Penciling in some remarks

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.

5 thoughts on “Penciling in some remarks”

  1. My favorite pencil explanation is this one, which is both succinct and perfect.

    In fact, the pencil is the reason why a the monster state-owned NBN is such a stupid idea. A bunch of union leaders, former communist lawyers (former communist, former lawyers…) and other useless idealists will create a huge monopoly to allow every Australian to surf the net.

    And I don’t need to be Milton Friedman to predict the outcome of such a bad idea. Just go and ask Juliar Gillard to make a pencil.


  2. Umm, you do realise that this is exactly the piece I was responding to?  And a
    and as regards the huge monopoly that currently allows Australians to surf the net (Telstra), it was created by exactly the process you describe, then privatised with highly unsatisfactory results.


  3. Yes, I agree. Telstra is a monster. It was privatized with highly unsatisfactory results because of the absolutely indecent collusion (government+private interests) that allowed Telstra to keep a monopolistic position in the Australian market.
    I’m sorry, but Telstra’s creation was the original cause of the problem. Now our government just wants to repeat the stupidity with the NBN. Well, they never got anything right. Maybe this time they strike their lucky one.
    But it is true, communists never learn. They just change their labels to socialists, social-democrats, and the like. In the end they always want bureaucrats to control people and destroy free enterprise. I have to admit they succeed beautifully.
    By the way, I just learned that our comrade Fidel Castro (or maybe his brother) just decided to allow a little bit of capitalism in his prison-island. Apparently now individuals can request and obtain a license to sell ice cream. I assume only selected few will be allowed to sell state-approved flavors.
    I wonder where the Cubans get their pencils from.


  4. What highly unsatisfactory results and for whom?
    I worked for a major telecoms supplier during the changeover from Australia Telecom to Telstra. It never ceases to amaze me the rose-tinted perception that some commentators have of the old monopoly where a universal fixed line to every home and business is the gold standard (along with multi-decade service provisions that locked down any effort to significantly improve or change aspects of the network). Innovation in technology and services was not their forte.
    To use a forced analogy, old-school Telstra could copy the technology of pad and pencil and provide it universally (and even improve it incrementally), but they would freeze in the face of upgrading to a disruptive service such as a 3G notebook.


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