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

I, Residential Mortgage-backed Security Collaterialized Debt Obligation.

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

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.

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?

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.

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”.

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.

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

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.”

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.

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.

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.

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?

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.

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.

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

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.

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).

“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.

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?

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.

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.

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.”

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

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.

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).

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.

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.

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.

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

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.

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.”

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.

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.

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.

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.

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.

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.

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!!

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.

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?

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…

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.

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

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”.

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.

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.

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.

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.

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

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.

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.”

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.

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?

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.

oops
…. any resulting INefficiency.

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.

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.”

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.

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.

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.

Megan has the definitive takedown.

http://www.theatlantic.com/business/archive/2011/04/markets-and-the-common-good/237572/

“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?

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

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.

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

“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”.

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.