Pointers from a Pencil

How an economy works, and what wrecks it when it doesn’t.

Atlanta, GA

January 26, 2025

Nobody knows how to make a pencil. But many people probably think they could.

Just wrap some wood around some lead, add a rubber eraser, a touch of metal, and a coat of lacquer…and voila!…you’re ready to take a standardized test or tackle The New York Times crossword puzzle.

But building a pencil is impossible for any one person…or any small group of people…to do. Even (or especially) the most ardent busybody has no idea how to make this superficially simplest of things.

Amazing Matrix

Creating a single pencil requires a complex lattice of financing, digging, drilling, growing, picking, pulling, packaging, shipping, trucking, buying, selling, and marketing among millions of people across every continent. Almost none of those engaged in these activities will ever meet one another or know each other’s names, and few are even aware of the thing they’re unwittingly helping to create.

This amazing matrix of seemingly uncoordinated activity was brilliantly described in the 1958 “autobiography” I, Pencil: My Family Tree, as Told to Leonard E. Read.

I first read this great story in 1990, not long after I’d moved to San Francisco. It was one of several essays that changed my life. It provided a valuable glimpse into how the world works, which is what economics (when done correctly) is supposed to do.

The origins of the commonplace pencil are extraordinarily complex, with components that are remarkably diverse. Were it applying to an Ivy League college, administrators could find ample grounds to admit or exclude it based on a wide array of assorted ancestry.

One of its fathers, as we all might guess, is a tree. But by what other parents was it conceived? What collection of saws, trucks, rope, and rubber were needed to commence the courtship, and plant the seed? And what mineral or material antecedents were conscripted and combined to create these essential ingredients?

As “the Pencil” put it, think of all the mining and metallurgy that went into making steel for the saws, how much growing and weaving was needed to make the rope, and what level of agricultural output was required to feed men in the logging camps when each day ended, and to wake them with coffee when the next one began.

Even the simple eraser is a marvel. It requires rapeseed oil from Indonesia, that it be reacted with sulfur chloride, and then combined with several vulcanizing and accelerating agents from around the world. Pumice from Italy enters the mix. Rubber is added for binding purposes, and cadmium sulfide provides the color.

No single manager, politician, or department secretary has any idea how to coordinate this complicated process for creating this one small part of a humble pencil.

But their presumptions go well beyond a mere eraser. To paraphrase Oscar Wilde, you’d have to have a heart of stone to hear their pretensions and not laugh.

Iron must be mined and smelted to build the ships that carry the requisite commodities. Oil needs to be drilled, extracted, and refined to fuel the vessels and trucks that haul those raw materials to far-away ports, or to take the pencil’s ancestral logs to distant mills.

And who builds and runs the millworks? What processes, materials, and manpower are brought to bear to construct any one of these indispensable facilities?

Then there’s the “lead”, which includes graphite mined in Sri Lanka, and that is placed in paper sacks and steel ships guided by harbor pilots and sophisticated navigation systems that are themselves the product of half a billion inputs from every corner of the world (and a few outside of it).

To bring these ingredients together so they can be formed into a pencil and brought to market, trucks and trains made of infinite inputs from countless countries must ride roads and rail that themselves derived from an inordinate web of engineering, financing, manpower, mining, and materials to eventually connect distant countries, great oceans, and domestic cities, towns, and villages where a vast array of intricate interactions combine to create a plain pencil.

Overweening Arrogance

You get the point. The capitalist economy and the supply chains that enable it are undeniable marvels. But they are incomprehensibly elaborate, and incapable of being centrally coordinated or politically planned. It wouldn’t take many sticks in the spokes or much sand in the gears to shackle the whole shebang.

Yet for decades over-educated meddlers have treated “the economy” as if it were a mechanical device, like a car, or a plane. Despite not knowing what they’re doing (as the pencil taught us, it’s impossible that they would), they think they can flip switches, turn dials, adjust knobs, pull levers, push the accelerator and pump the brakes (often at the same time), to engineer a “soft landing” to avoid a crash.

Meanwhile, the engines are on fire, oxygen masks are falling in our faces, and a mountain is dead ahead.

And the people in the cockpit are the type who are certain the temperature of the planet is not what it should be, that they know precisely which reading would be best, and who have a “plan” to get bring about that precise level in a prescribed time. Such overweening arrogance makes Renaissance popes, pop star divas, and NFL wide receivers seem like humble ascetics.

Such megalomaniacal world-improvers have no trouble thinking they can control a virus or “manage” an economy. To them, it’s perfectly reasonable to flip a switch that shuts businesses, closes factories, and severs transportation networks, and then assume it can all be instantly revived by returning the switch to its original position.

The elaborate process epitomized by the pencil is dependent on the supply chain. Or, more accurately, it is the supply chain, which requires unfettered collaboration and coordination fostered by unhindered prices, free flow of goods, unimpeded labor, unconstrained capital, and innumerable other interdependent factors to efficiently and effectively allocate scarce resources across time and place to satisfy their most pressing application.

An Incomparable Wonder

Sound money, the division of labor, the free flow of goods, and an unencumbered price mechanism are prerequisites for any well-functioning economy.

But the last five years governments around the world imposed lockdowns, restricted transportation, crippled trade, hamstrung hydrocarbons, provoked wars, and suffocated small businesses. They simultaneously fired up the presses and passed out the checks, which kept people home while galvanizing demand. Then…like censuring the heat for causing the sun…they blamed “supply chain disruptions” for shortages of goods and the rise in prices.

As GK Chesterton put it, “We are perishing for want of wonder, not for want of wonders.” A free market is a modern miracle, an incomparable wonder.

But it has the fatal flaw of many sensible systems – it benefits everyone in general to the advantage of no one in particular. And most of it’s beneficiaries have been so unconsciously blessed by it that they carelessly disregard (or derisively denigrate) this unheralded source of unprecedented bounty.

The miracle is under assault. Politicians, apparatchiks, and central bankers who don’t know the first thing about making a pencil are certain they can re-make society. They can’t run an economy, but they almost reflexively ruin it.

You’d think they’d know better. But it’s amazing what people can’t see when they’re paid to be blind.

JD