Nobody knows how to make a pencil
I watched an excellent 1994 interview with Milton Friedman earlier this week, a day or two after the news of his death. In it, the Nobel Prize winning economist retold the story of how the pencil is the quintessential example of free markets at work, Adam Smith's Invisible Hand and Friedrich Hayek's understanding of the power of dispersed knowledge, the role of pricing as information and emergent, spontaneous order.
Friedman originally introduced the pencil story to popular public consciousness in his 1980's television series 'Free to Choose' (You can watch the clip here):
"Nobody knows how to make a pencil. There's not a single person in the world who actually knows how to make a pencil.
"In order to make a pencil, you have to get wood for the barrel. In order to get wood, you have to have logging. You have to have somebody who can manufacture saws. No single person knows how to do all that.
"What's called lead isn't lead. It's graphite. It comes from some mines in South America. In order to make pencils, you'd have to be able to get the lead.
"The rubber at the tip isn't really rubber, but it used to be. It comes from Malaysia, although the rubber tree is not native to Malaysia. It was imported into Malaysia by some English botanists.
"So, in order to make a pencil, you would have to be able to do all of these things. There are probably thousands of people who have cooperated together to make this pencil. Somehow or other, the people in South America who dug out the graphite cooperated with the people in Malaysia who tapped the rubber trees, cooperated with, maybe, people in Oregon who cut down the trees.
"These thousands of people don't know one another. They speak different languages. They come from different religions. They might hate one another if they met. What is it that enabled them to cooperate together?
"The answer is the existence of a market.
"The simple answer is the people in South America were led to dig out the graphite because somebody was willing to pay them. They didn't have to know who was paying them; they didn't have to know what it was going to be used for. All they had to know was somebody was going to pay them.
"What brought all these people together was an enormously complex structure of prices - the price of graphite, the price of lumber, the price of rubber, the wages paid to the laborer, and so on. It's a marvelous example of how you can get a complex structure of cooperation and coordination which no individual planned.
"There was nobody who sat in a central office and sent an order out to Malaysia: 'Produce more rubber.' It was the market that coordinated all of this without anybody having to know all of the people involved.".
Friedman's story of the pencil is inspired by the 1958 essay, I, Pencil, by Leonard E. Read. Read's essay concludes:
"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."