I was reminded today of a great TED Talk where a guy tries to build his own toaster from scratch. The end result looked like this:
Obviously, he didn’t succeed. There were far too many specialized parts to replicate the $10 toaster you can pick up at WalMart.
This is an example of comparative advantage that Leonard E. Read explained in his seminal piece, “I, Pencil“. Put another way, comparative advantage is doing what you do best and trading for the rest. By specializing in a specific product or service, you become a master at your craft that gives value to others.
For instance, the steel factory that makes many pieces of the toaster specializes in only making steel. They then sell their raw materials to companies that are looking to use their specialty for an end good (in this case, a toaster). The buyer of steel is probably also a buyer of plastic, hot plates, electrical wiring, and all the components that make the toaster. They probably then sell it to a retailer (WalMart) who sells the product to the consumers.
All of this, the mining of ore, turning ore into a component, combining the components into a product, selling the product, the shipping, packaging, marketing, and all other factors of production allow for a company to sell you a toaster for $10. It’s a pretty miraculous feat when you realize there’s no overseer making this happen. This has all been created by economic necessity. Every person involved in the operation is trying to make their ends meet and by doing so improve our standard of living.
It truly is an amazing time to be alive.