We Pencils

Introduction: This essay is guest authored by a group of pencils.  Yes, we are a bunch of ordinary writing instruments.  Even though any one of us is very dumb, even a group of idiots can produce something much greater than the sum of their parts when they figure out how to work together.  Collaboration is what this essay is all about.  We think that Leonard Read’s famous 1948 essay, “I Pencil” was misleading about how collaboration works.  This is to set the record straight.

We Pencils

We are lead pencils–the ordinary wooden pencils familiar to everyone who can read and write. This is our story, our genealogy. You may wonder why we would write this genealogy, but we are a mystery–more so than a tree or even a flash of lightning. Sadly we are taken for granted as if we were without import, but imagine life without us.

We pencils, simple though we appear to be, should merit your wonder and awe, a claim we shall attempt to prove. In fact, if you can understand us—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which we pencils symbolize, you can help save the prosperity that mankind is so unhappily losing. We have a profound lesson to teach. And we can teach this lesson better than can an automobile or an airport because—well, because we are so simple.

Simple? Yet, not a single person on the face of this earth knows how to make one of us. This sounds fantastic, doesn’t it? Pick up one of us to look over. What do you see? Not much meets the eye— wood, paint, the graphite lead, a metal ferrule, and an eraser.

Innumerable Antecedents

Even though you are a distant cousin to everyone else on earth, you probably cannot trace your family tree back far enough to identify your relationship to more than a few thousand relatives at best. Just as it is impossible for you to name all your antecedents, so is it impossible for any of us to name and explain all of ours. But we would like to suggest enough of them to impress upon you the richness and complexity of every humble pencil.

Our family tree begins with actual trees, such as straight-grained cedars that grow in forests in Northern California and Oregon that are mostly owned by the federal government which manages 70% of the forests and 47% of all the land in states west of the Great Plains as you will see below.

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 corporations and the numberless central planners that managed their fabrication: Glencore Xstrata Corporation mining the ore, ArcelorMittal Corporation making the steel and its refinement into saws, axes, motors by Techtronic Industries; the corporate logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons working for Kraft Foods had a hand in every cup of coffee the loggers drink!

Now contemplate the necessity of roads to get workers into the forests and get the wood back out. Without roads, most wood could never be harvested. US Forest Service workers managed our trees and State Transportation Department bureaucrats planned the roads to get them out to the railroad.

Can you imagine the individuals who work for GE Transportation in over 160 countries making the flat cars and rails and railroad engines and who construct and install the communication systems for the shipping containers that transport the wood for pencils?

Some of us were part of logs that were shipped to one of the 33 enormous sawmills in California that produce billions of board feet every year. Some of us were shipped to a facility in China like the California Cedar Products’s pencil slat mill in Tianjin.

Our cedar logs are cut by robots into small, pencil-length slats less than one-fourth of an inch in thickness. Other robots dry us in kilns and then tint our wood red for the same reason women put on makeup. People prefer that we pencils look pretty, not pallid white.

How many other robots in other factories made the lights, belts, motors and other equipment the pencil slat mill requires? Yes, although machines do most of the work in factories, there are people there among our ancestors too. There are engineers who programmed the robots and maintained the machines and janitors who swept the floors. There were construction workers who poured the concrete for the Communist-Chinese government Three Gorges Dam hydroelectric plant, the world’s biggest, which supplies the mill’s power.

Don’t overlook the ancestors present and distant who had a hand in transporting numerous containers of slats across the globe. Most of them will be replaced by robotic self-driving vehicles in the near future, but that creative destruction will just bring other corporate managers into our family tree.

Once in a Chinese pencil factory—hundreds of millions of dollars of robotic machinery and building, financed with capital accumulated in government-run Chinese banks—each slat is given eight grooves by a robotic machine, after which another robot lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Eight of us are robotically carved from this “wood-clinched” sandwich.

Our “lead” itself—it contains no lead at all—is complex. It begins with the world’s graphite deposits, nearly 80 percent of which are located in China and, like all land in communist Chinese are owned by the government. Consider the graphite miners and the workers who made their many tools. They are slowly being replaced by machines owned by multinationals just like the workers who used to load bags of graphite on ships. Even those who make large shipping containers in which the graphite is shipped and those making the ships are slowly being replaced by mechanization. Even the lighthouse keepers along the way who assisted in our birth have long-since been replaced by government-owned robotic lights. The harbor pilots will soon be replaced by corporation-owned robots too.

The graphite is mixed with kaolin clay from Georgia and wetting agents from a chemical factory. After passing through numerous semi-autonomous machines, the mixture is finally extruded like thin sausages, cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit, all untouched by any worker’s hands. To increase the strength and smoothness of the leads, robots then coat them with a hot treatment of waxes synthesized at petroleum refineries.

Robots then coat the naked cedar of our bodies with paint. Do you know all the ingredients of paint? Who would think that middle-eastern petroleum is the biggest part of it? That oil is chemically transformed into solvents like aliphatic and alicyclic hydrocarbons. Why, even the processes the AkzoNobel corporation uses to make our paint’s pigments a beautiful yellow involve the skills of many people that is too complex to explain.

Observe our labeling. That is a mixture of carbon black and polymer binders that is painted on and rapidly cured by heating. How does AkzoNobel make polymers and what, pray, is carbon black?

Our bit of metal—the ferrule—is aluminum. Think of all the robots of Rio Tinto Alcan Corporation who mine bauxite in Australia and the robots at UC Rusal who have the skills to smelt it and make shiny a sheet of alloy. It would take pages to explain just how one robot works and much more to explain how they make sheets of alloy.

Then there’s our crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with us. It is made by corporations that distil crude petroleum into its different chemicals and crack them separately with catalysts into styrene and butadiene which are mixed back together with vegetable oil, sulfur, tints, heat, and many other inputs to chemically react into the final “rubber” that is extruded and cut into the desired shapes by robotic machines.

No One Knows

Does anyone wish to challenge our earlier assertion that no single person on the face of this earth would know how to make one of us without the help of many other people?

Thousands of corporations have a hand in our creation even though none of them knows more than a small fraction of the total that the others know. Now, you may say that we go too far in claiming in our creation the coffee corporations and food managers in far-off countries. This is an extreme position, but we stand by our claim. There isn’t a single employee in all the millions, including the president of the pencil company, who contributes more than an infinitesimal amount of know-how or effort to make one of us. The only difference between the contribution of the president of the pencil company and the logger in Oregon is in the type of know-how and the amount of political power they have in their organizational structures. Neither the president nor the logger can be dispensed with, any more than can a chemist in the factories or the workers in the oil fields. Even so, the company president will get a lot more money because of his political power as a central planner in the process and the scarcity of the knowledge that top central planners gather.

Here is an astounding fact: Neither the oil field employee nor the chemist nor the robotics engineer nor any who cuts the trees or mines the ores performs his singular task because he wants to make pencils. Each of these workers wants pencils less, perhaps, than does a child in the first grade. Indeed, there may be some among this vast multitude who never even saw a pencil nor would they know how to use one. Their motivation is other than pencils. Perhaps it is something like this: almost all of the millions of workers and robots are ordered to perform their tiny work by managers who control the salaries that they need to buy goods and services. We pencils may or may not be among these items.

Only the pencil company workers take pride in their contribution to us pencils, but they are a tiny fraction of the people and robots who are necessary for producing us. There are only three pencil factories in the U.S. which produce about two billion pencils a year. Of course, this was only 14% of the pencils sold in America in 2008 (86% being imported), but it is amazing how few of the world’s workers manage the machines that make all the pencils in the world and even more amazing how very few pencil company presidents there are to mastermind the process.

So Many Masterminds

There is a fact still more astounding: the numerous masterminds, dictating and to some degree forcibly directing the countless actions which bring us Pencils into being. They are involved in almost every step of every manufacturing process. The Invisible Hand is also important for giving managers incentives to help coordinate the work of multinational corporations, but markets merely intermediate between the boundaries of companies that are run by bureaucrats and MBAs, the unsung heroes of our story. It is a mystery why the bureaucrats aren’t more appreciated for the miracles they produce.

Everyone agrees that only God can make a tree because we realize that we ourselves could not make one. Indeed, can we even understand a tree? We cannot, except superficially. Even though we could describe the molecular configurations manifested in a tree, no one could record, let alone direct, all the constant molecular changes that transpire across the life span of a tree to produce its majesty. Such a feat would be unthinkable.

Similarly, we Pencils are complex combinations of the miracles that manifest themselves in nature: cellulose, petroleum, aluminum, graphite, and so on. But to these miracles an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows cooperating under the direction of numerous human masterminds who manage large and small companies of employees working together. These companies simultaneously compete and cooperate with each other in response to market prices, government regulations, and negotiations among managers. Although only God can make a tree, he never made a pencil.  We insist that managers are required to coordinate the people to make us. Without managers, mere markets can no more direct the millions of individuals that bring us into being than they could put molecules together to create a tree. Markets help give managers guidance, but the managers are the real key to the process.

The above is what we meant when we wrote, “if you can become aware of the miraculousness which we Pencils symbolize, you can help save the prosperity that mankind is so unhappily losing.” For the citizens of the world have forgotten the interdependence that creates wealth and are voting for politicians who have been helping wealthy elites grab power away from middle class interests and cause the median income to stagnate as inequality has skyrocketed since the 1970s. This has stymied the aspirations, talents, and creativity of the masses of ordinary citizens.

If one is aware that managers are necessary to arrange individuals into creative and productive patterns in response to human necessity and demand—then one will possess an absolutely essential ingredient for freedom: a desire to work for better governance. Freedom is impossible without this desire because the absence of government is anarchy and chaos. There is no freedom in anarchy. Only poverty and violence.

That is not to say that all governance is created equal and all managers benign. Just the opposite. Bad managers love power for the sake of power or try to selfishly extract as much out of others as possible. Good managers set up conditions within which their people naturally and spontaneously flourish productively. All managers have some coercive power over others, but the best managers use it sparingly and rely more on inspiration to motivate their people to follow the better angels of their natures.

But even the worst governance is no worse than the absence of government because governance is leadership and people have always needed leadership to survive and prosper. Without governance it is impossible to accomplish complex creative production involving the coordination of multiple people. To give a trivial, yet ubiquitous example, consider the delivery of the mail. National mail delivery has stereotypically been performed by a government monopoly, and some governments are much more efficient at it than others, just like some corporations are managed better than others. Ironically, Scandinavian nations are usually considered more socialist than the US, but in Sweden and Denmark, private postal corporations compete to deliver mail and are efficiently regulated by the government instead of directly owned by the government. Regardless of whether mail is delivered by a government agency or a private corporation, the management issues are largely the same. Without hierarchy and management, there is no national mail service. Markets alone cannot provide it nor can individual men acting freely and independently of one another. Only bureaucracies led by masterminds with some amount of coercive power can deliver the mail anywhere in a nation within a few days for the tiny price of a stamp. That is another miracle if you stop to think about it. How much would you charge to deliver a letter across the country in less than a week?

Now, in the absence of faith in governance — in the unawareness that leadership is necessary to help individuals naturally and miraculously cooperate to achieve ends that are greater than any one person — the individual might reach the erroneous conclusion that mail can be delivered without any governmental masterminding. That individual might become an anarchist.

For although democratic capitalism manages the economy better than communist dictatorship, even communism works much better than anarchy. Pencils were produced in abundance even by the central planners of communism. Here are striking photos of the Soviet Union’s original pencil factory in 2012 that was still operating 86 years after it was founded! It outlasted communism and continued to work the same way under capitalism.  Whereas we Pencils have been produced by communist central planners and corporate managers, we have never been produced in the absence of government nor coercive managers.

Testimony Galore

If we Pencils were the only products that could offer testimony on what men and women can accomplish when they are bound together under effective management, then those with little faith in governance would have a fair case. However, there is testimony galore: it’s all about us and on every hand. Mail delivery is exceedingly simple when compared, for instance, to the masterminds who manage the making of an automobile, airport, or Iphone.

Delivery? Why, in this area managers in large corporations and governments have delivered the human voice around the world. They deliver 150 passengers from Seattle to Baltimore in less than four hours. They deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates. They spend millions of dollars per mile building roads to subsidize the delivery of people and millions of other things! None of this would be possible without governance at multiple levels of society.

The lesson we have to teach is this: To have a prosperous society we need managers to lead and bureaucrats to nudge people to work act in harmony with each other. Let society’s legal apparatus create useful obstacles like property rights, but not be excessive. Some obstacles like patents are useful to create more creative energies, but too much intellectual property rights inhibits them. Let governments coercively extract taxes to pay for excellent schooling to encourage creative know-how and give everyone the opportunity to contribute back to society.

Know that inequalities of power are inevitable in every society, but that some societies manage to produce more benefit to the median individual than others. Be skeptical of powerful people who claim to be self-made because just as every pencil is the creation of millions of people, every billionaire and dictator is too. Elites can only accumulate power by limiting other people’s freedoms. Because all power ultimately derives from control over others, powerful people should contribute back to society in proportion to the power that they have. Because all power ultimately comes from others, greater power should also bring greater responsibility to serve others too.

A manager who realizes that she has a duty to give back to her people will have happier, more productive workers and that may even make her richer than if she tried to use her power to selfishly maximize the amount that she takes from them. This is one reason why most dictatorships are so poor. Most dictators are too selfish and don’t give back enough to their people to enable them to flourish. Democracies are better because they limit the ability of the ruling elites to leverage their power to selfishly extract resources. Unfortunately, democratic sentiments can be warped by elites who spend fortunes marketing myths to the people about how economic elites need less responsibility and more control because, they say, the invisible hand of God has blessed them with the divine right of wealth. Wealth is property which always involves some amount of coercion. Not all coercion is unjust, but libertarian elites are happy to cynically take advantage of the coercive force of government that is necessary to create and maintain property rights for them while they object to government coercion that would limit their power and help less wealthy citizens.

We Pencils, seemingly simple though we are, offer the miracle of our creation as testimony that good management is a necessity of prosperity and wherever there are groups of humans, some form of management is as inevitable as the sun, the rain, and the good earth. Given the natural resources at our disposal, the only difference between a shared cornucopia and an unjust famine is the quality of governance.

*Postscript:

We are writing this in response to Leonard Read’s essay “I Pencil” which he wrote because he thought Americans placed far too much faith in government and didn’t recognize the miracles of everyday markets. He worried that the invisible hand is so hidden that most people didn’t realize its power and put more faith in socialism. He had good reason to be worried because he was writing during the heyday of the Cold War when the Soviet Union was becoming a superpower and communist movements were popular around the world. Twenty-eight nations around the world adopted communism at some point during Read’s life and many more became overtly socialist. The vast majority of the population of the world lived under socialist rule for at least half their lifespans (more than thirty years) during this era.

Today socialism is unpopular and we may be in danger of a new problem that is in some ways similar to socialism and in other ways the exact opposite.  Today, people put too much faith in the myth of unfettered capitalism because they think capitalism is being directed by the invisible hand of God when in actuality an increasing share of our daily existence is shaped by the invisible powers of corporate management. Corporate power has been rising for decades and it has transformed our societies.  For example, Gabaix (2016) reports that fluctuations at large corporations explain about 1/3 of the fluctuations in GDP in the US and 1/2 in France.  In other words, large corporations are now the primary drivers of recessions.  Elite capitalists now have far more control over society than was the case in 1948 when Read wrote his essay. Stock market capitalization has been steadily growing faster than the economy as a whole because large corporations are have been growing increasingly dominant and taking over more of the economy. Even government-printed money is being replaced by electronic payments that are increasingly managed by two corporations: VISA and Mastercard.  Luigi Zingales (2017) says rising corporate power has even been reshaping democracy:

Among the largest corporations in 2015, some had private security forces that rivaled the best secret services, public relations offices that dwarfed a US presidential campaign headquarters, more lawyers than the US Justice Department, and enough money to capture (through campaign donations, lobbying, and even explicit bribes) a majority of the elected representatives.

According to the census, 64% of Americans now work for the biggest 2% of America’s firms. Most people now work for managers rather than markets. The BLS estimated that in 2012, only 6.7% of American workers were self-employed entrepreneurs or unpaid family members. In 1950, 25% of workers were self-employed and large corporations were much less important. Although markets had been expanding their influence across greater and greater areas of life for two centuries, information technologies are now giving managers greater power to control ever greater spheres of influence and along with demographic changes, this is causing markets to slowly retreat. Markets have probably already peaked and we are slowly moving into a post-market era.

The coming rise of artificial intelligence will only accelerate that trend by devaluing the skills of more and more classes of workers while raising the income of a few elite owners. Industrial capitalism has only existed for a couple hundred years in Europe and a few decades in the much of the rest of the world. It developed as the result of the technological changes that brought the industrial revolution.  The developing nations of the world are still waiting for this revolution to come. The whole point of economic development in the third world is for poor countries to figure out how to copy the industrial revolution that made the industrialized world rich. Now many scholars think that we are entering a post-industrial age that is often called the information age. What kind of economic and political system will that bring?

Every technological era has brought changes in economics and politics. The hunter-gatherer era had tribal government which was so loose that some scholars argue that it isn’t government at all, but there was always an important role for tribal leadership and management. The agricultural era brought civilization and monarchy became the predominant form of government. The industrial revolution has brought mass democracy. What system of governance will the information revolution bring?

As an information age sequel, we’d like the Iphone to write, “I Iphone” about its family tree. Actually, Mariana Mazzucato already wrote the story in The Entrepreneurial State, chapter 5.  She documents that the 12 most amazing technologies that are combined to create the Iphone were invented using government funding at crucial early stages.  That includes everything from the internet to Siri.  Tim Harford also made a 7 minute podcast telling the story.  Obviously, pure government (communism) didn’t completely build the Iphone, but they contributed a lot more than self-employed individuals coordinated by free markets.  In the 1940s there were a lot of starry-eyed leftists who thought that all we need is to get rid of (or minimize) markets to achieve prosperity.  Today there are a lot of starry-eyed rightists who think all we need to do is get rid of (or minimize) the government.  Both are wrong.

Most people understand that strong corporate governance is essential to modern capitalism, but national government is too because neither corporations nor capitalism itself can exist without a strong national government providing a minimum set of regulations so that courts can arbitrate disputes: Successful stock markets require detailed accounting regulations and corporations require limit liability protections and research and development require patents and public education funding and insurance companies require insurance regulations. Some nations have regulations that encourage stronger markets than others, but none of these essential institutions of capitalism arise independently of the regulations and other government actions that nurture them. The key to capitalist prosperity is getting the regulations right. That is good management.

The Western USA, beloved by cowboys, is the most socialist region.

When people talk about how the western states’ geography feels free and open without restrictions, they are talking about how it is mostly owned by the government.  That is why there is relatively free access in the west. Most of the land in the eastern states is privately owned and there are much greater restrictions on recreational use because property rights are the right to exclude others. That is the whole point of private property. This map shows the distribution of federally owned land.

Because this map only shows federal ownership, it leaves out vast territories owned by the state governments. For example, state government owns a quarter of the state of Alaska leaving less than 1% of Alaskan territory for ownership by private citizens. There is a lot more land in the east that is owned by state and local governments including roads, parks, schools, and rivers, but these are divided into numerous small parcels are rarely big enough to give the expansive sense of freedom that the vast national forest or BLM territories give.

Ironically, the socialist land management of western states makes people there feel freer than in the east. It encourages libertarian sentiments and some libertarians get extremely upset when the government tries to act like a private landowner and exclude them from abusing public land such as by overgrazing. Public ownership reduces exclusions which is why our socialist road system is so incredibly popular despite its mind-bogglingly high cost to build and maintain. Government ownership of roads is extremely expensive real estate, particularly in urban areas where road density is concentrated. A newly paved road costs anywhere from a minimum of about $2 million per mile in rural areas to more than $10 million in urban areas. Maintenance is also very expensive. Resurfacing a 4-land road costs about $1.25 million per mile. Despite this cost, we call the most expensive roads freeways. This expensive system connects all of the most important places together as you can see in this a map of nothing but the roads in Florida. The most valuable regions pop out visibly because they have more roads. (This map and many other states are available for purchase from Fathom).

The Chinese government claims to be communist although they have adopted numerous capitalist reforms, which they call the “Chinese characteristics” of Marxism. Socialism is usually defined as the government ownership of the means of production and one area where China has continued the communist tradition is the public ownership of all land. Everyone in China must rent any land that they want to use privately. The western states of the USA have a similar tradition.

A last word for lovers of pencils.

Leonard Read wrote “I Pencil” about a miraculous supply-chain of globalization in 1948, and the world has become a lot more globalized since then. He traced the network of inputs to make a “Mongol 482” pencil made by the Faber-Castell Pencil Company, the largest and oldest pencil manufacturer in the world. It is headquartered in Stein, Germany, and still operates 14 factories in 10 countries around the globe. This brand was bought by Staedtler in 1978 and then by Sanford, a division of Newell Rubbermaid in 1994. They shut down their US production, but the Mongol 482 brand is still produced in Venezuela for sale in South America and the Philippines.

When Leonard Read wrote “I, Pencil” in 1948, the US had dozens of pencil companies running dozens of small factories across the nation.  By the year 2000, 86% of us Pencils sold in America were imported, mostly from China.  There are now only three pencil factories in the US (although two of the factories mostly just assemble pencil parts made overseas) and these three factories produce two billion of us Pencils each year.  In 1948, the US pencil industry employed many more factory workers, and they probably produced all of US demand without significant net imports. Even so, the dozens and dozens of US pencil factories in 1948 produced 25% fewer pencils per year than our three factories do today.  In an era when pencil companies were smaller and more numerous, market competition was more important relative to corporate management, but management has always been more essential than markets as the Soviet Union’s production attests.

Leonard Read did a great job of illuminating the undeniable miraculousness of markets and international supply chains when he wrote “I Pencil,” but effective management has always been more important and is increasingly so in the information age.

We Pencils were inspired by a libertarian organization who mailed a book about “I Pencil” to the owner of this blog in 2016 as part of an effort to spread libertarian ideology among university professors. They recognize that markets don’t work well enough to disseminate their ideology, so they give away their propaganda like a government handout. Other libertarian managers have made the story into a cheesy movie that was also distributed more like a welfare program than a market product. We encourage you to compare this essay with the original (naturally available as a free handout).

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Posted in Globalization, Managerial Micro, Public Finance

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