Charting The Course

What the Humble #2 Pencil Can Teach Us About Trade and Freedom

By Mitch Siegler, Senior Managing Director

Mitch SieglerPencil“I, Pencil”, an essay by Leonard E. Read first published in 1958, tells the story of an ordinary wooden pencil and teaches profound lessons about economics, trade and freedom.

A pencil – what could be simpler? Not much there, really – some wood, lacquer, printed labeling, graphite lead, some metal and an eraser. The story – told by the pencil – begins with a cedar tree that grows in northern California. The pencil reminds readers of all of the saws, rope and equipment used in harvesting and shipping the logs to the railroad siding. All of the people and numerous skills that went into their fabrication: mining ore, producing steel and manufacturing saws, axes, motors; growing hemp and producing heavy rope. The thousands of people who had a hand in every cup of coffee the loggers drink!

The logs are shipped to a nearby mill. Legions of people who make railroad cars and engines and rails and who construct and install the communication systems they rely upon. At the mill, the logs are cut into small, pencil-length slats less than ¼” thick. The slats are kiln-dried, waxed and kiln-dried again. Think of all who produced the kilns, supplied the electricity, poured the concrete for the dam that supplies the mill’s power.

In the pencil factory, featuring millions of dollars in machinery and building, 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. The “lead” itself is actually graphite mined in Ceylon. Hundreds of miners are supported by those who make their many tools and by stevedores who load graphite aboard ships and the supporting shipbuilders, sailors and harbor pilots.

WoodThe wood receives six coats of lacquer, which itself has many ingredients and is made according to a complex process. The small bit of metal (called a ferrule) is brass. Brass is made of zinc and copper, which are mined and shipped in processes involving thousands of people. Very few people have the skills to fabricate sheet brass from these natural elements. Then there’s “the plug”, commonly referred to as the eraser. It’s made by combining rape-seed oil from the Dutch East Indies with sulfur chloride and various vulcanizing and accelerating agents.

Mr. Read asserts that no single person on the face of this earth knows how to make a pencil. There isn’t a single person on earth, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how to the overall process.

Neither the worker in the oil field, the chemist, the miner, any stevedore, sailor, railway worker, pencil factor worker – even the company president – performs his task because he cares one whit about pencils. Some can’t read or write and have never even used a pencil. Their motivation is simple: each sees that he can exchange his tiny skill or labor for the goods and services he needs or wants. It’s Adam Smith’s “Invisible Hand” at work.

Have faith in free people and get the government out of the way

Mr. Read, through the pencil, says that “If you can become aware of the miracle which I symbolize, you can help save the freedom mankind is so unhappily losing.” Read believed that all of these know-hows behind the simple pencil naturally and automatically arrange themselves into creative and productive work in response to human necessity and demand “in the absence of governmental or any other coercive masterminding – underlying all of this is a faith in free people. Read wrote that “freedom is impossible without this faith.”

Of course, pencil making is infinitesimally easier than producing cars, solar panels, telephones, X-ray machines – the list goes on and on. And open heart surgery, computer programming and nuclear power plants are more complicated still. The lesson from the pencil from nearly 60 years ago is just organize society to act in harmony with these free market principles and remove as many obstacles as possible to permit these creative know-hows to flow freely. Have faith that free men and women will respond to the Invisible Hand.

The pencil is fundamentally unchanged today from the time we used it decades ago for standardized tests in elementary school. It’s a fine tool, a good – even great – workhorse. About 1.5 billion pencils are sold in the U.S. each year.

You won’t be surprised to hear that not too many pencils are made in America today. The vast majority are produced offshore. The leading brand, Dixon Ticonderoga Co. ceased U.S. production but has factories in Asia, Europe and Latin America; you can purchase one of their pencils for about $.15 (pre-sharpened!). In March 2016, Nigeria announced that it will create 400,000 jobs by opening a pencil factory in 2018. Who knew?

AcOn pencils, cars and air conditioners

Now, we don’t know squat about performing open heart surgery or operating nuclear power plants. We couldn’t build an automobile or cell phone – even a pencil – if our lives depended on it. All of our employees are in America – we have no foreign divisions, subsidiaries or affiliates. We don’t know whether Ford and Carrier ought to make cars and air conditioners in the U.S., Mexico or Timbuktu. Presumably, these massive companies managed by very bright people know well what they need to do to compete. As taxpayers, we’re all for eliminating waste, fraud and abuse and unnecessary regulations and would love to see us increase the number of high-paying manufacturing jobs in the good ol’ US of A.

But, facts are stubborn things and for every U.S. manufacturing job lost to trade, another eight are lost to automation, according to a report from Ball State University. And protectionist pressures could trigger higher inflation – or worse – a deflationary depression like what we experienced following the Smoot-Hawley tariffs of 1930.

Notwithstanding our limitations, we like to think that we know what we don’t know and we do try to be mindful of unintended consequences. We’re pleased by some early signs that our new administration could be good – you might say great – for business. Nobody would be happier than us to see American businesses untethered from regulations and unleashed by lower taxes to invest, grow and hire all kinds of people. Bring it on! But we worry that cherry-picking companies for personal telephone calls, while it plays well on the evening news and at rallies, is likely to be neither effective nor sustainable.

Our New Year’s wish is that our new administration maintains humility, remains mindful of what it doesn’t know and lets the market work. Let freedom ring!

Mitch Siegler is Senior Managing Director of Pathfinder Partners, LLC. Prior to co-founding Pathfinder in 2006, Mitch founded and served as CEO of several companies and was a partner with an investment banking and venture capital firm. Reach him at msiegler@pathfinderfunds.com.