Tyler Cowen's Idea #5: Prices Matter

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- [Tyler] Now this slide --
it's another two-word catch phrase,

and this is my co-blogger
who cannot be with you,

but that's Alex Tabarrok,
and he's in a lot of the MRU videos.

And this is "Prices matter."

Now I've already said
incentives matter,

and this is a little different,
but I want to keep 'em

to like two words, three words
so they're short and pithy.

So when this says
"prices matter,"

it's not price goes up,
you buy less;

price goes down,
you buy more.

We've already kind of done that.

Prices matter means
that there are resources,

and they are arranged
across the whole world.

So we build automobiles
in some countries, in some states,

and not others.

St. Louis is strong for higher ed
and hospitals

but maybe not as strong
for high tech.

Northern Virginia, where I live,
we sell a lot of retail

to people who work
for the federal government.

And there's this whole broad array
of where resources go.

And for the most part,
it's not planned

by any one person or group.

Even when government is involved,
government is involved

in a pretty complex
decentralized way for the most part.

So it's understanding prices

that tell you what
ends up where doing what.

That's the price system.

One of my favorite MRU videos --
only Alex is in it.

They didn't let me be in it.

Roman and Mary said no.

Alex is carrying the roses,
and if you buy roses for a holiday,

for Valentine's Day in this country,
where do those roses come from?

Very typically the roses
come from Ecuador,

Colombia, Kenya, or Ethiopia.

They do not come for the most part
from the United States.

Though there are boutique roses
that you get very fresh,

and they cost more.

But they come from Africa,
Latin America,

and that has a lot to do
with the price system

so labor is cheaper
in those countries --

I think that's pretty well-known.

But you don't just necessarily take
the roses and bring them here.

Most of these roses --
they're actually flown

to a city in the Netherlands

that's the world's center
for doing flower auctions

because that's the best,
cheapest, most efficient place

to do flower auctions.

So they're sent first
to the Netherlands,

and then finally those roses
make their way to our consumption.

So the arrangement
of all the different pieces

of the rose transaction,
shaped by prices --

again, I'm not saying prices
always get it right,

but there's a general tendency
for the price system

to be minimizing
at least the upfront direct costs

of that arrangement.

And as I said before,
it's not just wages

so why does Ethiopia produce
so many roses?

If you've ever been to Ethiopia,
it's a pretty dry country.

It rains pretty frequently,
but not very much.

But the thing Ethiopia has

that a lot of other
African nations don't --

there are regular flights in
and out of Addis Ababa

with Ethiopian Air,
multiple times a day

to multiple locations
in Europe, North America,

other parts of the world.

These flights are profitable.

They are almost always on time.

Ethiopian Airways is
a well-run airline.

And if you look
at what is actually the cost

of the flowers getting to you,

the biggest part
of that cost is the flying.

So you want to pick places,
yes, low wages,

but where the flying
will go pretty well.

And the places that tend
to have low wages often

aren't that great for the flying.

So there's islands
in the South Pacific,

North Pacific, very low wages, right?

They're small, not too many flights
in and out --

they're not going to work for this.

So it's the price system
that's balancing off

where can you fly
in and out of easily.

The wages, other costs
of production,

and, again, that's shaping
what ends up happening where,

and that's what I mean
when I say prices matter.

Here's something I learned
just this morning I never knew

I should have known --
counterintuitive,

but when you think about it,
it's obvious.

Which company is America's
leading auto exporter?

I would have thought,
well, Ford, right?

But, no, it's BMW,
German company.

In terms of value, they export
a lot of fairly expensive vehicles.

So why is it that a German company
is America's leading exporter?

Ultimately, explaining that will be
a story of prices mattering.

The iPhone, right, or smart phones --
we all love our smart phones --

the real innovation behind
the iPhone was not mainly technical.

There were some technical advances,
but it was Apple and Steve Jobs

realizing that you could build
a supply chain making an iPhone

out of materials and designs
from the U.S., South Korea,

Taiwan, Philippines, Japan,

parts of Africa, for raw materials,

and finally, China
for final assembly.

So a typical iPhone --
there can be as many

as a dozen nations involved
in making that iPhone.

Why a dozen nations?

Some politicians have said,
"Let's do it all here."

Price system --
you realize it's cheaper

to make this miracle
across a dozen nations,

and that to me is quite striking.

♪ [music] ♪

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