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I Pencil: A product of the mixed economy

April 16th, 2011

I’m thinking about doing another book, which would be a reply to Henry Hazlitt’s Economics in One Lesson a tract published in 1946, and available online, but still in the Amazon top 1000. It’s largely (as Hazlitt himself says) a rehash of Bastiat.

I’ll try to put up a prospectus soon, but I thought I’d start with something simpler, a response to Leonard Read’s 1958 I, Pencil. This essay is a description of the incredibly complex “family tree” of a simple pencil, making the point that the production of a pencil draws on the work of millions of people, not one of whom could actually make a pencil from scratch, and most of whom don’t know or care that their work contributes to the production of pencils. So far, so good. Read goes on to say that

There is a fact still more astounding: the absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work.

Hold on a moment!

Read’s first person pencil starts the story like this

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon.

That would probably be in a forest managed by the US Forest Service or the Bureau of Land Management, or maybe a similar state agency.

It goes on to mention “all the persons and the numberless skills” that are involved in forestry and in the various subsequent stages of production. Most of those people would have acquired their basic skills in public schools, and learned more in colleges, trade schools and so on, mostly public or publicly funded.

Next up is the rail trip to San Leandro California. Read’s pencil doesn’t mention the line, but it’s presumably on the network of the Union Pacific Railroad, created by Act of Congress under Abraham Lincoln, with the plan of building a railway line across the US[1].

And, while we learn how the pencil is produced by sandwiching a graphite tube between two wooden slates, the pencil forgets to mention its invention and patenting by Nicolas Conte in the late 18th century. The patent system is a temporary government-created monopoly, and a classic example of the mixed economy[2].

Finally, let’s look at Eberhard Faber, the company that made the pencil. It’s now a subsidiary of Newell Rubbermaid, a multinational consumer goods conglomerate with over 20 000 employees and dozens of different brands. Obviously, someone sees a fair bit of benefit in “dictating and forcibly directing” the work of these thousands of employees, rather than relying exclusively on transactions in the marketplace. And the shareholders seem keen on organizing all this activity under the state-created protection of the limited-liability corporation, rather than acting as independent entrepreneurs.

What can we learn from all this? As Read argues, following Adam Smith, markets can indeed organize very complex production processes, to an extent that might well seem miraculous to anyone who tried to reason about it in the abstract. But that doesn’t mean that markets are the only, or invariably the best, way to organize production.

The majority of economic activity takes place without any direct connection to markets, undertaken in the household or government sector, or within large corporations that trade in the market sector, but use central planning to organize their own activities. The boundaries are constantly shifting as some activities shift between household, government and market sectors, and as households, governments and firms outsource some activities and integrate others.

The fact that a particular form of organization exists and functions does not prove that it is optimal. It is certainly possible to imagine forms of modern society in which markets and private property play no role, or forms in which there are “markets in everything”. And, within the broad class of mixed economies, there’s a wide range of possibilities – most goods and services have somewhere and sometime been provided by governments, and somewhere and sometime by private markets.

Nevertheless, the broad outlines of the mixed economy have remained broadly stable since the 1940s, surviving both the challenge from comprehensive central planning in the Soviet Union and the push for privatisation that began in the 1980s and ended (as a program with a credible theoretical foundation, if not as an ideological agenda) in the Global Financial Crisis. Any serious policy program has to take account of this fact.

fn1. Actually when Read was writing, it was probably the Southern Pacific, successor of the Central Pacific, which built the western half of the line, meeting the Union Pacific line halfway in a marvel of successful planning.

fn2. Libertarians and other free market advocates are divided in their views on patents and other forms of ‘intellectual property’. But their logic-chopping style of argument tends to push them to one or other of the extreme positions, either opposing any patent protection or treating intellectual property similarly to other property, with no time limits. Nozick (and Rothbard) finds an intermediate position, supporting protection against direct copying, but not against independent invention.

  1. Alice
    April 28th, 2011 at 20:58 | #1

    @Jarrah
    Jarrah…ad hom has been played to death by the right. Its like holding up a sign for goodness sake (I am right… because I shout ad hom the loudest).
    I dont know who is dim Jarrah but yoyu should have noticed by now?
    Its a dead giveaway that you are going to take a certain view. The “straw man” argument is next!
    Somone give me a lit match.

  2. John Quiggin
    April 28th, 2011 at 21:01 | #2

    Reluctantly, I’ll wade in. Jarrah is right on the presumption that the reference to amoebas was meant literally to say “this site is run by amoebas, not people, and we should disregard anything said by an amoeba”. That would indeed be ad hominem or (if the claim were true) ad amoebam.

    But, possibly flattering myself, I think the natural reading is “Quiggin’s post shines a powerful light on the weakness of the libertarian case, and the response is like that of an amoeba exposed to the light”. Obviously that is not an ad hominem argument, any more than Jarrah’s own suggestion that anyone who would believe a particular claim must be ignorant or stupid.

    In fact, both these arguments are in some sense the opposite of ad hominem – they infer from the (claimed) weakness of the argument that the person making it must be ignorant, ill-informed or intellectually dishonest.

  3. Alice
    April 28th, 2011 at 21:33 | #3

    ad amoebum? ROFL. I was going to suggest funeral rites at this point. A burial for ad hominem and a cremation for straw man…but how to dispose of ad amoebum?
    Goodnight all. Its past my bedtime.

  4. Freelander
    April 28th, 2011 at 21:54 | #4

    @John Quiggin

    Actually, I wasn’t comparing the site to Amoeba, or the writer of the article to Amoeba. I was comparing the reaction and insight contained in the article to an Amoeba’s reaction to strong light (which is an automatic negative reaction). My point was that the article was a knee jerk reaction rather than the product of giving the matter any deep though. In contrast, the article that Alice linked to on “Joe” I consider more insightful. Government plays a role. The long chain of independent operators in the pencil story would not be able to achieve their ends without government playing a role. Pencils still would get made, but nowhere as efficiently or cheaply as they currently are. The growth of government, albeit with great room for improvement, has been important in providing the structure that complex commercial operations involving multiple parties can take place in.

  5. Jarrah
    April 28th, 2011 at 22:15 | #5

    “I dont know who is dim Jarrah but yoyu should have noticed by now?”

    That sentence says answers itself.

    “The “straw man” argument is next!”

    If there was one, I would point it out. But pointing out logical fallacies doesn’t make me incorrect in my arguments (or right-wing!). Suggesting it does, is of course another logical fallacy. Your comments on this thread appear to be nothing but.

  6. Jarrah
    April 28th, 2011 at 22:16 | #6

    Oops. Left “says” in there during an edit.

  7. Chris Warren
    April 29th, 2011 at 08:44 | #7

    False claims such as “ad hominem” are used by the Right to disrupt debate. It is an opportunistic tactic of last resort.

    In Jarrah’s case – he (like others) fabricated this claim.

    The Right will often fabricated accusations to push their agendas, seek sympathy, and create confusion and misdirection.

    There was no “ad hominem” but Jarrah has earned the right to cop one now.

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