Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition Richard B.

McKenzie and Dwight R. Lee

Microeconomics: a way of thinking about business

Reading 1.1: I, enci!"

CHAPTER

Leonard E. Read (1983) 1 I am a lead pencil ordinary wooden pencil familiar to all boys and girls and ad lts w!o can read and write. ("y official name is #"ongol $8%.& "y many ingredients are assembled' fabricated and finis!ed by Eber!ard (aber )encil *ompany' +il,es-.arre' )ennsyl/ania.) +riting is bot! my /ocation and my a/ocation0 t!at1s all I do. 2o may wonder w!y I s!o ld write a genealogy. +ell' to begin wit!' my story is interesting. 3nd' ne4t' I am a mystery more so t!an a tree or a s nset or e/en a flas! of lig!tning. . t' sadly' I am ta,en for granted by t!ose w!o se me' as if I were a mere incident and wit!o t bac,gro nd. 5!is s percilio s attit de relegates me to t!e le/el of t!e commonplace. 5!is is a species of t!e grie/o s error in w!ic! man,ind cannot too long persist wit!o t peril. (or' as a wise man' 6. 7. *!esterton' obser/ed' #+e are peris!ing for want of wonder' not for want of wonders.& I' )encil' simple t!o g! I appear to be' merit yo r wonder and awe' a claim I s!all attempt to pro/e. In fact' if yo can nderstand me no' t!at1s too m c! to as, of anyone if yo can become aware of t!e mirac lo sness t!at I symboli8e' yo can !elp sa/e t!e freedom man,ind is so n!appily losing. I !a/e a profo nd lesson to teac!. 3nd I can teac! t!is lesson better t!an can an a tomobile or an airplane or a mec!anical dis!was!er beca se well' beca se I am seemingly so simple. 9imple: 2et' not a single person on t!e face of t!is eart! ,nows !ow to ma,e me. 5!is so nds fantastic' doesn1t it: Especially w!en yo reali8e t!at t!ere are abo t one and one-!alf billion of my ,ind prod ced in t!e ;9 eac! year. )ic, me p and loo, me o/er. +!at do yo see: <ot m c! meets t!e eye t!ere1s some wood' lac= er' t!e printed labeling' grap!ite lead' a bit of metal' and an eraser.

Inn merable antecedents

> st as yo cannot trace yo r family tree bac, /ery far' so is it impossible for me to name and e4plain all my antecedents. . t I wo ld li,e to s ggest eno g! of t!em to impress pon yo t!e ric!ness and comple4ity of my bac,gro nd. "y family tree begins wit! w!at in fact is a tree' a cedar of straig!t grain t!at grows in nort!ern *alifornia and ?regon. <ow contemplate all t!e saws and tr c,s and rope and t!e co ntless ot!er gear sed in !ar/esting and carting t!e cedar logs to t!e railroad siding. 5!in, of all t!e persons and t!e n mberless s,ills t!at went into t!eir fabrication@ t!e mining of ore' t!e ma,ing of steel and its refinement into saws' a4es' motors0 t!e growing of !emp and bringing it t!ro g! all t!e stages to !ea/y and strong rope0 t!e logging camps wit! t!eir beds and mess !alls' t!e coo,ery and t!e raising of all t!e foods. +!y' ntold t!o sands of persons !ad a !and in e/ery c p of coffee t!e loggers drin,A
5!e late Leonard Read was t!e fo nder of t!e (o ndation for Economic Ed cation. )ermission for se in t!is /ol me !as been granted by Bonald .o drea 4' )resident' (o ndation for Economic Ed cation ("ay $' 1999).
1

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University ress !"#"

Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition Richard B. McKenzie and Dwight R. Lee

% 5!e logs are s!ipped to a mill in 9an Leandro' *alifornia. *an yo imagine t!e indi/id als w!o ma,e flat cars and rails and railroad engines and w!o constr ct and install t!e comm nication systems incidental t!ereto: 5!ese legions are among my antecedents. *onsider t!e millwor, in 9an Leandro. 5!e cedar logs are c t into small' pencil-lengt! slats less t!an one-fo rt! of an inc! in t!ic,ness. 5!ese are ,iln-dried and t!en tinted for t!e same reason women p t ro ge on t!eir faces. )eople prefer t!at I loo, pretty' not a pallid w!ite. 5!e slats are wa4ed and ,iln-dried again. Cow many s,ills went into t!e ma,ing of t!e tint and ,ilns' into s pplying t!e !eat' t!e lig!t and power' t!e belts' motors' and all t!e ot!er t!ings a mill re= ires: 3re sweepers in t!e mill among my ancestors: 2es' and also incl ded are t!e men w!o po red t!e concrete for t!e dam of a )acific 6as D Electric company !ydroplant' w!ic! s pplies t!e mill1s power. 3nd don1t o/erloo, t!e ancestors present and distant w!o !a/e a !and in transporting si4ty carloads of slats across t!e nation from *alifornia to +il,es-.arre.

*omplicated mac!inery
?nce in t!e pencil factory E$'FFF'FFF in mac!inery and b ilding' all capital acc m lated by t!rifty and sa/ing parents of mine eac! slat is gi/en eig!t groo/es by a comple4 mac!ine' after w!ic! anot!er mac!ine lays leads in e/ery ot!er slat' applies gl e' and places anot!er slat atop a lead sandwic!' so to spea,. 9e/en brot!ers and I are mec!anically car/ed from t!is #woodclinc!ed& sandwic!. "y #lead& itself it contains no lead at all is comple4. 5!e grap!ite is mined in *eylon. *onsider t!e miners and t!ose w!o ma,e t!eir many tools and t!e ma,ers of t!e paper sac,s in w!ic! t!e grap!ite is s!ipped and t!ose w!o ma,e t!e string t!at ties t!e sac,s and t!ose w!o p t t!em aboard s!ips and t!ose w!o ma,e t!e s!ips. E/en t!e lig!t!o se ,eepers along t!e way assisted in my birt! and t!e !arbor pilots. 5!e grap!ite is mi4ed wit! clay from "ississippi in w!ic! ammoni m !ydro4ide is sed in t!e refining process. 5!en wetting agents are added s c! as s lfonated tallow animal fats c!emically reacted wit! s lf ric acid. 3fter passing t!ro g! n mero s mac!ines' t!e mi4t re finally appears as endless e4tr sions as from a sa sage grinder c t to si8e' dried' and ba,ed for se/eral !o rs at 1'8GF degrees (a!ren!eit. 5o increase t!eir strengt! and smoot!ness t!e leads are t!en treated wit! a !ot mi4t re' w!ic! incl des candililla wa4 from "e4ico' paraffin wa4 and !ydrogenated nat ral fats. "y cedar recei/es si4 coats of lac= er. Bo yo ,now all of t!e ingredients of lac= er: +!o wo ld t!in, t!at t!e growers of castor beans and t!e refiners of castor oil are a part of it: 5!ey are. +!y' e/en t!e processes by w!ic! t!e lac= er is made a bea tif l yellow in/ol/es t!e s,ills of more persons t!an one can en merateA ?bser/e t!e labeling. 5!at1s a film formed by applying !eat to carbon blac, mi4ed wit! resins. Cow do yo ma,e resins and w!at' pray' is carbon blac,: "y bit of metal t!e ferr le is brass. 5!in, of all t!e persons w!o mine 8inc and copper and t!ose w!o !a/e t!e s,ills to ma,e s!iny s!eet brass from t!ese prod cts of nat re. 5!ose blac, rings on my ferr le are blac, nic,el. +!at is blac, nic,el and !ow is it applied: 5!e complete story of w!y t!e center of my ferr le !as no blac, nic,el on it wo ld ta,e pages to e4plain. 5!en t!ere1s my crowning glory' inelegantly referred to in t!e trade as #t!e pl g'& t!e part man ses to erase t!e errors !e ma,es wit! me. 3n ingredient called #factice& is w!at does t!e erasing. It is a r bber-li,e prod ct made by reacting grape seed oil from t!e B tc! East Indies wit! s lf r c!loride. R bber' contrary to t!e common notion' is only for binding p rposes.

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University ress !"#"

Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition Richard B. McKenzie and Dwight R. Lee

3 5!en' too' t!ere are n mero s / lcani8ing and accelerating agents. 5!e p mice comes from Italy0 and t!e pigment w!ic! gi/es #t!e pl g& its color is cadmi m s lfide.

Hast web of ,now-!ow

Boes anyone wis! to c!allenge my earlier assertion t!at no single person on t!e face of t!is eart! ,nows !ow to ma,e me: 3ct ally' millions of ! man beings !a/e !ad a !and in my creation' no one of w!om e/en ,nows more t!an a /ery few of t!e ot!ers. <ow' yo may say t!at I go too far in relating t!e pic,er of a coffee berry in far-off .ra8il and food growers elsew!ere to my creation0 t!at t!is is an e4treme position. I s!all stand by my claim. 5!ere isn1t a single person in all t!ese millions' incl ding t!e president of t!e pencil company' w!o contrib tes more t!an a tiny' infinitesimal bit of ,now-!ow. (rom t!e standpoint of ,now-!ow t!e only difference between t!e miner of grap!ite in *eylon and t!e logger in ?regon is in t!e type of ,now-!ow. <eit!er t!e miner nor t!e logger can be dispensed wit!' any more t!an t!e c!emist at t!e factory or t!e wor,er in t!e oil field paraffin being a by-prod ct of petrole m. Cere is an asto nding fact@ <eit!er t!e wor,er in t!e oil field nor t!e c!emist nor t!e digger of grap!ite or clay nor anyone w!o mans or ma,es t!e s!ips or trains or tr c,s nor t!e one w!o r ns t!e mac!ine t!at does t!e ,n rling on my bit of metal nor t!e president of t!e company performs !is sing lar tas, beca se !e wants me. Eac! one wants me less' per!aps' t!an does a c!ild in t!e first grade. Indeed' t!ere are some among t!is /ast m ltit de w!o ne/er saw a pencil nor wo ld t!ey ,now !ow to se one. 5!eir moti/ation is ot!er t!an me. )er!aps it is somet!ing li,e t!is@ Eac! of t!ese millions sees t!at !e can t! s e4c!ange !is tiny ,now-!ow for t!e goods and ser/ices !e needs or wants. I may or may not be among t!ese items.

<o ! man master-mind

5!ere is a fact still more asto nding@ 5!e absence of a master-mind' of anyone dictating or forcibly directing t!ese co ntless actions t!at bring me into being. <o trace of s c! a person can be fo nd. Instead' we find t!e 9cottis! economist and moral p!ilosop!er 3dam 9mit!1s famo s #In/isible Cand& at wor, in t!e mar,etplace. 5!is is t!e mystery to w!ic! I earlier referred. It !as been said t!at #only 6od can ma,e a tree.& +!y do we agree wit! t!is: Isn1t it beca se we reali8e t!at we o rsel/es co ld not ma,e one: Indeed' can we e/en describe a tree: +e cannot' e4cept in s perficial terms. +e can say' for instance' t!at a certain molec lar config ration manifests itself as a tree. . t w!at mind is t!ere among men t!at co ld e/en record' let alone direct' t!e constant c!anges in molec les t!at transpire in t!e life span of a tree: 9 c! a feat is tterly nt!in,ableA I' )encil' am a comple4 combination of miracles@ a tree' 8inc' copper' grap!ite' and so on. . t to t!ese miracles w!ic! manifest t!emsel/es in <at re an e/en more e4traordinary miracle !as been added@ t!e config ration of creati/e ! man energies millions of tiny bits of ,now!ow config rating nat rally and spontaneo sly in response to ! man necessity and desire and in t!e absence of any ! man master-mindingA 9ince only 6od can ma,e a tree' I insist t!at only 6od co ld ma,e me. "an can no more direct millions of bits of ,now-!ow so as to bring a pencil into being t!an !e can p t molec les toget!er to create a tree. 5!at1s w!at I meant w!en I wrote earlier' #If yo can become aware of t!e mirac lo sness t!at I symboli8e' yo can !elp sa/e t!e freedom man,ind is so n!appily losing.& (or' if one is aware t!at t!ese bits of ,now-!ow will nat rally' yes' a tomatically' arrange t!emsel/es into creati/e and prod cti/e patterns in response to ! man necessity and demand t!at is' in t!e absence of go/ernmental or any ot!er coerci/e master-minding t!en one will

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University ress !"#"

Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition Richard B. McKenzie and Dwight R. Lee

$ possess an absol tely essential ingredient for freedom@ a fait! in free men. (reedom is impossible wit!o t t!is fait!. ?nce go/ernment !as !ad a monopoly on a creati/e acti/ity t!e deli/ery of t!e mail' for instance most indi/id als will belie/e t!at t!e mail co ld not be efficiently deli/ered by men acting freely. 3nd !ere is t!e reason@ Eac! one ac,nowledges t!at !e !imself doesn1t ,now !ow to do all t!e t!ings in/ol/ed in mail deli/ery. Ce also recogni8es t!at no ot!er indi/id al co ld. 5!ese ass mptions are correct. <o indi/id al possesses eno g! ,now-!ow to perform a nation1s mail deli/ery any more t!an any indi/id al possesses eno g! ,now-!ow to ma,e a pencil. In t!e absence of a fait! in free men naware t!at millions of tiny ,inds of ,now-!ow wo ld nat rally and mirac lo sly form and cooperate to satisfy t!is necessity t!e indi/id al cannot !elp b t reac! t!e erroneo s concl sion t!at t!e mail can be deli/ered only by go/ernmental master-minding.

5estimony galore
If I' )encil' were t!e only item t!at co ld offer testimony on w!at men can accomplis! w!en free to try' t!en t!ose wit! little fait! wo ld !a/e a fair case. Cowe/er' t!ere is testimony galore0 it1s all abo t s on e/ery !and. "ail deli/ery is e4ceedingly simple w!en compared' for instance' to t!e ma,ing of an a tomobile or a calc lating mac!ine or a grain combine or a milling mac!ine' or to tens of t!o sands of ot!er t!ings. Beli/ery: +!y' in t!is age w!ere men !a/e been left free to try' t!ey deli/er t!e ! man /oice aro nd t!e world in less t!an one second0 t!ey deli/er an e/ent /is ally and in motion to any person1s !ome w!en it is !appening0 t!ey deli/er 1GF passengers from 9eattle to .altimore in less t!an fo r !o rs0 t!ey deli/er gas from 5e4as to one1s range or f rnace in <ew 2or, at nbelie/ably low rates and wit!o t s bsidy0 t!ey deli/er eac! fo r po nds of oil from t!e )ersian 6 lf to o r Eastern 9eaboard !alfway aro nd t!e world for less money t!an t!e go/ernment c!arges for deli/ering a one-o nce letter across t!e streetA ( Some things have changed since this essay first ran in 1958 and 1983!)

Lea/e men free

5!e lesson I !a/e to teac! is t!is@ Lea/e all creati/e energies nin!ibited. "erely organi8e society to act in !armony wit! t!is lesson. Let society1s legal apparat s remo/e all obstacles t!e best it can. )ermit creati/e ,now-!ow to freely flow. Ca/e fait! t!at free men will respond to t!e #In/isible Cand.& 5!is fait! will be confirmed. I' )encil' seemingly simple t!o g! I am' offer t!e miracle of my creation as testimony t!at t!is is a practical fait!' as practical as t!e s n' t!e rain' a cedar tree' and t!e good eart!. The #ottom !ine "ar,ets res lt in miracles by t!e prod ct. E/en t!o g! no one ,nows !ow to ma,e a pencil in its entirety' tens of millions of pencils are prod ced eac! year by people speciali8ing in some narrow aspect of pencil prod ction and t!en comm nicating wit! many ot!ers t!ro g! mar,et prices. Re$ie% &'estions 1 % Is it e/en possible for people to learn eno g! to prod ce pencils totally from scratc!: +!at are t!e benefits in people speciali8ing t!eir efforts:

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University ress !"#"

Microeconomics for MBAs: The Economic Way of Thinking for Managers, Second Edition Richard B. McKenzie and Dwight R. Lee

G 3 3s prod cts become e/er more comple4' w!at does #I' )encil& say abo t t!e res lting speciali8ation of efforts: 3s prod cts become e/er more comple4' s!o ld prod ction become e/er more based on mar,ets:

Microeconomics for MBAs | Richard McKenzie & Dwight Lee | Cambridge University ress !"#"