I, Pencil

 Here is the classic essay I, Pencil.

 Milton Friedman wrote:

"I, Pencil" is a typical Leonard Read product: imaginative, simple yet subtle, breathing the love of freedom that imbued everything Leonard wrote or did. As in the rest of his work, he was not trying to tell people what to do or how to conduct themselves. He was simply trying to enhance individuals' understanding of themselves and of the system they live in. 

I.6

That was his basic credo and one that he stuck to consistently during his long period of service to the public—not public service in the sense of government service. Whatever the pressure, he stuck to his guns, refusing to compromise his principles. That was why he was so effective in keeping alive, in the early days, and then spreading the basic idea that human freedom required private property, free competition, and severely limited government.

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 Donald Boudreaux wrote:

There are two kinds of thinking: simplistic and subtle. Simplistic thinkers cannot understand how complex and useful social orders arise from any source other than conscious planning by a purposeful mind. Subtle thinkers, in contrast, understand that individual actions often occur within settings that encourage individuals to coordinate their actions with one another independent of any overarching plan. F. A. Hayek called such unplanned but harmonious coordination "spontaneous order."...

For its sheer power to display in just a few pages the astounding fact that free markets successfully coordinate the actions of literally millions of people from around the world into a productive whole, nothing else written in economics compares to Leonard Read's celebrated essay, "I, Pencil." This essay's power derives from Read's drawing from such a prosaic item an undeniable, profound, and spectacular conclusion: it takes the knowledge of countless people to produce a single pencil. No newcomer to economics who reads "I, Pencil" can fail to have a simplistic belief in the superiority of central planning or regulation deeply shaken. If I could choose one essay or book that everyone in the world would read, I would unhesitatingly choose "I, Pencil." Among these readers, simplistic notions about the economy would be permanently transformed into a new and vastly more subtle—and correct—understanding. 

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Milton Friedman discussing the pencil.


 Thomas Thwaites:  How I Built a Toaster--from scratch
 

Students:
 Here is the assignment (with answer key)
 Your welcome.

I, Pencil remains relevant today.
Read and Friedman use the pencil to show the folly of central planning: Nobody can possibly know enough to manage the production of pencils. And indeed, history has proven that when governments create Pencil Ministries (metaphorically speaking), they fail – inevitably and spectactularly.
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Bourgeois Revaluation

Donald Boudreaux writes:

Economist and historian Deirdre McCloskey calls it "the Great Fact" -- the humongous increase in humans' standard of living that began about 200 years ago.

And what a Great Fact it is! It's great not only in the sense of being amazingly, resplendently good for ordinary men and women, but also in the sense of being the single most surprising and astounding change that we humans have experienced in our 70,000 or so years on this planet...

Then all of a sudden, starting a mere 200 or so years ago in northwestern Europe, boom!

Material riches start pouring forth not only into the castles and manor houses of royalty and the nobility, but into the humble homes of peasants, of hoi polloi, of human creatures who, generation after generation -- tracing back all the way to their single-celled ancestors -- lived lives poor, nasty, brutish and short.

What did our great-great-great-great-grandparents do to suddenly deserve access to new and remarkable goods such as underwear made of tightly woven cloth that could be vigorously washed without unraveling?...

Only when merchants, tinkerers and practical seekers of profit in markets came to be respected -- and to be widely spoken of with respect, even with admiration -- did the social status of the bourgeoisie increase enough to make membership in that group desirable to large numbers of people. And when this Bourgeois Revaluation happened, innovation skyrocketed.

It's this innovation -- mad, fevered, historically off-the-charts amounts of innovation -- that really is what we today call "capitalism."

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Against the Big Three Bailout

The spectacle of corporate magnates from Detroit pleading to be on Uncle Sam's dole is a sordid one. So why aren't more Americans appalled? One reason is widespread misunderstanding -- much of it sowed by these auto makers -- about the size of their firms. The Big Three, we are told, are "too big to be allowed to fail."

This myth begins with the idea that GM, Ford and Chrysler are so huge that if they go belly-up, the livelihoods of a disproportionately large number of workers and suppliers would be affected. At once, the market for their services and products would close. Therefore, the argument concludes, government must prevent any such failures.

Nonsense.

Bankruptcy doesn't make assets -- such as factories, machines, contractual options to buy raw materials, workers' skills -- disappear. If markets still exist for products produced by these firms, Chapter 11 is the best way to discover this. Some workers might lose their jobs and some suppliers might lose their markets, but there would be no industry-wide collapse of the sort portrayed by the bailout's cheerleaders...

What will President-elect Barack Obama tell these other firms when they come begging? If he says no, he'll be seen as having played favorites with three firms that deserved no such special treatment. If he says yes, he gives private industry a blank check drawn on the American economy. To imagine that firms will not draw on that account too often, too greedily, and without real justification is a dangerous fantasy.

read the entire essay

Market Needs to Self-correct Without Bailout

Imprudent decisions by business owners, whether it be the owner of “Tip Top” or the executives of Washington Mutual or Lehman Brothers, require correction. If the correction does not come about by the owners improving their firms, then it should come from other investors looking to enter into the market in the hope of realizing the profit opportunities others are mistakenly leaving on the table.

Allowing for bad ideas to be cleaned out is how markets self-correct. The self-correction principle is, perhaps, the most important principle of economic science. The fact that an overwhelming majority of Americans oppose the bailout suggests the general public understands this principle at a basic level. Unfortunately, this principle is forgotten by politicians whenever a crisis arises...

Bailing out lending agencies is a dangerous step down the road towards socialism. The bailout completely distorts market incentives and thwarts the dynamic process of creative destruction, which is so crucial to market economies. We ask readers to consider the following: Was it a crisis for water-carriers to be driven from the market by the innovation of indoor plumbing, or for the whaling industry in New England to be displaced when electric light became widespread? While there were thousands of jobs lost when these industries failed, there were more efficient and better businesses right around the corner...

In addition to the perverse economic effects created by the bailouts, there are also constitutional and ethical issues in play when such sweeping legislation is proposed. At the most fundamental level, the bailout money is not the politicians’ money to be giving away; such blatant redistribution from average individuals to elites in investment banks is wrong. In addition, despite all the talk of the government “turning a profit” on the bailout money, the government’s role has never been to be a for-profit investor. We both cringe at the thought of government trying to act as entrepreneurs.

read the full essay

Will We Run Out of Oil?

Are we running out of oil? The question seems silly. "Yes" is the obvious answer.

Or is it?...

My colleague Russ Roberts explains why in his book The Invisible Heart. Imagine, Russ says, a room full of pistachio nuts. You love pistachios and can eat all that you wish as long as you throw each empty shell back into the room whenever you eat a nut. You might suppose that you'll eventually devour all of the nuts in the room. Their number, after all, is finite.

But some thought reveals this conclusion to be, well, nutty. At the start it's easy to find pistachio shells containing nuts. The more you eat, though, the more difficult it becomes to find uneaten nuts among the increasing number of empty shells. Eventually, it will not be worth the time and effort required to search amidst the empty shells for the relatively few remaining nuts. You'll voluntarily leave uneaten pistachios in the room.

And so it is with oil. As we continue using oil, getting more of it becomes increasingly difficult. This increasing difficulty of finding and extracting oil is reflected in its higher price -- a phenomenon that prompts consumers to consume oil more carefully and prompts producers to explore for alternatives.

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Essay: Laissez Faire is Best Medicine

New essay from Donald J. Boudreaux is chairman of the Department of Economics at George Mason University

"The ever-present demand to "do something" is unfortunately immune to the wisdom counseling that there are some problems best left to sort themselves out. Government efforts to "solve" market adjustments and dislocations typically -- and at best -- supply only short-run relief while making the longer-run situation more dire....

On the eve of entering World War II in 1941, America's economy was still quite depressed -- as it had been for more than a decade. And as economic historian Robert Higgs shows in his 2006 book, "Depression, War, and Cold War," New Deal policies and the prevailing climate of ideas from which they sprang suppressed investment.

The New Deal and the genuine risk of outright socialization of industry in the 1930s kept the American economy in deep doldrums for a much longer time than would have been the case if Uncle Sam just said "laissez faire" and had conspicuously ignored all the Very Smart People who clamored for socialism. No investor, after all, wants to put his assets at stake in a country whose government might tax away or outright confiscate these assets...

History is clear that freer trade means more opportunity and greater and more widespread prosperity. That Uncle Sam might be losing his taste for freer trade is very frightening. "


Read the entire essay here.