I Pencil: A product of the mixed economy (updated)

by John Quiggin on April 16, 2011

I’m thinking about doing another book, which would be a reply to Henry Hazlitt’s Economics in One Lesson a tract published in 1946, and available online, but still in the Amazon top 1000. It’s largely (as Hazlitt himself says) a rehash of Bastiat.

I’ll try to put up a prospectus soon, but I thought I’d start with something simpler, a response to Leonard Read’s I, Pencil.

Update I’m getting a lot out of the comments, and updating the piece in response.

This essay is a description of the incredibly complex “family tree” of a simple pencil, making the point that the production of a pencil draws on the work of millions of people, not one of whom could actually make a pencil from scratch, and most of whom don’t know or care that their work contributes to the production of pencils. So far, so good. Read goes on to say that

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.

Hold on a moment!

Read’s first person pencil starts the story like this

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon.
That would probably be in a forest managed by the US Forest Service or the Bureau of Land Management, or maybe a similar state agency.

And why is this? 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 for future generations if they relied on existing private property rights and the workings of the invisible hand. Similar judgements 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.

It would be naive to suppose that public management of national forests is driven by a concern for some abstract notion of the common good. A variety of interests (logging companies, land developers, environmentalists and others) push with greater or lesser success for their view of how forests ought to be run, and sometimes succeed in capturing government agencies that are supposed to regulate them. But whatever the faults of public ownership and management, it has survived in the forest sector for well over a century, and has delivered outcomes that appear generally acceptable.

The pencil goes on to mention “all the persons and the numberless skills” that are involved in forestry and in the various subsequent stages of production. Most of those people would have acquired their basic skills in public schools, and learned more in colleges, trade schools and so on, mostly public or publicly funded.

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. 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.

Again, it’s a mistake to think of this as the product of an all-wise and beneficent “central planner”. Schools, like everything else in society, are a site of contest and struggle, in part over attempts to produce a compliant workforce for an industrial society, as against broader visions of what education might mean. And, in the current context, it’s worth pointing out that proposals and attempts at what used to be called “manpower planning”, that is, trying to predict future labour demand patterns and ensure that the education system supplies the right kinds of skills, have been consistent failures. But still, the price system is playing only a marginal and indirect role in the provision of education.

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[1]. 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.

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[2].

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.

What can we learn from all this? As Read argues, following Adam Smith, markets can indeed organize very complex production processes, to an extent that might well seem miraculous to anyone who tried to reason about it in the abstract. But that doesn’t mean that markets are the only, or invariably the best, way to organize production.

The majority of economic activity takes place without any direct connection to markets, undertaken in the household or government sector, or within large corporations that trade in the market sector, but use central planning to organize their own activities. The boundaries are constantly shifting as some activities shift between household, government and market sectors, and as households, governments and firms outsource some activities and integrate others.

The fact that a particular form of organization exists and functions does not prove that it is optimal. It is certainly possible to imagine forms of modern society in which markets and private property play no role, or forms in which there are “markets in everything”. And, within the broad class of mixed economies, there’s a wide range of possibilities – most goods and services have somewhere and sometime been provided by governments, and somewhere and sometime by private markets.

Nevertheless, the broad outlines of the mixed economy have remained broadly stable since the 1940s, surviving both the challenge from comprehensive central planning in the Soviet Union and the push for privatisation that began in the 1980s and ended (as a program with a credible theoretical foundation, if not as an ideological agenda) in the Global Financial Crisis. Any serious policy program has to take account of this fact.

fn1. Actually when Read was writing, it was probably a feeder line to the Southern Pacific, successor of the Central Pacific, which built the western half of the line, meeting the Union Pacific line halfway in a marvel of successful planning (though see the comments thread for some more precise info on this and the distorting effects of poor incentives).

fn2. Libertarians and other free market advocates are divided in their views on patents and other forms of ‘intellectual property’. But their logic-chopping style of argument tends to push them to one or other of the extreme positions, either opposing any patent protection or treating intellectual property similarly to other property, with no time limits. Nozick (and Rothbard) finds an intermediate position, supporting protection against direct copying, but not against independent invention.

{ 145 comments }

1

garymar 04.16.11 at 3:16 am

I, Residential Mortgage-backed Security Collaterialized Debt Obligation.

2

TamBram 04.16.11 at 3:57 am

This sort of debate is so tired from a third-world perspective.
Once you understand Coase, this is not the set of interesting questions.
Sorry to be a darky raining on the intellectual masturbation.

3

john c. halasz 04.16.11 at 4:18 am

So Capital and the State are not quite distinguishable. And who owns whom? This is news?

4

mcd 04.16.11 at 4:20 am

The Global Financial Crisis is not the end of privatization. See today’s Republican 2012 budget plan for Medicare & Medicaid.

If as Read says, there are no masterminds or dictators or directors, why is private profit justified?

5

John Quiggin 04.16.11 at 4:23 am

@TamBram A hint. You might want to read Coase on The Nature of the Firm before assuming you know what you are talking about.

@JCH Predictably tiresome commenter displays superior Weltschmerz. This is news?

6

StevenAttewell 04.16.11 at 4:27 am

Interesting concept. An update of The Great Transformation is very much needed.

7

TamBram 04.16.11 at 4:37 am

Prof. Quiggin,
I’m *basing* my point on the Nature of the Firm–I guess we are drawing disparate conclusions. I would conclude that one cannot say how “free market” a society is by looking at how much is done within firms vs. by “markets”, b/c the market assigns some things to firms *for efficiency reasons.* So, what seems to me to be your attack on “I Pencil” appears to miss that point. Having some things done w/in firms is not anti-free market.
Apologies if I am mis-representing your point.

8

John Quiggin 04.16.11 at 4:40 am

@7 So, the corporation destroys the market in order to save it?

9

Gene O'Grady 04.16.11 at 4:46 am

Actually at the time he was writing the railroad, if the tree grew in California, would probably have been the Northwest Pacific, whose cars I remember seeing when I was kid, which provided service connecting the SP main line to the lumbering areas around Eureka. On the other hand, your point is valid in that without the federally sponsored mainline routes like the Central, later Southern, Pacific these shorter lines would have had nothing to connect to and the lumber would have some by coastal shipping.

Two weeks ago I was in Coos Bay to watch the sailing ships stage their mock duel and discovered from some well-done historical markers that the spot I was standing on had been the site of the largest shipbuilding facility between San Francisco and Seattle. Last of it went in a controlled burn in 1950 or so.

I wonder how many cedars are left to provide pencils given the transformation of so much of Oregon into Doug Fir monocultural.

Apologies for the digression. And you might have mentioned Thoreau?

10

TamBram 04.16.11 at 4:48 am

Why does the corporation “destroy the market”?
Sorry, what am I missing?
The corporation is just a set of contracts between people. Don’t essentialize it.
You would be more pro-corporation if you lived in a feudal society.

11

David 04.16.11 at 4:49 am

I only ran across this essay recently, in a Facebook link. As near as I can tell it is held in some regard by Libertarian types. Towards the end, iirc, he denounces most government regulation or “interference” with making pencils. Or anything else except maybe whoopee.

12

CMN 04.16.11 at 4:54 am

I don’t see how you think you’re refuting Reed. Do you really understand him to be claiming that no subset of the activities needed to make a pencil is directed by anyone, or that government plays no role in providing the background institutions that enable the invisible hand to work?

13

John Quiggin 04.16.11 at 4:57 am

TamBram, “the market” can mean two different things. The standard English meaning, is something like “a place or institution where goods, services, assets etc are traded at quoted prices”. With this usage it makes sense to distinguish between market transactions and intra-firm transactions, and ask whether particular processes are consciously planned or arise from responses to the information contained in market prices.

Alternatively you can use it as an ideological term to mean something like “everything that happens in the economy without direct government intervention.” In that case, of course, the distinctions Coase is making between the firm and the market make no sense.

14

Jim Harrison 04.16.11 at 5:00 am

Individuals certainly don’t know how what they do fits in with what everybody else is doing, but things would never get done if the process really were blind. It’s not just that the internal activities of firms are largely organized rationally. Even low-level employees have to understand what they are doing. A janitor may not have any loyalty to his company and may only push a broom to put bread on the table, but he’s rewarded not for moving this object here and cleaning this patch of floor there but for being a janitor, which is in fact a complex performance. The human machine who only knows how to tighten a particular screw is mostly found in just-so stories. In the real-world system of material production, intelligence is the other invisible hand, though it is mostly invisible because the discipline of economics is pretty much based on abstracting it away.

15

patrick II 04.16.11 at 5:01 am

Please write this book. Have an understandable pamphlet version to give away and act as teaser. I am tired of arguing with people who’s only answer to all political or economic problems is to “let the free market handle it”.

16

John Quiggin 04.16.11 at 5:01 am

@Gene Thanks for this. I was totally unaware that Thoreau made pencils (a commenter at my personal blog also told me this). Finding out stuff like this is what I really love about blogging.

17

mtraven 04.16.11 at 5:08 am

A random tale of capitalism: about 10 years ago, I worked for a software startup that was bought by a bigger company and our small office in San Francisco was relocated to their headquarters in San Leandro. To escape the deadening effects of life in large corporation, I would go and wander along what might have been the very same railroad tracks that the pencil’s parts traveled along. Meanwhile, the corporation was doing what they typically do to acquisitions, absorbing and killing the superior product of our startup, that they had apparently bought to forestall a potential competitor. I’m not sure what Coase would say about that, but I can guarantee that competitive markets are the last things that large companies want to see, especially in areas that favor monopolists, such as software.

Sorry, that was probably of no interest but the mention of San Leandro and its dreary industrial environs triggered memories.

18

TamBram 04.16.11 at 5:10 am

@ Prof. Quiggin #12,
Right, so we must go with the first meaning, to respect Coase. But then, the point is, knowing Coase, what is surprising about pencil-production? “Free” markets will produce “markets” (in the first-meaning sense of your comment 12) and also “firms,” which will jointly produce pencils. I hope we’re not just disagreeing about semantics, but I think I Pencil makes a good point, and you seem to disagree–I’m still trying to get precise on the locus of our (apparent) disagreement.

19

Lee A. Arnold 04.16.11 at 5:33 am

Specialization and the gains to trade are prior to price transactions.

20

Neil 04.16.11 at 6:50 am

I am puzzled by this thread. Is TamBram saying “I disagree with JQ, and it is incumbent on him to tell me what I disagree with him about”?

21

snuh 04.16.11 at 7:48 am

tambram, the coasian claim that a corporation “is just a set of contracts between people” is demonstrably false. as in, it’s demonstrated to be false in the post you are responding to, noting quiggin’s reference to “the state-created protection of the limited-liability corporation.”

you can like or loathe the corporation’s legal personality and limited liability, but you can’t just wave them away with “just a set of contracts between people.”

22

TamBram 04.16.11 at 7:53 am

snuh,
That’s just false. Individuals also have limited liability (no debtor’s prisons) so that is a term in contracts between lenders and individuals. It’s no different between lenders and groups of people (which are corporations). Haha, you don’t even understand your own society/economic underpinnings.
Legal personality has no substantive effect–it is just about legal procedure.

23

bad Jim 04.16.11 at 7:55 am

Henry Petroski, The Pencil: A History of Design and Circumstance (1990), ISBN 978-0679734154.

What annoys me is the presumption that a pencil is a necessarily a cylinder of graphite encased in a cylinder of wood. I have those things around the house, and even an old Boston sharpener mounted to the wall in the garage, but for a lot more than forty years I’ve preferred a mechanical pencil (druckbleistift) at least in part because the eraser is just as important as the lead.

24

snuh 04.16.11 at 8:54 am

debtors’ prisons don’t exist therefore individuals have limited liability? um whatever dude.

there is little point in engaging with someone who would deny that there is a difference between the liability of people operating a business through a company, and those people operating a business otherwise.

25

Tim Worstall 04.16.11 at 9:00 am

Trying to avoid this:

“Predictably tiresome commenter displays superior Weltschmerz.”

But isn’t this:

“What can we learn from all this? As Read argues, following Adam Smith, markets can indeed organize very complex production processes, to an extent that might well seem miraculous to anyone who tried to reason about it in the abstract. But that doesn’t mean that markets are the only, or invariably the best, way to organize production.

The majority of economic activity takes place without any direct connection to markets, undertaken in the household or government sector, or within large corporations that trade in the market sector, but use central planning to organize their own activities. The boundaries are constantly shifting as some activities shift between household, government and market sectors, and as households, governments and firms outsource some activities and integrate others.”

Precisely what Coase was trying to explore? Leave aside his solution for a moment, his actual question orginally was why do firms exist? Why isn’t everything done by a network of contracts in a market place?

I assume that your argument would be that some things are better done by, say, State power or direction, some by market processes, some inside corporations, some inside households etc. OK, but that ends up rather as a refinement of Coase doesn’t it, rather than a refutation or correction of Read?

“fn2. Libertarians and other free market advocates are divided in their views on patents and other forms of ‘intellectual property’. But their logic-chopping style of argument tends to push them to one or other of the extreme positions, either opposing any patent protection or treating intellectual property similarly to other property, with no time limits. Nozick (and Rothbard) finds an intermediate position, supporting protection against direct copying, but not against independent invention.”

This does irritate (no, not what JQ is saying, but that logic chopping). The whole point of IP is that it’s an admission that at times, all markets all the time markets is not an optimal solution. As public goods (non rivalrous, non excludable, although we can logic chop as to whether if you keep it secret it’s non excludable but then we’d rather knowledge wasn’t kept secret) we know that IP isn’t best dealt with by an all markets, all the time markets, approach.

The current system may or may not be optimal (99 years for Mickey Mouse for example) but zero IP protection isn’t either (and nor, I would submit, is permanent). Some sort of second order solution is necessary.

26

Tim Worstall 04.16.11 at 9:08 am

And purely by chance, the John Bates Clarke Medal has just gone to someone in this field:

http://www.economist.com/blogs/freeexchange/2011/04/economics_1

Jonathan Levin is a leading scholar in the fields of industrial organization and microeconomic theory, whose work stands out for its combination of theoretical depth, empirical methods, and compelling applications. He has conducted influential research on the economics of contracting, the organization and design of markets, subprime lending, and on empirical methods for studying imperfect competition.

27

Martin Wisse 04.16.11 at 9:11 am

There’s more than one sleight of hand going on in I, Pencil — for a start it assumes that everything that made it possible for the pencil to be made the way it describes was a) created especially to make this possible and b) that this is the only way in which a pencil can be made.

Another piece of legerdemain is the background assumption that this state of affairs only exists in the free market, when in fact any complicated enough system is — and any human system is complicated enough — is never understandable from just looking at the sum of its parts: emergent complexicity is emergent.

This something that any system of economics obviously needs to deals with and does, consciously or not and which does not make state planning impossible.

28

Henri Vieuxtemps 04.16.11 at 9:24 am

“…It was not a hexagonal beauty of Virginia juniper or African cedar, with the maker’s name imprinted in silver foil, but a very plain, round, technically faceless old pencil of cheap pine, dyed a dingy lilac. It had been mislaid ten years ago by a carpenter who had not finished examining, let alone fixing, the old desk, having gone away for a tool that he never found. Now comes the act of attention.

In his shop, and long before that at the village school, the pencil has been worn down to two-thirds of its original length. The bare wood of its tapered end has darkened to plumbeous plum, thus merging in tint with the blunt tip of graphite whose blind gloss alone distinguishes it from the wood. A knife and a brass sharpener have thoroughly worked upon it and if it were necessary we could trace the complicated fate of the shavings, each mauve on one side and tan on the other when fresh, but now reduced to atoms of dust whose wide, wide dispersal is panic catching its breath but one should be above it, one gets used to it fairly soon (there are worse terrors). On the whole, it whittled sweetly, being of an old-fashioned make. Going back a number of seasons (not as far, though, as Shakespeare’s birth year when pencil lead was discovered) and then picking up the thing’s story again in the “now” direction, we see graphite, ground very fine, being mixed with moist clay by young girls and old men. This mass, this pressed caviar, is placed in a metal cylinder which has a blue eye, a sapphire with a hole drilled in it, and through this the caviar is forced. It issues in one continuous appetizing rodlet (watch for our little friend!), which looks as if it retained the shape of an earthworm’s digestive tract (but watch, watch, do not be deflected!). It is now being cut into the lengths required for these particular pencils (we glimpse the cutter, old Elias Borrowdale, and are about to mouse up his forearm on a side trip of inspection but we stop, stop and recoil, in our haste to identify the individual segment). See it baked, see it boiled in fat (here a shot of the fleecy fat-giver being butchered, a shot of the butcher, a shot of the shepherd, a shot of the shepherd’s father, a Mexican) and fitted into the wood.

Now let us not lose our precious bit of lead while we prepare the wood. Here’s the tree! This particular pine! It Is cut down. Only the trunk is used, stripped of its bark. We hear the whine of a newly invented power saw, we see logs being dried and planed. Here’s the board that will yield the integument of the pencil in the shallow drawer (still not closed). We recognize its presence in the log as we recognized the log in the tree and the tree in the forest and the forest in the world that Jack built. We recognize that presence by something that is perfectly clear to us but nameless, and as impossible to describe as a smile to somebody who has never seen smiling eyes.

Thus the entire little drama, from crystallized carbon and felled pine to this humble implement, to this transparent thing, unfolds in a twinkle. Alas, the solid pencil itself as fingered briefly by Hugh Person still somehow eludes us! But he won’t, oh no.”
— Vladimir Nabokov, Transparent Things.

29

rfriel 04.16.11 at 9:35 am

I think TamBram has a point — namely, that even if firms “dictate and forcibly direct” what goes on inside them, this isn’t really a counterexample to what “I, Pencil” wants to show. To me it seems like the key line in “I, Pencil” is:

“For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand—that is, in the absence of governmental or any other coercive masterminding—then one will possess an absolutely essential ingredient for freedom: a faith in free people.”

This makes it clear that what “I, Pencil” really wants to attack is specifically “governmental” or “coercive” control. I’m not familiar enough with libertarian theory to know exactly what’s being meant here by “coercive,” but I can certainly conceive of a view that holds government intervention, but not within-firm control, to be “coercive.” As Coase says, in-firm control is just what happens when people act in a free market in the presence of transaction costs, and if you think in-form control is not “coercive” (and therefore not bad), this isn’t a count against free markets.

Of course this doesn’t count against any of Quiggin’s other points. Moreover, “I, Pencil” shouldn’t be able to get away with saying “this can all happen in the absence of government intervention, therefore blah blah blah” since obviously it doesn’t happen in the absence of government intervention. So the points about limited-liability corporations, etc. seem to me much more damning to the essay than the point about in-firm control. If Read wants to show that government intervention is bad, or even just unnecessary, he can’t just hold up a process in which the government is intimately involved and say, “look! this works!” I mean, it does (optimally or not), but what does that prove?

30

Henri Vieuxtemps 04.16.11 at 10:37 am

…Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson.

Yeah, sure, let’s organize society in the best way possible. I see you and I’ll raise you: why just leave all creative energies uninhibited? Let’s expand them. Who’s against that?

31

Walt 04.16.11 at 10:47 am

While Coase’s essay is very clever, it basically reverses the historical causality. Markets don´t create firms because markets are not causal agents. People create firms. Firms in turn create markets. They create markets when it’s in their interest to do so, and they prevent their creation when they don’t. Right now I suspect that the big investment banks are working hard to prevent the creation of markets that would undermine their fee income where they can serve as intermediaries, for example.

32

Guido Nius 04.16.11 at 10:58 am

“This something that any system of economics obviously needs to deals with and does, consciously or not and which does not make state planning impossible.”

How can you plan for something that emerges?

It’s a serious question. Clearly markets are overrated – but there are many things overrated that are not better rated when they are suddenly being underrated.

33

Antonio Conselheiro 04.16.11 at 12:51 pm

Thoreau pencil logo.

Thoreau was the American pioneer in mixing clay with the graphite to get a consistency of hardness, but it seems to be agreed that his efforts were not up to the contemporaneous French and German standards. According to one report he researched pencil-making in the encyclopedia Americana and complained that their article was useless to him.

34

x.trapnel 04.16.11 at 12:57 pm

I actually think Garymar’s “I, Residential Mortgage-backed Security Collaterialized Debt Obligation” won the thread at #1, and ought to have been taken more seriously by all those who followed. “I,RMBSCDO” confronts head-on what rfield notes is “I, Pencil’s” key claim, that “these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand,” and forces us to look harder at the use in the latter of the terms “creative,” “productive,” and “human necessity.”

Human entrepreneurial creativity is a near-miraculous thing, but it’s always embedded in a context that goes far beyond prices-and-quantity-of-deliverables schedules, and the danger of “I, Pencil” is forgetting that. Or, yes, what Steven said in 6, but I think “I,RMBSCDO” could be a clever way of doing an update of “The Great Transformation”–should we now be talking about The Financial Society, rather than The Market Society?

35

Jonathan H. Adler 04.16.11 at 12:59 pm

This is rather silly. It is no more a refutation than pointing out that there were pencils in the Soviet Union too, and I think it misses Read’s point, which was about planning, not about whether government was capable of providing or subsidizing particular goods or services.

This entry also filled with lots of unfounded assertions. Let’s just start with the first one:

“My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon.”
That would probably be in a forest managed by the US Forest Service or the Bureau of Land Management, or maybe a similar state agency.

Not so. Most productive timberland in the United States is private, and this even holds in the Pacific Northwest, where there is a greater share of government-owned timberland than in other regions. This was the case when Read wrote, and is even more the case today, as net timber growth has been greater on private land over the past fifty years and substantial amounts of federally owned forestland that would otherwise qualify as timberland have been withdrawn into wilderness. So, in all likelihood, the pencil did not come from a government-owned forest.

I don’t have the time or inclination to go through the rest, but this isn’t a good start.

JHA

36

tomslee 04.16.11 at 1:02 pm

rfriel #29. I can certainly conceive of a view that holds government intervention, but not within-firm control, to be “coercive.”

Yes, the libertarian rhetoric is that Government has a monopoly on coercion, where coercion is defined as force used by government. When there are more private security guards than police in many countries any other attempt to say what it is that government has a monopoly on fails.

In the libertarian approach there is a bright line between coercion and transaction costs, but that’s ideologically driven too. Refugees flee, prisoners escape after all. From the libertarian perspective, the trials of the characters in the Jungle, the Ragged Trousered Philanthropists, and any other socialist inspired book were all voluntarily undertaken.

I think the idea behind the original post is a fine one. Libertarians too often get away with ignoring the benefits they get from non-market institutions; highlighting those benefits in a catchy format would be a worthwhile effort.

37

Daniel Beez 04.16.11 at 1:04 pm

This is a weird post. You’re treating “I, Pencil,” as if it’s a defense of laissez-faire. Read certainly believed in laissez-faire, but “I, Pencil” is a defense of markets in general as against central planning by the government. Just about no one believes in central planning anymore, but it was certainly a live intellectual issue at the time. Your post is like arguing that Hayek’s Road to Serfdom doesn’t refute the case for state universities. True, and irrelevant to the argument.

38

James Wimberley 04.16.11 at 1:25 pm

“…meeting the Union Pacific line halfway in a marvel of successful planning.”
What actually happened is that they hadn’t properly agreed the meeting point, and the massive government subsidies (free land either side of the track) depended on the length of track laid. So Union Pacific and Central Pacific workmen were building parallel track a few yards away from each other over miles of Utah.

39

Andrew 04.16.11 at 1:25 pm

One of the great things about these comment threads – other than the cool and relevant facts thrown in like that about Thoreau (which would make part of a great lead sentence by the way) – is that the disagreements between other readers and posters can clue one in to aspects of the post that one may have missed or poorly understood.

For example, I didn’t pay much attention to JQ’s point about activity within firms and households not being directly tied to market activity until I read Tam’s (unfortunately somewhat rude) comment and JQ’s response, and the ensuing discussion. I think Tam is wrong – Coase is very important to these questions, but that doesn’t make them uninteresting to many of us – but the disagreement was ultimately helpful (to me anyway).

I think a response to Hazlitt’s little book would be a great endeavor, particularly if it addresses, fairly, the assumptions that many of us hold which give some of Hazlitt’s arguments more force than they are perhaps entitled to hold. This might connect nicely to the Zombies book.

Garymar’s suggestion @1 is hilarious, though it would be challenging to write a readable and funny book along that line. The sequel can be I, Asset Backed Securities Collateralized Debt Obligation (Squared).

40

Barry Freed 04.16.11 at 2:21 pm

Let me just third garymar @1 FTW.

41

Main Street Muse 04.16.11 at 4:23 pm

“I, Pencil, am a complex combination of miracles: a tree, zinc, copper, graphite, and so on. But to these miracles which manifest themselves in Nature an even more extraordinary miracle has been added: the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding! Since only God can make a tree, I insist that only God could make me. Man can no more direct these millions of know-hows to bring me into being than he can put molecules together to create a tree.”

SERIOUSLY?

Read’s I, Pencil is a showcase for one of the most irritating traits exhibited by economists – the need to prop up a point using illogical and false assumptions.

The “market” recently created demand for opaque and little understood products like the above mentioned “I, Residential Mortgage-backed Security Collaterialized Debt Obligation.” (Would LOVE to read THAT version of the essay!)

Seems there are a number of markets (like the CDO market) that do not fall neatly into “I, Pencil’s” model, where all those “millions of know-hows” come together to provide the “natural and spontaneous response” to the demands of “human necessity.” Wonder what Read would say about that.

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Bruce Wilder 04.16.11 at 4:52 pm

I love the way “contracts” are brought in through a side door, to completely confuse everything. We have contracts “across” markets to rescue the metaphor of a market, whose reality is nothing like an actual “market”, and we have corporations as a nexus of contracts, to rescue the bureaucracy of the firm from the calumny of being a relative of the coercive state.

Markets and Hierarchies do not perform the same economic function. Markets do not “coordinate”. Just the opposite: they provide the “loose” in loosely-coupled.

Market price is a valuable piece of information, and maybe there’s no better way to generate it, but that’s it. End of the market story. Clearly, not all the necessary information is not in “price”. And, most of that information is not generated in markets or “incorporated” in price.

And, actual non-metaphorical “markets” are rare in our allegedly mixed economy.

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anon/portly 04.16.11 at 5:57 pm

It seems to me that Reed is right and Quiggin wrong, the production is almost entirely “Invisible Hand,” all the way down. The timber company, even if it is leasing public land, is run for a profit. The timber company employees, even if a small part of their relevant training was via public institutions, almost certainly chose their profession free of government influence. (Unless, I suppose, their public schools were so bad that the only profession available to them was logging – this may have been true in certain places in the past). The railroad, even if the beneficiary of government largesse/corruption in the past, is run for a profit. Etc etc. I think we’d still have pretty much the same forest-products industry and the same pencils even if there were no government planners in existence.

Of course, this doesn’t mean that public goods aren’t hugely under-rated and under-provided. Or that the Invisible Hand means that companies will always be well-run. Or that “government planner motives” haven’t greatly affected the structure and practices of the timber and rail industries.

There is obviously much greater government influence on the structure and practices of financial firms than on the structure and practices of forest-products firms and railroads. I think most of “I, CDO,” if told in its essentials, would be a rehash of Congressional hearings and meetings in government agencies. Why is this analogy is supposed to tell against the market?

44

leederick 04.16.11 at 6:11 pm

“The standard English meaning, is something like “a place or institution where goods, services, assets etc are traded at quoted prices”. With this usage it makes sense to distinguish between market transactions and intra-firm transactions, and ask whether particular processes are consciously planned or arise from responses to the information contained in market prices.”

I have two problems. (1) It’s false to say that non-market processes are consciously planned, anyone – even people are the top – working in a large organisation has very, very limited understanding and agency. The idea that this behaviour is ‘planned’ and directed through a ‘master mind’ – is a total caricature of what happens in non-market situations and doesn’t help us talk sensibly about them at all. (2) It’s daft to ask whether processes are consciously planned or arise from responses to the information contained in market prices. If pencils made by people buying the wood and graphite sell for 20p, and I sell them for 19p after making the wood and graphite in house the situation is intra-firm and arises from responses to the information contained in market prices. There’s no either/or situation.

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Bloix 04.16.11 at 6:28 pm

1) “even an old Boston sharpener mounted to the wall in the garage”
My father had a Boston sharpener screwed to his workbench – a huge, heavy thing that he’d built of 4×4’s and 8×2 planks, where he did his woodworking and tinkering. When I needed a pencil to do my homework I’d go down to his bench, amid the smell of saw-dust and the tin boxes of nails and screws, and sharpen one up.

It’s just extraordinary how nostalgia can attach to any conceivable physical object. You say “Boston sharpener” and I remember my old man.

46

Salient 04.16.11 at 6:44 pm

It seems to me that Reed is right and Quiggin wrong, the production is almost entirely “Invisible Hand,” all the way down.

The free marketeer is the 18-year-old striking out on their own to declare his independence and manifest his destiny, having grown to fruition under the care of the nurturing parents of governance, whose security and self-confidence subconsciously relies not only on the growth-to-maturity-accommodating environment they provided, but also on the secret knowledge that if he ever runs into too much trouble he knows where to turn for safety and support.

We don’t usually expect him to admit this freely, as operating under the illusion of independence is comforting, and probably essential to one’s self-esteem and clear thinking. But when a free marketeer starts banging on about how much parents just get in the way of one’s natural development, or (as in this case) how all the good things in life are the result of a community to which parents contribute no useful part, it’s natural to reply with a gentle reminder that such statements are the transparent triumphant bullshit of the critically insecure.

47

Henri Vieuxtemps 04.16.11 at 7:42 pm

The timber company, even if it is leasing public land, is run for a profit. The timber company employees, even if a small part of their relevant training was via public institutions, almost certainly chose their profession free of government influence.

Yes, I am now convinced: capitalist economy is often good at coercing people, who have to sell their labor to survive, into mass-producing pencils, and other kinds of identical cheap items. Let freedom ring. Hallelujah.

48

John Quiggin 04.16.11 at 7:52 pm

@JHA Not a promising start to a refutation. The Forest Service and BLM own more than half of all land in Oregon

http://www.ohs.org/the-oregon-history-project/narratives/this-land-oregon/people-politics-environment-1945/oregons-public-lands.cfm

49

Shay Begorrah 04.16.11 at 7:55 pm

salient@48 has the comically unself-aware advocates of the “an invisible hand assembled my Saturn 5 rocket” fantasy nailed.

As an experiment could we kidnap the children of a selected free marketeers, remove them to a desert island and see just how soon the whole pencil thing manifests magically from the workings of the market, free from coercion and all that?

The resulting documentary film can be called “I, cannibal.”

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andrew 04.16.11 at 8:01 pm

A response I thought up after reading the “I, pencil” story in Milton Friedman’s “Free to choose” was “I, computer,” or “I, internet.” Both were created out of heavy public funding for long and expensive basic research and then public subsidy to create a market for the end-products (ARPANet was initially used only by the government and military, and apparently Bill Gates used to think that there was no future in the internet; the government also was pretty much THE market for the early behemoth computers).

51

ice9 04.16.11 at 8:03 pm

3 non-economist points, if you’ll pardon my weighing down the discussion.

Do either of the duelling philosophies account for the scenario in which Mongol Pencil identifies an innovation in, say, graphite and uses its superior position (stable currency, reliable communication networks, access to a business-friendly state+military) to acquire the graphite supply across international boundaries?

JHA @35 points out that the most ‘productive’ timber is ‘privately held’. Does that ‘private’ holding represent an opposite to ‘public’ holding? Here in Minnesota there’s lots of both, and most of that privately held timberland was bought for a song by papermills after the first growth (very valuable) white pine had been cut. The state (ie me) had little benefit from the sale. Yet the public land still held in Minnesota is open to me–I can use it and get value from it, and I do, but not as much as if the white pines were still standing. c.f. “wasted muddy mess of a trout stream where ranchers have cheap BLM leases. It might also be relevant that that timberland is productive because it is second (or third or fourth) growth monoculture, and its use for profit degrades all neighboring forests in a variety of ways.

What is the meaning of the notations at each paragraph?

ice

52

John Quiggin 04.16.11 at 8:24 pm

The notations are footnotes. At one time we had this great system that would actually do footnotes, but WordPress (I guess) broke it, so now we do it the clunky way.

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StevenAttewell 04.16.11 at 8:46 pm

It seems to me that Reed is right and Quiggin wrong, the production is almost entirely “Invisible Hand,” all the way down. The timber company, even if it is leasing public land, is run for a profit. The timber company employees, even if a small part of their relevant training was via public institutions, almost certainly chose their profession free of government influence. (Unless, I suppose, their public schools were so bad that the only profession available to them was logging – this may have been true in certain places in the past). The railroad, even if the beneficiary of government largesse/corruption in the past, is run for a profit. Etc etc. I think we’d still have pretty much the same forest-products industry and the same pencils even if there were no government planners in existence.

So, let’s review: on one side of the ledger, we have a profit-making entity and freedom of occupation (however limited by the essential power imbalance between employers and wage workers). On the other we have: land grants and public education as previously stated, a natural resource access to which was obtained by the Federal government via treaty and purchase, a resource which requires public fire agencies to guard against damage, a resource which to get to market you need to go over Federally-constructed highways, that is then exchanged through contracts that are enforced by the legal system of the state, and a form of organization whose very existence flows from state recognition. Yeah…all the way down is a bit much.

But what I think Quiggan’s getting at is that the provision of public goods was, historically, a planned process. Legal/economic historians from Morton Horwitz to Marty Sklar to William Novak to Richard Franklin Bensel to William Cronon (to say nothing of Karl Polayni for the European case) have demonstrated that, far from an “absence of governmental or any other coercive masterminding,” the market was a conscious political project from the 18th century on. The corporation did not emerge merely as a confluence of contracts, but rather from a particular confluence of high fixed capital costs and hypercompetition in the railroad industry leading individual business owners to seek increasingly coercive forms of price cooperation (because voluntary agreements kept breaking down) while negotiating with the state over the extent of anti-trust laws; similarly, modern markets in agricultural goods required an enormous amount of planned coercion to transform property rights from inhering in the individual farmer’s ownership over the bag of grain to inhering in a futures contract that would be regulated and enforced on the Chicago Exchange (which was both private and public enforcement).

Likewise, this required a legal revolution to move from the regime of corporation-as-state-privilege, salus populi, and sic utero tuo to a regime of general incorporation, legal personhood, and the expansion of property rights to include such intangibles as expected future revenues. This revolution was in large part conducted through the Republican Party’s historical project of establishing a national market with minimal regulation.

The overall point of this is that there’s a lot more planning in our economic system than people want to admit, and that there is a lot more private sector coercion than people want to admit.

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StevenAttewell 04.16.11 at 8:46 pm

* whoops, screwed up the html there. Was trying to link to my argument here:
http://realignmentproject.wordpress.com/2010/04/11/industrial-democracy-vs-economic-liberty

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Zora 04.16.11 at 9:18 pm

TamBram: Are you expecting us to be impressed that you’re a Tamil Brahmin? Why advertise that? Then there’s the sneer and the assertion that as a Third-World “darky”, you understand economics better than the confused colonialists. I don’t see that there’s anything to your attack other than claims to caste privilege and victim status (which consort strangely).

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Dan 04.16.11 at 10:16 pm

While I agree that the distinction between state and private enterprise is a fuzzy one – much fuzzier than liberterians like to admit – this post seems to demonstrate an ignorance of certain empirical realities. Planned activity within a corporation does not compare to centrally-planned economies for several reasons. First, corporations are endogenous responses to market-based transactions (where the limited liability corporation was created to make such a response legally viable), while a centrally-planned economies of the 20th century were almost totally exogenous endeavors based upon a hypothesis. Second, corporations are not the only form of organization, nor are they the most common form of organization within a market-based system. Third, the corporation is held accountable to the market, while the state is not accountable except in the extreme. Fourth, large institutions are invariably inefficient and unproductive, where the corporation emerges only in situations where the economies of scale overcome the diseconomies of scale. However, the state suffers from similar diseconomies of scale and is only efficient in a very limited number of realms, most notably in the exercise of power. Indeed, an arguement could be made that the corporation arises in some circumstances as the only viable means to check the power of the state. Mixed economies are here to stay, but it would be dangerous to assume that the organization of economic activity within a corporation structure is no different than within a state institution.

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Consumatopia 04.16.11 at 10:39 pm

The fact that corporations involve central planning doesn’t disprove libertarianism. Under libertarian assumptions, intra-firm planning isn’t coercive.

But it does make the whole I, Pencil essay kind of pointless, if not just plain wrong. To a libertarian, it would make no moral difference whether one corporation produced the entire pencil from start to finish, or there were no corporations and the whole process were overseen by individuals laborers trading with each other. But one of these possibilities definitely implies the existence of a “master mind” overseeing pencils, or at the production of that particular pencil. Not that there’s a single person who knows everything or even a significant portion of what is required to produce the pencil, but nothing about socialism or the mixed economy assumes the existence of such a person. Corporate and governmental bureaucracies both assume it is possible to direct workers without fully understanding the complete decision process those workers engage in. And the successful production of pencils offers plenty of evidence that both are correct.

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Nemi 04.16.11 at 11:09 pm

The question of organization (market, command and control) is orthogonal to the question of ownership (state/collective/private).

If “i pencil” is a argument for the market – it is a argument against command and control (e.g. firms and regulations) – and irrelevant with respect to the question of ownership.

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StevenAttewell 04.16.11 at 11:13 pm

Consumatopia – except that it does involve coercion. The pools fell apart because they couldn’t be enforced, the trusts fell apart because their enforcement mechanisms were found unconstitutional – the history of the corporation is a search for coercion.

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john c. halasz 04.17.11 at 1:33 am

@5:

“@JCH Predictably tiresome commenter displays superior Weltschmerz.”

Nah. Weltschmerz is a given. Why evade it? But it doesn’t connote an overweening desire for “superiority”. That’s just projection.

But the point is this: why confine the argument to an easy refutation of libertarian/laissez-faire accounts of the “market economy”, in favor of a “mixed economy”? Doesn’t that narrow the spectrum of consideration or debate to the difference between libertarians and liberals, as if there were no other POVs worthy of consideration? And thus just amount to easy self-confirmation. (This is a fairly standard m.o. for CT posters BTW). One could, of course, argue more fruitfully over the composition of the “mix”. But that still ignores the over-riding contemporary political-economy issue: the capture of state power, in its regulatory and policy functions, both as supporting and compensating for the organizational and social realities of large-scale, concentrated, technically advanced production, by MNC/Wall St. corporate power. But it strikes me that that’s the sort of issue that you’d rather evade, as putting too much of a dent in your conceptual equipment.

The miraculous pencil story is trivial and rather silly. (Writing or printing are fundamental “technologies”; but pencils have lots of close substitutes and different recipes, so the best pencil and the cheapest price is scarcely something to, er, write home about). And it’s not historically accurate, as you roughly indicated. But there’s still a problem of conceptual “grammar”, with respect to accepting the “market economy” framework, however mixed. Production systems, however dispersed their “origins”, are not simply reducible to market transactions and incentives. Once high, long-run, fixed capital-intensive investment takes hold, the technical efficiency of production achieved far exceeds the alleged efficiencies induced by competitive markets, and tend toward large-scale, oligopolistic concentration and the substitution of administrative pricing for market transactions. Besides which markets of themselves produce nothing. (O.K., they exchange and aggregate information, which is not quite nothing, but which also doesn’t of itself yield productive surpluses). If there is a highly inefficient distribution of “resource” endowments, then a series of “pareto-improving” exchanges can readily be made toward the “pareto frontier”, but once such a system is in operation, it faces diminishing returns. “Economic growth” is largely the result of technical, productivity-enhancing improvements in production systems/capital stocks, in processes and products, which markets might stimulate and promulgate, but don’t “create”. I take it that the point is, er, non-Coasean. (Firms arise not only by displacing market transaction-costs, but at the intersection of several markets, by controlling or stabilizing one or more of them, and by excluding or diminishing market competition, which tends toward the attrition of profits,- and, further, they tend to arise due to technical innovations, in markets that don’t fully exist yet, so they, as a commenter above put it, “make” markets). So large-scale, capital-intensive, technically efficient, oligopolististic production systems/organizations, together with the hi-fi that arises to variously service and promote it, both acquire large amounts of non-state dominative power, and produce large-scale social displacements, which state policy and expenditure must at once support and compensate for. And that’s where the political-economy argument over “public goods”, I think, arises and takes its place, especially in the light of the tendency for state and corporate power and domination to fuse.

So I’ll take the matter one step farther, for the sake of controversy. The “public goods” argument is much broader and more central than standard economics takes it to be. As “meta-transactional” and shaping rather than deriving from “incentives”. (Yes, I’m aware of the game-theory, lighthouse business, but that just goes to the shifting formation of imperfect socio-political alliances, as itself an imperfect rather than conceptually “pure” public good). But then “private” production systems, once built and operative, resemble public goods, if in lesser degree, far more than is usually imagined.

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Antoni Jaume 04.17.11 at 1:52 am

One point that I find missing is the establishment of standards. And that it is not so much that one standard is better than another but that one standard is better than two. I’m used to the metric system, and frankly when I find the chaos that are british costumary units I feel grateful for the Enlightment thinkers.

62

TamBram 04.17.11 at 2:34 am

@ Zora 55
Where did I even hint that you should be impressed? This is more colonialist intimidation–look, look, the evil Hindoo mentioned his identity–he’s not allowed to do that! Nor can he build his economy, b/c we colonialists insist on a certain (mis)interpretation of Coase.

63

Bruce Wilder 04.17.11 at 2:54 am

Is it descriptively accurate, as an historical matter, to describe metrics as “emergent” in the same sense that customary measures were?

64

Peter T 04.17.11 at 3:22 am

Two comments:

First is that the mechanisms of coordination are invented, not innate to any particular system – so what is “large-scale” changes. A large market is an exercise in communication, logistics and much else – mostly centrally coordinated. A large government is an exercise in various forms of coordination and control that likewise had to be developed.

Second is – my impression is that non-market processes make up less of the total economy now than in, say, 1860. In 1860 most shop, farms and businesses were small and government was small. The family sector was larger than now. Now, as JQ notes, a large proportion of activity is either intra-firm or governmental. And the family sector is still quite large (around 30% in OECD countries). Why has the use of market mechanisms shrunk?

65

Bruce Wilder 04.17.11 at 3:38 am

john c. halasz @ 60 makes a number of points, which would be relevant to an historically and functionally descriptive account of the economic systems of production and distribution, but which are pointedly ignored or minimized in accounts like that of Read in I,Pencil, or Hazlitt, in One Lesson. The descriptions are not functional or factual; they are moral narratives: one modeled on a Catholic meditation on faith in the miracles of God’s Nature; the other a standard rant by a conservative resentful of righteous preaching and the failure of the world to fully acknowledge the virtues of selfish complacency and narrowness of vision.

Their functionally descriptive accounts are faulty, but it is the moral imperatives, which they seek to justify and promote, which are their earnest core, and arguing for a functional account, however well supported by fact, stripped of a moral vision, will not meet these reactionary homilies on their own ground.

Read challenges us on the moral value of community restraint, and Hazlitt speaks for resentment by the lucky and the transvaluation of all values on their behalf.

They ought to be answered, on their own moral terms, by a morality with a clear functional foundation in the working of the world.

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Bruce Wilder 04.17.11 at 3:51 am

Peter T @64 Why has the use of market mechanisms shrunk?

See john c. halasz @60

The industrial revolution has witnessed the application of scientific knowledge to vast improvements in the control of production processes, increasing technical efficiency, while the allocative efficiency achieved by markets has remained an afterthought. Improved control of production processes can require huge sunk cost investments and deep specialization, resulting in some processes exhibiting enormous returns to increasing scale, and requiring social organization with considerable power to recover the capital investment. Sometimes, we call that power, the state; sometimes, we call it Standard Oil or General Electric; sometimes, it is hard to tell the difference.

Today, in the U.S. half the labor force work in bureaucracies of 100 employees or more, and most of the rest are directly dependent on firms of at least 20 employees. And, economists insist that this is a “market economy”.

67

Jonathan Gilligan 04.17.11 at 3:59 am

Perhaps relevant to your thoughts on the organization of the large firm and of the family, and the implications for the role of the public sector, is Arrow’s Uncertainty and the Welfare Economics of Medical Care, 53 Am. Econ. Rev. 141, 149 (1963), noting the “many social institutions in which the usual assumptions of the market are to some extent contradicted. … The economic importance of personal and especially family relationships, though declining, is by no means trivial in the most advanced economies; it is based on non-market relations that create guarantees of behavior which would otherwise be afflicted with excessive uncertainty.”

Where personal relationships erode to the extent that they’re no longer sufficient to fill their traditional role in managing uncertainty and trust, one needs alternate non-market social institutions, since “the laissez-faire solution … is intolerable.”

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Jason Treit 04.17.11 at 4:17 am

Sketch out if you would for us, StevenAttewell, the enormous planned coercion that brought about agricultural futures. What I can glean of the Chicago exchange’s founding tells of merchants gathering at a regular place to settle the many contracts circulating among them multilaterally. Its rules and structures solidified much in the pattern of early bank clearinghouses. Did members then patrol the Illinois farmlands with cudgels to stop anyone from writing side contracts or bringing crops straight to market?

As for futures themselves, variants of them show up at many points in world agricultural history. Aristotle in Book I of Politics even mentions “Thales the Milesian and his financial device”. To raise crops is, after all, to speculate. I’ve heard it argued that property rights rule out credit arrangements that might turn a claim over a holding into something more abstract than it was before – on a clear night you can hear Rothbard barking at the moon about fractional reserves – but it’s hard to see how one invalidates the other when the first takes negotiable transfer as a key ingredient.

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John Quiggin 04.17.11 at 4:21 am

Peter T, when I refer to the household sector, I don’t mean family-run businesses, I mean things done within households or between individuals/households without market intermediation: housework of all kinds, co-operation between friends, voluntary associations, even blogs like this one.

That category would include subsistence farms, but by 1860, most family farms and virtually all other family businesses were primarily producing for the market. So, their relative decline is evidence in support for a decline in the proportion of activity that is directly market driven.

70

Walt 04.17.11 at 6:12 am

Is TamBram for real? “Colonialist intimidation”? Seriously?

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StevenAttewell 04.17.11 at 6:15 am

It’s been a while since I read Cronon’s book…(pause to find that it’s out on Kindle, sigh at having to buy a book for the third time)…but, for example, establishing uniform standards through the Chicago Board of Trade’s collective agreement (without the participation of farmers), getting state authority for binding determinations of quality, and power to arbitrate disputes without recourse to court system, power to break cornered contracts and revoke right to trade , the elevator owners monopoly right to mix and thus take advantage of price arbitrage. There’s a reason those midwestern farmers got all Populist…

Overall, the “club” was a mix of state authority and banning people from access to national and world markets.

Similarly, Cronon’s description of how the Big Five meatpackers colluded with each-other on prices then sold at a deliberate loss to drive local and regional butcher’s out of business is an example of coercion in the creation of a national meat-market.

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Myles 04.17.11 at 6:34 am

the trusts fell apart because their enforcement mechanisms were found unconstitutional

I actually do agree with you that corporate power can be often coercive, but this isn’t one of the cases. Participation in a trust is voluntary. You can’t participate and then scream bloody murder when the conditions you agreed to are enforced; that’s called bad faith.

There’s a problem with this sort of question, because the history of Standard Oil was written by the offspring of people who were bankrupted by Rockefeller. The (many) others who agreed to the (often generous) terms offered by him, and joined him in the trust, were less heard from.

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StevenAttewell 04.17.11 at 7:28 am

Myles – trusts were voluntary. That was the problem, that you couldn’t enforce any agreements under them; Carnegie made himself rich by entering into steel trusts and immediately undercutting them, decimating his competition.

My point was that capitalists were looking for methods of coercion.

74

Salient 04.17.11 at 7:31 am

It’s weird beyond expression that an essay which emphasizes the lack of creative capacity in each human being would turn about in the final paragraph and try to tell me that humanity’s problems will be solved if we leave all creative energies uninhibited. “Nobody has the ability to figure out how to make a pencil! We should reorganize society so people can make use of that kind of ability!” I wonder if the author even realized that every occupation he listed involved mechanical labor — perhaps a fair bit of innovation at its conception, but little to none in its day-to-day practice.

Even more weirdly, the author (who had the freedom to choose) chose to narrate for a pencil made by Faber’s company. Isn’t Eberhard Faber one of these guys like Ray Kroc, who’s famous for having succeeded in his industry by buying/stealing someone else’s locally successful business innovation and implementing it elsewhere?

Libertarians, even the self-parodic variety, do just fine accommodating the fact that we have to work for a living and that most of our work will be uncreative drudgery… until they feel like being sanctimonious, at which time they forget the obvious and write crap like “Leave all creative energies uninhibited. Merely organize society to act in harmony with this lesson.” (I’m pretty sure acting in harmony with the principle that no creative energy should be inhibited would leave those logging facilities unmanned.) I’d say that snide “merely” is the most offensive bit in the piece, but actually I’m put off by the fact that the author couldn’t be bothered to follow through and learn how they tint lacquer yellow.

And damnit, Faber’s famous for making distinctively green pencils. Which were sold in distinctively green tins. Yes yes Faber made knockoff yellow pencils and gave them knockoff labels like Mongol, but that was at least originally with some kind of vague intent to confuse the buyer into thinking they were Chinese pencils, which is the kind of legerdemain that tends to undermine a libertarian’s point about the value of contributing one’s own creative innovation. Sheesh.

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William Timberman 04.17.11 at 7:31 am

JCH @ 60

These firms — the ones that Henry Miller invented the word cosmodemonic to describe — not only make markets, they also make moral and political universes, and sweep the hapless, which includes most of us, inexorably into their orbits. And yet, seeing them from the inside, as part of their white-collar servant class, I’ve always thought of them as being at least as fragile as they are powerful.

The level of control they aspire to — that they require — over materials, processes, people, and even events has always seemed unsustainable, no matter how sophisticated the technological prostheses of management become. Global warming, as apocalyptic as it may turn out to be, is, in my opinion, only one of the canaries in the coal mine. We have a right to be proud even of our most questionable achievements — and transnational corporations are certainly one of them — but I think that the jury is still out on whether or not the levels of organization and control that their managers are so proud of will ever be stable enough, or fulfilling enough, for the bulk of mankind to rely on.

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Salient 04.17.11 at 8:23 am

My point was that capitalists were looking for methods of coercion.

Chaneling Bush 43 — ‘It would be much easier if this was a coercive transaction, as long as I get to be the coercer.’

I went searching for old pencil ads and sure enough, a number of Faber-Castell’s high-quality pencil lines were notably green, it’s not just a recent thing. The Empress ad (linked page row 4 column 3) is one example.^1^ Anyhow, for those who care, here’s the Mongol 482, whose design and boxing just scream fungible mediocrity.

The Economist’s article about Faber-Castell, aside from entertainingly boasting of a pencil’s quality by describing how well it survives literally being thrown out of a castle instead of how well it writes, is notable for including:

The good advice the count did take, from Boston Consulting Group, was to launch a range of premium products to reinforce the brand, including “Graf von Faber-Castell” luxury items that bear his name. One of these is the “perfect pencil”, still made of wood and graphite, but with a silver sharpener and eraser. Many of these premium items are very similar to products found in ancient Faber catalogues: there is not much scope for innovation in pencil design

…truer words.

^1^I also remembered Faber’s green pencils irritatingly having these pointless metal ferrules with no eraser, but couldn’t find any old examples. (No pun intended.)

77

Myles 04.17.11 at 3:12 pm

My point was that capitalists were looking for methods of coercion.

I would much rather substitute the word “businessmen” for capitalist in there. Capital doesn’t have to be coercive, but business often is. The principled adhered to by J. P. Morgan was that you co-operated to mutual benefit or you got destroyed; that’s not so much proactive coercion as it is following the natural logic of efficiency.

78

Bruce Wilder 04.17.11 at 4:10 pm

Capital has to be coercive to recover sunk-cost investments.

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Robert Waldmann 04.17.11 at 6:09 pm

Brilliant post. I don’t want to get in a flame war (really) but I think you are too kind to TamBram. You infer that by “market” he means refers not to a market but to “everything that happens in the economy without direct government intervention.”

I think it is fairly clear that he means “anything which has turned out to be more efficient than the alternatives which have been tried.” This speeds things up, since one can discover the fundamental insight that the market is efficient and proclame this profound truth with great confidence so long as it is a tautology.

I will note that he uses “efficient” but doesn’t say anything about government being involved.

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Gene O'Grady 04.17.11 at 9:07 pm

My parents also had an old Boston sharpener mounted just inside the garage door. Lasted until about 1995, and I have never found another sharpener, either electric or (certainly not) mechanical, that did nearly as good a job.

I think Professor Quiggin was right about the fact that most Oregon productive timber land is not “private,” but I’m also curious about just what “private” means in an Oregon context. I also suspect that cedar trees tend not to be found on the private woodlands because they have largely been turned over to Doug Fir monocultural for reasons of economic efficiency.

Part of my reason for mentioning Coos Bay was that there is currently a little bit of crisis situation with those coastal communities like that due to the fact that the big boys that have bought up the small connector railroads have shut down the line that serves the south coast, apparently in an effort to extort maintenance costs from the Federal government. My personal opinion being that the government coercion the libertarians like to whine about pales in comparison to the coercion practiced by economic entities in deferring maintenance so their managers/owners can take the money and run. Might even be applied to failing to shut down nuclear plants that are past their life expectancy.

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Matt McIrvin 04.18.11 at 2:01 am

I have an animus toward Dixon Ticonderogas to this day because one year in my childhood I had a large pack of them whose erasers would not erase. The rubber they were made of had a slick, hard surface that wouldn’t pick up anything. Market failure!

I remember the eraserless Fabers as well, but at least they didn’t pretend to have erasers.

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Jonathan H. Adler 04.18.11 at 2:50 am

Quiggin @48 –

You need to dig into the numbers a bit deeper. Yes the Feds own lots of Oregon (one of the few states in which they own most of the forest) — as they own lots of every state west of the Mississippi — but that doesn’t mean the Feds are responsible for the lion’s share of timber harvest. The USDA Forest Inventory reports annual harvested area is far greater on private land than on government land for all but the Rocky Mountain region, and in the aggregate it’s not even close — it’s about 6 to 1, private to public.

JHA

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TamBram 04.18.11 at 2:55 am

Yes, Jonathan Adler, this is exactly the sort of detail that is hidden, in an attempt to frustrate and keep down the scorned of the earth. It is all smiles and hugs from the “development” crowd until you actually, you know, want to develop!!

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John Quiggin 04.18.11 at 5:20 am

@JA But, as you point out yourself, the decline in harvesting on Federal land in the last 20 years or so is largely due to wilderness preservation, which rather points up the complexities that tracts like “I, Pencil” try to smooth over.

TamBram, put a sock in it.

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dictateursanguinaire 04.18.11 at 6:13 am

Haven’t got a whole lot of time, so sorry if this sentiment appears earlier in the comments but: while I appreciate your project Prof. Quiggin and agree that looking at non-market aspects of the economy is important, I think it’s sort of missing the point. As Amartya Sen said, it makes no sense to be “pro” or “anti” market (well, if you’re a utilitarian, I suppose – but I don’t think natural rights theory can be taken very seriously) outside of any reference to their effects on society – markets, commands, laws, etc. are just tools to improve human society. With a little editing, the original piece being critiqued here could have been turned into a tribute to spontaneous or non-hierarchical coordinated human action in general, not just market action. All this dichotomizing seems like it’s lost a lot of its relevance to actual life.

I mean, I do think there are benefits of seeing “the market” as an abstract self-contained whole if you’re an economist writing strictly about a technical economic issue. But in a piece like this, that’s talking very much about social effects, politics and history, to me it seems silly to debate the mechanics of the market process. Shouldn’t we talk more about its broader effects? Maybe there’s a person working in the pencil factory is working there because s/he grew up poor and whose human potential was stunted. That’s completely left out of the story, and I think that’s where critiques of the market system should start. This discussion is so fine tuned that it even leaves out economic matters in general in favor of a laser focus on the market process per se. There is a legitimate range of technical dispute about those processes, but the key thing in question is, after all, humankind and its welfare, which is pretty much absent from either piece.

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John Quiggin 04.18.11 at 6:44 am

DS, I was just about to add some explicit discussion of this. But, a crucial subtext in “I, Pencil” and similar tracts is that, given the spontaneous and natural character of market processes, the distribution of income that arises from those processes is natural and should not be interfered with.

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Peter T 04.18.11 at 7:25 am

JQ

I was talking about households etc too.

I take the points raised by John Halasz – and one could make others. Complex networks are almost always “managed” at several levels by a mix of conscious planning, shared ideologies, aims and processes and various incentives. My query is better put as why has the ideology of the market not been reflected in greater use of it?

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reason 04.18.11 at 10:46 am

Bruce Wilder @42 – absolutely brilliant comment, that deserves more attention. The market as a misleading metaphor for bureaucratically organised systems is a good point.
Bruce Wilder @78
“Capital has to be coercive in order to recover fixed costs” – I think you are wrong about that. This is only true in some feasible circumstances, not in every case. It certainly is the argument used to justify intellectual property, but it could well be that returns to scale are sufficient (and the scale sufficient) that undercutting new entry becomes effectively impossible. You may call oligolopy coercion – but I don’t think that is entirely fair.

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MR Bill 04.18.11 at 1:42 pm

I can’t read the “I, Pencil” piece without seeing similarities to “the Great Chain of Being” and other exercises in moral philosophy that extol the divinity of the way things are…

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bianca steele 04.18.11 at 1:44 pm

John,
Great post. I’ve been avoiding “I, Pencil” at least since the last time everybody was talking about it. (At the moment, I’d like to see “I, garbage trackpad.”)

I suppose that a few minutes with the Encyclopedia Britannica could fill in some of the gaps, like what happens once all those manual workers and raw materials gather together at the factory location, other than that they just do what they ought to and stuff is manufactured. To the manual worker, Read’s essay says, “Yes, you have everything you need already.” To the skilled worker or foreman trying to educate himself, as much as to the government policy maker, Read’s essay would seem to say, “Don’t go meddling in the things of God.” This would seem at least a little problematic, especially given that Read’s audience was likely to be people responsible for that broad middle area in which, even in his own theology, decision-making and planning activity occurs.

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Gene O'Grady 04.18.11 at 2:32 pm

Since there has been any new Wilderness designated in Oregon since (I believe) the sixties — at any rate a long time — the decline in logging (on Federal and private lands) has to do not with wilderness preservation but with (a) protected species like the spotted owl that are claimed, probably accurately, as indicators of overall forest health and (b) concern for habitat degradation affecting fish and the overall security and safety of the water supply. Might throw in past overcutting in there too.

Also, the Federal-private dichotomy ignores the extensive state holdings.

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Pete 04.18.11 at 3:37 pm

I can’t believe nobody’s made the obvious “i, Phone” comment yet.

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Salient 04.18.11 at 4:11 pm

I, Pencil would hold up an anthill as the pinnacle of social achievement, as guided by the invisible hand of formic acid.

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Myles 04.18.11 at 5:58 pm

I can’t believe nobody’s made the obvious “i, Phone” comment yet.

Depends how much “i, Pa(i)d” for it.

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marcel 04.18.11 at 6:32 pm

1) JQ wrote: A corporate firm (or even an unincorporated business firm) is a complex social construction, embodying both co-operation, to produce and sell the firm,

I think you mean, “to produce and sell the product”, not “to produce and sell the firm”

2) Pete wrote: I can’t believe nobody’s made the obvious “i, Phone” comment yet.

Nor the even more obvious, “I, Robot”.

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Bruce Wilder 04.18.11 at 7:00 pm

reason@88

Thanks.

As for my comment at 78, better terse than turgid, don’t you think?

Stupid, religious essays, like the ones Quiggin, bless his heart, is drawing a bead on, are a symptom of a general scholastic mindset in economics, that is bound and determined to ignore most of the economy, as it is. It becomes remarkably hard for people discussing “economics”, to bring even readily observable facts to bear.

My general point about “sunk costs” and capital recovery is that cost structure actually matters to ex-post business strategy, and the giant corporate entities, which literally dominate the economy, have in common a few, peculiar or extreme cost structures, which are quite unlike the cost structures experienced by households or small proprietorships, let alone textbook “firms”. The barriers-to-entry works pretty well the context of, say, a professional or craftsman investing in educational credentials, licenses or training and skills. But, big “scale economies” are not just bigger than 3 years in law school, they imply a marginal cost of production, which is declining over the relevant range. (This is not a problem for the barber or dentist, with 24 hours in his day; marginal cost turns up, if only because she runs out of time in her day.) Very low marginal unit costs makes marginal cost pricing impossible, and that’s a strategic problem, for which a significant degree of (political) power is required.

A lot of 19th century railroads went bankrupt, despite the barriers to entry, and little competition from horses or dirt roads. And, it is not just a problem from the private perspective of Capital or the businessman, but also from the Social Perspective, of a society, which wants the productivity gains, but also wants those productivity gains to disperse into the larger society, not to be concentrated with John Galt.

I think it regrettable that economics doesn’t do more to bring these paradoxes to light.

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spyder 04.18.11 at 7:36 pm

Sadly, most of the cedar milling is gone from the West Coast. SPI still has its large timber cutting facility in Quincy, CA, but they need to bring in trees from OR and even WA to keep the mill operating (and only make a small run of cedar as it is). The Sierra Logging Museum holds most of the history and legacy of those heydays of pencil making (well, cutting cedar which grew a plenty in the foothills (btn 1800′ and 3500′). The very last mills were closed and gone (scrapped for the metal that was worth more than the timber) by the early 1990s.

It is damn hard to find a good pencil anymore, made with a hexagonal cedar stalk and a classic #2 graphite filler. Most are pulp products, more plastic than wood.

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James Kroeger 04.18.11 at 9:07 pm

One possible way to respond to Read, Prof. Quiggin, would be to present a counter-example that highlights the utter silliness of Read’s approach. What I have in mind is an “I, Private-Sector Police Officer”, a ‘unit’ of security that affluet consumers of police protection would be able to afford in a Libertarian Paridise.

In the Libertarian Ideal, government-run police agencies would be replaced with private-sector security companies that would provide police protection to all who are smart enough—or affluent enought—to afford their services. Of course, in this ideal world, one would have to be a ‘good shopper’ for police services, watching all the advertisements on video broadcasts for the best deals that competing police forces would be offering us. Should you just obtain basic police protection from a circumscribed number of security threats? Or perhaps pay more for the comprehensive package?

Of course, certain conveniences would have to be accomodated in order to allow for the manifold blessings of the entreneurial spirit. If it looks like you may be a victim of a crime, you will first have to decide which of the security companies you should call on, if you have not already arranged for protection, you will have to decide which of them is the smartest one to contact.

And yes, one of the first things that any security company would seek to determine is if you are a current customer of their services and if you are current in your payments. They might still be willing to send someone to help you if you are willing to make a payment on your past due balance.

Only after these security companies had determined that you are a good credit risk would they then check to see if you have the kind of plan that provides the specific kind of protection you are looking for. Yes, some members of society would take their chances and not pay for any police protection, simply because it would put too big of a dent in their family budgets, but they would have only themselves to blame.

At the end of this sort of blather, John, you would of course want to mockingly wax enthusiasiatic on the wonders of how I, Private-Sector Police Officer, came to be available to consumers, without “…a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being…”. End with high praise for the creative genius who made it all possible for that officer to be available in the market, thanks to his/her blessed freedom from evil of governments…

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john c. halasz 04.18.11 at 9:35 pm

Bruce Wilder @96:

Nitpicking, (but I got into trouble on this point at an econ blog), with high fixed capital cost investment, (which then is overwhelmingly the largest component of the cost structure), it isn’t marginal costs that are declining with increased output, but average unit costs. Or, at least, that’s the way economists account it, (which accounting I find a bit perverse), since, though for a number of reasons excess capacity is built in, such that further output almost always means lowered average unit costs and thus is devoutly to be wished by management, the extra capacity is already incurred, “sunken” cost, thus not considered an additional “marginal” cost. But the point is actually most significant in reverse: with a sharp drop in demand, average unit costs rise sharply, such that there can be no “marginal” price reductions, (e.g. GM). And that must be a key driver of the strategies adopted by oligopolies. Especially with respect to erecting and maintaining barriers to entry.

But dominant market power is, indeed, dominant power and does, indeed, involve lots of coercive measures, at least in terms of maintaining the upper hand in negotiations, and co-opting of public power to sustain. As the commenter a@75 put it, with some rhetorical hyperbole, firms “not only make markets, they also make moral and political universes, and sweep the hapless.” The fact that the rents or quasi-rents that accrue to such oligopoly power are partly “justified” not just by high technical productivity, but by the need to manage high fixed costs under long-run uncertainty doesn’t obviate the need for oligopolists to adopt all sorts of strategic measures aimed at controlling their market environment. (Has “reason” himself not dealt as a consumer with oligopoly pricing?) And that’s a huge political-economy problem, especially when you add in the tendencies toward financialization and the role of hi-fi, regardless of whether it’s “fair” or not.

But the basic economics point is that production is not simply derivable from an account of market exchange, that production systems and market transactions operate under different structures and constraints. (The assumption that there is always and everywhere a set of price/quantity relations that can guarantee market-clearing equilibrium is simply false. That price/quantity relations can attain market-clearing equilibrium is sometimes, often enough, a useful analytic assumption.) Which is the sort of thing that I find odd about the likes of Coase. It’s not just that, once internalized in the firm, there are no market transaction prices to be compared with. It’s that the most obvious explanation for the emergence of firms, the effects of technology and scale with joint and several production, is ignored or elided. (And then, of course, with the high, above market technical efficiencies achieved, the notion of a price mechanism set by competitive markets also breaks down.) The issues of organization and structure are downplayed, if not utterly elided, by an account entirely in terms of flows and aggregations of market transactions on the part of atomic agents, (who themselves, with their utility preference functions, are artefacts of the price mechanism). But with structural explanation you get the possibility of discontinuities rather than continuous equilibria.

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tom bach 04.18.11 at 9:40 pm

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Owen McShane 04.18.11 at 10:55 pm

My interest in “The Pencil” grew out of the claims that people know how to calculate the carbon footprint of producing complex goods and services.
Even whole buildings are given a green rating and it seems to me that if we cannot calculate the carbon footprint of the draughtsman’s pencil we are unikely to have the knowledge the footprint of the whole building.
Once carbon footprint ranking becomes a rating system for shelfspace in supermarkets watch the legal profession clean up again.

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Kaleberg 04.19.11 at 12:32 am

What’s so magic about contracts? They’re just government enforced agreements. A true libertarian society wouldn’t have contracts, or at least no contracts that could be enforced save by direct violence or threat of violence.

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John Quiggin 04.19.11 at 1:01 am

@Owen You’re right, and, in my current draft of the book, pollution tax/emissions trading is planned to be my first exhibit in why markets work well (when they do), using a case where the market in question has been deliberately created by governments.

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Bruce Wilder 04.19.11 at 2:09 am

jch@99

Nits picked here, for free.

People often confuse sunk-costs with fixed overhead costs, perhaps because they tend to coincide so often. You have to think long and hard about exactly why they coincide in the actual economy, to understand why I insist on the importance of marginal cost declining. Marginal cost will be less than average cost, in the presence of large, fixed overhead costs, as you say. But, marginal cost will, additionally, be declining in the presence of increasing returns to scale.
It is the latter condition, which precludes the possibility of a market-clearing equilibrium in price.

Breakfast cereals provide an excellent illustration of how an oligopoly of bureaucratic firms might handle major shifts in demand. The big, brand-name breakfast cereal companies — Kellogg’s, Post, General Mills, etc. — have very, very large-scale production in technically advanced plant. They are, in any common-sense of the term, the low-cost producers. And, they ordinarily choose to be the high-quality producers, and advertise heavily to promote their reputation for quality with consumers. The brand-name producers ordinarily enjoy infra-marginal rents from being the low-cost producer, which are enhanced by the high prices, which effective advertising enables. The fixed, overhead cost of the advertising opens up a strategic opportunity for contract-producers, who produce the store-brand cereals, which are not advertised (except incidentally to promote the store.)
If overall market demand declines sufficiently, the name-brand producers will reduce their prices dramatically and reduce their advertising, maintaining or even expanding their market share with low prices, while letting the high-cost, lower-quality contract producers take the hit in volume.

High, fixed “overhead” costs are a risky business, and an indication that the firm is earning large economic rents, which can be applied to attenuating the associated risks. I think that it is often the case that those economic rents, or quasi-rents, are the product of past historical accident, aka a successful sunk-cost investment. Possession and control of a resource, which earns a large economic rent in a particular application, is a source of economic power to attenuate risk, akin to financial wealth, and can be used to build a productive business organization (aka bureaucracy). Economic rents are the source of structure in the economy, structure being persistent organized application of resources to particular uses, despite variability and uncertainty in production and demand.

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Addicted 04.19.11 at 5:38 am

1) what in the world is the invisible hand? It’s a meaningless undefined term meant to give ideologues cover for any claim.
2) replace I, pencil with I, human, or I, eye, or I, panda and you have basically written the intelligent design (ie invisible hand) textbook, which kind of goes to show how much faith based nonsense libertarian theory really is. In other words, we don’t want to make the effort to figure out the complicated macro and micro processes that led to a particular state of being so we will just assign it to a nebulous meaningless term which conveniently always confirms our faith.

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Sebastian 04.19.11 at 7:56 am

“2) replace I, pencil with I, human, or I, eye, or I, panda and you have basically written the intelligent design (ie invisible hand) textbook, which kind of goes to show how much faith based nonsense libertarian theory really is. “

Actually the exact opposite is true. Just as with evolution, it is believed that complicated and useful structures can emerge through survival of the fittest *without* design. In fact you could almost argue that the invisible hand is just another manifestation of evolution in action.

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Tim Wilkinson 04.19.11 at 10:37 am

I, Pencil has no point. It’s classic instance of the indetectable hand in action as we marvel at the fact that people are able to learn skills, cooperate and communicate when things are needed, etc. We’re in false dichotomy country with cold war propaganda, hence disagreements about what is and isn’t a refutation of what – but there are two salient possibilities.

1. taken at its weakest plausible anti-giovernment reading, I Pencil would appear to be refuted by the successful manufacture of pencils in the USSR.

2. taken as a mere possibility proof, which is certainly how much of the thing is written, the strongest supported thesis would appear to be that it is possible that a pencil be manufactured in the US in 1953 or whever, which appears crashingly trite and in any case subject to an ego quoque from almost any competing system.

The last two verses cross over into religion.

Also TamBram – neither legal personality nor limited liability stockholding is reducible to contractual relations between natural persons. Data, off the top of my head: work to rule is considered a form of industrial action; employees are not agents of any natural person – which affects the way criminal and civil liability is apportioned; corporations have extra-contractual legal liabilities which are not borne by any natural person, and may go unmet while the personnel and owners of the firm remain solvent; corporations claim and are accorded individual rights which are not capable of being founded on those of its personnel.

And those are only formal legalistic objections to the idea that ‘corporation’ is just a nominal, abbreviatory, way of referring to a group of people and their contractual interrelations. There are also philosophical objections – the simple fact that like the Social Contract, the contracts invoked are merely notional and not real; contingent (but deep) facts like the unfeasibility of drafting complete employment contracts, and indeed all the other contracts which would be involved; and ‘soft’ but important facts like the way corporations are in fact regarded by people in general, branding, routine failures of governance (lying at various points along the scaloid ‘planned-intentional-deliberate-advertent-acquiescent-intuitive-instinctive-inadvertent-oblivious’) and the consequent leaking away of liability and of the need to take personal responsibility; the ability to oijaboard through decisions and collective actions that are clearly aimed at the advantage of the deciders without any definite personal resposibility dropping into anyone’s lap (wasn’t there a story that the US BP guy and the Russian one were both ‘disgraced’ and each resigned and took up the other’s job?) – all of which are benefits to the firm which to varying degrees are related to its legal status.

(JQ – or anyone; jurisprudents? – is there a good recent survey of this stuff?)

Re: evolution, invisible hand – Nozick (unlike Ullman-Margalit) regard evolution as a kind of ‘Invisible Hand’ explanation: this is

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Tim Wilkinson 04.19.11 at 10:39 am

posted prematurely in error – can’t remember the rest – no great loss I’m sure

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chris 04.19.11 at 1:29 pm

And yes, one of the first things that any security company would seek to determine is if you are a current customer of their services and if you are current in your payments. They might still be willing to send someone to help you if you are willing to make a payment on your past due balance.

I’m sure if you fell behind in your payments to your security company, they would be happy to send someone to discuss the matter with you and convince you that it is urgently in your interest to pay up promptly.

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reason 04.19.11 at 1:42 pm

I still see that nobody has taken up Bruce Wilder’s point about contracts not being “a market” in the way the Greeks would have understood the term. Although Faber buys cedar from a private sector supplier – I’m sure it used long term contracts with a negotiated price, exact specifications of quality and delivery terms and penalties for late delivery or poor quality product. Etc, etc. In other words this “market” procurement is carefully engineered to provide a reliable supply. It is anything but an example of the “invisible hand”, even if it is all private sector.

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bianca steele 04.19.11 at 4:40 pm

reason @ 110: contracts

Indeed. And BTW you should see the guys who emigrated from Soviet bloc countries wince whenever the COO uses the words “five year plan.”

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Nathaniel 04.19.11 at 5:13 pm

Reliance on the invisible hand to produce coherent railway networks was a failure wherever it was tried”

Are you aware of James J. Hill’s Great Northern Railway? It was completely private, and more efficient than its government-funded competitors. If so, in what way was it a failure?

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Axel Gelfert 04.19.11 at 5:42 pm

Random literary observation: Here is a quote from Arno Schmidt (Brand’s Haide, 1951):

‘Ein Bleistift ( : wenn man den selbst herstellen sollte! Stellt Euch vor, die Menschheit ist weg: und Ihr solltet einen Bleistift machen!! – Zauberei!’

(Rough) translation:

‘A pencil — if someone had to create one all by himself! Imagine the rest of mankind was gone, and you had to create a pencil!! – Magic!’

I doubt this could have had any influence on Read (who published his essay seven years later), but there is a nice affinity, I guess.

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dictateursanguinaire 04.20.11 at 1:53 am

Prof. Quiggin – good point, I suppose the implications in Read’s piece are the most pernicious part.

Also, separate point, but now that I think about it, Reid’s piece is basically a tautology. I mean, he sets up an imaginary, abstracted world and then proves something from it; further, he applies this analysis to every possible case. I mean, we can get empirical about this but really, at its most basic, the piece is reliant on several logical fallacies.

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StevenAttewell 04.20.11 at 3:10 am

Nathaniel – exception that proves the rule. Given that the overwhelming majority of railroad companies went belly-up in the repeated crashes of 1873-1893, and that the result was monopolies, it’s a fair assumption to make that railroad competition leads to insolvency and monopoly, so why not capture monopoly rents for the society as a whole?

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Greg Ransom 04.20.11 at 4:53 am

The Great Northern line was all private, not government subsidized, and woukd have shipped much cedar timber.

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Greg Ransom 04.20.11 at 4:55 am

Hayek’s “The Use of Knowledge in Society” paper was the inspiration for Read’s “I, Pencil”.

The issue of the “mixed economy” has nothing to do with the point of either paper.

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Bruce Wilder 04.20.11 at 5:26 am

James Jerome Hill was hardly invisible.

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John Quiggin 04.20.11 at 6:00 am

These supposed counterexamples merely point up the mixed nature of the actual economy, in two respects
(i) much economic activity takes place outside the for-profit sector
(ii) the output of the economy depends on public and private planning, as well as on the workings of the price mechanism

That doesn’t undermine a sensible reading of Hayek/Read, namely that when markets work well they can achieve outcomes that would seem amazing if they weren’t so commonplace in our society. But it does undermine the claim that markets are the uniquely best way of organising all kinds of economic activity and the associated implication that the distribution of income generated by the actual economy has some particular standing as ‘natural’.

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reason 04.20.11 at 9:28 am

As an extension of what I and others have pointed out above – the example chosen actually shows something completely different to what they think it does. It doesn’t in fact show much about the organising ability of the free market – completely socialist economies are capable of the same organisation – and in much the same way. (I’m sure socialist economies had production units that were not completely vertically integrated. And they would have had long term agreements with other production units to ensure supply.) What the market is uniquely good at is producing a great variety of goods. They should have concentrated on exploring that. I think I know where they went wrong in their thinking too. The problem is they start with an incorrect model of the consumer.

Friedman was aware that capitalisms great asset was “freedom to choose”. He actually thought this feature excused any resulting efficiency. I’m not sure where this conviction about the superior (even optimum) efficiency of capitalism comes. Anybody who thinks hard about competition, advertising and excess capacity can’t possibly seriously believe that it is optimally efficient.

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reason 04.20.11 at 9:29 am

oops
…. any resulting INefficiency.

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Joanna Liberation 04.20.11 at 10:30 am

reason – How can you say that competition results in inefficiency? Thanks to competition producers never cease coming up with increasingly
cheaper (ie more efficient) ways to produce (apart from, obviously, new products altogether). That is basically THE definition of efficiency! Advertising? So you say advertising constitutes inefficiency? So how are consumers supposed to know which products can potentially address their needs best? Knocking from door to door of every factory out there? I don’t know what world you live in, but in my world, people are far from omniscient. Consumer knowledge about products and services is basically THE definition of efficiency! Excess capacity inefficient? OMG, another guy who thinks “perfect” in “perfect competition” is actually perfect as in “real world perfect”… Remember, perfect competition assumes out entrepreneurship (because it assumes product homogeneity) so you have NO PROGRESS whatsoever. With perfect competition, there would be no civilization as we know it. Would that be efficient? Yes, according to mathematical equations it would efficient as hell, so what. Get back to reality and then you’ll some day realize why capitalism is optimally efficient.

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Nathaniel 04.20.11 at 12:41 pm

Steven:

Free market proponents would argue that all those transcontinental railroad companies that went bankrupt did so because they were all government-subsidized and cesspools of patronage and corruption (see The Myth of the Robber Barons, for an example). I hope you would agree that it’s misleading to damn the free market because of the failure of quasi-public operations.

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reason 04.20.11 at 1:09 pm

122 Nathaniel:
Like airlines since deregulation?

Isn’t the no true Scotsman fallacy, wrapped up?

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ScentOfViolets 04.20.11 at 1:30 pm

Nathaniel – exception that proves the rule. Given that the overwhelming majority of railroad companies went belly-up in the repeated crashes of 1873-1893, and that the result was monopolies, it’s a fair assumption to make that railroad competition leads to insolvency and monopoly, so why not capture monopoly rents for the society as a whole?

“Say what you will about Fascism, at least the trains run on time.”

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ScentOfViolets 04.20.11 at 1:37 pm

What the market is uniquely good at is producing a great variety of goods. They should have concentrated on exploring that. I think I know where they went wrong in their thinking too. The problem is they start with an incorrect model of the consumer.

Is there a good hard-core mathematically-based argument for this? My first thought would be to wonder if this fundamentally true, or if this has been a matter of some historical contingency (insert terminology like “low-hanging fruit” yadda-yadda), or if this is even true at all as opposed to being merely truthy.

My second thought is that as a term of reference, “the market”, “markets”, etc, sure have taken a beating. Does it even have a single, unique, agreed-upon definition in the literature? Or is there something going on, like, say with the terms “liberal” or “judicial activism” where the degradation is so deep that “the market” means pretty much whatever you want it to mean from moment to moment?

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Hugh Gino Neal 04.20.11 at 1:58 pm

It is a bit misleading to define the Great Northern Railroad as “completely private.” Hill’s incremental western expansion of the line was predicated on attracting new settlers — mostly farmers — who were essentially given their land. Some of the land Hill himself had acquired; some of it he leased from property owners, enticing them with highly unusual terms — 999-year leases, e.g. (That much of the land had been taken from an indigenous population prior to this commerce should be, at least, acknowledged.)

Further, the railroad’s success correlates strongly with a telegraph infrastructure that was already in place — put there by the government, one hastens to add. Thus Hill was the indirect beneficiary of government subsidy.

This is not say that Hill’s line wasn’t extraordinary. It definitely was–an exceptional case, as has been pointed out, that suggests the rule is sound. It should also be observed that the development of a such a large-scale project using mostly private means is a one-off. The availability of land that was practically free for the taking is not something that should be taken for granted or counted on for contemporary business models.

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engels 04.20.11 at 2:17 pm

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Tim Wilkinson 04.20.11 at 2:22 pm

Just out of interest, since we are talking about the invisible hand here, I would challenge any IH fans to produce a rigorous and informative statement of what the invisible hand does. It’s not much to ask.

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Bruce Baugh 04.20.11 at 3:18 pm

Tim: The invisible hand is everything good that comes out of marketplaces, unless there’s significant government involvement. What else? :)

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ScentOfViolets 04.20.11 at 4:25 pm

Just out of interest, since we are talking about the invisible hand here, I would challenge any IH fans to produce a rigorous and informative statement of what the invisible hand does. It’s not much to ask.

This is where the rubber hits the road, right? I mean, most of us say that “Capitalism won” on the strength of it’s superior price-signaling mechanisms (at least, that’s what we were taught thirty-odd years ago.) No one today[1] seriously believes that a purely top-down system of organization would lead to resource allocation that would be closer to the “production frontier” (to use still more oft-misused jargon).

But that’s it, that’s the sole “economic” reason I can think of for preferring a demand setup to a command one, and there are other perfectly good reasons to prefer otherwise, reasons that could also be justified as taking precedence over “the most efficient allocation of resources” (to use still another buzz-phrase).

Finally, as a paradigm or a metaphor, “the invisible hand” is looking pretty shopworn. I suspect these days that a lot of people might find the idea of cellular automatons with asynchronous updates to be a bit more intuitive. It just needs a little, er, pedagogical work, shall we say :-)

[1]A general note: if someone says the railroads all failed, or that dogs are (all) four-legged animals, producing a counter-example doesn’t tend to falsify the statement, and crowing that you’ve produced one so that it is leads one to suspect you’re just playing word games to score rhetorical points you can take shelter behind. Off-hand, the only times the words “all” or “none” can be rigorously assumed when talking about an indefinite class of objects is in the realm of pure mathematics. And I think it would be wise to assume that just about everyone here already knows that.

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StevenAttewell 04.20.11 at 5:16 pm

Nathaniel – except that the same thing happened to railroads that weren’t part of the U.S land grant system, such as was the case in Britain in the 19th century, or the collapse of the privatized rail network in the U.K post the 1980s.

Railroads involve extremely high levels of fixed capital investment, and not insubstantial running costs. A truly competitive market will reduce prices below operating costs.

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L2P 04.20.11 at 5:28 pm

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Substance McGravitas 04.20.11 at 5:31 pm

Megan McArdle never has the definitive anything.

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Sebastian 04.20.11 at 5:56 pm

“These supposed counterexamples merely point up the mixed nature of the actual economy, in two respects
(i) much economic activity takes place outside the for-profit sector
(ii) the output of the economy depends on public and private planning, as well as on the workings of the price mechanism”

Maybe I’m misunderstanding the argument, but it seems to me that much of the public and private planning you are talking about still relies on the price mechanism to mediate scarcity problems and problems/solutions regarding alternatives and substitutes. I.e. a huge amount of the planning is about using pricing tools–if labor costs X, having us do A, B, and C will cost Y. A is super important, B less so, C even less so, but we have to do a minimum of Z% of B and C, therefore for various funding/investment/profit levels we can do the following amount of A+B+C for labor cost X, more for labor cost X-1 and the following schedule of reducing B and C if labor costs X+5.

That *is* planning with price signals. Unless I’m wrong the Hayekian criticism of planned economies is that of planned economies where the planners don’t look at price signals sufficiently and don’t feel the feedback loop of their inefficiencies by dampening price effects (or more usually putting them off until much much later with government debt). Does he really criticize planning as a general idea? He certainly doesn’t like what passes for planning in all sorts of political spheres (identifying a problem, assuming that it can be fixed, not worrying much about the cost/benefit ratio of the fix, and/or not bothering with the details of how the cost of the fix changes other things). But the critique is about planning without large attention being put to price or as if price wasn’t important. Not a critique about planning in general.

So ” the output of the economy depends on public and private planning, as well as on the workings of the price mechanism” seems weird. While there surely is *some* portion of the economy that depends on public and private planning that is not hugely dependent on the workings of the price mechanism, most of it is. Right?

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Susan of Texas 04.20.11 at 6:04 pm

It’s no surprise that the former “Jane Galt” thinks “This is an argument to which the left-wing has a great deal of recourse whenever anyone suggests that people have a right to keep what they earn from voluntary transactions. You can only make money in the context of society, and so society has a right to regulate your transactions, and seize the proceeds, in any way that society sees fit.”

However she fails to support her thesis that regulation of commerce will inevitably lead to sexual repression. Still, I look forward to her next theory, in which she explains how government participation in health care will lead to dogs and cats living together.

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Emily 04.20.11 at 6:50 pm

Susan–I think the history of the world will show that we had sexual repression long before we had regulation of commerce.

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Nathaniel 04.20.11 at 7:03 pm

Tim, 128:

I haven’t read Adam Smith, but the relevant quote is:

By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain. . . . He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. . . . By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

Bruce in 129 makes a good point, namely, that the concept of the Invisible Hand gets more credit than it deserves. This quote from the The Wealth of Nations seems to narrow the claim to something more reasonable. I.e., that the individual seeking only his own gain (like the classic Randian hero, wanting only profits) actually benefits society more than he might have desired or expected.

Could unexpected benefits occur with government intervention? Sure. But the point is that the market itself provides “direction” (via prices, profits, and losses) toward fulfilling society’s needs and wants, without the need for a central planner.

It’s certainly not the ultimate argument for the free market. But then, Adam Smith was certainly not its greatest advocate, so it works out.

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bianca steele 04.20.11 at 8:05 pm

John Quiggin @ 119: a sensible reading of Hayek/Read

But Read’s point is precisely that things work out well in our society without the intervention of any “heroic” individuals (who should presumably be encouraged to sit on the sidelines). I thought Hayek was more likely to champion the heroic entrepreneur (the person who knows exactly what is needed when and where, what is available when and where–even if only because he’s tied into everything that’s going on, via the price system), who is missing from Read’s story as much as the foreman or chief engineer who keeps things running smoothly (it’s possible he means the entrepreneur to be seen as passive but I’d have thought probably not).

Read’s version is actually more plausible because he replaces the implausibly heroic decision-making with handwaving about processes that are too difficult for us to understand.

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tomslee 04.20.11 at 8:06 pm

I had not realised that JQ’s post was advocating taking what people earn from voluntary transactions, demanding a blank check for the government to trample rights as it pleases, or even that the post advocated regulation. But I obviously don’t read as carefully as some people.

The “definitive takedown” is remarkable in it’s complete lack of overlap with anything in the post she is supposedly arguing against.

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tomslee 04.20.11 at 8:07 pm

“its” not “it’s”. I blame the commenting system.

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anon/portly 04.20.11 at 10:39 pm

To me the IH just says, a resteraunt that you enjoy going to makes profits, perhaps expands or other resteraunts use their ideas; a resteraunt you don’t enjoy loses money and goes out business. Hence the profit motive directs capital to its best use.

Actually, the Crooked Timber comments section is very IHish. Those allocating their commenting capital to denigrating markets and their believers are raking in the reputational profits, while those (like me) who like the IH idea are revealed as infantile, religious-minded and naively uncritical. (Lucky guesses, perhaps). A social optimum is being realized! Compare this to a centrally planned comments section, like Delong’s. Do you see the same innovation, the same activity there? I didn’t think so.

I still see Quiggin as lacking any sort of interesting point. Sure, you can rewrite I, Pencil to illustrate potentially positive aspects of governments, as Quiggin does. You could also rewrite it illustrate negative aspects of markets: the tree is cut down too close to the stream, with the resulting silt and loss of shade destroying the fishing industry; a worker is maimed in the felling of the tree because worker safety was not germane to the company’s bottom line; the company only got the lease on public land by plying government officials with hookers. But it’s all, So what? I don’t see how anything Quiggin points out negates the essential logic of the IH as it pertains to the production of pencils, or tells us anything about when the private provision of goods and services works better, or when government provision works better.

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tomslee 04.21.11 at 1:43 am

“I don’t see how anything Quiggin points out negates the essential logic of the IH as it pertains to the production of pencils”

Assuming IH == Invisible Hand, surely the point of I, Pencil is that the IH produces pencils and isn’t that remarkable and yet right under our noses (literally) every day? Pointing out that IH doesn’t actually produce pencils by itself in the way I, Pencil claims it doesn’t so much “negate the essential logic” as “negate the essential fact”.

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dictateursanguinaire 04.21.11 at 3:55 pm

@anon/portly

A great deal of people on the left are not against markets or free exchange per se, just when such exchanges have pernicious effects. You’re setting up a mighty flimsy strawman, there.

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dictateursanguinaire 04.21.11 at 3:56 pm

pernicious effects, i.e. externalities or when the markets are rigged or when there are monopolies or when there are some goods that we believe are entitlements, even if you can’t pay the market price, etc. etc.

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