I, Pencil: My Family Tree as Told to Leonard E. Read

“I, Pencil” was most directly influenced by Austrian-British economist Friedrich Hayek’s famous article “The Use of Knowledge in Society.” The scholarly article was first published in the September 1945 issue of The American Economic Review. Hayek argues against the then-widespread notion that markets function efficiently only when market actors have complete knowledge of all relevant facts and issues—or, as Leonard Read puts it, when there is a central “mastermind” to assemble this knowledge. Hayek maintains that “perfect” knowledge is not only unattainable but unnecessary because in free markets, prices communicate enough information to induce actors to make rational decisions. This is also the core of Read’s argument in “I, Pencil.”

The economics term “dispersed knowledge” predicates that each individual participant in a market possesses unique “knowledge of the particular circumstances of time and place” in which he operates, and it is impossible for any one individual or organization to acquire all of these “dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess” (Hayek, Friedrich. “The Use of Knowledge in Society.” Foundation for Economic Education, 1 May 1996). Hayek asserts that this dispersed contextual knowledge is essential for adapting swiftly to changes in the marketplace. However, it can only be utilized effectively if the individual is free to make the relevant adjustments, or at least to cooperate in making them, instead of having to transmit his knowledge to a central decision-making entity.

At the same time, Hayek acknowledges that “the ‘man on the spot’ cannot decide solely on the basis of his limited but intimate knowledge of the facts of his immediate surroundings”; he also needs external information in order to “fit his decisions into the whole pattern of changes of the larger economic system” (Hayek, Friedrich. “The Use of Knowledge in Society.” Foundation for Economic Education, 1 May 1996). The “marvel” of markets is that they deliver this information automatically through price signals. If a certain raw material—let’s say graphite for pencil leads—becomes scarce, its price will increase in the open market, and this shift lets pencil manufacturers know they need to figure out how to use less graphite, find a cheaper substitute, or raise the price of their pencils. If a new source of graphite is discovered, or if enough pencil makers adopt an alternative, the price will correspondingly decrease. This is the law of supply and demand. To make prudent decisions, the pencil manufacturer needs to know only that the price of graphite has changed; he doesn’t need to know anything about why it has changed. The pencil company’s response to the price shift will, in turn, ripple out to influence other market participants, from the graphite mines to the office-supply stores, who will then make their own adjustments to maintain efficiency:

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 (Hayek, Friedrich. “The Use of Knowledge in Society.” Foundation for Economic Education, 1 May 1996).

“The Use of Knowledge in Society” made a powerful impact on professional economists, becoming one of the most frequently cited articles in the field. In “I, Pencil,” Read seeks to convey Hayek’s insight about dispersed knowledge simply and rousingly to a non-scholarly audience. The “genealogy” of the pencil serves to illustrate just how many “men on the spot,” or how many diverse spots around the world, must mobilize their context-specific information and skills in order for the simple pencil to be manufactured. As Read describes each link in the supply chain, he asks the reader to consider how little of this knowledge they possess:

Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it? […] How do you make resins and what, pray, is carbon black? […] 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 (6-7).

The “miracle” of markets is precisely that nobody, apart from the manufacturer of ferrules, needs to know that story, as long as free exchange enables prices to accurately reflect the dynamics of supply and demand.