Tag Archives: pencil

03.29.2011 | The Missing Sensor

According to one estimate, worldwide auto production could slide by 30% because Hitachi Automotive’s Sawa Ibaraki Prefecture plant was debilitated by Japan’s earthquake and tsunami. Hitachi Automotive makes the air flow sensors that are crucial in autos for determining “how much fuel to inject, when to ignite the cylinder, and when to shift the transmission.”

Translate sensor production into jobs, sales, related parts and you have a massive ripple from one $90 car part. In Shreveport LA, small pick-up truck production from GM stopped. As a result, GM’s Buffalo, NY engine plant had to lay off 10% of its workers. Similarly, in Spain, France, and Slovakia, Peugeot-Citroen announced cutbacks.

The Economic Lesson

This returns us to the classic 1958 pencil essay by Leonard Read. Conveying how people and places around the world are necessary for a simple pencil, at the beginning of the essay, the pencil says, “I, Pencil, simple though I appear to be, merit your wonder and awe…Simple? Yet not a single person on the face of this earth knows how to make me…”

It also reminds us that “made in …” labels are not entirely accurate. A t-shirt “Made in China” could include cotton grown in Texas. The iPhone is actually made by 9 different suppliers located around the world. And, a pick-up truck that is made in a U.S. factory could include a sensor that was manufactured Japan.

Posted by: adminEcon
Tags: air flow sensor, comparative advantage, Japan, Leonard Read, pencil, supply chain
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01.17.2011 | Toasters and Pencils

In this TED talk, a designer explains how he tried to build his own toaster. Deciding to focus on five basic ingredients instead of the 100 he would really need, he describes what happened. For the steel, first he needed iron ore. For the plastic, he went to BP to get “a jug” of oil but was unsuccessful so he settled, instead, on using potatoes. (Yes, you can make plastic out of potato starch.) Also, he needed mica and copper and nickel. As you can see, step-by-step, the simplicity of an everyday inexpensive toaster got more and more complex.

The point?

By showing how many people and materials were involved, designer Thomas Thwaites sought to display our interconnectedness.

The Economic Lesson

Now as economists, we should take his story a step further. Why are people willing to interconnect? The answer is price. During every step of the production process, someone, combining land, labor, and capital, decided that he or she would be willing to exchange a good or a service for a certain price.

So, in a way, we could say that a toaster exists because of prices and incentives. Economists call the interaction of prices and incentives the price system.

Written in 1958, a classic essay,”I, Pencil: My Family Tree as told to Leonard Read” illustrated a similar phenomenon. Close to the beginning of the essay, the pencil says, “I, Pencil, simple though I appear to be, merit your wonder and awe…Simple? Yet not a single person on the face of this earth knows how to make me…”

Posted by: adminEcon
Tags: incentive, Leonard Read, pencil, price system, TED, toaster
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07.07.2010 | A Pencil, An Apple, and a Price System

I suspect we take prices for granted. Please think for a moment about a $10 pair of shoes. As a consumer, that $10 price tag tells you that they are inexpensive and you won’t have to sacrifice very much to buy them. Correspondingly, seeing the same price, a shoe manufacturer might decide not to make them because profits would be minimal.

Saying prices are the reason, in Free To Choose, economist Milton Friedman (1912-2006) tells us that thousands of people, who might hate each other if they ever met, cooperate to make a pencil. Its wood, he says, probably comes from the state of Washington where they must have used a saw which required steel, which needed iron ore. The lead is actually graphite which probably came from mines in South America. With rubber from Malaya, they made an eraser and still, yellow paint and glue were necessary.

Telling a similar story about the iPhone4, the NY Times described the worldwide cooperation that created it. While the phone is assembled in Shenzhen, China, according to a “teardown” analysis, its chips come from Germany, South Korea, and the U.S., a touch-screen module is from Taiwan, and the phone’s gyroscope is made by a Geneva based company. Also involved are Japanese, Italian, and French firms and every one of them probably has production facilities around the world.

Why do they cooperate? Dr. Friedman would have said that the reason is the price system.

The Economic Lesson

In a market economy, prices that freely respond to demand and supply provide information and motivation to buyers and sellers. The up and down movement of prices is called the price system.

By contrast, in the former Soviet Union, prices were set by government created committees. As a result, they did not convey information about efficiency on the supply side nor about quality on the demand side. Different suppliers were not encouraged by prices to interact nor to cater to consumers. Lacking a price system, the Soviet economy collapsed.

Posted by: adminEcon
Tags: Free To Choose, iPhone4, Milton Friedman, pencil, price system
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