Tài liệu eadings in Applied Microeconomics: The Power of the Market pdf

If we possess all the relevant information, if we can start out from a given system of preferences and if we command complete knowledge of available means, the problem which remains is

A central concern of economics is how society allocates its resources Modern economies rely on two institutions to allocate: markets and governments But how much of the allocating should be performed by markets and how much by governments? This collection of readings will help students appreciate the power of the market It supplements theoretical explanations of how markets work with concrete examples, addresses questions about whether markets actually work well and offers evidence that supposed “market failures” are not

as serious as claimed

Featuring readings from Friedrich Hayek, William Baumol, Harold Demsetz, Daniel Fischel and Edward Lazear, Benjamin Klein and Keith B Leffl er, Stanley J Liebowitz and Stephen E Margolis, and John R Lott, Jr., this book covers key topics such as:

• Why markets are effi cient allocators

• How markets foster economic growth

Craig M Newmark is Associate Professor of Economics at North Carolina

State University, USA His research focuses on U.S antitrust policy and

has been published in the Journal of Political Economy, Journal of Law and Economics, Review of Economic Statistics, and other journals He teaches

graduate courses in microeconomics and writing for economists, and an undergraduate course on the moral foundations of capitalism.

The power of the market

Edited by

Craig M Newmark

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Readings in applied microeconomics: the power of the market / edited by Craig Newmark.

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Includes bibliographical references and index.

1 Microeconomics I Newmark, Craig.

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Notes on Contributors xi Acknowledgments xiii Preface xvii

THE TIMBER CRISIS

AND

AMERICA ’ S FIRST OIL CRISIS

MAKING HURRICANE RESPONSE MORE EFFECTIVE :

LESSONS FROM THE PRIVATE SECTOR AND THE COAST GUARD DURING KATRINA

THE COMPLEXITY OF PRICE DISCOVERY IN AN EFFICIENT MARKET :

WE ’ RE WORTH OUR WEIGHT IN PENTIUM CHIPS

THESE ARE THE GOOD OLD DAYS : A REPORT OF U S LIVING STANDARDS

A HYPOTHESIS OF WEALTH - MAXIMIZING NORMS : EVIDENCE

FROM THE WHALING INDUSTRY

ORANGE BLOSSOM SPECIAL : EXTERNALITIES AND THE COASE THEOREM

THE HALF - LIFE OF POLICY RATIONALES : HOW NEW

TECHNOLOGY AFFECTS OLD POLICY ISSUES

16 S J Liebowitz and Stephen E Margolis 208

THE FABLE OF THE KEYS

THE ROLE OF MARKET FORCES IN ASSURING CONTRACTUAL PERFORMANCE

BRAND NAME AS A BARRIER TO ENTRY : THE REALEMON CASE

PRICE PREMIA TO NAME BRANDS : AN EMPIRICAL ANALYSIS

A SOUR LEMON STORY

A DIRECT TEST OF THE “ LEMONS ” MODEL : THE MARKET FOR

USED PICKUP TRUCKS

26 Harold Demsetz 326

INDUSTRY STRUCTURE , MARKET RIVALRY , AND PUBLIC POLICY

DOES HORIZONTAL PRICE FIXING RAISE PRICE ? A LOOK AT THE

BAKERS OF WASHINGTON CASE

PRICE AND SELLER CONCENTRATION IN CEMENT : EFFECTIVE

OLIGOPOLY OR MISSPECIFIED TRANSPORTATION COST ?

PART EIGHT

Abuse of Firm Power

SHIPPING THE GOOD APPLES OUT

COMPARABLE WORTH AND DISCRIMINATION IN LABOR MARKETS

THE STRUCTURE OF CORPORATE OWNERSHIP : CAUSES

Richard Alm is Senior Economics Writer at the Federal Reserve Bank of

Dallas

Ronald Bailey is Science Editor at Reason magazine.

William J Baumol is Professor of Economics and Director of the C.V Starr

Center for Applied Economics at New York University and Senior Research Economist and Professor of Economics, Emeritus, Princeton University

He is a past president of the American Economic Association (1981)

Eric W Bond is the Joe Roby Professor of Economics at Vanderbilt

University

Geoffrey Colvin is Senior Editor-at-Large at Fortune magazine.

W Michael Cox is Senior Vice President and Chief Economist at the Federal

Reserve Bank of Dallas

Harold Demsetz is Professor Emeritus of Economics at the University of

California, Los Angeles

Robert C Ellickson is the E Meyer Professor of Property and Urban Law at

the Yale Law School

Daniel R Fischel is the Lee and Brena Freeman Professor of Law and

Business, Emeritus at the University of Chicago Law School

Fred E Foldvary is a lecturer in economics at Santa Clara University and a

research fellow at the Independent Institute

F A Hayek shared the Nobel Prize in Economics in 1974 He died in 1992 David Hemenway is Professor of Health Policy at the Harvard School of

Public Health and Director of the Harvard Injury Control Research Center and the Harvard Youth Violence Prevention Center

Steven Horwitz is Charles A Dana Professor of Economics at St Lawrence

University

Benjamin Klein is Professor Emeritus of Economics at the University of

California, Los Angeles and Director, LECG

Daniel B Klein is Professor of Economics at George Mason University Charles R Knoeber is Professor of Economics at North Carolina State

University

Clement G Krouse is Professor of Economics at the University of California at

Santa Barbara

Edward P Lazear is the Steele Parker Professor of Human Resources

Management and Economics at Stanford University and the Morris Arnold Cox Senior Fellow at the Hoover Institution He served as the Chairman of the U.S Council of Economic Advisors from 2006 to 2009

Keith B Leffl er is Associate Professor of Economics at the University of

Washington

Kenneth Lehn is Samuel A McCullough Professor of Finance at the Katz

Graduate School of Business of the University of Pittsburgh

S J Liebowitz is the Ashbel Smith Professor of Economics at the University of

Texas at Dallas

John R Lott, Jr is Senior Research Scientist at the University of Maryland

Foundation

Michael T Maloney is Professor of Economics at Clemson University.

Stephen E Margolis is Professor of Economics at North Carolina State

Michael C Munger is Professor of Political Science, Economics, and Public

Policy at Duke University He served as President of the Public Choice

Society and as North American editor of Public Choice.

Craig M Newmark is Associate Professor of Economics at North Carolina

State University

David G Raboy is Chief Economic Consultant at Patton Boggs LLP

Leonard E Read was the founder of the Foundation for Economics Education

He died in 1983

Russell Roberts is Professor of Economics at George Mason University, the

J Fish and Lillian F Smith Distinguished Scholar at the Mercatus Center, and a research fellow at Stanford University’s Hoover Institution

Michael Satchell is a writer at U.S News & World Report.

Eugene Silberberg is Professor Emeritus of Economics, University of

Washington

Charles W Smithson is a Partner with Rutner Associates, New York, NY Richard L Stroup is Adjunct Professor of Economics at North Carolina State

University and an Adjunct Scholar at the Cato Institute

Steven N Wiggins is Professor of Economics at Texas A & M University.

The publisher would like to thank the following for their permission to reprint their material:

Blackwell Publishing for permission to reprint Steven N Wiggins and David G Raboy,

“Price Premia to Name Brands: An Empirical Analysis,” Journal of Industrial Economics,

44, 4 (December 1996), pp 377–388

Elsevier Limited for permission to reprint Micheal T Maloney and J Harold Mulherin, “The Complexity of Price Discovery in an Effi cient Market: The Stock Market Reaction to

the Challenger Crash,” Journal of Corporate Finance, (2003) 9, pp 453–419; Craig M

Newmark, “Price and Seller Concentration in Cement: Effective Oligopoly or Misspecifi ed

Transportation Cost?” Economics Letter, 60, 2 (August 1998), pp 243–250.

Federal Reserve Bank of Dallas for permission to reprint W Micheal Cox and Richard

Alm, “These Are the Good Old Days,” Federal Reserve Bank of Dallas 1993 Annual Report, 1993, pp 3–25.

Hoover Institution Press for permission to reprint Charles Maurice and Charles W

Smithson “The Timber Crisis” and “America’s First Oil Crisis,” The Doomsday Myth: 10,000 Years of Economic Crises (Stanford, CA: Hoover Institution Press, 1984), pp 45–59 and 61–71; Russell Roberts “The Great Outsourcing Scare of 2004,” Hoover Digest, 2004, 2 (Spring 2004).

Mercatus Center for permission to reprint Steven Horwitz, “Making Hurricane Response More Effective,” George Mason University, Mercatus Center, Policy Comment No

17, March 2008

Oxford University Press for permission to reprint Robert C Ellickson, “A Hypothesis of

Wealth-Maximizing Norms: Evidence from the Whaling Industry,” Journal of Law, Economics, and Organization, 5, 1 (Spring 1989), pp 83–97.

Pearson for permission to reprint Eugene Silberberg, “Shipping the Good Apples Out,”

Principles of Microeconomics, 2nd Ed (Needham Heights, MA: Pearson Custom

Publishing, 1999), pp 81–84

Regnery Publishing for permission to reprint John R Lott, Jr., Freedomnomics (Washington,

DC: Regnery Publishing, Inc., 2007), pp 27–30, 35–39, and 86–87

Southern Economic Association for permission to reprint Clement G Krouse, “Brand

Name as a Barrier to Entry: The ReaLemon Case,” Southern Economic Journal, 51,

2 (October 1984), pp 495–502

Springer for permission to reprint Fred E Foldvary and Daniel B Klein, “The Half-Life

of Policy Rationales: How New Technology Affects Old Policy Issues,” Knowledge, Technology, & Policy, 15, 3 (Fall 2002), pp 82–92.

The American Economic Association for permission to reprint F A Hayek, “The Use of

Knowledge in Society,” American Economic Review, 35, 4 (September 1945), pp 519– 30; Harold Demsetz, “Toward a theory of Property Rights,” American Economics Review,

57, 2 (May 1967), pp 347–359; Eric W Bond, “A Direct Test of the ‘Lemons’ Model:

The Market for Used Pickup Trucks,” American Economics Review 72, 4 (September

1982), pp 836–840; Charles R Knoeber “Golden Parachutes, Shark Reppellents,

and Hostile Tender Offers,” American Economics Review, 76, 1 (March 1986), pp 155–

167; Benjamin Klein, “Transaction Cost Determinants of ‘Unfair’ Contractual

Arrangements,” American Economics Review, 70, 2 (May 1980), pp 356–362.

The Freeman for permission to reprint Leonard E Read, “I, Pencil,” The Freeman, 46, 5 (May 1996), pp 274–278; Daniel B Klein, “Private Highways in America, 1792–1916,” The Freeman, 44, 2 (February 1994), pp 75–79.

The Independent Institute for permission to reprint Richard L Stroup, “Free Riders and

Collective Action Revisited,” The Independent Review, 4, 4 (Spring 2000), pp 485–500.

The Liberty Fund for permission to reprint Michael C Munger, “Orange Blossom Special: Externalities and the Coase Theorem,” The Liberty Fund, Library of Economics and Liberty, www.econlib.org/library/Columns/y2008/Mungerbees.html

The National Interest for permission to reprint Ronald Bailey, “The Law of Increasing Returns,” The National Interest, 59 (Spring 2000), pp 113–121.

The University of Chicago Press for permission to reprint William J Baumol,

“Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Political Economy, 98, 5, part 1 (October 1990), pp 893–921; S J Liebowitz and Stephen E Margolis, “The Fable of the Keys,” Journal of Law and Economics, 33, 1 (April 1990), pp

1–25; Benjamin Klein and Keith B Leffl er, “The Role of Market Forces in Assuring

Contractual Performance,” Journal of Political Economy, 89, 4 (August 1981), pp 615– 641; Harold Demsetz, “Industry Structure, Market Rivalry, and Public Policy,” Journal

of Law and Economics, 16, 1 (April 1973), pp 1–9; Craig M Newmark, “Does

Horizontal Price Fixing Raise Price? A Look at the Bakers of Washington Case,”

Journal of Law and Economics, 31, 2 (October 1988), pp 469–484; Daniel R Fischel

and Edward P Lazear, “Comparable Worth and Discrimination in Labor Markets,”

University of Chicago Law Review, 53, 3 (Summer 1986), pp 891–918; Harold Demsetz

and Kenneth Lehn, “The Structure of Corporate Ownership: Causes and

Consequences,” Journal of Political Economy, 93, 6 (December 1985), pp 1155–1177.

Time Inc for permission to reprint Geoffrey Colvin, “We’re Worth Our Weight in

Pentium Chips,” Fortune, 141, 6 (March 20, 2000), p 68.

University Press of American for permission to reprint David Hemenway, ‘The Ice Trust,”

in Prices and Choices: Microeconomic Vignettes (Cambridge, MA: Ballinger Publishing

Company, 1977), pp 153–169

U.S News and World Report for permission to reprint Michael Satchell, “Save the

Elephants: Start Shooting Them,” U.S News & World Report, 121, 21 (November 25,

1996), pp 51–53

A central concern of economics is how society allocates its resources Modern economies rely on two institutions to allocate: markets and governments But how much of the allocating should be performed by markets and how much

by governments?

In economics classes students learn—in a rather abstract way—that kets are generally good allocators They are also taught that in some instances markets do not work well and that in these instances of “market failure,” including externalities, non-excludable goods, asymmetric information, and monopoly, allocation by government is better But even before the instructor discusses market failure, students typically question whether markets work well Do they work well if companies become large? Won’t large companies exploit their “power”? If markets work well, why are people forced to use infe-rior products such as Windows software? Won’t market exploitation of vital natural resources, such as oil, cause us to run out? How can markets work well

mar-if information is costly? How can consumers trust what fi rms tell them?

As I write this in October 2008, concerns about the market system are especially intense But people have always feared and suspected markets Markets—and the idea of capitalism—don’t inspire loyalty or love like other ideas Peter Saunders wrote:

Capitalism lacks romantic appeal It does not set the pulse racing in the way that opposing ideologies like socialism, fascism, or environmentalism can It does not stir the blood, for it identifi es no dragons to slay It offers

no grand vision for the future, for in an open market system the future is shaped not by the imposition of utopian blueprints, but by billions of indi- viduals pursuing their own preferences.

Peter Saunders, “Why Capitalism is Good for the Soul,”

Policy, 23, 4 (Summer 2007–8, pp 3–9)

This collection of readings is intended to address that problem The book will help students appreciate the power of the market It supplements theo-retical explanations of how markets work with concrete examples It addresses questions about whether markets actually work well And it offers evidence that supposed “market failures” are not as serious as claimed

Over one-third of the readings focus on vital aspects of markets that are insuffi ciently stressed in economics courses Part one of the book looks at how market prices effi ciently aggregate and transmit information while simul-taneously also providing individuals with incentives to take good actions, good for both themselves and society Part two’s readings look at how and why markets create wealth Part three reminds students that property rights are important to the market system

The other parts of the book present more standard topics but from a spective that differs from the one undergraduate students usually see Sections

per-on externalities, nper-on-excludable goods, and asymmetric informatiper-on demper-on-strate that these problems are not as serious, or as common, as introductory textbooks imply The readings in part seven on monopoly and collusion indicate that even if a market has a small number of sellers, monopolistic behavior does not necessarily result Finally, part eight’s readings demonstrate that often-alleged abuses of fi rm power are powerfully constrained by the market.Virtually every selection included in this book contains a story or a con-crete example of the power of the market The selections are non-technical, use almost no math, and should be comprehended by college students who have had an introductory course in economics (It would be helpful if the students have also had introductory statistics up to basic regression analysis Eight of the articles report regression results But even if students haven’t had statistics, I believe they will readily grasp the main points of those arti-cles.) I have assigned many of these articles in undergraduate courses in microeconomics and industrial organization with success

demon-Each section begins with an introduction Review and discussion tions follow each reading And each section ends with some annotated sug-gestions for further readings This reader can be used as a supplement in courses in intermediate microeconomics, industrial organization, business and government, and public policy

ques-I thank my editors at Routledge, Rob Langham and Emily Senior, for their encouragement and help I thank my colleagues at North Carolina State University for their support and kindness And, as always, I thank my wonder-ful family for everything: my wife, Betsy, and my two daughters, Katie and Meredith

Information and Incentives

The power of the market comes from prices Prices do two important things simultaneously First, they aggregate and transmit information—information about consumers’ demands and suppliers’ costs—cheaply and quickly And second, they provide everyone incentives to act in ways that benefi t not only themselves, but benefi t others.

In the classic article, “The Use of Knowledge in Society,” Friedrich Hayek explains how important it is that prices transmit information and provide incentives Hayek notes that solving the fundamental economic problem—coping with scar- city—would be easy for a “central planner” if the planner had perfect information about all the tastes, skills, and technologies in the economy But the planner doesn’t have that all information He doesn’t have it because much valuable information is known only at specifi c places and times by widely dispersed individuals.

A market economy, on the other hand, obtains that information through the price system Prices induce people who have valuable information to use it, because using it will make them money The information is thereby revealed in the market price.

And the market price then induces people to act in desirable ways If a new source of tin is discovered, demanders will conserve tin and suppliers will produce more These are the same actions a central planner would want to take, but they happen quickly and automatically through the power of market prices.

The other four readings in Part One provide examples of the power of prices at work Leonard E Read notes that a pencil is a simple product So simple that pencils are extremely common: billions of them are sold each year 1 But Read’s article states

a surprising fact about the simple pencil: there isn’t a single person on Earth that knows everything about how to manufacture one The manufacture of a single pencil involves, directly or indirectly, literally thousands of people and dozens of technolo- gies To manufacture a typical pencil, cedar trees are grown in California, graphite is mined in Sri Lanka, and an oil is extracted from plants in Indonesia Nobody can possibly know all the details about these processes, and all the others, needed to manufacture a pencil How, then, does a pencil get made? Answer: it is made largely through the price system As Hayek observed, the price system means that a single individual needs to know very little A grower of California cedar trees or a fi rm mining graphite in Sri Lanka need only compare its costs to a market price If the prices are high enough compared to costs, these fi rms will ship their products to other fi rms, who then repeat the process The process works without central control, without explicit orders, and with no one person knowing all the details.

The process is so powerful, in fact, that as Charles Maurice and Charles W

Smithson discuss in two excerpts from their book, The Doomsday Myth, market

prices have so far allowed us to avoid an economic Doomsday The economic Doomsday that some people fear would come because we are using up our vital natural resources, such as oil The amount of oil we have is fi nite As the world’s population and econ- omy grows, we might ask: won’t we run out of oil, and when we do, won’t the world economy suffer a massive blow, even “Doomsday”?

Maurice and Smithson note that people have had similar fears a number of times before Two of the similar instances were a concern in the nineteenth century about running out of whale oil, and a worry in the early twentieth century U.S about running out of timber But in both cases, Doomsday didn’t arrive It didn’t arrive because of the information and incentive effects of market prices As use of whale oil grew and whales grew scarce, and as use of timber skyrocketed, prices for whale oil and timber rose Higher prices gave people powerful incentives to change their behav- ior Users reduced consumption Producers tried to produce more effi ciently, and more importantly, developed substitutes for the scarce resources Whale oil was replaced by “rock oil”—petroleum or what we just call oil today—and the timber used by railroads was gradually replaced by steel As with the production of pencils, these big, benefi cial changes were accomplished without central control, relatively quickly, and effi ciently.

Quick and effi cient actions fostered by the market are emphasized in the article

by Steven Horwitz about the aftermath of Hurricane Katrina After Katrina tated parts of Louisiana and Mississippi, residents desperately needed relief Which organization provided especially effective relief? The huge retailer, Wal-Mart According to Horwitz, Wal-Mart was effective because the market gave it “the right

devas-incentives to respond well and [it] could tap into local information necessary to

know what the response should be” emphasis added.

Finally, following the tragic explosion of the U.S space shuttle Challenger,

a blue-ribbon panel of distinguished engineers and scientists determined that the explosion should be blamed on faulty parts manufactured by the fi rm Morton Thiokol The panel took more than four months to reach that conclusion The U.S stock market, on the other hand, identifi ed Morton Thiokol as the likely culprit, on the day

of the crash, within less than fi ve hours The article by Michael T Maloney and

J Harold Mulherin illustrates how the market is an extremely effi cient processor of information.

Note

1 Baron D (2007) “Don’t Write Off the Pencil,” Los Angeles Times, January 23, A-15.

WH AT I S T H E P RO B L E M, we wish to solve when we try to construct a

rational economic order?

On certain familiar assumptions the answer is simple enough If we possess all the relevant information, if we can start out from a given system of preferences and if we

command complete knowledge of available means, the problem which remains is purely one of logic That is, the answer to the question of what is the best use of the available means is implicit in our assumptions The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best

in mathematical form: put at their briefest, they are that the marginal rates of tution between any two commodities or factors must be the same in all their different uses

substi-This, however, is emphatically not the economic problem which society faces

And the economic calculus which we have developed to solve this logical problem, though an important step toward the solution of the economic problem of society, does not yet provide an answer to it The reason for this is that the “data” from which the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications, and can never be so given

The peculiar character of the problem of a rational economic order is mined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form, but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how

deter-to secure the best use of resources known deter-to any of the members of society, for ends

F A Hayek

THE USE OF KNOWLEDGE IN SOCIETY

whose relative importance only these individuals know Or, to put it briefl y, it is a problem of the utilization of knowledge not given to anyone in its totality.

This character of the fundamental problem has, I am afraid, been rather obscured than illuminated by many of the recent refi nements of economic theory, particularly by many of the uses made of mathematics Though the problem with which I want prima-rily to deal in this paper is the problem of a rational economic organization, I shall in its course be led again and again to point to its close connections with certain meth-odological questions Many of the points I wish to make are indeed conclusions toward which diverse paths of reasoning have unexpectedly converged But as I now see these problems, this is no accident It seems to me that many of the current disputes with regard to both economic theory and economic policy have their common origin in a misconception about the nature of the economic problem of society This misconcep-tion in turn is due to an erroneous transfer to social phenomena of the habits of thought

we have developed in dealing with the phenomena of nature

II

In ordinary language we describe by the word “planning” the complex of interrelated decisions about the allocation of our available resources All economic activity is in this sense planning; and in any society in which many people collaborate, this planning, whoever does it, will in some measure have to be based on knowledge which, in the fi rst instance, is not given to the planner but to somebody else, which somehow will have to be conveyed to the planner The various ways in which the knowledge on which people base their plans is communicated to them is the crucial problem for any theory explaining the economic process And the problem of what is the best way of utilizing knowledge initially dispersed among all the people is at least one of the main problems of economic policy—or of designing an effi cient economic system

The answer to this question is closely connected with that other question which

arises here, that of who is to do the planning It is about this question that all the

dispute about “economic planning” centers This is not a dispute about whether ning is to be done or not It is a dispute as to whether planning is to be done centrally,

plan-by one authority for the whole economic system, or is to be divided among many individuals Planning in the specifi c sense in which the term is used in contemporary controversy necessarily means central planning—direction of the whole economic system according to one unifi ed plan Competition, on the other hand, means decentralized planning by many separate persons The half-way house between the two, about which many people talk but which few like when they see it, is the delegation of planning to organized industries, or, in other words, monopoly

Which of these systems is likely to be more effi cient depends mainly on the question under which of them we can expect that fuller use will be made of the exist-ing knowledge And this, in turn, depends on whether we are more likely to succeed

in putting at the disposal of a single central authority all the knowledge which ought

to be used but which is initially dispersed among many different individuals, or in conveying to the individuals such additional knowledge as they need in order to enable them to fi t their plans in with those of others

It will at once be evident that on this point the position will be different with respect

to different kinds of knowledge; and the answer to our question will therefore largely turn on the relative importance of the different kinds of knowledge; those more likely

to be at the disposal of particular individuals and those which we should with greater confi dence expect to fi nd in the possession of an authority made up of suitably chosen experts If it is today so widely assumed that the latter will be in a better position, this

is because one kind of knowledge, namely, scientifi c knowledge, occupies now so prominent a place in public imagination that we tend to forget that it is not the only kind that is relevant It may be admitted that, so far as scientifi c knowledge is concerned, a body of suitably chosen experts may be in the best position to command all the best knowledge available—though this is of course merely shifting the diffi culty to the problem of selecting the experts What I wish to point out is that, even assuming that this problem can be readily solved, it is only a small part of the wider problem

Today it is almost heresy to suggest that scientifi c knowledge is not the sum of all knowledge But a little refl ection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientifi c

in the sense of knowledge of general rules: the knowledge of the particular stances of time and place It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which benefi cial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and special circumstances To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to

circum-be aware of a surplus stock which can circum-be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques And the shipper who earns his living from using otherwise empty or half-fi lled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost

exclusively one of temporary opportunities, or the arbitrageur who gains from local

differences of commodity prices, are all performing eminently useful functions based

on special knowledge of circumstances of the fl eeting moment not known to others

It is a curious fact that this sort of knowledge should today be generally regarded with a kind of contempt, and that anyone who by such knowledge gains an advantage over somebody better equipped with theoretical or technical knowledge is thought to have acted almost disreputably To gain an advantage from better knowledge of facilities

of communication or transport is sometimes regarded as almost dishonest, although it is quite as important that society make use of the best opportunities in this respect as in using the latest scientifi c discoveries This prejudice has in a considerable measure affected the attitude toward commerce in general compared with that toward production Even economists who regard themselves as defi nitely above the crude materialist fallacies of the past constantly commit the same mistake where activities directed toward the acquisition of such practical knowledge are concerned—apparently because in their

scheme of things all such knowledge is supposed to be “given.” The common idea now seems to be that all such knowledge should as a matter of course be readily at the command of everybody, and the reproach of irrationality leveled against the existing economic order is frequently based on the fact that it is not so available This view disregards the fact that the method by which such knowledge can be made as widely available as possible is precisely the problem to which we have to fi nd an answer.

IV

If it is fashionable today to minimize the importance of the knowledge of the particular circumstances of time and place, this is closely connected with the smaller importance which is now attached to change as such Indeed, there are few points on which the assumptions made (usually only implicitly) by the “planners” differ from those of their opponents as much as with regard to the signifi cance and frequency of changes which will make substantial alterations of production plans necessary

Of course, if detailed economic plans could be laid down for fairly long periods in advance and then closely adhered to, so that no further economic decisions of impor-tance would be required, the task of drawing up a comprehensive plan governing all economic activity would appear much less formidable

It is, perhaps, worth stressing that economic problems arise always and only in consequence of change So long as things continue as before, or at least as they were expected to, there arise no new problems requiring a decision, no need to form a new plan The belief that changes, or at least day-to-day adjustments, have become less important in modern times implies the contention that economic problems also have become less important This belief in the decreasing importance of change is, for that reason, usually held by the same people who argue that the importance of economic considerations has been driven into the background by the growing importance of technological knowledge

Is it true that, with the elaborate apparatus of modern production, economic decisions are required only at long intervals, as when a new factory is to be erected

or a new process to be introduced? Is it true that, once a plant has been built, the rest is all more or less mechanical, determined by the character of the plant, and leaving little to be changed in adapting to the ever-changing circumstances of the moment?

The fairly widespread belief in the affi rmative is not, so far as I can ascertain, borne out by the practical experience of the business man In a competitive industry

at any rate—and such an industry alone can serve as a test—the task of keeping cost from rising requires constant struggle, absorbing a great part of the energy of the manager How easy it is for an ineffi cient manager to dissipate the differentials on which profi tability rests, and that it is possible, with the same technical facilities, to produce with a great variety of costs, are among the commonplaces of business experience which do not seem to be equally familiar in the study of the economist The very strength of the desire, constantly voiced by producers and engineers, to be able to proceed untrammeled by considerations of money costs, is eloquent testimony to the extent to which these factors enter into their daily work

One reason why economists are increasingly apt to forget about the constant small changes which make up the whole economic picture is probably their growing preoccupation with statistical aggregates, which show a very much greater stability than the movements of the detail The comparative stability of the aggregates cannot, however, be accounted for—as the statisticians seem occasionally to be inclined to do—by the “law of large numbers” or the mutual compensation of random changes The number of elements with which we have to deal is not large enough for such accidental forces to produce stability The continuous fl ow of goods and services is maintained by constant deliberate adjustments, by new dispositions made every day

in the light of circumstances not known the day before, by B stepping in at once when

A fails to deliver Even the large and highly mechanized plant keeps going largely

because of an environment upon which it can draw for all sorts of unexpected needs; tiles for its roof, stationery for its forms, and all the thousand and one kinds of equipment in which it cannot be self-contained and which the plans for the operation

of the plant require to be readily available in the market

This is, perhaps, also the point where I should briefl y mention the fact that the sort

of knowledge with which I have been concerned is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very signifi cant for the specifi c decision It follows from this that central planning based on statistical informa-tion by its nature cannot take direct account of these circumstances of time and place, and that the central planner will have to fi nd some way or other in which the decisions depending on them can be left to the “man on the spot.”

V

If we can agree that the economic problem of society is mainly one of rapid adaptation

to changes in the particular circumstances of time and place, it would seem to follow that the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them We cannot expect that this problem will be solved by fi rst communicating all this knowledge to a central board which, after

integrating all knowledge, issues its orders We must solve it by some form of

decentralization But this answers only part of our problem We need decentralization because only thus can we ensure that the knowledge of the particular circumstances

of time and place will be promptly used But the “man on the spot” cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings There still remains the problem of communicating to him such further information as he needs to fi t his decisions into the whole pattern of changes of the larger economic system

How much knowledge does he need to do so successfully? Which of the events which happen beyond the horizon of his immediate knowledge are of relevance to his immediate decision, and how much of them need he know?

There is hardly anything that happens anywhere in the world that might not

have an effect on the decision he ought to make But he need not know of these events

as such, nor of all their effects It does not matter for him why at the particular moment more screws of one size than of another are wanted, why paper bags are more readily available than canvas bags, or why skilled labor, or particular machine tools, have for the moment become more diffi cult to acquire All that is signifi cant for him is how much more or less diffi cult to procure they have become compared with other things

with which he is also concerned, or how much more or less urgently wanted are the alternative things he produces or uses It is always a question of the relative impor-tance of the particular things with which he is concerned, and the causes which alter their relative importance are of no interest to him beyond the effect on those concrete things of his own environment

It is in this connection that what I have called the economic calculus proper helps us,

at least by analogy, to see how this problem can be solved, and in fact is being solved, by the price system Even the single controlling mind, in possession of all the data for some small, self-contained economic system, would not—every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected It is indeed the great contribution of the pure logic of choice that it has demonstrated conclusively that even such a single mind could solve this kind of problem only by constructing and constantly using rates of

equivalence (or “values,” or “marginal rates of substitution”), i.e., by attaching to each kind

of scarce resource a numerical index which cannot be derived from any property sessed by that particular thing, but which refl ects, or in which is condensed, its signifi cance

pos-in view of the whole means end structure In any small change he will have to consider only these quantitative indices (or “values”) in which all the relevant information is con-centrated; and by adjusting the quantities one by one, he can appropriately rearrange his

dispositions without having to solve the whole puzzle ab initio, or without needing at any

stage to survey it at once in all its ramifi cations

Fundamentally, in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts

of his plan It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes Assume that somewhere in the world a new opportunity for the use of some raw material, say tin, has arisen, or that one of the sources of supply of tin has been eliminated It does not matter for our purpose—and it is very signifi cant that it does not matter—which of these two causes has made tin more scarce All that the users

of tin need to know is that some of the tin they used to consume is now more profi ably employed elsewhere, and that in consequence they must economize tin There is

t-no need for the great majority of them even to kt-now where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply If only some

of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fi ll it from still other sources, the effect will rapidly spread throughout the whole economic system and infl uence not only all the uses of tin, but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in

bringing about these substitutions knowing anything at all about the original cause of these changes The whole acts as one market, not because any of its members survey the whole fi eld, but because their limited individual fi elds of vision suffi ciently overlap so that through many intermediaries the relevant information is communi-cated to all The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

to be able to take the right action In abbreviated form, by a kind of symbol, only the most essential information is passed on, and passed on only to those concerned It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is refl ected in the price movement

Of course, these adjustments are probably never “perfect” in the sense in which the economist conceives of them in his equilibrium analysis But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards

in judging its effi ciency The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products

more sparingly; i.e., they move in the right direction This is enough of a marvel even

if, in a constantly changing world, not all will hit it off so perfectly that their profi t rates will always be maintained at the same constant or “normal” level

I have deliberately used the word “marvel” to shock the reader out of the complacency with which we often take the working of this mechanism for granted

I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have signifi cance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do But those who clamor for “conscious

direction”—and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not

be able to solve consciously—should remember this: The problem is precisely how to extend the span of our utilization of resources beyond the span of the control of any one mind; and, therefore, how to dispense with the need of conscious control and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do

The problem which we meet here is by no means peculiar to economics but arises in connection with nearly all truly social phenomena, with language and most

of our cultural inheritance, and constitutes really the central theoretical problem of all social science As Alfred Whitehead has said in another connection, “It is a profoundly erroneous truism, repeated by all copy-books and by eminent people when they are making speeches, that we should cultivate the habit of thinking what

we are doing The precise opposite is the case Civilization advances by extending the number of important operations which we can perform without thinking about them.” This is of profound signifi cance in the social fi eld We make constant use of formulas, symbols and rules whose meaning we do not understand and through the use of which we avail ourselves of the assistance of knowledge which individually we

do not possess We have developed these practices and institutions by building upon habits and institutions which have proved successful in their own sphere and which have in turn become the foundation of the civilization we have built up

The price system is just one of those formations which man has learned to use (though he is still very far from having learned to make the best use of it) after he had stumbled upon it without understanding it Through it not only a division of labor but also a coordinated utilization of resources based on an equally divided knowledge has become possible The people who like to deride any suggestion that this may be so usually distort the argument by insinuating that it asserts that by some miracle just that sort of system has spontaneously grown up which is best suited to modern civilization It is the other way round: man has been able to develop that division of labor on which our civilization is based because he happened to stumble upon a method which made it possible Had he not done so he might still have developed some other, altogether different, type of civilization, something like the “state” of the termite ants, or some other altogether unimaginable type All that we can say is that nobody has yet succeeded in designing an alternative system in which certain features

of the existing one can be preserved which are dear even to those who most violently assail it—such as particularly the extent to which the individual can choose his pursuits and consequently freely use his own knowledge and skill

VII

It is in many ways fortunate that the dispute about the indispensability of the price system for any rational calculation in a complex society is now no longer conducted entirely between camps holding different political views The thesis that without the price system we could not preserve a society based on such extensive division of labor

as ours was greeted with a howl of derision when it was fi rst advanced by von Mises twenty-fi ve years ago Today the diffi culties which some still fi nd in accepting it are no

longer mainly political, and this makes for an atmosphere much more conducive to reasonable discussion When we fi nd Leon Trotsky arguing that “economic accounting

is unthinkable without market relations”; when Professor Oscar Lange promises Professor von Mises a statue in the marble halls of the future Central Planning Board; and when Professor Abba P Lerner rediscovers Adam Smith and emphasizes that the essential utility of the price system consists in inducing the individual, while seeking his own interest, to do what is in the general interest, the differences can indeed no longer be ascribed to political prejudice The remaining dissent seems clearly to be due to purely intellectual, and more particularly methodological, differences

A recent statement by Professor Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences

which I have in mind Its author is preeminent among those economists who approach economic phenomena in the light of a certain branch of positivism To him these phenomena accordingly appear as objectively given quantities of commodities imping-ing directly upon each other, almost, it would seem, without any intervention of human minds Only against this background can I account for the following (to me startling) pronouncement Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theo-rist “from the elementary proposition that consumers in evaluating (‘demanding’)

consumers’ goods ipso facto also evaluate the means of production which enter into

Taken literally, this statement is simply untrue The consumers do nothing of the

kind What Professor Schumpeter’s “ipso facto” presumably means is that the valuation

of the factors of production is implied in, or follows necessarily from, the valuation of consumers’ goods But this, too, is not correct Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind It is evident, however, that the values of the factors of produc-tion do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that

in the solution of the problem knowledge should be used that is dispersed among many people

The problem is thus in no way solved if we can show that all the facts, if they were

known to a single mind (as we hypothetically assume them to be given to the observing economist), would uniquely determine the solution; instead we must show how a solution is produced by the interactions of people each of whom possesses only partial knowledge To assume all the knowledge to be given to a single mind in the same manner in which we assume it to be given to us as the explaining economists is

to assume the problem away and to disregard everything that is important and signifi cant in the real world

That an economist of Professor Schumpeter’s standing should thus have fallen into a trap which the ambiguity of the term “datum” sets to the unwary can hardly be explained as a simple error It suggests rather than there is something fundamentally wrong with an approach which habitually disregards an essential part of the phenomena with which we have to deal: the unavoidable imperfection of man’s

knowledge and the consequent need for a process by which knowledge is constantly communicated and acquired Any approach, such as that of much of mathematical economics with its simultaneous equations, which in effect starts from the assump-

tion that people’s knowledge corresponds with the objective facts of the situation,

systematically leaves out what is our main task to explain I am far from denying that

in our system equilibrium analysis has a useful function to perform But when it comes to the point where it misleads some of our leading thinkers into believing that the situation which it describes has direct relevance to the solution of practical problems, it is time that we remember that it does not deal with the social process at all and that it is no more than a useful preliminary to the study of the main problem

Note

1 J Schumpeter, Capitalism, Socialism, and Democracy (New York, Harper, 1942), p 175 Professor

Schumpeter is, I believe, also the original author of the myth that Pareto and Barone have

“solved” the problem of socialist calculation What they, and many others, did was merely to state the conditions which a rational allocation of resources would have to satisfy, and to point out that these were essentially the same as the conditions of equilibrium of a competitive market This is something altogether different from showing how the allocation of resources satisfying these conditions can be found in practice Pareto himself (from whom Barone has taken practically everything he has to say), far from claiming to have solved the practical prob- lem, in fact explicitly denies that it can be solved without the help of the market See his

Manuel d’économie pure (2nd ed., 1927), pp 233–34 The relevant passage is quoted in an

English translation at the beginning of my article on “Socialist Calculation: The Competitive

‘Solution,’” in Economico, New Series, Vol VIII, No 26 (May, 1940), p 125.

Review and Discussion Questions

1 What is an example mentioned in the article of information that is specifi c to time and place?

2 Discuss what happens, according to Hayek, when a new use of tin is discovered.

3 How does the price system help “dispense with the need of conscious control”?

4 Hayek wrote:

What is the problem we wish to solve when we try to construct a rational

eco-nomic order? On certain familiar assumptions the answer is simple enough If

we possess all the relevant information, if we can start out from a given system

of preferences and if we command complete knowledge of available means, the

problem which remains is purely one of logic This, however, is emphatically not the economic problem which society faces The reason for this is that the

“data” from which the economic calculus starts are never for the whole ety “given” to a single mind which could work out the implications, and can never be so given.

soci-Explain what Hayek means (Why can the data “never be so given”?) How does Hayek’s argument relate to a fundamental idea of economics?

I A M A L E A D P E N C I L—the ordinary wooden pencil familiar to all boys and

Writing is both my vocation and my avocation; that’s all I do

You may wonder why I should write a genealogy Well, to begin with, my story is interesting And, next, I am a mystery—more so than a tree or a sunset or even a fl ash

of lightning But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background This supercilious attitude relegates me to the level

of the commonplace This is a species of the grievous error in which mankind cannot too long persist without peril For, the wise G K Chesterton observed, “We are perishing for want of wonder, not for want of wonders.”

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

Simple? Yet, not a single person on the face of this earth knows how to make me This

sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A each year

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

Innumerable antecedents

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

Leonard E Read

I, PENCIL

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refi nement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

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

Consider the millwork in San Leandro The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness These are kiln dried and then tinted for the same reason women put rouge on their faces People prefer that I look pretty, not a pallid white The slats are waxed and kiln dried again How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers

in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacifi c Gas & Electric Company hydroplant which supplies the mill’s power!

Don’t overlook the ancestors present and distant who have a hand in transporting sixty carloads of slats across the nation

Once in the pencil factory—$4,000,000 in machinery and building, all capital accumulated by thrifty and saving parents of mine—each slat is given eight grooves

by a complex machine, after which another machine lays leads in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak Seven brothers and I are mechanically carved from this “wood-clinched” sandwich

My “lead” itself—it contains no lead at all—is complex The graphite is mined in Ceylon Consider these miners and those who make their many tools and the makers

of the paper sacks in which the graphite is shipped and those who make the string that ties the sacks and those who put them aboard ships and those who make the ships Even the lighthouse keepers along the way assisted in my birth—and the harbor pilots

The graphite is mixed with clay from Mississippi in which ammonium hydroxide

is used in the refi ning process Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid After passing through numerous machines, the mixture fi nally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit To increase their strength and smoothness the leads are then treated with

a hot mixture which includes candelilla wax from Mexico, paraffi n wax, and hydrogenated natural fats

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

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

My bit of metal—the ferrule—is brass Think of all the persons who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature Those black rings on my ferrule are black nickel What is black nickel and how is it applied? The complete story of why the center of my ferrule has

no black nickel on it would take pages to explain

Then there’s my crowning glory, inelegantly referred to in the trade as “the plug,” the part man uses to erase the errors he makes with me An ingredient called “factice”

is what does the erasing It is a rubber-like product made by reacting rape-seed oil from the Dutch East Indies with sulfur chloride Rubber, contrary to the common notion, is only for binding purposes Then, too, there are numerous vulcanizing and accelerating agents The pumice comes from Italy; and the pigment which gives “the plug” its color is cadmium sulfi de

No one knows

Does anyone wish to challenge my earlier assertion that no single person on the face

of this earth knows how to make me?

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others Now, you may say that I go too far in relating the picker of a coffee berry in far off Brazil and food growers elsewhere

to my creation; that this is an extreme position I shall stand by my claim There isn’t

a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infi nitesimal bit of know-how From the standpoint

of know-how the only difference between the miner of graphite in Ceylon and the

logger in Oregon is in the type of know-how Neither the miner nor the logger can be

dispensed with, any more than can the chemist at the factory or the worker in the oil

fi eld—paraffi n being a by-product of petroleum

Here is an astounding fact: Neither the worker in the oil fi eld nor the chemist

nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me Each one wants me less, perhaps, than does a child in the fi rst grade Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one Their motivation is other than me Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants I may or may not be among these items

No master mind

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 fi nd the Invisible Hand at work This

is the mystery to which I earlier referred

It has been said that “only God can make a tree.” Why do we agree with this? Isn’t

it because we realize that we ourselves could not make one? Indeed, can we even describe a tree? We cannot, except in superfi cial terms We can say, for instance, that

a certain molecular confi guration manifests itself as a tree But what mind is there among men that could even record, let alone direct, the constant changes in molecules that transpire in the life span of a tree? Such a feat is utterly unthinkable!

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 confi guration of creative human energies—millions of tiny know-hows confi gurating 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

The above is what I meant when writing, “If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing.” 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 master-minding—then one will possess an absolutely essential ingredient

for freedom: a faith in free people Freedom is impossible without this faith.

Once government has had a monopoly of a creative activity such, for instance, as the delivery of the mails, most individuals will believe that the mails could not be effi ciently delivered by men acting freely And here is the reason: Each one acknow-ledges that he himself doesn’t know how to do all the things incident to mail delivery

He also recognizes that no other individual could do it These assumptions are correct No individual possesses enough know-how to perform a nation’s mail delivery any more than any individual possesses enough know-how to make a pencil Now, in the absence of faith in free people—in the unawareness that millions of tiny know-hows would naturally and miraculously form and cooperate to satisfy this necessity—the individual cannot help but reach the erroneous conclusion that mail can be delivered only by governmental “master-minding.”

Testimony galore

If I, Pencil, were the only item that could offer testimony on what men and women can accomplish when free to try, then those with little faith would have a fair case However, there is testimony galore; it’s all about us and on every hand Mail delivery

is exceedingly simple when compared, for instance, to the making of an automobile

or a calculating machine or a grain combine or a milling machine or to tens of thousands of other things Delivery? Why, in this area where men have been left free

to try, they deliver the human voice around the world in less than one second; they deliver an event visually and in motion to any person’s home when it is happening; they deliver 150 passengers from Seattle to Baltimore in less than four hours; they deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates and without subsidy; they deliver each four pounds of oil from the Persian Gulf to our

Eastern Seaboard—halfway around the world—for less money than the government charges for delivering a one-ounce letter across the street!

The lesson I have to teach is this: Leave all creative energies uninhibited Merely

organize society to act in harmony with this lesson Let society’s legal apparatus remove all obstacles the best it can Permit these creative know-hows freely to fl ow Have faith that free men and women will respond to the Invisible Hand This faith will

be confi rmed I, Pencil, seemingly simple though I am, offer the miracle of my tion as testimony that this is a practical faith, as practical as the sun, the rain, a cedar tree, the good earth

crea-Note

1 My offi cial name is “Mongol 482.” My many ingredients are assembled, fabricated, and

fi nished by Eberhard Faber Pencil Company.

Review and Discussion Questions

1 Read writes, “Leave all creative energies uninhibited.… Have faith that free men and

women will respond to the Invisible Hand This faith will be confi rmed.” What does he mean?

2 Read’s article is several decades old Are pencils made in approximately the same way today? Do you think it’s still true that “not a single person on the face of this earth knows how to make” one?

WE N OW G O B A C K T O T H E T U R N O F T H E C E N T U RY to

And it was a bona fi de crisis America was running out of its most important, most necessary, and (purportedly) most nonsubstitutable natural resource

At the turn of the century, America was experiencing the greatest period of economic growth in its history—indeed, this was probably the greatest period of growth in the history of the world But America was running out of one of the two primary ingredients for sustaining this growth—wood (The other essential input was iron.)

As reported by the doom merchants of the period, the reason was easy to see: we were cutting down forests much faster than they could be replaced

According to the doom merchants, the railroads, the driving force behind the industrialization, were doomed After all, the railroads accounted for 20–25 percent

of annual timber consumption Most of this wood was used to replace crossties; 15–20 percent of the crossties had to be replaced every year You simply couldn’t run

a railroad without wood

And, for most uses, there was apparently no substitute for wood It appeared there were only two choices: (1) follow the lead of the U.S Forest Service, an impor-tant division of the Department of Agriculture, and force reforestation of the conti-nent or (2) conserve wood by slowing down or ending the growth of the nation Those were the only apparent choices Only a fool couldn’t see that these were the only solutions Somebody had to do something and fast

A few headlines from the New York Times during the fi rst decade of the twentieth

century give a picture of how we viewed the situation (see overleaf)

The headlines, reminiscent of those in the 1970s, convey the feeling at the time And the feeling was utter gloom Really, banning Christmas trees to save wood! Was nothing sacred? We can’t recall such a draconian measure having been suggested even during the height of the oil crisis, although President Carter did refuse to light the White House Christmas tree in 1979 We all have to sacrifi ce during a crisis

Charles Maurice and

Charles W Smithson

THE TIMBER CRISIS

The U.S Forest Service was still forecasting a resource disaster even as late as the

early 1920s, when the crisis had been resolved Sherry Olson, in The Depletion Myth

(pp 141–42), quotes a Forest, Service publication of 1923:

Directly or indirectly, every commodity of life will cost more because of the depleted supply of forest products Every American will pay an unnecessarily large part of his income for shelter, and food, and clothing and fuel, transportation and amuse- ments, necessities and luxuries alike, because wood will be no longer plentiful and near at hand.

This economic punishment will increase in severity as time goes on There is only one way by which its pressure can be relieved and removed, and that is by growing enough timber for the national needs.

Change “wood” to “oil” and the last sentence to “… that is by becoming suffi cient in oil.” A report of the Department of Energy in 1979? A speech by the energy czar in 1975? Remember? We really did have an energy czar in 1975

self-But there was clearly a problem in 1900 Public offi cials, the media, the dent, and the informed public were justifi ably worried about it If people continued

presi-to consume timber at the same rate and if the growth rate of timber did not increase signifi cantly, our forests would be quickly depleted We would be a second rate economic power We would become practically a “banana republic” except we couldn’t grow bananas very well in our climate

Well, where do we stand today? When was the last time you worried about running out of wood? Out of lumber? Possibly you experienced a timber crisis when you were caught short while building a dog house on Saturday afternoon and the lumber yards were closed Certainly lumber prices rise and fall in response to

ROOSEVELT [AND] NATIONAL FOREST SERVICE”

SENATOR SMOOT TO RECOMMEND THAT THEY BE TURNED OVER TO STATES, CITIES, AND COUNTIES

REFORESTRY THE OBJECT”

WOOD NEARS END—MUCH WASTED AND THERE’S NO SUBSTITUTE”

MACARTHUR SAYS THIS HEATHENISH PRACTICE DENUDES FORESTS”

WILL BE WIPED OUT IN TEN YEARS AT PRESENT RATE, WHIPPLE SAYS”

building booms and busts But Americans now worry about other kinds of tion issues—energy, water, pollution, soil exhaustion—rather than timber.

conserva-Why aren’t people lining up at the Smithsonian to look at America’s last living tree? What happened to the timber crisis? What caused it? More signifi cantly, what ended it? How did such a serious national problem with such dire consequences become practically inconsequential? Let’s face it It was a serious problem; but it did end—and in a relatively short period of time Let’s see what happened

Evolution of a crisis, 1865–1896

After the Civil War, America began the greatest economic expansion in history In less than thirty years, the railroads spanned a continent Prairie crossroads became towns, towns became cities, and cities became metropolises The so-called robber barons were investing and building industrial empires at an unprecedented rate

The economic expansion required labor; and labor came, by the millions in the form of the “poor and huddled masses” from Europe and Asia Rapid growth also required iron, steel, coal, and oil—all in increasing amounts Pittsburgh made iron and steel from the seemingly unlimited ore deposits of Minnesota Men discovered coal seams in the northern Appalachian Mountains that would last 500 years at prevailing rates of depletion When the Pennsylvania oil fi elds petered out, seemingly infi nite deposits were found in Texas A single well, Spindletop, outside of Beaumont, Texas, pumped more oil in its fi rst year of operation than had been previously pumped from the earth Everything was apparently unlimited That is, almost everything

If the nation was built with iron, it was also built with wood If the nation moved

on iron rails, it also moved on wood ties And Pittsburgh couldn’t forge timber Neither could Cleveland, Chicago, or New York

Timber had to be grown; and that took time, a long time Much more time than late nineteenth-century use would allow We were using up our forests faster than they could grow Why?

One problem, of course, was the depletion of eastern forests to make room for farms prior to the Civil War For a long time, the prevailing method of extracting timber was clear cutting This technique also led to forest fi res, further depleting the forests Furthermore, such cutting was not conducive to reforestation Indeed, the railroads had switched from wood to coal for fuel by the end of the Civil War, partially

as a result of this problem

Wood, however, was a major ingredient in the expansion following that war It had many advantages as a building material In most areas, it was a low cost material; since wood was light relative to its size, it was inexpensive to ship Unskilled labor, using relatively simple equipment at the building site, could handle the material quite easily Most signifi cantly, however, it was abundant

During the years following the Civil War, American woodworking machinery became the most advanced in the world American power saws were the fastest anywhere American mills could handle more timber in less time, by far, than any other mills anywhere in the world

But it is important to note that no other country adopted the American technology Although they were extremely fast, American saws turned a very large