“I was pretty mad,” Elon Musk said about his failed attempt to buy Russian rockets, “and when I get mad I try to reframe the problem.” Walter Isaacson explains (in his biography of Elon) how Musk employed first-principles thinking:
This led him to develop what he called an “idiot index,” which calculated how much more costly a finished product was than the cost of its basic materials. If a product had a high idiot index, its cost could be reduced significantly by devising more efficient manufacturing techniques.
Rockets had an extremely high idiot index. Musk began calculating the cost of carbon fiber, metal, fuel, and other materials that went into them. The finished product, using the current manufacturing methods, cost at least fifty times more than that.
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So on the flight home, he pulled out his computer and started making spreadsheets that detailed all of the materials and costs for building a midsize rocket.
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“Hey, guys,” he said, showing them the spreadsheet, “I think we can build this rocket ourselves.” When Cantrell looked at the numbers, he said to himself, “I’ll be damned — that’s why he’s been borrowing all my books.”
Idiot index is a great way of looking for opportunities for better design and process, but a lot of times the engineers have done a fine job with the design and process, and the extra cost is expensive local labor and legal and regulatory burdens. That just created a bunch of arbitrage opportunities for outsourcing, mostly to China. Where idiot index pays off is for stuff you can’t outsource, which also tends to be stuff insulated from cost-cutting pressures by monopoly or government subsidy.
Software has no raw materials whatsoever yet it is the most valuable commodity. Starlink is a fantastic achievement yet each satellite costs many thousand times more than the tin and plastic in it. Back of envelope wins again.
Software is the most valuable “commodity” owing entirely to special favor by the Digital Millennium Copyright Act. To repeal the DMCA is to solve the problem.