The Lesson of the Toaster (Bumped)

Designer Thomas Thwaites decided to undertake a rather unusual project. He was inspired by an excerpt from Douglas Adams’ Hitchhiker’s Guide to the Galaxy, in which the protagonist finds himself on an alien planet.

Left to his own devices he couldn’t build a toaster. He could just about make a sandwich and that was it.

So Thwaites decides to try to see if he can build a toaster himself–from scratch–and discovers the task to be essentially impossible. No one in the world knows how to make a toaster.

Of course, this result is not new or surprising to those of us familiar with Leonard Read’s I, Pencil, published way back in 1958. What is true of toasters is also true of pencils–and virtually every other product of modern civilization.

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me.
[Emphasis in original.]

In the TED talk below, Thwaites describes his hapless efforts to build a toaster. The whole video is rather amusing, but perhaps the most interesting part of the story occurs right near the beginning. Thwaites pays just a bit more than $6 for the cheapest toaster he can find. When he gets home and takes it apart, he’s dismayed to find that it consists of some 400 different parts made from more than 100 different materials.

toaster

Clearly even a cheap toaster is remarkably complex. But the lesson of the toaster is not just complexity, but what that complexity implies. The implication is that there can be no modern civilization without free markets.

To see this, consider first that Thwaites’ toaster demonstrates not only that no single person can make a toaster, but that no single firm can make a toaster. The 100+ materials found in the toaster have to be mined and/or processed by a great many different firms. Then numerous additional firms must manufacture out of those materials the 400 different parts. The firm that we think of as ‘making’ the toaster mostly just assembles and transforms the parts produced by all those other firms. Those firms in turn rely on other firms to provide support in the form of equipment and necessary inputs such as energy. Overall, perhaps thousands of different firms play a role in producing the toaster. No single firm produces the toaster from scratch because no single firm can do it, at least not efficiently enough to sell the toaster at a price at all close to $6.

The numerous firms involved with producing the toaster must conduct amongst themselves many, many transactions. And those numerous transactions are not possible without markets and prices. The invisible hand of the price system regulates and directs those transactions. And that’s precisely why no single firm can produce the toaster. The vastly numerous transactions are far too complex and require much more information than a single entity can possess. Only the price system can handle that task. Producing a toaster requires prices determined by a system of free markets.

Somebody remarked that Thwaites’ project proves that it takes a modern civilization to make a toaster. That is true. But more specifically, making a toaster requires free markets. And the same is true for other products that define modern civilization. The lesson of the toaster is that modern civilization itself is not possible without free markets.

Drafting Apple?

All the controversy over the government trying to force Apple to create software to unlock a terrorist’s cell phone brings to mind the 13th Amendment to the US Constitution:

Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.

While usually thought of in terms of slavery, “involuntary servitude” refers to being forced through coercion to work for another. Isn’t this what is happening to Apple? They are being forced through coercion (a court order) to work for another (the US Government).

One can say that Obamacare sort of does this already since the Federal Government has forced everyone to buy insurance or be fined. But buying insurance is not preforming a service. What the government is trying to do to Apple goes way beyond purchasing something. One could also argue that taxation does the same thing and that anyone in say the 25% tax bracket is forced to work one out of every four days for the government. But this argument falls flat since individuals are not “compelled” to earn any income at all. This seems more akin to the military draft and, for us, raises the question that if Apple can be ordered to aid the US government, where is the limit to what the government can force anyone to do?

Yes, Economic Nationalism Would Hurt American Consumers

We’ve previously quoted blogger “Agnostic” for his insights on the music preferences of the millennial generation. We’re less impressed, however, with his views on the merits of economic nationalism. Specifically, Agnostic argues that trade restrictions will only erode corporate profits, and will not subject American consumers to higher prices.

We’ve never off-shored entire fundamental sectors of our economy before, nor have we taken them back. So we have no history to consult when we try to figure out what might happen once the Trump administration begins to bring manufacturing back to the United States.

Certainly the company’s labor costs will be higher — cutting costs on labor was the main reason they sent the jobs overseas in the first place. Why pay an American who expects $20 an hour, when a Mexican or a Chinese will do it for $5?

But if a company tries to pass that higher labor cost onto the consumer in the form of higher prices, they risk pricing themselves out of the market. After all, there will be other companies in that sector who will raise their prices by a smaller amount in order to grab the customers. This competition creates a race to the bottom, where they won’t end up passing on much of the higher labor costs at all.

If they want any business whatsoever, they’re just going to have to get by on smaller profit margins than they had been enjoying during the era of off-shoring.

This assumes there’s a healthy level of competition, but for most of the stuff we’re talking about — clothing, tools, appliances, electronics, furniture, etc. — there are already numerous companies competing against each other.

Agnostic’s argument only has validity in a very special case of a competitive industry in which the process of offshoring is incomplete in the sense that only a few firms have moved production offshore, while most have not. Those few firms now have a cost advantage from using cheaper foreign labor, and so can earn excess profits. This is usually a temporary situation that can last only so long as the offshoring firms’ competitors have not yet offshored their own production.

Eventually, the rest of the industry will realize the advantage of offshoring, and most or all of the industry’s production will move overseas. In this case, the very competitive environment on which Agnostic’s argument relies will eliminate excess profits and cause prices to be bid down to cost. That means the cost advantage from using cheaper foreign labor gets passed down to consumers in the form of lower prices.

This cost advantage enjoyed by consumers is evident in the very industries Agnostic mentions, like electronics and clothes. Consider in particular the case of clothes. Our friend Mark Perry recently produced a very revealing chart, which we have taken the liberty of displaying below.

clothing

The chart shows that, since 1993, the price of apparel has fallen 5.5 percent, while nominal wages have increased 95 percent. Hence, income has nearly doubled, whereas prices have fallen slightly. In other words, the fraction of income people have to devote to apparel has been slashed in half. There’s no way that wages and apparel prices could have diverged so much if apparel had to be produced with domestic labor.

Reversing this process by requiring domestic production could easily mean that American consumers would have to pay nearly twice as much for clothing. And the only alleged benefit to offset that cost would be the return to the U.S. of jobs in the textile industry.

Two points, however, about those jobs. First, textile jobs are not very good jobs; most Americans nowadays would not want to work on the floor of a textile plant. Moreover, the additional textile jobs would not represent a net addition to American employment, because they would come at the expense of jobs in other domestic industries. Once Americans have to pay twice as much for apparel, they have less money to spend on other goods, causing other domestic industries to contract. (Also foreigners who have lost their textile jobs have less money to spend on American exports, which further reduces U.S. employment.)

Economic nationalism is just really bad economics.

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International trade is like a productive machine (Revised)

One of the most frequently repeated economic fallacies is that free trade is bad for America because American workers cannot compete with foreign workers who might get paid only $2 per hour. But that low foreign wage is not a problem for the U.S. economy, it’s an opportunity. Specifically, it’s an opportunity to obtain goods that are costly for us to produce in exchange for goods that are cheap for us to produce.

It’s true, however, that free trade can displace American workers in import-competing industries. Those displaced workers need to find new employment, and might need help with re-training and job placement. But the same is true whenever workers are displaced by labor-saving technology like machines and robots. Indeed, the effects of labor-saving technologies are essentially equivalent to those of international trade. Either way, the effect is to increase productivity by economizing on domestic labor and other resources.

An American worker cannot compete with a foreign worker who earns only $2 per hour. True enough. Just as it is also true that a manual laborer with a shovel cannot compete with a mechanical excavator. And that’s the point. The foreign labor and the excavator both increase wealth and productivity, and do so in the same way–by economizing on domestic labor and other resources, thus freeing up resources for alternative uses.

Whenever you hear someone argue that trade must be restricted in order to protect jobs, ask them if they also believe that producers should not be allowed to eliminate jobs by automating production tasks. For instance, should the invention of the printing press and movable type have been suppressed in order to protect the jobs of scribes?

Outsourcing a job to a foreign worker or ‘outsourcing’ a job to a robot; either way, the effects are essentially the same, and so it’s not logically consistent to oppose one but not the other.

An Economic Theory of Political Correctness

Kristian Niemietz argues that political correctness is a kind of positional good, specifically a form of virtue signalling.

A positional good is a good that people acquire to signalise where they stand in a social hierarchy; it is acquired in order to set oneself apart from others. Positional goods therefore have a peculiar property: the utility their consumers derive from them is inversely related to the number of people who can access them.

Positionality is not a property of the good itself, it is a matter of the consumer’s motivations. I may buy an exquisite variety of wine because I genuinely enjoy the taste, or acquire a degree from a reputable university because I genuinely appreciate what that university has to offer. But my motivation could also be to set myself apart from others, to present myself as more sophisticated or smarter. From merely observing that I consume the product, you could not tell my motivation. But you could tell it by observing how I respond once other people start drinking the same wine, or attending the same university.

[…]

[I]f you see me moaning that the winemakers/the university have ‘sold out’, if you see me whinging about those ignoramuses who do not deserve the product because they (unlike me, of course) do not really appreciate it, you can safely conclude that for me, this good is a positional good. (Or was, before everybody else discovered it.) We can all become more sophisticated wine consumers, and we can all become better educated. But we can never all be above the national average, or in the top group, in terms of wine-connoisseurship, education, income, or anything else. We can all improve in absolute terms, but we cannot all simultaneously improve in relative terms. And that is what positional goods are all about – signalising a high position in a ranking, that is, a relation to others.

Since the purpose of the positional good is to set oneself apart from others, as more people become PC and accept PC nostrums, the PC crowd, to maintain their status, must discover ever new things to be morally outraged about.

PC-brigadiers behave exactly like owners of a positional good who panic because wider availability of that good threatens their social status. The PC brigade has been highly successful in creating new social taboos, but their success is their very problem. Moral superiority is a prime example of a positional good, because we cannot all be morally superior to each other. Once you have successfully exorcised a word or an opinion, how do you differentiate yourself from others now? You need new things to be outraged about, new ways of asserting your imagined moral superiority…new things to label ‘offensive’, new victim groups, new patterns of dominance and oppression.

Niemietz’ theory has considerable merit, and in particular it explains why so much of the outrage of Social Justice Warriors seems feigned and contrived. For instance, the moral indignation over the name of the Washington Redskins seems driven much more by attention-seeking pasty white people than by any genuinely offended American Indians.

Further evidence that PC is just posing and signalling is reflected in the fact that SJWs have their priorities constantly out of whack. If they really cared about fairness and justice, they would prioritize by focusing their concerns on the specific injustices that are most egregious. Instead, they focus on relative trivialities.

So gangs of Pakistani men can rape and sexually enslave literally thousands of underage British girls, but feminists don’t have much to say because they’re focused on fake rapes at college fraternities. Some 200 million women worldwide have been subjected to female circumcision, including many in Western countries, but feminists prefer to talk about the moral outrages of manspreading and advertisements in the London Underground that show a model in a bikini. When your priorities are that far out of line, you’re not serious about finding solutions to real problems.

The theory of PC as virtue signalling is also consistent with Fen’s Law, which states that leftists don’t really believe any of the things they lecture the rest of us about. Hence when there’s a Republican president, the anti-war movement holds huge marches with placards and giant papier-mache heads. But when a Democrat president fights the same war in Afghanistan, and in fact sends twice as many American troops into the conflict, with even more combat deaths as a result, the anti-war movement is nowhere to be seen. They’re not really anti-war, they’re just signalling support for their own tribe: leftists and Democrats. Similarly, people who speak in dire tones about the supposed evils of income inequality are strangely unreceptive to proposed measures that would actually reduce inequality, like reforming the schools or abolishing the Ivy League.

In the video below, George Will takes an amusing look at the absurdity of political correctness. It all does makes a lot more sense, however, when one keeps in mind that the objective is status whoring, not practical social reform.

The text introducing the video starts as follows.

Is there a point where the “P.C. Police” are satisfied? Are there ever “enough” rules governing the jokes we tell, the mascots of sports teams, or the symbols on city seals?

If political correctness is a positional good, the answer is “no,” the PC crowd will never be satisfied. The goal is not to satisfy a fixed list of objectives. The goal is to feel morally superior to others, which requires constantly updating the list to remain one step ahead of everyone else.

Oh, and one final point about the video. We can’t believe Will’s roster of politically incorrect place names didn’t include Matamoras, Pennsylvania. Wait until the SJWs find out what that name means.

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The Big Issue Nobody Wants to Talk About

It’s fatherlessness. Tony and I were talking just the other day about the deplorable fact that approximately half of American teenagers do not have their biological father living at home. This is a potentially crucial issue because it lies at the root of numerous other social ills. And yet, nobody wants to talk about it. In over a dozen presidential debates, the issue of fatherlessness has never once been raised.

Writing at pjmedia.com, Leslie Loftis noticed the same thing Tony and I did.

Fatherlessness is on the rise. It is causally linked to an array of social risk factors. While there are success stories in single-parent households, children raised without a father in the home are more at risk for dropping out of school, using drugs, having emotional problems, and becoming involved in crime, just to name a few.

Each of these individual risk trends can impact health care expenses, education, the budget and economy as well as public safety. Taken together they look like the root problem for many of our societal ills. The body of research confirming fathers’ importance grows. We even have studies looking at the stunning public cost of fatherlessness. Yet our politicians do not discuss fatherlessness as a policy matter.

Of course, for government and the political class, fatherlessness is a feature not a bug. As fatherlessness spreads, it is the government that steps in as a kind of surrogate father, providing some of the resources that the father otherwise would have supplied. From the point of view of government, fatherlessness is good for business.

Just another of the many ways in which government can’t be expected to solve problems because the interest of the political class diverges from the interest of society, or more precisely, the interest of those of us who prefer to live in a decent society.

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The Marvel of the Price System

The following video offers an excellent explanation of how the price system produces and transmits valuable information that serves to coordinate peoples’ economic activities. Prices are not just annoying attempts by sellers to extract your money. They are signals and signposts that direct economic activity in the right direction, telling people what to produce, how to produce it, and to whom to sell it. In response to new information, like say an oil shock, the market induces millions of efficient changes in peoples’ economic activities that could never have been planned or foreseen by anybody.

Narrated by our former classmate, Alex Tabarrok.

Videos: “I, Pencil” and “I, Smartphone” (Revised)

We recently posted video of Milton Friedman discussing Leonard Read’s famous essay, I, Pencil. A good video adaptation of the essay, embedded below, was made by the Competitive Enterprise Institute.

See also below the video I, Smartphone, a brilliant take-off on I, Pencil. The video runs through a lengthy list of just some of the many diverse and far-flung countries–on several different continents–that are involved in producing various inputs and components of the phone. Just this hint at how many countries and inputs are involved in the process makes clear how utterly impractical is Donald Trump’s recent proposal to force Apple to produce its phones in the U.S. The idea really is completely absurd.