Economics: I, Pencil

[shanek]

Well, there's no Economics subforum (yet), but in the interests of education and enlightenment I'd like to present an essay written in the 1950s by Leonard E. Read, founder of the Foundation for Economic Education. It's a wonderful description of how the free market improves life for everyone, using something as deceptively simple as a pencil...told from the pencil's point of view. You can read the whole thing at the link, of course, but I'll post some relevant highlights:

http://www.fee.org/vnews.php?nid=316

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me — no, that's too much to ask of anyone — if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because — well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me.

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

He continues with the shipping of the logs, the millwork, etc., all of the complex tasks performed by an uncountable number of people, all of whom participate, in one form or another, in the making of the pencil.

Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field--paraffin being a by-product of petroleum.

Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies--millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.

The above is what I meant when writing, "If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing." For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand--that is, in the absence of governmental or any other coercive master-minding — then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely. And here is the reason: Each one acknowledges that he himself doesn't know how to do all the things incident to mail delivery. He also recognizes that no other individual could do it. These assumptions are correct. No individual possesses enough know-how to perform a nation's mail delivery any more than any individual possesses enough know-how to make a pencil. Now, in the absence of faith in free people — in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity — the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental "master-minding."

The lesson I have to teach is this: 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. Permit these creative know-hows freely to flow. Have faith that free men and women will respond to the Invisible Hand. This faith will be confirmed. I, Pencil, seemingly simple though I am, offer the miracle of my creation as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth.

Seems to me that today, much moreso than when Read wrote this piece, we are much in need of the lessons that can be taught to us by a simple pencil...or pen, or a pair of jeans, or any other simple and basic item everyone has and thinks little about when buying it. While the big government types deny even the existance of the Invisible Hand, it is at work every day in practically every aspect of our lives.

 

[Donks]

What role do you think the governemnt should play in the economy?

 

[shanek]

Only in keeping its cotton-pickin' hands off of it.

 

[Donks]

Only in keeping its cotton-pickin' hands off of it.

So it should be a customer, and offer some jobs, but nothing more? If monopolies arise, how should they be dealt with? Should testing for safety and efficacy in products be voluntary (I'm not asking who should do the testing, I agree it should be a private institution)?

 

[shanek]

So it should be a customer, and offer some jobs, but nothing more?

Pretty much, yeah.

If monopolies arise, how should they be dealt with?

Monopolies can only exist with government support.

Should testing for safety and efficacy in products be voluntary (I'm not asking who should do the testing, I agree it should be a private institution)?

Well, yes, but that shouldn't be read to mean that there should be no liability on the part of manufacturers.

Any responses to the essay?

 

[Donks]

Monopolies can only exist with government support.

I take it you don't believe in natural monopolies.

Any responses to the essay?

Well, it's interesting enough, though nothing I hadn't already heard from my one class in economics in college. I don't find anything I strongly disagree with.

 

[Chaos]

Pretty much, yeah.



Monopolies can only exist with government support.

Let me echo Donks´ reply here: what about natural monopolies?

And, besides that, what about the so-called oligopolistic monopoly - i.e. several competitors agree on dividing up the market among themselves and each acts as a monopolist in his own share.

Well, yes, but that shouldn't be read to mean that there should be no liability on the part of manufacturers.

*snip*

Aren´t the laws you´ll need to establish liability and possibility for damaged parties to sue already government intervention?

 

[Kerberos]

Let me echo Donks´ reply here: what about natural monopolies?

Ditto

And, besides that, what about the so-called oligopolistic monopoly - i.e. several competitors agree on dividing up the market among themselves and each acts as a monopolist in his own share.

I never heard of oligopolistic monopoly. Are you talking about a cartel or collusion. BTW Shanek collusion would be legal in a libertarian socierty right?

 

[The idea]

Re: Mail Delivery

[...] I'd like to present an essay written in the 1950s by Leonard E. Read [...] some relevant highlights:

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be efficiently delivered by men acting freely.

Has anyone actually objected to mail delivery by private companies on the grounds that the service would be more expensive than the total cost (in fees and taxes) of government mail delivery service?

Some more realistic concerns:

(1) What if there are some areas into which no company wants to deliver mail? Will a person who wants to send a letter to an address in such an area have no service available?

(2) Suppose a large company that owns businesses in various industries buys a private mail delivery company. What would prevent it from systematically delaying delivery to or from its competitors? For example, if the large company owns a construction company, what would prevent it from delaying bids mailed by a competing construction company?

(3) Suppose you pay a fee beyond the regular delivery fee to guarantee that a letter will be received. If the company lost the letter, would the company have an incentive to create a phony substitute letter and claim that the phony substitute was actually the letter that you sent?

(4) If a private mail delivery company stops operating, what will happen to mail that it has not yet delivered? Assuming that the mail is returned to the senders, will the fees paid by the senders be refunded?

 

[The Central Scrutinizer]

Only in keeping its cotton-pickin' hands off of it.

Odd, coming from someone who enthusiastically supports government intervention in the business affairs of a private company. When did your position change?

 

[Chaos]

Ditto


I never heard of oligopolistic monopoly. Are you talking about a cartel or collusion. BTW Shanek collusion would be legal in a libertarian socierty right?

It´s a bit of both. Suppose you have two companies in a country that both produce and sell good X. The price at which they could sell it so that they make neither loss nor profit is $1.00; so if the competition was really hard the price they´d both offer would $1.odd per unit.
But these companies are not content with a few cents of profit per unit, so they secretly agree that one company only sells in the north half of the country, while the other only sells in the south half of the country, and that they both sell their good X for $5.00 per unit.

 

[Kerberos]

It´s a bit of both. Suppose you have two companies in a country that both produce and sell good X. The price at which they could sell it so that they make neither loss nor profit is $1.00; so if the competition was really hard the price they´d both offer would $1.odd per unit.
But these companies are not content with a few cents of profit per unit, so they secretly agree that one company only sells in the north half of the country, while the other only sells in the south half of the country, and that they both sell their good X for $5.00 per unit.

OK, the term just confused me because I've never heard of it, but have heard of oligopolistic competition in my economy class (I've got an exam in three days).

 

[shanek]

I take it you don't believe in natural monopolies.

No such thing. Oligopolies, yes, but not monopolies. Standard Oil and Microsoft are examples of oligopolies.

Well, it's interesting enough, though nothing I hadn't already heard from my one class in economics in college. I don't find anything I strongly disagree with.

Fair enough.

 

[shanek]

And, besides that, what about the so-called oligopolistic monopoly - i.e. several competitors agree on dividing up the market among themselves and each acts as a monopolist in his own share.

Again, not possible without government intervention to stop the introduction of competitors.

Aren´t the laws you´ll need to establish liability and possibility for damaged parties to sue already government intervention?

But that's not intervention in the economy; that's just justice.

 

[shanek]

BTW Shanek collusion would be legal in a libertarian socierty right?

Sure, as long as government was no part of it, and none of the companies involved initiated force.

 

[shanek]

Re: Re: Mail Delivery

Has anyone actually objected to mail delivery by private companies on the grounds that the service would be more expensive than the total cost (in fees and taxes) of government mail delivery service?

Not to my knowledge. In fact, up through the late 19th century, most of the mail was delivered by Wells Fargo, Western Union, and other private mail carriers. The Post Office was actually doing very poorly. That was why Congress passed legislation giving the Post Office a monopoly on the mail.

In the 1970s, independent companies lobbied the government to drop their monopoly on parcel delivery service. People made all of the same points that they do today about private mail, and why it's too expensive to put into private hands. Of course, today, most people prefer sending parcels through UPS or FedEx than through the USPS.

Here's a question: if it's impossible for the free market to do this, then why did Congress have to pass laws stopping them from doing so?

(1) What if there are some areas into which no company wants to deliver mail?

Are there places in the country that UPS or FedEx won't deliver parcels?

Actually, I can think of one example: I ordered something from a company I found through the new & used section at Amazon.com. They shipped it through DHL (which, apparently, is not a hockey league*). DHL apparently doesn't deliver to my area, so they ended up repackaging it and sending it via UPS.

*Inside joke for people who attended TAM2.

(2) Suppose a large company that owns businesses in various industries buys a private mail delivery company. What would prevent it from systematically delaying delivery to or from its competitors?

The fact that they'd certainly lose business and profits by doing so.

(3) Suppose you pay a fee beyond the regular delivery fee to guarantee that a letter will be received. If the company lost the letter, would the company have an incentive to create a phony substitute letter and claim that the phony substitute was actually the letter that you sent?

No, because it's called "forgery." It's a lot easier just to refund the price of the letter.

BTW, I have received tons of things through the USPS damaged, sometimes even absent (they just send the envelope torn completely out at one end), I even got a summon for jury duty two months after I was supposed to serve. What was the USPS's liability for all of this? None; zip; zilch; zero; nada. Whereas FedEx will automatically accept liability up to $100 for every parcel shipment unless you declare a greater value upon shipping.

(4) If a private mail delivery company stops operating, what will happen to mail that it has not yet delivered? Assuming that the mail is returned to the senders, will the fees paid by the senders be refunded?

It's not like a company goes out of business in a millisecond. They could easily finish the shipments on time and just not take on any new ones as they were closing down.

 

[shanek]

It´s a bit of both. Suppose you have two companies in a country that both produce and sell good X. The price at which they could sell it so that they make neither loss nor profit is $1.00; so if the competition was really hard the price they´d both offer would $1.odd per unit.

But these companies are not content with a few cents of profit per unit, so they secretly agree that one company only sells in the north half of the country, while the other only sells in the south half of the country, and that they both sell their good X for $5.00 per unit.

It's not that simple. There's still a market equilibrium price. The reason why competition drives down prices is that it pushes the supply curve to the right. This kind of collusion only works when both companies agree to limit production, pushing the supply curve back to the left and increasing the equilibrium price. Otherwise, they'd have a bunch of units produced that just weren't being sold and they'd be forced to lower their prices anyway.

Of course, this just opens the door for more production by new competition, so again, they'd have to have government help to prevent it.

 

[roger]

What do libertarians say about limited resources? Or more precisely, sales of endangered species. For example, import and export of Brazilian Rosewood has been banned, with a few exceptions (oddly enough, I have a ready supply of it, though the price is quite outrageous). It was logged nearly to extinction because of the rapacious desires of the market (and hey, I'm included in that, I've bought the stuff in the past year), and the willingness of the owners/cutters to destroy their source.

Likewise, if I choose to sell elephant ivory, should I be able to? Or 'bush meat'?

To give a bit of background, right now if Brazilian Rosewood is sold illegally, and is confiscated, it will be destroyed, and not sold. The idea is to eliminate demand by not allowing any in the market. I'm not so sure I buy that argument, since I can buy it legally (i'm buying wood from stumps of trees that were cut down pre-CITES ban).

 

[shanek]

What do libertarians say about limited resources?

The free market is by far the best tool for dealing with limited resources that humanity has ever devised!

Or more precisely, sales of endangered species. For example, import and export of Brazilian Rosewood has been banned, with a few exceptions (oddly enough, I have a ready supply of it, though the price is quite outrageous). It was logged nearly to extinction because of the rapacious desires of the market (and hey, I'm included in that, I've bought the stuff in the past year), and the willingness of the owners/cutters to destroy their source.

Well, as you said, as the resource becomes more scarce, the price goes up and up and up and up and up. Eventually, it becomes too expensive for anyone to buy it anymore, or, at least, consumption goes down until its numbers increase enough to make it viable again. It's a problem that takes care of itself.

 

[roger]

It's a problem that takes care of itself.

Well, it sure does. Ebony is basically gone. Oh, there's still some stripey ebony out there, and there seems to be plenty of Macassar Ebony for the foreseeable future (mostly because the trees grow far apart and they are forced to log them one by one, by hand), but the days of quartersawn black ebony are over. Well, at least for our lifetimes. The stuff being put on instruments today is either flatsawn, which is quite unstable and causes many problems down the road, or is dyed black, and usually both. I could go on with many other instrument woods, but you get the idea. Unrestrained free market has led to destruction of many species.

Now, there are other woods that have started to suffer the same fate, but people have learned from this and have taken steps to try to control it. For example, Koa, which only grows in HI, was quickly headed for extinction. However, the cutters, seeing what has happened with the rosewoods, ebony, etc, have slowed down their cutting, and may even be doing sustainable harvesting now.

Anyway, I have no intention of discussing this for pages and pages, so I'll just say while we are in agreement with what happens to price and availability when you have a free market, I don't consider the outcome desirable or acceptable in this case. I'd rather have the government regulation, and am happy that rosewood trading has been banned. However, positive examples like the Koa I cited above, or the cooperatives that fishermen have created to avoid destroying the fisheries certainly convinces me that private solutions can work, and should certainly be the preferred solution, with government intervention the last resort.