is to have a zone where

1479
01:12:34,760 --> 01:12:37,130
income is accelerating.

1480
01:12:37,130 --> 01:12:41,830
And this zone must to be at a
place where the income was

1481
01:12:41,830 --> 01:12:44,750
relatively low to start with.

1482
01:12:44,750 --> 01:12:48,490
And it needs to accelerate
enough that it's becoming high

1483
01:12:48,490 --> 01:12:49,250
to start with.

1484
01:12:49,250 --> 01:12:52,740
In other words, it needs to be
a zone where, if you're below

1485
01:12:52,740 --> 01:12:55,280
the zone, you're making
less tomorrow than you

1486
01:12:55,280 --> 01:12:56,820
started from today.

1487
01:12:56,820 --> 01:12:58,870
And when you're on the right
of the zone, you're making

1488
01:12:58,870 --> 01:13:02,120
more tomorrow than you
started from today.

1489
01:13:02,120 --> 01:13:03,790
And you need to have
this point.

1490
01:13:03,790 --> 01:13:07,420
Otherwise, there is
no poverty trap.

1491
01:13:07,420 --> 01:13:08,000
All right?

1492
01:13:08,000 --> 01:13:15,090
So that's the mathematical
expression of it.

1493
01:13:15,090 --> 01:13:21,840
And now, in a sense, the game
that we're going to play all

1494
01:13:21,840 --> 01:13:25,350
around this class is
to be looking for--

1495
01:13:25,350 --> 01:13:30,810
are we in this situation where
whatever is the relationship

1496
01:13:30,810 --> 01:13:33,060
between income today and income
tomorrow crosses the

1497
01:13:33,060 --> 01:13:35,300
45-degree line from below.

1498
01:13:35,300 --> 01:13:38,170
Or are we not in
this situation.

1499
01:13:38,170 --> 01:13:42,060
And now we are in a much better
position to ask the

1500
01:13:42,060 --> 01:13:44,250
question that Zach asked at the
beginning of the question

1501
01:13:44,250 --> 01:13:46,790
which is, are we really
believing that there could be

1502
01:13:46,790 --> 01:13:49,540
a poverty trap based on food?

1503
01:13:49,540 --> 01:13:52,480
I didn't want to answer his
question to start with because

1504
01:13:52,480 --> 01:13:56,650
I needed some time to specify
the question in a much more

1505
01:13:56,650 --> 01:13:58,250
precise way.

1506
01:13:58,250 --> 01:14:01,840
Now we can re-ask the question
and say, is it really possible

1507
01:14:01,840 --> 01:14:10,260
that the relationship between
the calories I consume and my

1508
01:14:10,260 --> 01:14:15,150
strength has this specific form
where it intersects the

1509
01:14:15,150 --> 01:14:17,230
45-degree line from below?

1510
01:14:17,230 --> 01:14:20,720
And how does that intersect with
the fact that I choose

1511
01:14:20,720 --> 01:14:22,820
how much to consume?

1512
01:14:22,820 --> 01:14:27,120
Because, of course, if there
is indeed a strong

1513
01:14:27,120 --> 01:14:31,500
relationship between the
calories consumed and the work

1514
01:14:31,500 --> 01:14:35,000
capacity, then people should
try and get out of it by

1515
01:14:35,000 --> 01:14:38,040
eating as much as possible
when they are very poor.

1516
01:14:38,040 --> 01:14:41,340
So to the extent that people
can choose how much to

1517
01:14:41,340 --> 01:14:44,620
consume, how much food to eat,
they should eat more when they

1518
01:14:44,620 --> 01:14:48,210
are very poor in order to try
and pull themselves to the

1519
01:14:48,210 --> 01:14:50,270
right of this point.

1520
01:14:50,270 --> 01:14:53,030
And when they are richer then
it wouldn't really matter.

1521
01:14:53,030 --> 01:14:55,870
So they would eat less.

1522
01:14:55,870 --> 01:15:01,540
So that would create a force
that goes against an S-shape

1523
01:15:01,540 --> 01:15:03,120
for the capacity curve.

1524
01:15:03,120 --> 01:15:04,800
So we have to see--

1525
01:15:04,800 --> 01:15:06,190
and that goes back to
your question, where

1526
01:15:06,190 --> 01:15:07,240
do you get it from?

1527
01:15:07,240 --> 01:15:11,380
Well, we get it from looking at
the data and looking at--

1528
01:15:11,380 --> 01:15:15,630
to what extent people who have
more money eat so much more,

1529
01:15:15,630 --> 01:15:17,990
and to what extent people who
eat so much more are so much

1530
01:15:17,990 --> 01:15:19,120
more productive.

1531
01:15:19,120 --> 01:15:20,520
And that's what we
are going to do.

1532
01:15:20,520 --> 01:15:22,010
We are going to do
it for food.

1533
01:15:22,010 --> 01:15:25,950
But now that we understand the
principle for food, we are

1534
01:15:25,950 --> 01:15:27,240
going to do it for education.

1535
01:15:27,240 --> 01:15:28,990
We are going to do it for
health, we are going to do it

1536
01:15:28,990 --> 01:15:31,082
for savings, for businesses,
et cetera.

1537
01:15:31,082 --> 01:15:31,528
Yeah?

1538
01:15:31,528 --> 01:15:33,760
AUDIENCE: To go back to the
example with the start of the

1539
01:15:33,760 --> 01:15:35,600
class, would you say that--

1540
01:15:35,600 --> 01:15:38,960
I forgot his name but-- that
the man was at an unstable

1541
01:15:38,960 --> 01:15:42,080
equilibrium since as soon as he
lost his job, he seemed to

1542
01:15:42,080 --> 01:15:45,560
go down and not be able
to eat enough to get

1543
01:15:45,560 --> 01:15:47,030
another job, et cetera?

1544
01:15:47,030 --> 01:15:48,250
PROFESSOR: Right.

1545
01:15:48,250 --> 01:15:49,560
So that's a very
good question.

1546
01:15:49,560 --> 01:15:53,290
What we can try now is to
re-interpret Mister Solhin's

1547
01:15:53,290 --> 01:15:55,690
story in the context of this.

1548
01:15:55,690 --> 01:15:59,020
And you could say, well perhaps,
it was exactly

1549
01:15:59,020 --> 01:16:00,270
something like that.

1550
01:16:03,120 --> 01:16:04,500
So what would have
happened to him?

1551
01:16:09,020 --> 01:16:11,000
Let's see, I want to--

1552
01:16:11,000 --> 01:16:12,250
oops.

1553
01:16:20,430 --> 01:16:22,990
What would have happened
to him?

1554
01:16:22,990 --> 01:16:25,615
So we discussed that one thing
that might have happened to

1555
01:16:25,615 --> 01:16:29,620
him is that something happened
to the capacity curve, right?

1556
01:16:29,620 --> 01:16:34,830
We were saying that coincident
decrease in the wage and

1557
01:16:34,830 --> 01:16:38,130
increase in the food prices
means that the capacity curve

1558
01:16:38,130 --> 01:16:41,590
tends to move to
the southwest.

1559
01:16:41,590 --> 01:16:44,180
So assume that Pak Solhin
was at the high

1560
01:16:44,180 --> 01:16:46,720
equilibrium up there.

1561
01:16:46,720 --> 01:16:47,000
Right?

1562
01:16:47,000 --> 01:16:48,620
But right there.

1563
01:16:48,620 --> 01:16:51,350
And then the curve moves
slightly to the right.

1564
01:16:54,770 --> 01:16:58,800
Then, with the same income, he
suddenly is now below what

1565
01:16:58,800 --> 01:17:01,590
would correspond to the new
equilibrium and it would start

1566
01:17:01,590 --> 01:17:03,610
falling down, down,
down, down.

1567
01:17:03,610 --> 01:17:07,560
And once he starts going down,
there is no going up again.

1568
01:17:07,560 --> 01:17:10,250
It could also have
eliminated--

1569
01:17:10,250 --> 01:17:13,630
we might also be in a situation
where, at the

1570
01:17:13,630 --> 01:17:15,710
beginning there was just
one equilibrium--

1571
01:17:15,710 --> 01:17:19,140
so we were, for example
in this situation--

1572
01:17:19,140 --> 01:17:23,200
and then once the curve moves
down, they are now two

1573
01:17:23,200 --> 01:17:26,620
equilibria, including
the unstable one.

1574
01:17:26,620 --> 01:17:29,625
So we may have started, in the
former situation, where people

1575
01:17:29,625 --> 01:17:33,440
were productive enough that they
were always moving up.

1576
01:17:33,440 --> 01:17:37,680
And then, with the increase in
food prices and the decrease

1577
01:17:37,680 --> 01:17:40,670
in wages, that curve shifts down
and now it creates two

1578
01:17:40,670 --> 01:17:41,170
equilibria.

1579
01:17:41,170 --> 01:17:43,940
So some people get trapped
like he was.

1580
01:17:43,940 --> 01:17:46,850
What was interesting in Pak
Solhin's villages is that, in

1581
01:17:46,850 --> 01:17:48,930
the same villages, I
met people who were

1582
01:17:48,930 --> 01:17:50,840
happily eating enough.

1583
01:17:50,840 --> 01:17:56,920
So it seemed that there was both
kinds, which makes you

1584
01:17:56,920 --> 01:18:00,320
think that these two things
were coexisting.

1585
01:18:00,320 --> 01:18:02,810
So maybe what happened with him
is that we started from a

1586
01:18:02,810 --> 01:18:06,770
situation like that, and then
we moved left and we end up

1587
01:18:06,770 --> 01:18:08,320
with this double situation.

1588
01:18:08,320 --> 01:18:18,750
That's possible

1589
01:18:18,750 --> 01:18:25,760
So what we had in the
Sachs-Jolie video is--

1590
01:18:25,760 --> 01:18:29,130
we said when we just
started the class--

1591
01:18:29,130 --> 01:18:32,230
lots of examples of
poverty traps.

1592
01:18:32,230 --> 01:18:36,620
And in each case, we could try
and think, well, what makes us

1593
01:18:36,620 --> 01:18:39,090
think that there is indeed a
poverty trap in this case?

1594
01:18:39,090 --> 01:18:41,630
Or what makes us think that
maybe there is no poverty trap

1595
01:18:41,630 --> 01:18:42,930
in this case?

1596
01:18:42,930 --> 01:18:47,700
So one example is what
happened with the

1597
01:18:47,700 --> 01:18:48,950
farmer that they meet.

1598
01:18:52,545 --> 01:18:55,350
So they claim that there
was a poverty trap.

1599
01:18:55,350 --> 01:18:58,970
So what is the implicit argument
that they had in mind

1600
01:18:58,970 --> 01:19:05,000
that would help us think that,
for a farmer, the decision to

1601
01:19:05,000 --> 01:19:08,480
use fertilizer corresponds
to that

1602
01:19:08,480 --> 01:19:13,670
problem versus that problem?

1603
01:19:13,670 --> 01:19:18,210
What do we need to know about
fertilizer and fertilizer use

1604
01:19:18,210 --> 01:19:22,640
to try and sort out whether we
are in the situation that they

1605
01:19:22,640 --> 01:19:24,482
talk about or in the
other situation.

1606
01:19:24,482 --> 01:19:26,700
Yeah?

1607
01:19:26,700 --> 01:19:28,522
You go ahead, I have
a problem.

1608
01:19:28,522 --> 01:19:31,184
AUDIENCE: You need to know if
there is some minimum of

1609
01:19:31,184 --> 01:19:35,310
fertilizer used that becomes
useful for the farmer.

1610
01:19:35,310 --> 01:19:35,470
PROFESSOR: Right.

1611
01:19:35,470 --> 01:19:38,460
So there could be that, minimum
fertilizer used.

1612
01:19:38,460 --> 01:19:43,800
But why would there be a minimum
fertilizer used?

1613
01:19:43,800 --> 01:19:44,637
Yeah?

1614
01:19:44,637 --> 01:19:47,906
AUDIENCE: Maybe it's super
difficult to acquire small

1615
01:19:47,906 --> 01:19:49,310
quantities of fertilizer.

1616
01:19:49,310 --> 01:19:52,640
PROFESSOR: So for example,
it might be sold by

1617
01:19:52,640 --> 01:19:55,560
the bag or 50 kg.

1618
01:19:55,560 --> 01:20:01,320
So in that case, what we have
is not so much S-shaped but

1619
01:20:01,320 --> 01:20:05,220
something which is a degenerated
S where you get

1620
01:20:05,220 --> 01:20:07,955
nothing if you can't invest
enough and then you get the

1621
01:20:07,955 --> 01:20:11,380
return which are, potentially,
very steep at the beginning.

1622
01:20:11,380 --> 01:20:17,890
So instead of a nice little
curvy S, we have a flat part

1623
01:20:17,890 --> 01:20:20,540
and then an inverted L.

1624
01:20:20,540 --> 01:20:24,080
But if we have a flat part and
then the inverted L, it would

1625
01:20:24,080 --> 01:20:27,920
still work like an S. Because
there would still be an

1626
01:20:27,920 --> 01:20:32,450
intersection where the curve
intersects from above on the

1627
01:20:32,450 --> 01:20:37,370
flat part, an intersection where
it intersects from below

1628
01:20:37,370 --> 01:20:39,590
at the beginning of the
L-shape, and another

1629
01:20:39,590 --> 01:20:41,840
intersection where it intersects
from above at the

1630
01:20:41,840 --> 01:20:43,490
end of the L-shape.

1631
01:20:43,490 --> 01:20:46,790
So the S doesn't have to be a
proper S. It could be a flat

1632
01:20:46,790 --> 01:20:50,640
part and then an inverted L. So
this example could be one,

1633
01:20:50,640 --> 01:20:54,800
which is you can only buy
fertilizer by the 50 kg.

1634
01:20:54,800 --> 01:20:59,280
What other situation
could we find?

1635
01:20:59,280 --> 01:21:00,160
Yeah?

1636
01:21:00,160 --> 01:21:03,466
AUDIENCE: The percentage of
chance for success in using

1637
01:21:03,466 --> 01:21:03,955
fertilizer.

1638
01:21:03,955 --> 01:21:09,089
So if you only had [INAUDIBLE]
over a small plot of land, it

1639
01:21:09,089 --> 01:21:11,290
is, like, 20% chance
of actually

1640
01:21:11,290 --> 01:21:12,268
improving your crop yield.

1641
01:21:12,268 --> 01:21:15,691
You would have to use a larger
quantity to actually get an

1642
01:21:15,691 --> 01:21:17,670
improved crop yield.

1643
01:21:17,670 --> 01:21:21,650
PROFESSOR: So that could be a
possibility if the chance of

1644
01:21:21,650 --> 01:21:24,630
success depends on
how much you use.

1645
01:21:24,630 --> 01:21:27,540
I think it's not very likely
that it would be a purely

1646
01:21:27,540 --> 01:21:31,060
physical thing because
fertilizer is quite scalable.

1647
01:21:31,060 --> 01:21:36,550
But one way in which we could
have your story is if, to use

1648
01:21:36,550 --> 01:21:39,460
fertilizer it requires
some learning.

1649
01:21:39,460 --> 01:21:42,590
And there's no point doing
all that learning--

1650
01:21:42,590 --> 01:21:45,050
and asking all of your neighbors
how they do it, and

1651
01:21:45,050 --> 01:21:46,870
try to understand
how they do it.

1652
01:21:46,870 --> 01:21:50,020
Maybe experiment a little bit,
maybe it won't work first.

1653
01:21:50,020 --> 01:21:51,960
--Maybe there is no point to
go through all of this

1654
01:21:51,960 --> 01:21:55,740
learning if, at the end of the
day, you know that, no matter

1655
01:21:55,740 --> 01:21:59,730
what, you will always be able
to use just a little bit.

1656
01:21:59,730 --> 01:22:01,940
So that would be one way
in which you would,

1657
01:22:01,940 --> 01:22:03,890
again, create this.

1658
01:22:03,890 --> 01:22:07,050
You're not going to use any
fertilizer if you know that

1659
01:22:07,050 --> 01:22:10,240
you, eventually, would be able
to use it on the substantial

1660
01:22:10,240 --> 01:22:11,060
part of your field.

1661
01:22:11,060 --> 01:22:11,552
Yeah?

1662
01:22:11,552 --> 01:22:14,012
AUDIENCE: I think that the main
point they made in the

1663
01:22:14,012 --> 01:22:16,964
video is that there needed
to be an initial push.

1664
01:22:16,964 --> 01:22:19,424
So they needed a lot of
fertilizer and you needed to

1665
01:22:19,424 --> 01:22:22,868
put it on all of the crops for
it to make a big impact.

1666
01:22:22,868 --> 01:22:26,312
And the fact is, if you have a
little bit of fertilizer-- the

1667
01:22:26,312 --> 01:22:30,740
point was why couldn't
they invest?

1668
01:22:30,740 --> 01:22:34,184
So save would be paying for a
little bit of fertilizer.

1669
01:22:34,184 --> 01:22:37,136
And then buy more fertilizer and
then continue to grow it

1670
01:22:37,136 --> 01:22:39,596
until [INAUDIBLE].

1671
01:22:39,596 --> 01:22:42,721
You know, if you started off
with a small amount, you

1672
01:22:42,721 --> 01:22:45,362
couldn't really invest
and grow your yield

1673
01:22:45,362 --> 01:22:47,630
to make more money.

1674
01:22:47,630 --> 01:22:47,990
PROFESSOR: Right.

1675
01:22:47,990 --> 01:22:51,035
Then the third possibility is
that if you invest just a

1676
01:22:51,035 --> 01:22:52,780
little bit--

1677
01:22:52,780 --> 01:22:56,920
let's say fertilizer scales
nicely, so you can invest just

1678
01:22:56,920 --> 01:22:58,550
a little bit and
you can do it.

1679
01:22:58,550 --> 01:23:02,390
But then, you're going to make
just a little bit more money.

1680
01:23:02,390 --> 01:23:05,560
And then we need some other
mechanism which means that

1681
01:23:05,560 --> 01:23:09,090
saving a little bit more money
is not feasible, or people are

1682
01:23:09,090 --> 01:23:10,650
not going to do it.

1683
01:23:10,650 --> 01:23:13,130
So then we need to bring in
something else which is along

1684
01:23:13,130 --> 01:23:14,730
the line of what we
were discussing

1685
01:23:14,730 --> 01:23:16,020
earlier in the class.

1686
01:23:16,020 --> 01:23:20,170
We need to bring in something
else which is, the banks are

1687
01:23:20,170 --> 01:23:22,520
not going to take your small
amount of money.

1688
01:23:22,520 --> 01:23:24,720
Or if you have a small amount
of money, you are

1689
01:23:24,720 --> 01:23:25,660
going to waste it.

1690
01:23:25,660 --> 01:23:29,380
But if you have a lot, now
that's enough money to be

1691
01:23:29,380 --> 01:23:32,560
worthwhile and you're
going to keep it.

1692
01:23:32,560 --> 01:23:33,300
All right.

1693
01:23:33,300 --> 01:23:37,300
So we are going to end
here for today.

1694
01:23:37,300 --> 01:23:40,430
So make sure you understand this
because we are not ready

1695
01:23:40,430 --> 01:23:42,480
to go back to it formally a lot,
but this is going to be

1696
01:23:42,480 --> 01:23:44,620
with us all the time.

1697
01:23:44,620 --> 01:23:46,620
And on Tuesday, we are going
to go through experiments.