The radical ignorance displayed by those who claimed that the government had created a laptop costing Rs 500 (~US $10) is jaw-dropping spectacular. How on earth can one for even one moment entertain the idea that any entity — least of all the government and a bunch of students — could produce something for an order of magnitude less cost than currently possible is unfathomable.
As the photoshopped image in my first post on this matter previously states, “I see stupid people . . . they don’t even know that they are dumb.” And now we note the furious back-peddling. I had noted in the followup post that the claim is that it was a typo. It seems that India’s Minister of State for Higher Education D Purandeswari’s claim that a $10 laptop was a reality was based on a simple typo, a dropped “0″. (H/t: Sudipta)
A fine invention — the missing zero — from the land which lays claim to have invented the zero.
It’s a sad commentary on the state of India’s governance that the minister of state for — hold on for this — “higher education” is so ignorant so as to be unable to reason and uncritically announces a near impossibility. Should anyone be even the least bit surprised at the sorry state of India’s education sector if its policy makers are so astonishingly disconnected with reason and reality?
I can imagine an illiterate person who has never seen an electronic device in his or her life being unable to estimate the cost (or the price) of a computer. He or she would have no basis for estimating the cost — it could be anything between Rs 1,000 or Rs 100,000 or more. But even the average high school student in India — who probably knows roughly the prices of cell phones, mp3 players, various electronic toys and gaming machines — would easily enough reject the notion that a laptop could cost as little as Rs 500.
You don’t need to have the smarts of a professor of quantum physics to know that some things are too improbable. For instance, most of us really don’t know how much a commercial airliner costs. For all we know it could be $50 million or it could be $500 million. We have no way of telling for sure. But if someone claims that they have recently built one for the astonishing $100,000, we would tell him to get a brain cell or two. We can do this because we know that a car costs around $20,000 and a commercial airliner is tens of times bigger and more complicated than a car.
I will not dwell anymore on this shameful display of ignorance. Let me review a bit of economics to take off the bad taste in my mouth left by having dropped my jaw too often lately.
The first fun fact is that most of the manufactured stuff available out there is produced by private firms in competitive markets. That implies that they have to make profits. How do they make profits? By reducing their costs. Because in competitive markets, if your costs are below what the prevailing price for your widget is, then you make a profit. But since all firms are simultaneously trying to cut costs, the price itself drops because firms reduce their own prices as much as they can while still making a profit so that they can sell more to the market. This leads to the situation that in competitive markets, prices track costs closely.
If you are getting a laptop for around $700 a pop (give or take a couple of hundred bucks), then you can be sure that the costs are around that. The margins are super thin. Laptops are almost commodities and there isn’t much room for super-normal profits.
The second fun fact is that manufacturing has “scale economies.” The more units of something you manufacture, the lower is your per unit cost. So what happens is that firms specialize in the manufacture of components.
Example: Intel makes processors. They make them by the millions. They spend billions of dollars in the design of a chip (that’s the fixed cost) but then manufacture tens of millions of those babies. That distributes the high fixed costs and so the average fixed cost is a few dollars per chip. The scale economies arise from the combination of high fixed costs and low variable costs (these are the costs of the silicon wafer and the fabrication of each individual chip.)
Then Intel sells these chips to others. These processors are intermediate goods, as opposed to final goods such as laptops. Much international trade is trade in intermediate goods. You see container ships carrying components from one country to another. The globalized world we hear so much about is held together by links that are essentially component manufacturing.
There are tons of intermediate goods. Just look around. The LCD display: made by a few large manufacturers like Samsung. Same goes for the hard drives in your computer. But let’s not restrict ourselves to computers alone. The windshield in your car is made by one of a handful of windshield makers, regardless of whether you drive a Suzuki or a Honda.
Every subsystem of a complex machine is actually produced by some firm specializing in the manufacture of that bit. The end product that you buy is an assembly.
What does this specialization imply? Obviously that you get stuff at prices that would have been impossible without it. The firms do the best they can, spending truck loads of money in research and development to figure out how to make their stuff cheaply. Over decades of this sort of learning and doing, the ones that manage to survive are the best of the breed. It is not easy to dislodge these firms. So if I have dreams of starting up a company which will knock Intel out of the ring, I should wake up and smell the coffee.
The bottom line is this: a computer is a complex bit of manufactured stuff, each subsystem of which is manufactured by firms at the lowest possible costs given the present state of the art, and it takes billions of dollars worth of investment to keep improving the technology and advancing the state of the art.
You can bet your bottom dollar that although things get cheaper over the years, there are no quantum leaps. (Here, I use the term quantum in the original sense of the word — a discrete step — and not in the sense that is generally misused as a synonym for “massive” or “big.”)
Things improve gradually. They evolve. Not just evolve, they co-evolve. To make something, it takes an ecosystem of firms all competing and all trying their hardest to cut costs and improve efficiencies. Last month I paid $100 for a 250 GB external (USB) hard drive. Two years ago, I had paid $130 for a 80 GB hard drive. Next year, I will perhaps pay $100 for a one-terabyte drive. But I will not be paying $2 for a 250 GB drive next year. That will not happen.
Why? Because there is a simple rule. There is a minimum cost dictated by the amount of stuff in a device. It is easy to arrive at that minimum cost. Just weigh it and then multiply the weight with the per kilo cost of the matter that went into it. By this device you can immediately put a floor on the cost (and therefor the price) of a car (weight multiplied by the cost of steel, say), or the floor on the cost of a bus. The latter minimum will be more than the former.
But note that this is a minimum. It says nothing of a maximum. A Porche sports car can cost a lot more than an average bus.
Also note that in many cases, the smaller the thing, the more expensive it can be. The Macbook Air costs a lot more than the average laptop.
The point is that one can reject the idea that a computer, however minimalistic in its design, can cost $10. It takes eye-popping ignorance to do otherwise. (Here we are not talking of a price. The price can be arbitrarily set by the government.)
Well, that is it for now. Got to go. Perhaps I will write more later.