An Interconnected System

Everything has a cost, and those costs compound

I was making sandwiches for the family, and we had all sorts of bread options: wheat, white, rye, gluten free, etc. When you look at the wheat sandwich bread, and compare it to the gluten free bread, there is a noticeable difference in dimensions. The gluten free is usually much smaller, maybe two thirds the size, but it’s almost always three times as expensive as generic sandwich bread. Thinking about why, it’s probably because the cost of goods that goes into sandwich bread, mostly wheat flour, is much less than the exotic flours and ingredients to approximate wheat bread.

When you read a finance or business book, the cost of goods sold gets abbreviated as COGS, which always reminds me of cogs in a machine. Machines are used all the time in producing goods, such as woolen socks. When you eventually buy the wool socks, you pay for the wool, or really, it’s cost to the sock maker, plus whatever work those cogs did to spin, dye and weave the wool fiber into finished goods. C.O.G.S. plus cogs, if you will. But where does the cost of the wool come from?

When I had my Finn sheep, I would shear them every spring. The wool grew on sheep fed from a pasture I rented out. I would borrow my friend’s shears and clip off the fleeces. The wool bought for the socks was really grass in a pasture, grown on a farm, and the effort of a farmer shearing sheep. After the socks are woven and packaged, and in a store, the store adds another round of costs to pay for operating expenses.

Buying a pair of wool socks is not just buying wool. There is creation, craft, and care in that cost. We can find ourselves taking all that goes into something for granted, reasonably so, since it’s not essential to whether the socks keep your feet warm. By conceptually compressing all the details, we’re free to focus on more important issues. We buy the socks and move on.

But so much of our daily coming and going isn’t in making, but in doing. Economists like to say we’re a service economy, where one gets paid not for being a cog in a machine, but for looking after the cogs. People make livings from doing: teaching, food service, IT, legal, or medicine, to name a few. Our value is not in making the socks, but in selling them.

In most of human history, wealth was in what was tied up in what you physically had, such as gold or land. But with a move towards urbanization, and most recently, digitalization, we compressed wealth into what we can do, a desire which the market is happy to accommodate.

Take your smartphone, iPhone or Android, it doesn’t matter. You paid some amount for the class screen, the aluminum and plastic case, the chips, and camera inside. But its real usefulness comes from your cell provider, or your Wi-Fi at home, and the App Store run by Apple or Google. With no service, your phone is a shiny brick. Think of your car, with no fuel service, your car is a rusty, dusty lump of steel parked at your home. You can make do, without a phone, but having a car will likely paralyze your family. Even farms rely on services to keep an operation running. The tractors, sees, and fertilizers frequently come from somewhere else, and crops don’t drive themselves to market.

We’re in a delicate, interconnected world, at all aspects of our lives. The economy is complicated, but only because there are so many fine points. A fine mechanical watch has many small, intricate parts, but you don’t need to be a watchmaker to know that any amount of grit is going to ruin the time keeping. We saw that trying to shut down the world for a few weeks, and then a few months has a bigger effect for everything, and two years later, we’re feeling the results of shutting down, and then trying to bring everything back as if nothing had happened. At one point, there was nothing on the store shelves, and now warehouses are packed because shoppers stopped buying. Before we prescribe the perfect cure to fix all problems in the economy, we need the humility and prudence to realize there will always be bigger effects than what we can imagine.