Where Did the iPhone Come From?

0:00Speaking of straight here, straighten that up with the camera. Welcome everybody, good morning and welcome to the Ludwig von Mises Institute. It's a pleasure to have you here today and I think we have a great program for you this morning. I'm Dr. Mark Thornton. I'm a senior fellow here at the Mises Institute which says nothing about my age, it's just the name of the position. Okay, let me tell you about the Mises Institute. The Ludwig von Mises Institute is a non-profit educational institution and our main mission is to teach economics and to provide economics materials for people who are interested in the Austrian School version of economics.

0:52It's named after an economist named Ludwig von Mises, who was a student of the original founders of the Austrian School of Economics in the 19th century. And Mises was one of the great economists in Europe during the 1920s and 30s. He was an advocate of free market economics, of private property, and of the gold standard. And he was really one of the top economists of Europe at the time. One of his great initial contributions was that as the Soviet Union was founded in 1917 and with the rise of National Socialism or Nazism in Germany and of Fascism in Italy, Mises discovered a principle which showed that Socialism was economically irrational and it was really impossible to put it into work in a complete form in a national economy or in an international economy.

1:53Now Mises fled Austria right before World War II. He was Jewish and he was a famous free market economist and opponent of socialism and so he knew he was in trouble and so he left Austria, his native country, went to Switzerland and and then came to the United States. Most of what we know about his early days, we didn't really know much for a long period of time until the Soviet Union fell in the 1980s and we discovered his papers and his books and various things that he had prior to World War II.

2:38It turns out that when the Nazis invaded Austria, they took all of Mises' stuff and brought it back to Berlin to try to find out what was the key to making socialism work. They thought if they could study his papers, they could unlock the key to making their form of socialism possible. And then when the Russians took over Berlin, they took all of his papers and brought them Well, all of these events served to really crush the Austrian school during the 1930s, 40s, 50s and 60s.

3:26But in 1974, Mises' student, F. A. Hayek, won the Nobel Prize and the Austrian school started to revive. This institute was founded in 1982 and was brought to Auburn University in 1983 and this is our 30th year of operation. We now have the largest and most trafficked website in the world and of course you probably heard of Ron Paul the presidential candidate and his advocacy of Austrian economics. He's not the leading contender for president so I get a lot of questions about what's Ron What is Ron Paul going to do after this election, when he's lost? I said, he's already won. All of the young people, the leaders of tomorrow, are all fully in Ron Paul's camp, but also in the camp of Austrian economics, so that our future is very bright indeed.

4:22Okay, I'm going to start off the program, as you can all have a copy of the program I'm here in front of us, and my talk this morning is going to be, where did the iPhone come from? Anybody got an iPhone in here? Smartphone? A few. So there's three or four who have one and everybody else who wants one. Well, there's a big debate right now in the media about the iPhone and jobs, and I'm not talking Steve Jobs, I'm talking about working jobs. There are about 70,000 jobs at Apple and in Steve Jobs' biography there's a quote by Steve Jobs that says that Apple has more than 700,000 jobs in China including more than 30,000 engineers and so because we have such high unemployment in the United States there's a lot of concern and debate about you know why doesn't Apple bring some of those jobs back to the United States and so that's what we're going to be finding out this morning.

5:56That's the argument, it's a closed case. And to highlight the whole thing, USA Today's editorial page is focusing in on that very issue today. There are basically two types of economics. One is the type that you are learning in school and the one that we teach here at the Mises Institute. The second type of economics is generally taught at government schools and is used to to Run the Economy in Washington D.C. With the first type, the type that we teach here, we study how the economy works and you try to establish and learn economic laws.

6:41Economic laws to understand how the economy works. And these are not laws that are written down and enforced by government. It's not that type of law. These are laws that are based on natural law, in that they work for everyone, everywhere, at all times, and you don't need police enforcing these kind of laws. They're self-enforcing laws. Societies that work with these laws experience peace and prosperity, harmony and economic growth over time. And societies that are ignorant of these laws, or who simply ignore these laws, experience increasing poverty, conflict, and it can break down into outright chaos.

7:31So within the first type, the type that we teach here, within that framework, you understand the necessity of private property, the beauty of the marketplace, and the magnificence of of the Worker and the Saver in the Economy, and most especially the courage and foresight of the entrepreneur. If economic problems emerge in society, our first inclination or our first instinct is to expect or rather to suspect that there's some sort of government intervention in the economy, a regulation or a tax, that is the cause of that problem. provides us with a whole toolbox to investigate economic problems and to implement solutions.

8:25For example, why do we have such persistent high unemployment amongst teenagers? The unemployment rate in the economy is between 8 and 9 percent. The unemployment rate of teenagers is something like 16, 17 percent. So why is that persistent unemployment there? Is it that just... Yes? I think for teenagers it would be because they want a more experienced employee rather than just someone who's never had a job before. That's correct. That's a big part of it. Teenagers don't have the experience. That's absolutely true. But it's not that teenagers are lazy, right? Well, yeah, I guess they are.

9:11But there's actually a roadblock to unemployment because if you wanted a job and you needed the experience, you could offer your services at a lower rate. So we have this persistent high unemployment rate of teenagers, which we call a surplus of Labor in that category, and economists explain such surpluses are usually caused by price floors, and price floors are prices or wage rates that are mandated by some government law, in this case, the minimum wage law.

10:01We have a minimum wage law at the federal level that says all employers must pay all All Employees, at least $7.15, and so when you're going for a job and somebody has more experience, they're going to pick the more experienced person, but if you could say, well, I'll work for $6 an hour, and then all of a sudden the employer's got to say, well, which one do I really want? So in a free and open marketplace, teenagers could compete on the basis of wage competition and that if we eliminated the minimum wage law, teenagers could compete and what we'd see is that that high teenage unemployment rate would come down to a normal level.

10:53In other words, we could get rid of that problem simply by abolishing the law or setting it at a much lower level. Now the other type of economics, the type that's favored in government schools and in Washington DC, sees the whole thing differently. For them, economics is not about laws. It's about theories that may or may not be true. Things could be different in the future. There are a lot of special cases for what I call mainstream economics. There are special cases that are possible, and with this being the case, Their version of economics calls for a constant monitoring of the marketplace, a constant monitoring of economic data in order to detect these special cases and establish benchmarks in the economy, such as the minimum wage law, and regulating markets on a regular basis.

11:49This type of economics is fixated on what we call market failure, that the market fails to produce. And the villain here, in their scenarios, is usually the entrepreneur, the person who's leading businesses. The solution for this mainstream economics is always government intervention. So the government should regulate markets, the government should control prices, the government should tax away excess profits, The government should stimulate demand, should bail out failing firms and prohibit certain practices. So with this case of high teenage unemployment in the market failure approach, what they would argue is that the government should provide employers with subsidies in order to hire more teenagers.

12:47Of course, with subsidies, you have to raise taxes in order to pay for the subsidies and because some employers might try to cheat and abuse these subsidies, the government has to write regulations concerning who can receive the subsidy, how many subsidized jobs can any one employer make, and how long would the subsidy last. Then you have to hire regulators to make sure all these regulations are being followed, And then you have to raise taxes again in order to pay for the regulator. His or her office, the desk, the computer, fringe benefits, etc. And so this other school, this mainstream of economics, wants to heavily regulate tax and prohibit economic activities in the economy.

13:33A recent study published out in Birmingham, Alabama, found that for every regulator we We have at the federal level, it cost the economy $6.2 million and over 100 jobs. So if we add regulators to the economy, we shrink the productive aspects of the economy. And if we were to cut regulators, we would see an expansion in the economy. And so this study out of Birmingham found that if we cut the regulation budget of the for Government by 5%, it would increase gross domestic product by $75 billion. In other words, if they gave that money to us, we would all have $3 billion each.

14:20And when I was in college many, many years ago, I actually had a job where I cleaned classrooms and bathrooms and emptied all the waste baskets in an academic building. It turned out that my job was one of those subsidized jobs. The federal government was paying 75% of my wages. My college had to hire extra people to keep track of us. They had special time cards to keep track of our hours. And with this program, things have gotten actually much more complicated over time, much more cumbersome out there for these subsidized jobs. So their approach is to subsidize and regulate all of these things, whereas our approach would be simply to eliminate the minimum wage law or at least bring it down considerably so that teenagers could compete.

15:15Now I don't want you to think that Austrian economics knows everything about everything out there in the economy. We're not all-seeing, all-knowing, all-powerful. Economics, even good economics can get quite complicated and the real world is very complex. So therefore we emphasize the fact that we have to remain objective and humble and we have to remain cautious and conscientious in economic analysis. So now let's turn to the iPhone. Obviously the iPhone is the result of a long process of capital accumulation. You can't have an iPod until you create music. You can't have an iPhone until you have a phone.

16:00And so there's a lot of technical accomplishments that have accumulated over time that make the iPhone possible, along with the Internet, the World Wide Web, wireless technology and so forth. And capitalism is only about four or five centuries old. And global capitalism is really only a couple of decades old. So Steve Jobs and Apple stand on the shoulders of millions of people in addition to the thousands of people that actually work for Apple. Now of course, Steve Jobs is really a remarkable entrepreneur, someone who takes risks. He's made our lives better by providing great products and forcing competitors to compete better. He's transformed the way we talk to one another, the way we listen to music, the ways we get and Transmit Information and Knowledge, sometimes forgotten of the fact that he's made products that are elegant to possess and to look at in a marketplace of otherwise pretty clunky products.

17:05And he's made products that are very dependable and easy to use in a market that has long been dominated by complicated and unreliable products. When I first bought an iPod a few years ago, I'd never ever used any Apple product before. And so I open it up, I take it out of the box and plug it in and it starts working. I don't have to program it, I don't have to do anything. I couldn't believe it was that simple to use. I didn't have to look at the directions, not that I ever do anyways, but that's what he's really done and he's forced others to compete, to follow him. So now let's take a look at this controversy, the jobs controversy.

17:53Now as I said before, there's this claim out there that Apple has 700,000 jobs in China and Asia. That's not really true. What is true is that Apple contracts with companies, many, many companies in many, many different countries on several different continents to produce the parts that go into the iPhone in the iPhone and the iPod. And so of all the companies that they buy from, all of those companies have 700,000 jobs. So the iPhone has parts from Taiwan, from Germany, from Korea, Japan, and even the US. And of course, these companies produce these same parts for other companies that compete with Apple.

18:46And they produce other parts that are used in other completely different product lines. So the idea that Apple has 700,000 jobs that it might bring back to the United States is really very misleading. It makes contracts with companies to provide Apple with parts. And the idea that Apple should bring these jobs back from China to the United States, The fact that we need more good high paying jobs back in the United States ignores the idea or the principle or the law of comparative advantage. The law of comparative advantage says that everyone has a comparative advantage and that you are potentially the lowest cost provider of a good or service and that if we follow Follow the Principle of Comparative Advantage.

19:42What we end up doing is buying products at the lowest possible price, and the end result is that more goods and services are ultimately produced, and on the consumption side, more products are ultimately consumed. But that's just the parts. The actual assembly of the iPhones does take place in China. That's what China does, is assemble the iPhone. If you look at all the parts that go into the iPhone and you added up the cost of all the parts, it would come to about $200.

20:34So the parts equal $200, the assembly is only about $10. The iPhone, if you look at its undiscounted price, is $600. So we're missing $390 per iPhone. And that brings me to this clever diagram here, which is the smile curve.

21:22It really helps unravel the mystery of the iPhone and its manufacturing and all that kind of stuff. The smile curve has two axes. On the vertical axis, we're measuring value added. This is higher value added, this is lower value added, and on the horizontal axis, we're measuring time. In the production chain, we're starting at the very beginning of a product, and then ultimately we're getting over here to the other end, where the consumer actually actually gets the product.

22:24In this structure of production or time of production, we have parts and we have assembly. That's what we typically think of in terms of a product, right? But there's a lot more to it than that. First of all, a product starts with a concept.

22:51Someone's got to have a vision of a product that consumers might want and might be willing to pay a lot of money for. That's Steve Jobs. That's his role. And then from Steve Jobs, then he hands that off to all of his managers, his engineers, right? So, there's got to be a lot of research and development for R&D. So there's got to be a lot of thought processes, you've got to write a lot of code, software for this, and then you've got to send all that information to designers. And then the designers turn it over to the fabricators, people who make up initial versions of the product so that it can be tested.

23:51These are all roles in the production chain that have high value added. And if you're adding a lot of value, it means your rewards, your wages and your salaries are going to be really high. Once the product, you've got a concept, you've done the research and development, you've designed the product and then you've fabricated the product, what comes next? Constructing the product, manufacturing. So all that stuff that's done by other companies, the making of the parts, and then it's all shipped to China and assembled, these are all now in the modern world low-value added aspects of the process of production.

24:51Manufacturing which once was a very complicated process, nobody really understood how Henry Ford could make so many things in the world. Money Cars. He could make them so fast, thousands a day. Steel would go in one end of the factory and out popped cars out the other. Nowadays, in terms of making a manufacturing plant, it's much easier. I mean, they can design a factory on a computer, send out all the information in the specs, and voila, the Kia plant can magically emerge down at West point Georgia, the robots are installed, workers come in and cars start going out. It's a well-known, well-established part of the game. So it's a low value added and as a result it's generally lower wage jobs. Okay, so at this point we actually have products for sale. What comes Next, well, after we get the manufacturing process established, well, what do we have to do?

26:02Well, we have to distribute the product, we have to advertise the product, it has to be sold and services, in this case, apps have to be designed and implemented. And so after the product has been manufacturing, there's distribution, you have to set up a worldwide distribution network, you have to do marketing and advertising, and then ultimately there's sales and after sales. What does after sales mean? In the case of the iPhone. You've sold the product to the customer. What comes after?

26:50Music and apps and service. You break your iPhone. It's got to be serviced. Somebody comes in and presses a couple buttons, and if it's not under warranty, it's going to cost you $75. Another big one is data usage. And yeah, all that kind of stuff. Yeah. All of that means money that's coming in. Data usage, apps, you make an app, they sell it for 99 cents. Apple gets probably more than half of that. So all of these are high value added aspects of the production chain. and it also means that those are all high-paying jobs and so all the high-paying jobs are here at Apple and all these jobs which are a combination of Apple and outside providers people who make the apps for example don't necessarily work for Apple data usage not necessarily Apple but Apple's In the United States, Apple is taking advantage of comparative advantage and using these outside Suppliers and Low Cost Assemblers in China, and by the way, all of that process is now

28:26managed by the current CEO of Apple, Tim Cook, who was a 1982 graduate of Auburn University. And this has been a really a magical transformation of our lives and it's because of capitalism, relatively free markets where entrepreneurs can serve and take advantage of comparative Advantage on a Global Scale. We don't want to just trust the newspapers and the TVs for our economics. It's very hard to be a bi-American type of person. You shouldn't really base your decisions on those type of arguments. For example, if you wanted to go out and buy an SUV and you were a patriotic American, you could go out and buy the Jeep Patriot. 66% of its parts in the Jeep Patriot are made in America.

29:15Or you could buy one of its competitors, foreign competitors, like the Toyota Sequoia, where you'd be getting 80% of the parts made in America. So you can't really trust that stuff in a global marketplace. You can't really buy American products anymore. and more. It's too integrated of a marketplace. If you really want to buy American, then you should buy what is truly and uniquely American, and that's freedom.