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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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