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  I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

  Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

  Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.

  Just as you cannot trace your family tree back very far, so is it impossible for me to name and explain all my antecedents. But I would like to suggest enough of them to impress upon you the richness and complexity of my background.

  My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. 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 persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the states to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

  The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

  Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydro plant which supplies the mill’s power!

  Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation from California to Wilkes-Barre!

  Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. Seven brothers and I are mechanically carved from this “wood-clinched” sandwich.

  My “lead” itself—it contains no lead at all—is complex. The graphite is mined in Ceylon [now Sri Lanka]. Consider these miners and those who make their many tools and the makers of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships. Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots.

  The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

  My cedar receives six coats of lacquer. Do you know all of the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? They are. Why, even the processes by which the lacquer is made a beautiful yellow involves the skills of more persons than one can enumerate.

  Observe the labeling. That’s a film formed by applying heat to carbon black mixed with resins. How do you make resins and what, pray, is carbon black?

  My bit of metal—the ferrule—is brass. Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature. Those black rings on my ferrule are black nickel. What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain.

  Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me. An ingredient called “factice” is what does the erasing. It is a rubber-like product made by reacting rape seed oil from the Dutch East Indies [now Indonesia] with sulfur chloride. Rubber, contrary to the common notion, is only for binding purposes. Then, too, there are numerous vulcanizing and accelerating agents. The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfide.

  At this point, please pause and recall some of the skills, materials, and places involved in the making of a simple pencil. (I list a few in the figure on the next page.)

  * * * * *

  At this point, Leonard Read, author of “I, Pencil,” asks his readers a question:

  Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?

  How about it? Would you challenge his assertion? Please pause to consider it before you read on. Is it true that no one person knows how to make a pencil?

  Figure 1.1 The Making of a Pencil

  Skills

  Materials*

  Places

  logging

  cedar

  California

  carting

  tint

  Oregon

  mining

  wax

  San Leandro, CA

  growing (hemp)

  glue

  Wilkes-Barre, PA

  cooking

  graphite

  Brazil

  raising foods

  clay

  Sri Lanka

  shipping

  ammonium hydroxide

  Mississippi

  flat car making

  sulfonated tallow

  Mexico

  rail making

  candelilla wax

  Indonesia

  railroad engine making

  paraffin wax

  Italy

  milling

  hydrogenated natural fats

  kiln operating

  lacquer

  tint making

  castor oil

  kiln making

  carbon black

  pouring concrete

  resins

  string making

  zinc

  chemistry

  copper

  lacquering

  factice

  castor oil refining

  vulcanizing agents

  resin making

  accelerating agent

  carbon black making

  pumice

  metallurgy

  cadmium sulfide

  * This list includes only those materials that become part of the pencil, not the many others mentioned that are used to process these inputs.

  “I, Pencil” continues:

  Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far off Brazil and food growers elsewhere
to my creation; that this is an extreme position. I shall stand by my claim. There isn’t a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field—paraffin being a byproduct of petroleum.

  Here is the first of three fundamental lessons about economic life that “I, Pencil” teaches: The human knowledge that is essential for producing the things we want and need is fantastically dispersed around the world. It is in the heads and hands of thousands—or millions—of people. There is so much knowledge in these processes that no one person or group could possibly know more than a tiny fraction of it. Now for the second lesson:

  Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

  Everyone aims at his or her own purposes. This is not to say that people are selfish and inconsiderate of others, but rather that we all care more about our own purposes and families and, indeed, our favorite charities, than we care about those of others. Almost no one involved in the process cares much about getting pencils made; all have their own purposes in mind. We are self-interested. That’s the second fundamental lesson about economic life that “I, Pencil” teaches; the third follows:

  There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

  No one is in charge. There is no mastermind, no boss. In a very real sense, the process is out of control! People work together to produce pencils and printers and sewing machines and smart phones, but nobody manages their production from start to finish. Nobody could manage these processes as a whole, because they are too complex for any person or group even to begin to grasp, much less direct. Indeed, where people have tried to direct production processes, as in the old Soviet Union, they have failed utterly. Production must happen spontaneously—without central direction—if it is to go forward smoothly.

  A market economy is a spontaneous order; its orderliness and coherence happen, without any design or plan, in response to the behavior of its constituent parts. Language is like this—it was not invented or designed; rather language evolves out of the interactions of people seeking to communicate. Snowflakes are spontaneous orders. They are beautiful, even perfect in their way, but not designed. They happen as a consequence of the interaction of water molecules under certain conditions of temperature, humidity, and air pressure. The Internet is a spontaneous, undesigned order that is constantly evolving in response to human desires and innovation.

  Together these three lessons about the economy raise the key question for this chapter, whose answer is the first of the three principles that explain why people flourish better the freer is the economy they live in.

  If

  1. the knowledge necessary for production is spread all over the globe, and

  2. everybody whose knowledge and skills we need is self- interested, and

  3. nobody is in charge,

  then

  how can it all work so smoothly and dependably? It would seem to be a recipe for chaos! What provides the coordination that keeps a decentralized market economy running so smoothly and productively?

  We take the coordination for granted: Is there anyone of us who doubts that if we wanted a pencil today, we could go to the university book store or local drugstore and find one? Of course not—we would be surprised if there were not a supply of pencils there. But how does it come to be that there are pencils for sale, in about the right quantities, in lots of stores all around (the commercialized part of) the world—with no one in charge of getting them there?

  Consider the wood of the cedar trees that goes into the pencils: Why do the lumber companies cut about the right amount of cedar, rather than too much oak or maple instead? How do they know how much of each to cut? Once the cedar is harvested, there are many different uses for it. My wife has been equipping our closets with cedar hangers, our backyard fence is cedar, some picnic tables are cedar. Why doesn’t too much cedar go to fencing and picnic tables, and too little go to hangers and pencils?

  What provides the coordination? There is perhaps no more important insight in all of economics than the answer to this question. Answer for yourself before reading on.

  * * * * *

  What provides the coordination among the millions of people who contribute directly or indirectly to the making of pencils and every other good or service?

  Prices do.

  Market prices coordinate the actions of billions of people pursuing their myriad goals, by communicating the changing, particular knowledge of everyone about the availability and potential uses of everything.

  Market prices are necessary to allow societies to function. Without market prices—not just any prices set arbitrarily, but prices determined in free exchange—human society would regress to savagery, because we would not know what to do to use our scarce resources sensibly. Prices provide us with essential information about the current and anticipated state of things in society, as understood by everyone involved. They communicate concisely, to everyone interested, the specialized knowledge that is spread all over society. They need never be exactly “right” to do their job well; in fact, most prices are “wrong” to some degree most of the time because they reflect people’s mistakes, misjudgments, and misinformation as well as their good judgments and sound information. Nevertheless, market prices do a marvelous job for us, and there is nothing else that can take their place.

  Perhaps the best way to understand this point is to consider what a fix we would be in if we had no prices to communicate to us, in usable fashion, the knowledge of myriad others. Let’s consider such a situation next, with a thought experiment.

  A Railroad Thought Experiment

  Imagine yourself the Commissar of Railroads in the old Soviet Union. It is the early days after the Revolution of 1917; you and your comrades are trying to eliminate markets and money relations, to do away with the anarchy of markets, and to plan directly for the good of the people. Suppose you are truly dedicated to your task, as many of the old Bolsheviks were—they worked long days for little pay, burning with desire to make communism work. You are not out to line your own pockets, you are genuinely striving to do what is best for the Soviet Union.

  Now suppose you want to build a railroad line connecting City A to City B. Standing between the two cities is a mountain range that presents you with a choice: you may build the railroad either through the mountains or around them. There are advantages and disadvantages to both choices. If you go through the mountains, you will save greatly on the amount of steel you use, because that route would be much shorter than going around. At the same time, however, going through the mountains will require a great deal of engineering to design the bridges and tunnels and elaborate grading necessary to get the railroad through the mountains. By contrast, if you go around the mountains, you will need to use very little engineering because the line can be laid out simply on level ground. But you will have to lay much more steel rail because the route is
far longer.

  Which route would you choose? Would you go through the mountains, saving on steel but consuming more engineering? Or would you go around the mountains, saving on engineering, while consuming more steel? You are the Commissar of Railroads, and the choice is entirely up to you. Remember, we assume that you care only about what is best for the nation as a whole. Which would you choose?

  To keep the thought experiment simple, let us ignore all considerations other than the consumption of engineering and steel. Of course, much more is involved in building a railroad than just steel and engineering: there are the ties and gravel, explosives and excavating equipment, labor of many sorts, fuel, machinery, and so on. Let us ignore these or assume that the same amounts would be needed on both routes. Once the railroad is built, there are different advantages to each route. For example, the route through the mountains would be shorter and hence provide a quicker trip between the cities. On the other hand, going around the mountains would allow the road to serve more towns and farms and factories along the way. Again, let us ignore all these considerations, or assume that they come out even, so that we have a manageable problem to think about.

  Would you go through or around? How would you make the decision?

  Consider the kind of information you would need to take into account. You know that there are very pressing needs for steel all around the country. Steel is needed to make girders for new hospitals, pots and pans, vehicles of all descriptions, surgical instruments, and thousands of other valuable goods. If you use more steel on your railroad line, less steel will be available for all these other important uses.