John Quiggin decides that the pencil might be a flash point in understanding economic systems. He isn’t alone and was, indeed, reacting to an essay by Leo Read arguing the same thing. Read’s point is that no-one knows how to make a pencil but that pencils get made from an aggregation of individual decisions in the market place. It is the wonder of the Invisible Hand at work.
The idea that no-one knows how to make things is not knew. There was this great TED talk (and this one too) and earlier, it marked the beginning of Thomas Schelling’s terrific systems tome: Micromotives and Macrobehavior. But does this mean that decentralisation works best?
Read argued yes. Quiggin argues ‘hang on a moment. You can’t make a pencil without having some public infrastructure.’ There’s the trains, the nationalised forests and we could go on. So let’s not think of this has a message for complete deregulation. Indeed, if anything, it demonstrates the opposite.
In my mind, Quiggin is right but not strong enough in advocating the mixed economy. The point is that governments are essential for efficiency in the operation of private markets and for doing things (usually at scale) that many individual agents can leverage off. The key word is ‘leverage.’ With regard to the pencil, the baseline infrastructure enables those with local information to enter into production along some segment of the vertical production chain. That is how local information accesses the system and better choices can be made. Without that infrastructure (as well as assurances coming from things like contract and antitrust law), that entry by local information holders is prohibitive.
This also gives me an opportunity plug Tim Harford’s forthcoming book, Adapt: Why Success Always Starts with Failure. The books is, in many ways, an ode to Hayek although that has misleading political connotations. Instead, it is an ode to systems that allow decision-making to take place close to the source of local or specialised information. You want stories of local decision-makers winning out, then this book is for you. (I have already written about it here, here and here).
Finally, in other pencil related moves, there is this BBC piece on the pencil wars. [HT: Kwanghui Lim] It turns out that pencil innovation is quite localised — in Germany in this case (although I always thought that there were great Japanese innovators in this area too). So when it comes to the economies that allow pencil production to flourish, the world trade system has spoken.