Why John Quiggin Is Wrong About *I, Pencil*
In 1958, Leonard Read published I, Pencil, an essay written in the first person from the point of view of a pencil. In the essay, the pencil explains the unbelievable complexity of creating such a simple product. However, despite its simplicity, Read also argues, “Not a single person on the face of this earth knows how to make one.” In fact, there are no central planners dictating its creation.
Read’s seemingly unbelievable claim is argued to perfection after he cites the numerous raw materials, capital and labor required to produce a pencil, and the millions of people unknowingly cooperating throughout its production. Although the story is educational, the final message that Read attempts to convey is this: Leave all creative energies uninhibited. Society must have faith that free men and women will respond to the Invisible Hand without government coercion.
However, a few weeks ago, John Quiggin, wrote a response to I, Pencil (UPDATED LINK). In Quiggin’s rebuttal, he argues that a pencil is really a product of the mixed economy, not the product of the Invisible Hand. Moreover, Quiggin makes the astounding claim that markets aren’t the best way to organize production. Unfortunately for Quiggin, he fails miserably to argue his case, while ignoring numerous facts that refute his assertions.
Quiggin first argues that the wood used to produce the pencil was probably acquired in a forest managed by the US Forest Service or the Bureau of Land Management, or maybe a similar state agency. He writes the following:
Starting in the late 19th century, the US government (most notably under Theodore Roosevelt) judged that the nation’s forests were not likely to be adequately managed to ensure a supply of timber for, among other things, the production of pencils future generations if they relied on existing private property rights and the workings of the invisible hand. Similar judgements [sic] have been made in Australia and many other countries. That is, the production of pencils in the US in the 1950s depended, to a substantial extent, on conscious planning undertaken 50 years ago.
Quiggin is assuming without evidence that the trees used to produce the pencil in I, Pencil would be absent but for the creation of some government agency. That claim is erroneous. Nearly 90% of the U.S. timber harvest comes from private lands.
In addtion, the forests of Oregon existed well before the US Forest Service, and a government nationalization of land doesn’t produce the trees already in existence. If Quggin is arguing a government agency was necessary to prevent total deforestation, then the “Tragedy of the Commons” is to blame during westward expansion, not private property rights.
In fact, privately owned tree farms have proved to be very successful at sustaining forests. The American Tree Farm System, a nonprofit organization that has certified millions of private tree farm acres, was created over a decade before I, Pencil was written. Moreover, the Oregon Tree Farm System has successfully achieved Theodore Roosevelt’s goals that Quiggin outlines. Although it appears these nonprofits may accept government money, that would not dispute the effectiveness of private property rights to adequately protect the long-term health of forests.
When individuals profit off trees, there is an enormous incentive for private farms to maintain the forests in the long-term. A sustainable forest creates a sustainable profit with the protection of private property rights that prevent the “Tragedy of the Commons,” the real villain of long-term deforestation.
Quiggin continues by arguing, “Education is a prime example of a service that (except in marginal cases, or for very specific vocational skills) has almost nowhere been successfully provided on a market-driven for-profit basis.” He continues:
Successful ‘private’ schools are almost invariably non-profit, and commonly benefit from direct or indirect public funding. The near-total failure of for-profit school companies like Edison, and the reliance of the for-profit higher education sector (Kaplan, Phoenix etc) on fraudulent exploitation of Federal Grants are cases in point. In Sweden, long the poster child for for-profit schooling, similar rorts are showing up. As with forests, the availability of skilled and educated workers to produce Read’s pencil depends on planning decisions made years or decades previously.
As the economist Thomas Sowell has eloquently stated, “Too much of what is called “education” is little more than an expensive isolation from reality.” That quote is particularly appropriate when responding to Quiggin’s argument.
Notably, Quiggin’s definition of “education” is limited to what is taught at an academic institution. In doing so, he totally ignores the human capital and real education that individuals acquire in the workforce. In the real world, theories taught in academia are greeted by the constraints of reality and market forces.
Furthermore, Quiggin cites no evidence for why nonprofit schools, often with multimillion dollar endowments, should not be classified as “market driven.” The fact that Quiggin and some politicians are in favor of educational subsidies, does not demonstrate that they are a good idea, or an efficient use of resources. The reality is that educational subsidies have proven to be an abject disaster. They have inflated school tuition, and students are graduating with thousands of dollars in debt, while unable to find employment. In fact, at the time I, Pencil was written, educational subsidies in the United States were significantly less than they are today.
Quiggin’s next argument is one of his most absurd. He states the following:
Next up is the rail trip to San Leandro California. Read’s pencil doesn’t mention the line, but it’s presumably on the network of the Union Pacific Railroad, created by Act of Congress under Abraham Lincoln, with the plan of building a railway line across the US. Reliance on the invisible hand to produce coherent railway networks was a failure wherever it was tried, and the same is proving true today wherever governments seek to turn the road network over to private toll road operators. In complex transport networks, a fair degree of central planning is in fact necessary.
Here Quiggin either ignores historical evidence to the contrary, or is ignorant of railroads in the United States. The Great Northern Railway ran from St. Paul, Minnesota, to Seattle, Washington. It was privately funded, received no federal land grants, was extremely profitable and never went bankrupt. Almost all other government-subsidized railroads lost money and went bankrupt, or had to be taken into government receivership. By definition, the private Great Northern Railroad was more efficient and better than the government option, which Quiggin advocates.
Quiggin continues to argue that patents are a form of a mixed economy:
And, while we learn how the pencil is produced by sandwiching a graphite tube between two wooden slates, the pencil forgets to mention its invention and patenting by Nicolas Conte in the late 18th century. The patent system is a temporary government-created monopoly, and a classic example of the mixed economy.
The problem with Quiggin’s definition of “mixed economy” in this case is that the same argument could be used to label all private property rights a “mixed economic creation.” After all, a government-run legal system is funded through tax dollars and used to adjudicate the protection of private property. Strangely, Quiggin even acknowledges that some free-market libertarians object to patents, and part of their nuanced argument is that the patent system is inefficient and prohibits new inventions.
Quiggin’s final argument regarding corporations and limited liability is a straw man argument at its best, and demonstrates a lack of understanding of market forces at its worst. Quiggin states the following:
Finally, let’s look at Eberhard Faber, the company that made the pencil. It’s now a subsidiary of Newell Rubbermaid, a multinational consumer goods conglomerate with over 20 000 employees and dozens of different brands. Obviously, someone sees a fair bit of benefit in “dictating and forcibly directing” the work of these thousands of employees, rather than relying exclusively on transactions in the marketplace. And the shareholders seem keen on organizing all this activity under the state-created protection of the limited-liability corporation, rather than acting as independent entrepreneurs.
A corporate firm (or even an unincorporated business firm) is a complex social construction, embodying both co-operation, to produce and sell the firm, and conflict, between workers and owners over wages and conditions, between shareholders and managers over corporate control, and between long-term and short-term stakeholders over strategic directions. Out of this mix of co-operation and conflict, the firm produces a distribution of the income it generates: always unequal, but more equal at some times and places than others.
First of all, Read clearly defines “dictating and forcibly directing” as government mandate or fiat. Only governments have the ability and the authority to use force to achieve their goals. Taxation and regulation is a primary example of this phenomenon.
For example, Citizens are compelled to pay taxes and obey regulations. If they refuse, they can be fined or even jailed. If they resist arrest after the refusal to pay taxes, physical force, and possible lethal force, may be used against them. This is done all in the name of achieving a particular goal.
Conversely, corporations have no ability to tax or use force of any kind. In fact, unlike government “dictation,” all corporate dictates are constrained by market forces. A corporation will go bankrupt if it runs at a loss indefinitely. Either the corporation stops what it is doing and changes course, or reality will. Only a government bailout, and subsequent moral hazard, could change this fact. Read never claimed that there were no bosses making decisions for their employees, a wholly voluntary and market driven arrangement; that is simply a strawman.
To add to this, Quiggin argues that limited liability is a state-created protection. Frankly, he has the entire process backwards: Limited liability means that a government-instituted court will not intervene and adjudicate claims in limited circumstances. Hence, without a government there would be no government adjudication of claims.
If, as Quiggin argues, the default position is the adjudication of claims, then he would need to explain how a government legal system existed out of thin air absent the creation of a government.
In the end, Quiggin declares, “The fact that a particular form of organization exists and functions does not prove that it is optimal.” Ironically, Quiggin’s entire response to I, Pencil uses this reasoning (especially regarding his US Forest Service example), which he now disputes. He even declares by fiat that, “The push for privatization ended in the Global Financial Crisis.” Amazingly, Quiggin ignores the fact that governments removed market forces from the economy, namely the ability to go bankrupt, and created a moral hazard with implicit bailouts before extreme risks were taken.
Overall, Quiggin fails to rebut Read’s basic premise: Not a single person on the face of the earth knows how to create a pencil, and no centralized planners are required for its production.