The iPhone economy

Anyone who has had a chance to play around with either the iPhone or its ipod touch cousin will likely agree that they are amazing products. With the iPhone you can make phone calls, take pictures, browse the internet, play games, listen to music, watch movies and use any number of applications that have been developed for the platform. It is basically a small computer that fits in your pocket.

But how did the iPhone come about? And how has it succeeded? The answer is largely self-interest and competition.

Apple developed the phone because it wanted to make money (under pressure from its stockholders seeking a return on their investment) and thought that it could make a better mobile phone than the many models that already existed in the marketplace. Self-interest drove the decision while a cutthroat business environment spurred it to excellence.

Self-interest goes both ways, however, with consumers trying to get as much value for their money as possible. When the iPhone debuted its price tag was $599, which was soon reduced to $399 in a bid to expand market share. Last year saw another cut to $199 for an improved phone while yesterday that model was further marked down to $99, with an even more capable iPhone unveiled at the $199 price point.

To do reduce prices Apple has had to rely on the international economy to minimize costs. The company famously designs the iPhone in California while assembling them in China. At least some of the parts, meanwhile, are purchased in Taiwan. It's interesting to note that while China and Taiwan have a history of tense political ties that capitalism has brought them together.

Competition in these labor markets, meanwhile, ensures that workers in each are paid their respective values. If Apple underpays an engineer in California he may bolt for Google, or another such tech firm while workers in Taiwan in China similarly have other options.

The iPhone has gone on to create an economy of its own, with software developers producing thousands (around 50,000 I believe) of applications for download. They do this not out of charity but from desire to make a buck -- and some of them have done quite well -- for programs that consumers find useful or fun. Competition ensures that quality remains high and prices reasonable, and most such apps are sold for only a few dollars (and even given away for free).

The end result of all this is a product that has experienced a rise in capabilities and decline in price.

As important as the factors responsible for the success of the iPhone are those that did not play a role. This incredible piece of technology did not stem from a government program or initiative. No task force was appointed on cell phone technology, nor were government "investments" made in this sector. No politician declared mobile phones to be the next great industry that would move the economy forward, yet they have quickly become indispensable items for many people.

We need to make more of the U.S. economy like the iPhone, harnessing both competition and self-interest. It is this, not government mandates and money, that will drive the economy forward and further enrich our lives.

Update: It just occurred to me that last year's price cut was somewhat illusory because I think AT&T -- the iPhone carrier -- raised the cost of their service plan. But I think the point still stands considering that you still got a better phone and the price was just reduced for last year's model.