The million dollar pencil factory problem - Economics and Defense Contracting

 The million dollar pencil factory problem - Economics and Defense Contracting

A common economic problem, and one that is often not well understood, is the million dollar pencil factory problem. If a million dollar pencil factory makes only one pencil, that is effectively a million dollar pencil. In order to make up for the cost of building an entire factory, you have to make enough pencils to justify the initial cost. One might assume that one then needs to make a million pencils; however, that would be incorrect, as no-one buys pencils for a dollar. You wouldn't buy a pack of 50 pencils for 50 dollars, you'd buy it for 4.99, or 5 dollars. As a result, you need to manufacture at least 10 million pencils to make your money back. 

However, there's additional costs, such as labor for the workers, their training and pensions, electricity, and of course the biggest part of all, the actual cost of the pencil, the wood, the graphite, the metal and eraser. To break even just on the cost of the pencil factory, you need to manufacture, and find a way to sell, 100 million pencils. It's not enough to make them, you need a buyer. Advertising, sales teams, some kind of way to make your pencils worth it on the market. By the end of it all, you need to have manufactured an entire line of pencils. Then there's staying in business over many decades. 

The problem with a million dollar pencil factory is that if it only produces one pencil, that is a million dollar pencil. The cost for research and development, prototypes, design, sales, studies, marketing, and the like are all things that must be factored in to the price. Mass production, naturally, reduces prices, but not always in ways people think of. The same is true frequently with defense contractors. 

Companies which sell equipment to the military have it worse than normal, as they have a market of one, essentially. What that means is, unlike a civilian who can go to a store, pick up a can of beans off of a shelf, decide they don't like it and return it, there is no market for tanks outside of the military or collectors who have limited legal capacity to obtain them. There is little market for rockets outside of NASA and Elon musk. When you create a custom product from scratch, you need an entire factory line set up for it. There are not items you can just return, there are sunk costs for the base cost of developing something. Before a single finished F-35 had taken off of a runway, the U.S. had already spent 400 billion dollars on the program. In the program's lifespan, it will be worth approximately 1.6 trillion dollars for all 3000 F-35's. However, 1/4 of that was spent before a single finished plane took off the ground, just in research and development, creating factories, training workers and for prototypes. 

When Donald Trump sold F-35's to our allies, increasing the total number of aircraft, the cost per aircraft went from 240 million dollars per plane, to approximately 80 million. The primary reason being that the base cost of manufacturing, the factories, workers, electricity etc. and research and development was all fixed. The cost of going from 1500 aircraft to 3000 was only a marginal increase in the overall program's cost, from approximately 1.45 trillion dollars to 1.65 trillion, but resulted in twice as many aircraft. 

Often times in many people's minds, to cut spending they want to cut the number of something being made, but it doesn't work like this in production. By investing in a system and mass producing it, we can produce more of it, and lower the cost, within a certain extent. Before hitting diminishing returns, it behooves us to make an appropriate amount of something to get our moneys worth from a project. Simply going from 10 to 9 aircraft carriers might not save much money; in fact, it might not save money at all, as the factories that needed to be built to build that many aircraft carriers is where the bulk of the cost comes from. It's not some abstraction of steel and dollars, it's a real world project requiring a real port and factory to build. Research, training, technology gaps, solutions found, the sunk cost of which can be undone. 

One might believe it would be cheaper to make less aircraft carriers, but it could be cheaper to build more and sell them to our allies to spread out the base cost of the product. Rather than buying less than we need and having to buy more later of different types, buying a lot of a product that is meant to last well in to the future and that can be upgraded and consolidating around a single chassis or base unit will save the most money. Eventually when the factory workers move on to another project, they will not have to work about job security as they already built their old product and this won't be put in to question. 

Understanding the million dollar pencil factory problem is key to many misunderstandings in economics, something that can't be resolved by simple number crunching alone. It can be non-intuitive at first from an ordinary person's perspective of buying things, such as from a grocery store, as bulk purchases of custom products are generally uncommon. It's hard to imagine a need for buying 10,000 custom ordered birthday cakes. However, it's not as if those chefs can simply undo their labor. If you order this, you will have to pay for either way with no refunds. The same works for the military and defense, so simply cutting ships from 10 to 8 or tanks from 10,000 to 8,000 might not even save money at all, but rather just hurt our military readiness while politicians can gloat about "doing something". Fundamentally, it would be cheaper just to sell these to allies than to not make them. 


An example is the zumwalt destroyer, while originally 100 were to be made for 30 billion dollars, instead it transformed in to 30, then 10, and then 3, with congress not understanding why each ship now cost 7 billion a piece, instead of the original 3 billion. The simple reality was the cost to develop the capacity to produce 100 ships had a base cost of 21 billion dollars. Rather than declaring the zumwalt a failure and scrapping the program, they should have build 100 ships which we needed and gotten the costs down. But this kind of thinking results in tremendous waste, ironically something congress claimed it was trying to avoid. 

While especially true in defense contracting, it is also an issue in other areas. A famous golfer had a custom made golf club for himself, and sold thousands of them to his fans so he could justify the cost of making a single one. While obviously not custom fit to each fan, they could buy a similar enough product for themselves and make their favorite golfer capable of having a batch of very well made golf clubs. To make even one of these, he first had to get a factory to make 10,000. The same can be true of other products. Therefore rather than thinking you can simply cut a certain number in production, it is better to manufacture a certain fixed amount which results in the most economic efficiency. When the U.S. military developed over 500 tanks a year vs. 50, tanks were cheaper overall, as more of the cost for labor, the factory and other factors were spread out over each tank. Therefore it behooves us to consolidate around a single tank chassis and make more of them rather than make dozens of unrelated vehicles; using a tank body for an IFV, bridge layer and the like would save money on each tank by spreading out the load cost to more vehicles. While it may not be possible with the abrams inherent complexity, designs optimized for this way should be considered wherever possible. 

Thus one needs to take in to account what I have coined "the million dollar pencil factory problem" when considering defense contracting and various other means of mass production. The simple reality is that mass production, when done correctly, can lower prices, and both for military readiness and economic efficiency, it behooves us to take this in to account when creating contracts. 

As iron sharpens iron, so does man sharpen another man - Right-wing infighting

"As iron sharpens iron, so does man sharpen another man."- Proverbs 27:17

Let's not snatch defeat from the jaws of victory, effortlessly fumbling what should have been a perfect score.  


I've been giving this more thought recently, and it's an idea I've had for some time. With the left going completely crazy, they have no internal self regulation mechanisms and have let the extremists take over the party. In the words of Herbert Mercuse, the father of the new left and primary strategic thinker for the left, Anything from the left is acceptable and anything from the right intolerable. This includes communists like Che Guevara, who were mass murderers who ran execution systems and wanted to nuke the entire world to reset it, and he's seen on posters and t-shirts in nearly every highschool and college in America. The left has no internal regulation mechanism, they have no means of preventing extremists from taking over or their ideas from becoming mainstream. There's no filter, and all the worst ideas, like defunding the police or mutilating kids rise to the top, with no ability to stop it. 

This has been incredibly destructive in the short run, but it is also self destructive for the left who are largely seen as extremists by the general public, thus creating the mechanism for their own downfall. But this has created a unique problem for the right. The right has thus far managed to maintain a high degree of internal self regulation, but without an effective competitor, an enemy to keep the right properly in check, to force them to remain grounded and moderate, extremists have been able to emerge. In theory, in a capitalistic or democratic system, competition creates conditions that forces people to be practical, grounded and sensible, and appeal to the average person. There's always a candidate you can lose to, on your own side or to the enemy, that can take your spot, if you don't tone things down and appeal to the average person and their desires. 

Without a proper enemy to fight, the only thing keeping the right internally stable thus far has been it's self. This is an incredibly difficult task to maintain, and after many decades we've finally seen the cracks emerging. The right is starting to lose the ability to moderate it's own side, with many calling for unity with the absolute worst of people. While their hearts are in the right place, they are wrong to do this. In fact, internal competition and discourse, internal struggles to iron out the truth and facts and most logical course of action is extremely important. We don't need unity with the lowest common denominator resulting in the worst ideas rising to the top or becoming acceptable and society collapsing when there are no normal people left in politics. It's how extremists take over and come to power, like Hitler or Stalin or Mao, when all one can do is choose to pick between two extremes, the best of two evils. 

The right needs to police it's own and the free market place of ideas is about having certain ideas win and come to the top, not about hashing out or accepting tired and broken ideas. Obviously there's a growing issue with antisemitism in society at large and anti-Israel and anti-jewish sentiment, that now seems to have spilled out over to the right as the left-wing permission structure has allowed open antisemitism that wasn't there before. Crazy ideas by Candice owens and others that Charlie Kirk was killed by Trump or the jews, or Tucker Carlson praising putin and blaming Churchill and the west for WWII and saying nuclear power is demonic and it makes america fundamentally immoral as a country is insane and needs to be pushed back on. Tucker Carlson implying "Hummus eaters" wanted to kill Jesus and Charlie kirk, clearly a reference to implying the jews wanted to do this, as he cackles like a maniac is not acceptable. 

Tucker Carlson describes himself as an old school leninist who hates capitalism, and used to be a Russian correspondent who worked for CNN, back in a time when Ted Turner was going duck hunting with Fidel castro and giving him gushy interviews like Tucker has done with Putin. Not everything is acceptable actually, and certainly not ideas that end up with those supposedly on the right ending up exactly the same as left-wingers with some form of hybrid or straight up socialism or communism overtaking everything. It's okay to say No to these people, and it's something Charlie Kirk and others did every day. It's something Trump does all the time. And no, rabid fringe lunatic conspiracies or going against our principles will destroy us in the end, in no way does it strengthen the right. 

In all honesty, what does Tucker do for the movement, or Candance? Do they clean up litter and trash, do they support Donald Trump by claiming he's a jewish puppet who will do WWIII, or do they help the left? Do they push policies or do they ridicule the Right endlessly for every policy achievement like cracking down on third world immigration and lowering crime even in democrat ran cities by deploying the national guard. People like Milei, Trump, Ted Cruz, Marco Rubio, actually get things done, while basement dwelling deranged twitter users who get clicks only be saying or doing sensationalist but obviously sociopathic things should be given any kind of special reverence when all they do is try to tear the right down.

If we want unity, it starts with the antisemites and never-Trumpers not attacking the bulk of the right wing and tearing us down at every opportunity. The deranged anti-western, anti-american and anti-conservative views these people espouse and their ceaseless attacks on our most successful people because they are also willing to help jews, contributes nothing. It does nothing but weaken and divide us. Trumps unbelievable success in Israel and the middle east, avoiding WWIII, should have the party united while the left's antisemitism and extremism against israel is a perfect time to scoop up voters and bring them over to the right, it should be an ultimate victory, and right as we are about to attain victory, here come interlopers to snatch defeat from the jaws of victory. 

They are most likely introduced by the left in to the right to weaken us, divide us and tear us apart, and drive leftists who are terrified of the rising antisemitism away from the right. These people even say we should be left wing on economics and to vote Democrat, be it Nick Fuentes or others, and certainly not to support Trump or any Republican. If this didn't exist, Republicans would get 10+ points across the board vs. democrats, and here these people come with a shovel to unload their mountain of horsecrap on the right-wing movement. Enough is enough. We will grow weak without a proper enemy and so we must internally self regulate, and this is the first real challenge on that issue. Put your foot down and say no. Kids don't always get what they want from their parents, for their own self benefit, and tough love sometimes means telling people on your own side, your friends, your family, even people you love, no. Don't be afraid to say No, and apply common sense. And let's not snatch defeat from the jaws of Victory.