The second-order growth effects of Ford’s Model T

I recently read a book about the birth of the first credit card, and I realized that the second-order effects of a new invention can impact completely unrelated industries and far outweigh the impact on immediate industries.

For example, with Ford’s first affordable automobile, the Model T, suddenly, everyone was mobile, which transformed American manufacturing and changed urban planning. There were also seemingly unrelated industries, however, that were heavily impacted. The Model T meant that people everywhere could drive and stay at far away places that they couldn’t before —leading to the booming of the hotel and vacation industry.

Technological invention will only get you so far — you also need affordability

But you cannot transform the structure of an industry by purely inventing a new technology — it is also about affordability. Ford produced the Model A in 1903 for $900 — well beyond the reach of ordinary people. The Model A was still seen as an expensive toy for rich people. It wasn’t until ten years later that Ford was able to drop the price down to $260, that led to the mass adoption of the car, giving people the freedom and power that comes with mobility.

The correlation between cost and economic value that entrepreneurs get wrong

We often believe the correlation between cost and economic value is linear — $1 cheaper means 1% increase in economic value. But in fact, it’s only linear up to a point — and then its exponential, where $1 cheaper means 50% or even 100% more economic value. 

Leave a Reply

Your email address will not be published. Required fields are marked *