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. Alice – three points.

    1. I don’t oppose a mixed economy. I just have a different view about the mix.

    2. The public wants good public services. It is less concerned about whether they are delivered via the private sector or public sector. They want what works. If the private sector does airlines better than the public sector then they’ll choose the private sector option.

    3.

  2. @TerjeP

    It seems you are merely citing “mixed economy” as a figleaf.

    What is your so-called mix?

    I don’t think anyone is objecting to mixing public, private, regulated, or deregulated. This can all be adjusted flexibly.

    The real problem with some versions of “mixed” is they mix capitalism into everything.

    If you have capitalism – then you HAVE to bailout bankrupts. In a democracy, there is no choice. Whether they are families, small businesses, banks or countries makes no theoretical difference.

    People who include capitalism in their so-called “mix”, often engage in great expositions for and against all the other elements – but all this is a distraction. Once they are scratched – you find a capitalist.

  3. TerjeP,

    So what you are saying in your point 3, Terje, is that criminal fraudulent companies should be protected by some kind of commercial Nannny State?

    I pay higher rates and have to do without services that I pay for because of those Goldman Sachs ratbags. But you think that their behaviour should be rewarded?

  4. No, @3 Terje was saying that he does not agree with bailing out banks of the type of Goldman Sachs.

    Terje, IMO many would agree on moral grounds that banks of the type in question should have gone bankrupt. The trouble is that unless we get a better information system on financial transactions the consequences for people world wide of having all Wall Street Bankers (some located in other countries but into the same game) go bankrupt cannot be assessed. So, there are two moral problems, not one.

    On the face of it, what happened in the USA is nothing but a monumental waste of resources and misery for huge numbers of people in the USA and elsewhere. It is for all to see. People in the USA lost their houses and live in tents while tax payers are being committed to convert the private bank generated ‘money’ – debt – into public money – debt -and the merry-go-around continues including rewarding the operators with bonuses and taking note of the S&P’s ranking (as if they would have any credibility). Would it not have been better to give the public debt to those who could not pay their mortage? Alternatively, take public possession of all houses of bankrupt owners, pay the said banks a fraction of the debt and rent out the houses at rents consistent with the income of these people. These are rhetorical questions because the data to make an assessment is not available and, more importantly, the lack of data is not confined to the USA. We all know there is an international network of debt channels but we don’t know enough about what goes on to deal with the second moral issue I mentioned.

  5. @TerjeP
    On this we are in complete agreement. Goldman Sachs were at the forefront of the gambling spree before the 1929 crash. It really is time GS crashed.

    In the 1890s they would have just failed. Ever since powerful banks have been saved. But they are just too powerful now and saving them is a huge mistake. I can see Ernestine’s argument. Innocent people will lose money but I dont know too many who bank with GS and I bet there are innocent super savers who dont even know they bank with GS but people around the world are paying to prop them up anyway. Innocents will pay but GS should fail is my opinion. Lehamn failed. Did it impose hardships of the like we are seeing now through global budgets which devoted themselves to propping up sick banks?

  6. @TerjeP

    3. (unfinished point by Terje) ..if the public sector delivers public services better than the private sector (and we are seeing some monumental private sector bunglings of public services) then people have a right to public sector delivery.

    Yes Terje?

    Apart from that I agree with you,

  7. Ernestine, it was the particular way that Goldman was bailed out that was so offensive.

    If a small bank in the US fails, it gets taken over by the FDIC, accounts are set right, then its assets and liabilities are auctioned off to some other bank. In the process, the shareholders (note to others: not the depositors) lose everything and the management gets fired.

    This didn’t happen with Goldman. The shareholders and management made out like bandits.

  8. Oops sorry Terje. I read that on too small a screen. Actually I read that in the negative because I thought that Goldman Sachs didn’t get a bailout. The whole GFC orgey of greed gets worse the more that I learn about it.

    But that would have been a brilliant plan, Ernestine, which is why it could not have never happened.

  9. The public want public services, true enough. The public don’t care about the nature of the provision of those services (ie private or public), they just want the end result…to paraphrase Terje. Where Terje and I part company on this would be the fact that private companies go bust or rip off the goods and run away, all too often. While it is arguable that there is some risk of inefficiency in provision of services by a public sector, the flipside is that with the private sector the public a submitted to additional risks concerning the service provision in itself, ie continuity of the service provision. Examples abound, of private company collapse taking down what was once largely a publically provided service (ABC Learning, anyone?)…In the case of ABC Learning, the government had to step in and fix it, at substantial cost to us taxpayers.

    In other words, the public care about both the service itself, and the nature of its provision (continuous, reliable, etc) – only some of which may be covered by contract since business viability risks are inherently external to a contract to deliver. After all, penalties and the like are hardly of use when exacted against a bankrupt company. If the public get a good public service, and if the quality factors relating to the provisioning of the service itself, are covered, then I don’t think the public necessarily have a problem with privately supplied public service (an oxymoron of an expression if I ever saw one, though). Unfortunately, continuity of service in today’s world means that the government must be ready to step in when essential services are at threat. For non-essential but nevertheless vitally important services, perhaps the government could rely on other private companies stepping up to fill a void (in the situation of a private provider collapsing catastrophically, for instance), but the political risks in that strategy are severe.

    Have a good Easter everyone (although I don’t believe in it, but hey – chocolate!).

  10. Shorter Leonard Read: ‘Industrial economies are complicated and interdependent’.

    Yes, but so what? I do not see how this has anything to do with the ideological point he is trying to make.

    The entire non-trivial content of this article (in relation to the point he is trying to make) is in the last paragraph: ‘Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson. Let society’s legal apparatus remove all obstacles *the best it can*.’ (emphasis added)

    Sure – but how? How much? What are the countervailing forces whose existence is admitted by ‘as best it can’? What unintended consequences might there be? How should they be dealt with? Where some people’s obstacles are other people’s goals (living wage, secure job, safe workplace…) how should the conflicting interests be resolved? The author signs off just at the point where things start to get interesting.

  11. Alice 10,

    Counting ones blessings in the country where everyone needs to be “blessed”, is a rare event these days.

    I was having a look at the historical value of the US dollar a while ago and it very much appears to nose dive when there is a Republican president, and partially recover when there is a Democrat. One would think that after the disasterous George W Bush who took the country, and a lot of other countries, into a pointless war over oil costing the country at least 3 trillion dollars of extra debt while trashing the US’s international “good will” reputation, all in the disguise of needing to be tough on terrorism, that the Republicans would slink into the background for a decade or two. But no, they now are certain that they alone can fix the disaster that has been created, and have demonstrated their skills by immediately blaming everone else for the mess, while drawing on the intellectual power of John Shimkus to clean up the environment.

  12. @BilB
    BilB (probably need a sandpit as a bit off topic) The US has two circular flows – one that creates jobs and is useful. The other that is sort of a black hole circular flow ie the inverse of the useful flow to the US or other economies. Policymakers traditionally had a role in ensuring the health of the first but something tells me the will of the political system has been hijacked so that policy makers / regulators of all types (and at all levels) are now engaged in expanding the black circular flow.

    This ugly second flow is a leakage that withdraws the taxes of ordinary every day citizens applies it to “ostensibly worthy causes” such as “bailing out banks” “aid relief to Haiti”, a “war on terrorism”, “increased military self protection” and then misuses the ostensibly worthy fund allocation..

    Talib refers to the problem of US corruption as the “regulator franchise” . The very people that make it into government are already grossly in debt to the funders who put them there. Corruption does not seep up in through the ranks of an increasingly tainted bureaucracy the US. Corruption trickles down.

    Two examples

    http://www.huffingtonpost.com/nassim-nicholas-taleb/the-regulator-franchise-o_b_667967.html

    http://rwer.wordpress.com/2011/04/25/only-in-america-former-u-s-official-sued-haiti-contractors-for-kickbacks/

  13. If you have capitalism – then you HAVE to bailout bankrupts. In a democracy, there is no choice. Whether they are families, small businesses, banks or countries makes no theoretical difference.

    Chris – what you said above is rubbish in my view. I’d challenge you to justify and defend what you have said.

  14. the fact that private companies go bust or rip off the goods and run away, all too often.

    Private companies occasionally go bust but not that often. And rarely do they “run off”. Weighed against this is the inefficiency of the public sphere and it’s unresponsive tendencies in the face of shifting demand. More public initiatives should go broke and run off.

  15. TerjeP :

    … rarely do they “run off”. …

    One thing is almost universal about private companies of any reasonable size and how they cease business.

    Almost inevitably they don’t just shut up shop, pay all their creditors and walk away with what is left when it becomes obvious that that is the best course for them and their creditors (and shareholders). No. Those running the companies, with other peoples money, typically (that is, using other people’s equity, debt, goods on credit, workers pay and entitlements for capital) keep drawing huge management fees (and bonuses), try to borrow more, try to get more goods on credit, delay payments, to the tax man, to super, entitlements they ought to be paying on behalf of their workers, and so on. When finally they can’t continue this any longer, either they or their creditors call in an administrator and the massive debts are uncovered. If the managers time it right, they appoint the administrators, that is, they go into voluntary administration, which is the most advantageous departure for those executives.

    We have recent examples.

    Here is a question. Is it reasonable for a company to be selling gift vouchers before Christmas when their business is obviously bust and they should know that when it officially goes bust those vouchers are unlikely to be fully honored?

    By the way, I neither brought or received any of those types of vouchers. It was obvious where that group was headed at least a year ago. Obvious, simply from walking into their shops and taking note of the evidence. Wasn’t difficult to see the credit problems on the floor.

    You don’t need to run off when all the money, other peoples money, is long gone and it doesn’t even seem that what you have done violates any law that anyone might want to enforce.

    The commercial practice of looting for profit is big business. If you can loot so that what you have been up to is not found out until you have long moved on to your next job, so much better. Looting for profit is why companies don’ t properly provision for long-term liabilities (except when it comes to senior executive remuneration). Look at the history of company pension schemes. And is why they don’t close when they ought to.

    The touted efficiency of private business is largely a myth. Sadly both the private and public sector are shamefully inefficient, and for much the same reasons. And where business has scope to corrupt government (The brown paper bag economy) you get the worst of all worlds in a mixed economy. The Russian brown paper bag economy seems to be less efficient now than it was prior to the totalitarian collapse, and certainly less equitable (and possibly not even less totalitarian). Maybe that is why so many there are nostalgic about the ‘good old days’, and so many are drinking themselves into oblivion.

  16. Sadly both the private and public sector are shamefully inefficient, and for much the same reasons.

    Yes they are no doubt on par. The difference is that whilst the private sector inefficiently produces stuff that people want the public sector all to often engages in inefficiently producing stuff people don’t want.

  17. @Freelander
    Freelander – strange how many comapnies cannibalise future profits, employee benefits and everything else when they are going bust…thats often when private firms get really ugly.

    Terje – says “Private companies occasionally go bust but not that often.”

    Cant believe you said that Terje. Bankrupcty hardly an endangered species.

  18. Terje does not realise that if you do not bailout bankraupts, creditors take all, and the victims must resort to crime and beggery in order to survive. This is the first impact. The second effect is that wealth becomes concentrated even as the productive units in an economy diminish.

    Finally capitalism becomes choked-up with its own capital, and often enough in the past this leads to empire0-building wars and invasions.

    So it seems Terge is the so-called ‘rubbish’ he so fears.

  19. Terje does not realise that if you do not bailout bankraupts, creditors take all, and the victims must resort to crime and beggery in order to survive.

    Creditors are the primary victims of bankruptcy. So your analysis seems quite flawed.

  20. @TerjeP

    They both produce stuff people want and stuff people don’t want. Interestingly, the public sector is frequently there to save the private sector’s bacon.

    When Iceland had its volcanic eruption it was the public sector that shut the airlines down. They clearly wouldn’t have done it themselves and made it clear they would fly if they weren’t stopped. A recent PNAS piece of research indicates what would have been the result.

    Once again, government and its regulators have saved an industry from destroying itself. In the process of destroying itself, the airline industry would have produced plenty more of a product the public doesn’t want – non-arrival at your flight destination due to your flight terminating short and somewhat abruptly.

  21. @TerjeP
    Terje hasnt yet put two and two together to realise that sole traders and partners who go bankrupt are still part of businesses. They are in the stats as bankrupt individuals Terje and you might like to check the increase in bankruptcies on this site…..
    However it is kind of out of date (last year percentage changes reported was the year ended 09 and its still not pretty) but you will have to deal with that.

    http://www.itsa.gov.au/dir228/itsaweb.nsf/docindex/statistics-%3Eannual+statistics+archive-%3Eannual+statistics+archive?opendocument

  22. Freelander – I don’t know enough to comment on the Iceland case but airlines do have strong financial incentives to avoid airplane crashes. And not just because airplanes are expensive.

  23. JQ – if you are reading these comments I’d like to say that I regard Chris calling me “rubbish” to be a case of personal abuse.

  24. @TerjeP

    Creditors are the primary victims of bankruptcy. So your analysis seems quite flawed.

    So where is there any “flaw”?

    No bankruptcy, creditors run riot, debtors loose.

    With bankruptcy, creditors loose some and debtors get protection (ie bailout).

    Under capitalism in a democracy you have to bailout bankrupts.

    So what if capitalist creditors loose … this is not a flaw, it is a virtue.

  25. @TerjeP

    Of course they have financial incentives to avoid airplane crashes. But so do problem gamblers have financial incentives not to lose all their money by feeding pokie machines. Both problem gamblers and the people who run airlines are punks who feel they are lucky (with tribute to Harry Callahan). Unfortunately, the result is unlikely to make the travel-going public’s day.

  26. If the government bails out bankrupts to a survivable position then the bailed out entities should loose an approporiate amount of equity to the bailing out body (government). The government then has the option to trade or reasign that equity in a meaningful manner, perhaps to the employees with the cost of the bailout recovered over time from profits.

  27. Oops – Prof can you delete above comment?. Its in violation of policy but there is a real excess of spin about the US recovery in the media and a dearth of well informed critical summing up about the real state of the US in the msm, its long running policy failures and its current potential for recovery. It might be fair to suggest that the US is now no better off than Japan in the 1990s and beyond and no, they have not reformed their banks so the structural problems in their financial system are still there. The risks are still there. This is a pretty good summing up

    http://rwer.wordpress.com/2011/04/27/where-are-we/

  28. @TerjeP

    I guess it depends upon what “occasional” is taken to mean: Running Off Statistics for Registered Companies, courtesy of ASIC. Rough as guts, for 2009 and 2010, we have the following info:
    Date | Registered Companies | New Registrations | Insolvency Appts | External Admin |
    2010 | 1.79 million | 11,249 (Dec) | 14,000 (2010) | 8500 (2010) |
    2009 | 1.73 million | 11,351 (Dec) | 15,600 (2009) | 8365 (2009) |

    Now, “Insolvency Appts” may have one company counted multiple times, eg goes insolvent then back on feet then insolvent again all in one year. The “External Administration” reports gives a single count, so is probably the better figure to use. There are good data at the ASIC site, if you want to knock yourself out.

    To me the notable feature is that being registered with ASIC is not essential for sole traders etc. I might be a fledgling writer, for instance, and have an ABN but not have a registered company. Nevertherless, the ASIC figures indicate that companies go insolvent at a lower rate than new companies are registering, but it is a comparable rate, say 70% of new registrations gives a rough guide to the number of external administration reports for the same period, more or less. On the other hand, if you compare 8,500 say, against 1.79 million registered companies, it doesn’t looks so bad, so maybe Terje’s use of the word “occasional” is a fair call.
    On the third hand, when a single company like Ansett goes down the gurgler, the fallout reverberates widely (why, that lousy company took my frequent – #?$$%@!! – flyer points, doh!), affecting 16,000 people directly, and their families and friends indirectly. I’ll concede the point though.

    Irregular family upheaval is the cost of an “efficient” capitalist system, I suppose. I’m making no allusions to alternatives though.

  29. Alice,

    I don’t share Radfords lack of concern on debt being a problem, one years GDP of government debt has got to be a problem, but his point 7 is on the money.

  30. A comprehensive rebuttal, LD (Lee Doren?). Good work. Note the ad hom from Freelander – that means you won the argument.

  31. @BilB
    @Jarrah
    Nice work Jarrah – but can you ffind a rebuttal to I – Joe – my link above. I dont think the Profs comments on I pencil so wrong that I would automatically assume your bloke was right…there is a scarcity of references and sources in your blokes rebuttal but we come to expect this from the right dont we?

    Just because your source says it aint so doesnt mean it aint so. The commanding voice of pseudo authority is nothing but a meaningless source of real authority.

    The use of ‘ad hom’ also means you lost the argument here Jarrah. Its a mark of a certain class of persons. ?Those who take no real evidence on board in arriving at their own personal opinions and who also happen to be ideologically slanted to a particular (read unquestioning right wing) view, despite all of its now apparent failings??

    I – Joe.

    Bil B

    Radfords point 7 is on the money….I dont think Radford is unconcerned about US debt levels. I think Radford is very concerned about it, but not to the extent he wants to further enrich the rich in the united states at the expense of budget cuts to the services for the poor. I thought he made that pretty clear and its a good point.

  32. So reasonable and rational criticisms of Quiggin’s central thesis and empirical examples is “no argument”, Freelander? Wait, that’s just more ad hom from you. Please try again.

  33. @Freelander
    Agree Freelander. I – pencil nailed it to the wall. The prof was being pretty polite but the same idea is in both arguments. Those that want to diminish government and government intervention are doing untold damage to all whilst cleaning their teeth with clean regulated water and convincing themselves and trying to convince the rest of us they did it all on their own and they dont need government intervention, because they had the get up and go to get a job and look after themselves.

    Yeah right. Nice from the comfort of your clean regulation protected world to say you now never needed government protection because you had the “guts and smarts to make it on your own without government protection and government regulation”” (some of which was pretty hard to get passed in history)” in a government protected world.

    Dare I say it? Complete idiots.

  34. @Jarrah

    There wasn’t any ad hom in my response. I simply noted the lack of insight.
    Anyway, a sound argument is incomplete without an element of ad homonym.

  35. By the way… now that Obama has gotten the Hawaiian State Government to make an exception and release the long version of his birth certificate, isn’t it about time that Donald Trump had that thing on his head authenticated?

  36. “There wasn’t any ad hom in my response.”

    Your response lacked anything but ad hominem. It did not engage with the arguments, but merely “played the man, not the ball”. That’s the definition of ad hom.

  37. @Jarrah
    ad hom is a tired old right “staller” of discussion by right Jarrah…time to ditch it and play the argument yourself…

    ad humanym needed?

  38. @Jarrah

    Played the man? Noting the article lacked insight? Doh? I didn’t say anything about the man. Mind you, accusing someone of ad hom is playing the man.

  39. @Freelander
    If the only true escape is death, that thing on Trumps head never got away in time. You have to admit Freelander – no one owns life, but anyone who can afford a long deceased racoon hairpiece owns death.

  40. “ad hom is a tired old right “staller” of discussion by right Jarrah”

    Ironically, more ad hom.

    “Mind you, accusing someone of ad hom is playing the man.”

    Not true. To believe that, you must be ignorant, or a bit dim. (By the way, that’s an insult, not ad hom.) ‘Noting’ a supposed lack of insight is not what you did. You responded to an argument by comparing the site to an amoeba. That’s not grappling with the issue. That’s saying the argument is wrong/trivial/whatever because of who is making the argument. That is a textbook definition of ad hominem.

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