I Pencil: A product of the mixed economy

Updated June 2019: The book mentioned in this post is now published as Economics in Two Lessons, from Princeton University Press.

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.

107 thoughts on “I Pencil: A product of the mixed economy

  1. Damn, I’d thought of doing that some time ago. Very good idea though. Given that “I Pencil” is such an amazing work of fiction and shows a total ignorance of how businesses handle their supply chains. Any fool ought to know that a business doesn’t, including pencil manufacturers, doesn’t just wave a hand ful of cash in the air with the market pray “Wave your money and they will come!” To make sure you get exactly the inputs you require to the specifications you require is not a simple matter of the magic of markets. There are all sorts of non unfettered market activities helping the whole pencil making magic on its way.

  2. Henry Petroski’s book “The pencil” tells you more about the pencil than you would want to know. He’s followed it up with a book on the toothpick! And there’s a Pencil Museum in Keswick!

  3. Hmmm, I seem to recall that Henry David Thoreau knew how to make a pencil. His father owned the business and Henry David improved the design of it and and the quality of input materials.

    Later, IIRC, he made his own pencils living solo in the cabin “On Walden Pond”.

    That does not disprove the “I, Pencil” thesis of course. What does disprove it is a consideration of the specialisation of labour and coordination of the same in enterprises as JQ says.

    People (in the aggregate) do know how discrete manufactured items are made be they pencils, houses or bridges. These are things markets can be involved in in trading. What we perhaps don’t know is how more complex social possessions are made and maintained, like language, institutions, broad culture and so so. Interestingly, these accreting social inventions are largely NOT “made” by markets or traded by markets. Markets are one sub-system among many in the overall system of humjan interaction, communication, cooperation and civilization. Whe do these ideologues try to make out that markets are somehow the be all and end all of everything? It’s humbug.

  4. Another one to attack is Paul T. Heyne’s The Economic Way of Thinking which is much beloved by the looney right and especially loved as a primer for economic education. I flicked through it once and seem to remember it had looney things in it like using the way drivers behave on the road system as an example of acheiving optimal outcomes without government interference, comparing it favorably as very similar to the marvel of the unfettered market.

    Only two problems, first, there is hardly an absence of government involvment when it comes to driving on the road, and second, even within this government constrained and regulated environment, individual behaviour is still often antagonistic to acheiving a global (or frequently local) optimum. Constraints begin with the white lines, and the direction concerning which side to drive on. Contrary to Heyne, even with this existing high level of regulating, there are plenty of arguments why a bit more government intervention would make things even better on the road.

  5. As Austerian and propertarian comment is becoming quite ubiquitous, I thought about reading what is it exactly that these people are talking about.

    One question I have, which nobody has been able to answer, concerns the Natural Rate of Interest (as opposed to the market rate of interest).

    As I see it, the general idea is that the natural rate of interest measures how compelled to consume people are. If consumption goods are less scarce now, investment on capital goods is less profitable (because there’s already enough consumption goods). And if consumption goods are less scarce, then people will discount future consumption at a lesser natural interest rate (i.e. are more willing to save now).

    Notice that this “natural rate of interest” exists only in people’s heads, maybe even unconsciously, and is independent of the rates one sees advertised in banks.

    As you guys seem to have read about Austerian thought, I wonder can anyone here answer me: why on earth should the natural rate of interest converge to a single value?

    Notice that a mechanism of arbitrage could explain the convergence of market interest rate to a single value. Further, in a competitive market, where one considers interest rates as prices (which Austerians seem to deny, btw) a price elasticity of demand argument could also rule out multiple market interest rates.

    What argument, if any, can explain a convergence of individual’s different natural rates of interest into an aggregate one?

    Or maybe I just misunderstood the whole idea?

  6. Come on then John, get writing – looks like you already have the chapters mapped out! How about “It takes a village” for a title, or has that been used?

  7. Yes, get writing and I look forward to the book.

    An aside, was there really a ‘credible theoretical foundation’ for the program that started in the 1970s in the USA and locally in the 1980s? Surely Radner’s early 1970s work should have sent a warning about securities markets and the later work by several authors on incomplete markets was published just in time when AGW was emerging as a major market failure. There are also warnings in the theoretical papers on risky bond portfolios.

  8. The incredible specialisation in the manufacture of a pencil is in large part a choice rather than a necessity. This choice reflects different available organising principles for production of said item, nothing more.
    Cars were once built by a small team, working together for however many days it took (I think it was like two or three). Of course they sourced iron and steel, but the made many of the parts essential to the automobile. A team of eight designed on Toyota car. So more than one organising principle exists, and no doubt they are each optimal in their own niches.
    Perhaps I am missing the point…

  9. Brilliant Tu quoque. Especially liked the subtle reference to Coase’s proof of the need for a corporate command economy, albeit owned by capitalist proprietors rather than statist sovereigns.

    Ideologists of Left and Right need to lose their Platonic absolutes. The mixed economy, like the world itself, is an evolutionary work-in-progress with boundaries constantly shifting.

    Attempts to box everything into one conceptual schema invariably founder on reality, sometimes condescendingly referred to as “pragmatism”. As if “practice” was some kind of vice that theorists should never indulge in.

    I prefer Einstein’s dictum: the good scientist should be a “shameless opportunist”. Let the ideologists be scandalised, I prefer to see good deeds get done rather than rest on my pristine pure philosophical laurels.

  10. John,

    You wrote:
    “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.”

    It’s the majority of activity takes place……., not economic activity. Economic activity is, sensus strictu, limited to the market.

    The rest of your arguments must therefore fall.

  11. So if I mop the kitchen floor, that’s mere activity, but if I pay a cleaner to do it, that’s economic activity. I guess that’s true if the value of my time is zero, which might be true for certain blog commenters (and quite possibly negative, in particular cases of responding to certain blog commenters. SFFTT.)

  12. You are right pencils and most other things are a product of the mixed economy. Isn’t that what level-headed textbook writers – e.g. Paul Samuelson – have been saying for a generation? I think focusing on extremist ideologues on the right is not the way to go.

    Freelander, I think Paul Heynes had a more nuanced view than this. I think you didn’t get much past the introduction. He is trying to sell economic theory to introductory economics students. I don’t think Heynes is trying to suggest roads can operate on the basis of laissez faire but just that there is a surprising degree of overall consistency of action.

    Heynes is an important figure in the limited literature on teaching economics.

  13. “Economic activity is, sensus strictu, limited to the market.” Really? See Boulding on ‘Grants Economics’ or anything about gift economies….

  14. Pr Q said:

    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.

    This is obviously true, but somewhat misses the point of the libertarian Right. They are not so much as enamoured with market transactions (although they are) as abhorrent towards government authority. Especially the power to tax, spend and regulate according to democratic mandate.

    They regard all private sector non-market transactions (such as household and corporate activity) as ultimately examples of the proprietor’s legitimate individual autonomy. They do not regard the sovereign as enjoying comparable legitimate institutional authority.

    So ultimately the libertarian ideological position is predicated on a view of the legitimacy, rather than efficiency, of state authority. Really it ultimately boils down to Alpha-males ruling their business and home roosts without interference from niggling bureaucrats (and nagging wives).

    Hence they are driven to the ideological solution of privatisation, which transfers the authority to make command economic decisions from the public to private sector. Of course this usually ends in economic disaster. But since the libertarian agenda is primarily driven by non-economic factors its not surprising that they stare like zombies at the bitter fruits of their endeavours. Economic rorts are a feature, not bug, of the privatisation program.

  15. More generally, the fundamental ideological problem these days is not insufficient government action, but inappropriate government action. We have a mixed economy alright, but it is badly mixed-up with public and private sectors mangled together in many unholy alliances.

    Ultimately this is a problem that stems from the degeneration of the traditional seperation of private church from public state. The old Westminster system used to avoid the conflict of interests that crop up when private lobbyists live off the public teat.

    Government rules and money are everywhere, but usually beholden to private corporate purposes. Most notoriously with private-public partnerships but also with outsourcing and commercial-in-confidence contracting. No bid contracts and cosy sweet-heart contracts.

    The lowest common denominator here is the systemic attempt to do an end-run around standard public accountability. The blurred boundaries allow audit trails to be covered up or finish up in dead-ends.

    The poor results of the mixed-up economy speak for themselves. In the federal sphere we had pink batts, the BER, the hybrid bastard love children of Telstra & Optus, and now the unfolding mess of the NBN. In the state sphere we have MYKI, the Desal plant, cross-city tunnel and anything touched by Macquarie Bank’s infrastructure tentacles.

    I conclude that Pr Q’s attempts to develop a counter-narrative about the virtues of non-liberal (“corporal”?) mixed economy is worthy but will fall on deaf ears.

  16. @Jack Strocchi

    “Really it (libertarianism) ultimately boils down to Alpha-males ruling their business and home roosts without interference from niggling bureaucrats (and nagging wives).” Jack S.

    I agree (even if you were being ironic). Libertarianism is about legitimising self-interest, aggrandising all wealth and power to specific advantaged individuals whilst allowing all others to be exploited without hindrance. Libertarianism might deny this but it is the inherent truth in the attempt to minimise the legitimacy of democratic government. In practice libertarianism equals oligarchy.

  17. Love this story about I pencil…
    Every time the Prof says he is thinking about writing another book, you can bet the metaphorical pencil is already hard at work.

  18. If you want a real challenge, then try doing a family tree for the iPod, a product with a far shorter history, but will probably require several supercomputers to calculate the cross links for this similarly sized product. Here though you will find a guiding plan which will include nearly every science and graphics based tertiary institution on the planet.

  19. Nice definition there Ikonoclast

    “Libertarianism is about legitimising self-interest, aggrandising all wealth and power to specific advantaged individuals whilst allowing all others to be exploited without hindrance. Libertarianism might deny this but it is the inherent truth in the attempt to minimise the legitimacy of democratic government. In practice libertarianism equals oligarchy”

    I have added that to my library.

  20. Louis Hissink.

    The government does not share your view. That is why they have a fringe benefits tax, which must annoy you endlessly.

  21. Hang on …..

    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.

    What precisely are these broad outlines that have “survived”?

    If the terms are mixed “public-planned” vs “private-market” then this is a dead end – pencil or no pencil.

    The real issue is whether society can continue with any sort of capitalism eating away at its roots.

    A mixture of “planned capitalism” [which is what competition policy delivers] with “market capitalism” or “public capitalism” with private capitalism” solves nothing.. Both forms of this “mixed economy” require increased per capita debt and population growth.

    The concept ‘mixed economy’ is better developed as a mixture of capitalist enterprise (planned or market) and socialist or cooperative enterprises(planned or market).

    Once you have escaped capitalism – do you need a mixed economy? Would a regulated market economy then suit all at least for most goods and services?

  22. Great strawman argument!!

    Great red herring argument!!

    Great “no one claimed otherwise” argument!!

    You are tilting at windmills. indeed write your book.

    Then we can engage in various arguments of second best institutional design, public choice theory, etc., etc.

  23. The is plenty of private timberland in the West, and many non-government subsidized rail lines, etc.

    You’ll actually habe to work to tell a story that is true and is not myth.

  24. I think, Chris, that you are arguing for a homegenous slab economic construction versus the mixed material random rubble economy that works best in most countries, Australia included. The homogenous one colour economy construction may be simpler to understand and operate for a time, but it does not cater for the wide variety of the people, energies, ideas, opportunities, and needs that make a vibrant society. An economic construction hewn over time of heavy industry capitalism blocks and government planning blocks infilled with a small business, private enterprise and public service mortar makes for a more appealing collage of human enterprise than the alternative of the centrally managed economy. It may not be as strong overall as the homogenous construction, but it is a far better serves the needs of a mixed variety of peoples.

  25. BilB

    I cannot see how our current ‘mixed economy’ rubble or not, works at all. When you look at it you cannot avoid noticing that:

    per capita debt has increased and this is necessary (due to capitalism)
    the importing of value from offshore oppressed labour has increased.

    Both of these threaten the entire structure irrespective of how it is constructed.

    Its not the collage that concerns me but the cancer eating away underneath.

  26. Fair point, Chris, but there is nothing to stop a fully managed economy making the very same mistakes. The Cinese people, I think I heard on the news, have a 50% saving level, and this is despite their horrible individual personal circumstances. It is not about what the governement does, it is about the national work and saving ethic.

  27. Judging from appearances China appears to be running a capitalist economy and probably has 100 years of such boom and bust cycles to go until they arrive at the same debt-burdened endpoint as Europe and America.

    Here is the latest funeral rite for Keynesian America:

    More debt

    But the problem for the Chinese is that the current flush of growth they are experiencing is not based on any internal dynamic of capitalism but more on opportunistically feasting on the rest of the world.

  28. @Chris Warren

    America is hardly ‘Keynesian’. They do have a debt problem.

    As for the Chinese, due to the GFC they have swapped to greater reliance on internal demand, unfortunately. Unfortunately, not for them but for us. I like getting cheap goods subsidised by cheap Chinese labour. If the GFC hadn’t happened the Chinese government would most likely have continued with their depressed wages and depressed internal demand approach and their reliance on maintaining export demand. That they have not means our honeymoon of cheap Chinese goods will end sooner than it would have.

    The Chinese may have problems. What economy doesn’t? However, most of the anticipated problems spouted by many so-called analysts are often based more on wishful thinking than sound reasoning.

  29. Freelander

    The recourse to debt to to counter cyclical deviations and to stimulate the economy is Keynesian.

    Once upon a time the Europeans liked getting cheap goods sunsidised by cheap Negro, ‘Coolie’ and ‘Hindoo’ labour. If WW1 hadn’t happened the Colonial governments would most likely have continued with their depresed wages and depressed internal demand approach and their reliance on maintaining export demand. That they did not means the honeymoon of cheap Colonial goods ended sooner than it would have.

    So it is an old, old tale.

    Sound reasoning depends on whose shoulders you stand on.

    What sound reasoning suggests that capitalist profits can be made without either exploitation or increasing percapita debt to multi-trillion dollar levels (and rising)?

    Is it reasonable to have continuous ratchetting debt without the Keynesian muddle?

  30. Dont you just love this debt link on the US posted by Chris above

    I mean Congress just has to vote to raise the debt levels (already in the insane trillions numbers) so as to keep the “creditworthiness of the US intact”.

    “Congress is going to have to raise the debt limit,” Mr. Geithner said on the NBC program “Meet the Press.” “They understand that. That’s absolutely essential to preserve the creditworthiness of the United States of America.”

    Its (US credit worthiness) has been robbed blind by US banks. But oh dear they must keep their rating agenciy reports looking sweet.

    Right. This is worthy of a Monty Python comment.

    “Always look on the bright side of life.”

  31. @Alice

    I can’t understand how S&P and Moody’s have ignored things until now. (Well to be honest I can, and its not so unusual given their track record.)

    Also, unlike the consternation over Greece, Ireland, Portugal, and Spain, which after all are only really equivalent to state governments given that they don’t have their own currency, little notice, so far, has been taken of the state of the US states.

    Whereas, Germany and others don’t really need to do anything to help the GIPS (and could just let them suffer), because state citizens have votes in the US Federal elections, that luxury is not available there. Moreover, in the US it is not just the peripheral states which are shaky, the rot in state finances is pretty well all the way through.

    It was very amusing and another example of the stupidity of those still in control of international money markets and other people’s money, that the S&P’s warning on the US caused a Pavlovian ‘flight to safety’, that is, to the ‘safety’ of the US dollar!

    Another reason for “Always look on…”

  32. This is obviously true, but somewhat misses the point of the libertarian Right. They are not so much as enamoured with market transactions (although they are) as abhorrent towards government authority. Especially the power to tax, spend and regulate according to democratic mandate.

    More often without mandate. Rudd promised tax cuts and an end to reckless spending. Delivered the tax cuts but then proposed a raft of new taxes, never got around to taking a “meat axe” to the public service (his words not mine), and created endless new spending initiatives. He was succeeded by Gillard who found it necessary to deny her carbon tax agenda in the eve of an election. There are problems with democracy but the problem is not principly with voters who seem to do a reasonable job dealing with a pretty second rate menu that offers mostly fraudulent products.

  33. There are problems with democracy but the problem is not principly with voters who seem to do a reasonable job dealing with a pretty second rate menu that offers mostly fraudulent products.

    Unfortunately in NSW, voters appear to have rejected one set of liars and fraudsters in favour of a worse set of liars and fraudsters.

    This was pretty much a media con.

    Such is life.

  34. What informed options did they have? Not many I’d say. Given a bad menu you eat bad food.

  35. @TerjeP
    I do remember the “meat axe” line disappearing.

    I also recall all financial markets freezing during the GFC. Perhaps the message got lost somewhere in that mess.

  36. @TerjeP
    Terje… I dont suppose you even notice that people want public services do you and the reason they voted NSW Labor out was because they werent getting them?

    I dont know how libertarians manage to take solace from the fact that most normal people want a mixed ecobnomy and a reasonable government presence when it comes to getting the infrastructure planned and built.

    It would be strange to actually sign up to be part of such a minority.

  37. The politics on offer has become much like the ‘choice’ we have in supermarkets. We get to choose the name of the party in power but have no choice over policies and government decisions, which, whichever brand or differences in packaging, stay much the same.

  38. @TerjeP

    I think the Government made the right decision to guarantee deposits, given the state of panic at the time.

    Additionally, many more Australian banks would have folded or have been taken over by the Big Four if the government did not provide liquidity. The short term market for funds was gone!

    Back to your point about Rudd not having the mandate to act. I find this intriguing because I believe the ability of the financial industry to create “independent” SIVs and shift all their risk off balance sheet is evidence that the market will not necessarily produce good systems. The failure of the market to account for systemic risk which was significantly intensified through the use of CDS to “manage risk” is undeniable. If governments did not act, the international economy was staring at a big, black hole.

    I suppose this is where we differ, I was happy with the decision for Australian government (and other governments) to take action whereas perhaps you would have preferred to let the market do its thing.

  39. Alice – you assume too much.

    W – I don’t think the guarantees were a good idea. The banks in Australia did not need them and if there were problems with the banks Ireland shows where bank guarantees can lead you.

  40. @TerjeP
    Aren’t you conflating two different situations. Australian banks were in a quite different state to Irish banks. In Australia it was more-or-less an issue of confidence, or even just a potential issue of confidence. IIRC it was generally agreed at the time that the real risk was small. That analysis has proved correct. The process worked well and was pretty painless apart from the minor questions like when to sever the guarantee. This makes the action right in Australia. (That is, unless you are generically against government guarantees for other reasons.)

    Ireland’s problems were significant, as demonstrated by their post GFC trajectory so it’s not a guide to action in Australia in this case. Allowing banks to fail there might have been a good idea if you could clean up the bodies quickly, but that’s a different question.

  41. @TerjeP
    Terje says “Alice – you assume too much.

    How so? Are you suggesting, by any chance, OFarrell got in because people are moving towards libertarianism Terje?

    Even OFarrell knows its about the trains and the roads.

  42. @TerjeP
    Its Goldman I wanted to see collapse as they should have, spectaucularly, but we have Geitner to thank for that.The thieves and inequality merchants still prosper in the the US.,,but not for long..until the next crash and there is no bailout.

  43. Ireland’s problems were significant, as demonstrated by their post GFC trajectory so it’s not a guide to action in Australia in this case.

    At the time the ALP used Ireland as a role model for why we should have a guarantee.

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