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The Jaw-Dropping Cost of Making Things on Your Own - Efficiency of Free Markets - FutureIQ

14,712 views Wait, is this logic right? • Jul 26, 2024
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Slog Reference: Our Connected World

Description

The invisible hand or the efficiency of free markets in economics explains why it would be insanely expensive to build or make simple things on your own. Things like tea, chicken sandwich and more. Let's understand how the world works in brilliant cooperation to bring objects as simple as a pencil and as complex as a mobile phone. Understand the economics behind the free market efficiency in this FutureIQ episode.

Hope you enjoyed FutureIQ by Navin Kabra and Shrikant Joshi. Do hit us up on Twitter:
@ngkabra http://twitter.com/ngkabra
@shrikant https://twitter.com/shrikant

Listen it on the podcast provider of your choice: https://tapthe.link/FutureIQRSS
Watch other episodes of The FutureIQ podcast: https://www.youtube.com/playlist?list=PLAppTB0r5_TaYueZ0adD42Wiw5X-wTE4v

Books referred in this episode:
Thanks a thousand: https://tapthe.link/ThanksAThousandBook

More videos for you:
The illusion of explanatory depth: https://youtu.be/_ak0k7GNCjM
Dunning-Kruger effect: https://youtu.be/GtmcY3t5hB4

Chapters:
00:00 Introduction
01:10 Making a pencil
05:35 The eraser
07:05 Specialization
08:55 How does this happen?
10:57 Making a chicken sandwich
11:54 Making a toast
13:55 Thanking everyone
16:02 Brilliant design of the lid
17:07 Why it matters?

Sources:
I, Pencil: https://www.econlib.org/library/Essays/rdPncl.html
XKCD Lamp: https://xkcd.com/1741/
Coffee supply chain visualisation: https://www.visualcapitalist.com/from-bean-to-brew-the-coffee-supply-chain/
Milton Friedman on I, pencil: https://www.youtube.com/watch?v=67tHtpac5ws
Six months to make a Chicken sandwich: https://www.theverge.com/2015/9/17/9344597/man-spent-six-months-1500-making-sandwich-from-scratch
TED Talk: how I built a toaster from scratch: https://www.ted.com/talks/thomas_thwaites_how_i_built_a_toaster_from_scratch?subtitle=en
1000 thank yous for a coffee: https://nextbigideaclub.com/magazine/one-cup-coffee-inspired-journey-thousand-thank-yous/19485/

#futureiq #economics #freemarket

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Transcript

Shri Kant how long does it take to make a chicken sandwich 15 minutes that's because 8 billion people in the world are helping you to make it try to make it yourself and it will take 6 months it'll cost $1,500 that's more than a LH rupees what forget that try to make a single toast and it will take you 9 months and cost more than ,00 a toast like bread in the toaster yes 11,100 pounds yes today's episode is about how this entire world is connected and everything we do every little simple thing we use requires contributions from almost all the countries of the world we will talk about what it takes to make one pencil we will talk about the guy
who tried to make a chicken sandwich from scratch and took six months and $1,500 and the guy who made a toaster by himself and took 9 months and looking into this will teach us about interdependence about economics about capitalism about communism and how it takes the whole world to make you your morning chai wow I admit I have thought about it but haven't really thought about it you know nobody really thinks about it and the best way to understand it is by reading an essay called ey pencil written by Leonard Reed an economist in 1958 it's a brilliant essay which gives you an idea of what it takes to make one simple pencil like this okay okay no
single person in the world knows how to make this simple pencil that's true right it seems trivial but it has so many different parts and requires so much technology to make that it is mind-blowing okay let's go through it step by step this essay was written in the US so there will be us specific references but the same concept will apply to a pencil made anywhere in the world okay let's start with the wood of the spencil okay it came from trees in Oregon okay for that trees had to be filled you had to use saws which use iron you needed trucks to transport the logs you needed Mills to cut the logs into little slivers those needed steel
those needed Motors you needed rope hemp to tie things together the logs now come to a mill in California in California there are big machines which cut the logs into thin slivers for the pencil you know half this thickness okay okay then these sers of wood have to be dried in a Kil because natural wood cannot be used in a pencil like this it's very wet yeah correct see this color for the wood oh it is tinted for some reason just having the natural wood doesn't look really nice okay that yeah I mean I never thought about it but that is actually not a natural wood color is it no it is not so it is dried in a kin
then it is tinted then it is waxed then it is dried again okay imagine how much expertise goes into just getting the right color wood and the right consistency wood okay we haven't even started making the pencil now yeah we are still on the outside of the pencil on the wood of the pencil correct now this slats of wood move to another Factory okay okay in this Factory this is the pencil making factory you take one slat of wood and in that there is one machine which makes a Groove for the lead to go in for the lead to go okay then the lead which is actually graphite yeah that goes and then a second slat
with a similar Groove goes on top and you basically make a graphite sandwich okay wait where does the graphite come from oh yes we were in California but the graphite has come from Sri Lanka and it is mixed with clay from Mississippi okay then right because just graphite by itself is not going to be a very good pencil yeah because graphite is very soft as a material and it needs to be hardened with something which I'm guessing is the clay and then probably baked or something no first there has to be ammonium hydroxide in it okay okay then there has to be wetting agents okay otherwise it's too dry and it'll just crumble okay okay so there is something
called sulphonated Tallow sulfonated animal fats treated with sulfuric acid all of this mixture is then extruded like noodles okay and this long thing is baked for hours at 1,000° Centigrade okay then you add candelila wax from Mexico okay okay to add strength and smoothness to this lead made of graphite once we have the graphite sandwich now we need this shiny nice color on top yeah that is lacquer mixed with color okay and it is six quats of that okay castor bean Growers and refiners of castor oil get involved in this process and just to make the lacquer color blue requires the skill of more people than you can name okay so far we haven't even
come to the labeling yet okay okay this consists of a film formed by chemicals that I don't one know and I have no idea but basically that labeling goes on top okay now you must have seen pencils where there is an eraser on top and there's a little metal thing around it called the feru okay let's talk about that the metal is brass which is zinc and copper which comes from mine and Mining is a whole different thing it's an entirely different industry so yeah and then there are black nickel Rings there why I mean I'm not even going to get into you know forget it now let's come to the Eraser huh what is that it's
rubber no it is not rubber rubber doesn't actually do a very good job of rubbing okay it is called the plug in the industry and it is made of a material called factus factus yeah it's a rubberlike product made by reacting rap seed oil from Indonesia with sulfur chloride wow okay in that there is some rubber used for binding purposes okay okay then many Vulcanizing and accelerating agents are added to it huh then pumis is added to it P pumis pumis is volcanic Stone which you powder and that gives the abrasive quality which will actually do the erasing would you like to guess where that comes from I am guessing from some place where volcanoes
are active so either Iceland Italy there you go yeah so pumis comes from Italy and also it usually have a nice yeah that comes from cadmium sulfide okay okay nobody knows how to do all of these things of course the guy running the pencil company has no clue basically nobody does okay people from so many different countries of the world and we haven't even talked about what they need to produce the stuff yeah I mean we spoke about we started with Oregon then went to California and suddenly there were things coming in from different countries from Sri Lanka from Mexico from Italy from I don't even know what other countries where zinc and copper are mined for that brass very funny
thing is that all these people who worked to get you this pencil none of them wanted a pencil okay some of them have never seen or never used a pencil in their entire life okay each person who worked on this had some tiny bit of knowhow some tiny skill and they exchanged it in return for something they wanted usually money yeah okay the other thing is no single person is in charge okay the person who runs the Pencil Factory cannot go to the graphite Factory and start giving orders to the people working there yeah right he would get kicked out yeah no military enforced the orders all over the world true what true there were no orders given okay all
of this happened people from so many different lands people with so many different ideas about what to do with so many different ideologies so many different religions people who hate each other worked together to make this pencil that's yeah that's true communist Russia tried to have Central planning and it was a complete disaster because no Central planner can know all the little details of doing this efficiently that is true right that is true you know that makes me wonder then how how did all of this even come together how did it happen Milton fredman has the answer how did it happen Adam Smith gave us the answer 200 years ago okay this is called the
Invisible Hand of the market of the market free trade free markets okay and this is a simple thing yeah right try to imagine something far more complex like your mobile phone or this whole episode yeah it takes much more complexity many more people and everybody needs to work together yeah that is true but then it makes me wonder uh some of these things that moved almost halfway across the world like graphite from Sri Lanka or pumis from Italy were they really necessary couldn't you find something local why did you have to go all across the world okay let me ask you a question okay right we are here in Pune yeah okay and you want apples yeah which is
cheaper apples that come from kmir or apples that come from New Zealand ooh trick question we've done an episode on this before and you will find a detailed answer in that episode but the answer is not the apples from Kashmir yes the apples from New Zealand modern transport yeah is so efficient that a moving things halfway across the world costs very very very little even in terms of the environment and carbon and all of that and it is less than 5% or 10% of the cost of the ultimate thing right the specialization of different parts different people in different countries and the economies of scale they get that beats any advantage you get from going
local okay rubber bands that we import all the way from Malaysia would be significantly cheaper than local made rubber band but all of this involves manufacturing which is complex in itself which anyways requires a lot of cooperation and coordination uh let's talk about the chicken sandwich examples that you spoke about chicken sandwich is well take chicken take bread make sandwich correct so there's a guy called Andy George po of how to make everything he decided to make a chicken sandwich from scratch okay fine that involves raising a chicken that's fine okay but it also requires some veggies so he had to make an own garden yeah it requires cheese so he had to go figure out how to
make cheese get a cow milk all of that so he went through all of that I'll tell you the ult part yeah turning ocean water into salt yeah he did the whole thing it cost $1,500 more than a LH rupees it took him 6 months of his life and at the end of it the chicken sandwich tasted it's not bad okay yeah 6 months of your life more than one lakh rupees for not bad let's take something simpler you have to make toast you don't have to make bread you already are given a bread slice and you have to toast toed you need a toaster yes I so a guy called Tom twitz decided to make a toaster from
scratch okay he went and studied a normal toaster and he figured out that it has 404 different parts made of 100 different materials okay but he also decided that these people are all being fancy schmancy I don't need all of that and he figured out that he could make a toaster from just five materials okay iron for the grill copper for the electrical wires and the plug correct plastic for casing the toaster and for insulation of the wire and for the plug itself correct nickel H which is the heating element right okay and Mah the heating element has to be wound around something insulation materials right how do you make metal at home okay you don't
yeah you're not allowed to use all the Modern Machinery in mines he had to go around searching until he found a 15th century book on how to make iron from ore okay he also discovered that plastic is almost impossible to make from scratch just getting a barrel of oil was difficult enough but he did something okay take a look at the image and you will find that his plastic was terrible of course and at the end of this huh his toaster worked once and then ConEd off obviously I I didn't imagine he would actually go around making those materials like I assumed he would take a tawa from somewhere and you know or an induction plate plug it in and make
toast on it yeah see that is the problem anything you think of you just take for granted the hundreds and thousands of things that modern technology modern civilization makes available to you and makes them available for so cheap yeah okay but all of this seems over complicated I mean there was no need to go that far into making the toster and what not how about something simpler okay how about just thanking everyone who made something simple happen for you like what let me tell you the story of AJ Jacobs okay okay he had a very nice ritual like many people do of saying thanks at the end of the day for various good things that happened to him very
nice with his family very nice one day his son told him but Dad those people can't hear you smart son Jacobs took it seriously okay okay then he decided to thank everybody involved in the cup of coffee he bought that morning okay this project by the way it became a big project it took him six months and he ended up having to thank a thousand people and traveling to God knows what all countries okay let's just go through a few simple examples okay okay simple first he went and he thanked the Barista right yeah initially she was taken away it's like okay what is going on here we don't really thank our customer service people no they are just
there to serve us that's exactly what she said she said forget that she said most people don't even notice me they treat me as if I'm a vending machine they're like on their phone and they take their coffee like this without even looking up oh that's so sad and he realized that he probably does this and from that day onwards he said you know what I'm going to notice everybody I'm going to acknowledge them as like real human beings right that's nice he also thanked the person who chooses the coffee okay this is a guy who travels to South America Africa Asia and he's an expert in the smell and Aroma and which beans and so on right okay he
thanked the van driver who delivers the coffee beans okay okay he decided that he's not going to go and thank everybody who was involved in making the van and involved in making the road that would be never ending yeah very literally never ending he thanked the designer of the cup of coffee what's different about a cup of coffee it's just forget the cup let me just talk about the lid on the cup it's just a lid no it's not just a lid okay the design of the lid has been perfected over 50 years okay one example a badly designed lid will block the aroma of the coffee from reaching your nose and most of the taste of any food is from the
aroma so your coffee will taste horrible unless the lid allows the aroma to reach your nose okay there are so many other things in the design of the lid he went and found a guy called Doug Fleming who he calls the Ellen musk of cup tops okay okay modern things have so many little little little details that somebody spent a lifetime perfecting and we just take them for granted we don't even think think about it I let me show you this brilliant XK CD pause the video and take a look at it in detail so this experience of AJ Jacobs led to a bunch of realizations for him which are an excellent summary for this whole episode
okay let me go through some of those right okay going through the details of any one simple thing of how everything works and how many people have contributed to it makes you understand how the world Works how complex it is how everything fits together and how free markets make this happen yeah it makes you mindful of the large number of things that go right every day every minute every second okay yeah that leads to gratitude for how everybody is working together right it's a good vaccination against all the tribalism and all the factionalism and all the nationalism that is going on right yeah all of that happens in the news in real life everybody is cooperating to to make
a pencil for you it also makes you mindful of the small number of things that don't go right or which can be improved when you talk to these people when you interact with them you understand the issues they're facing and then you feel like doing something right uh it let AJ Jacobs to start donating to Charities something that he always thought about but never really got through to doing right forget charity and donation right just small gestures like being nice to the people who are serving you right yeah mostly it is a mindset right it is a refusal to take things for granted yeah it is an acknowledgement that we are all in this together we are all working
together except the political leaders and news media all right that's a very spicy end to the summary but he is right uh we need to be more mindful of uh the people around us we need to be more mindful of the things we use in our daily life and where they come from how they are made and how they reach us um I hope that this episode truly drives home the point of Wasa kutumbakam the world is a family because it is this family that has come together to help us bring this episode to you very literally and uh our gratitude goes out to this entire family for helping us bring this episode to you
and by us we mean Shri Kant naen future IQ and video school if you like this episode check out our other episode you don't know anything the illusion of explanatory depth