Some criticisms of "I, Pencil"

by @edent | # # | 1 comment | Read ~106 times.

I am not an economist - so perhaps someone more intellectually equipped than me has already written a better version of this blog post.

"I, Pencil" by Leonard E. Read is an influential essay on the nature of free-market capitalism. It correctly points out that the modern world is so complex and interdependent that no one man can know his true place in it. The world is impossible to control, so we should let the market work without interference.

I'm not going to argue about the nature of capitalism - but I am going to show that many of the arguments it uses as justification are factually incorrect.

The essay is short, and is freely available to read online - I will concentrate on the conclusion.

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.

Let us see what testimony there is!

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.

Mail delivery has been chosen as an example because - when the essay was written - the US Mail service was a government monopoly. And government monopolies are bad. Is mail delivery simple? Anyone who has studied graph theory would say not! The act of routing a physical packet around a network is hideously complicated - especially when done at scale.

Private mail companies are in existence now. FedEx, for example, employs nearly half-a-million people around the world. That's more than Ford and BMW combined.

But given it's hard to compare complexity of different activities - let's give this one a pass.

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;

In the UK - and most of the world - the telecommunications network was delivered by governments. In the USA, the telecoms infrastructure was nationalised in 1918. This was partly on national security grounds - but also partly because private companies wouldn't provide service to unprofitable areas.

The US Government - like governments around the planet - forced a subsidy situation. Rich city customers paid slightly higher bills to ensure poor rural customers had access to the network. This increased the value of the networks thanks to Metcalfe's Law.

(Of course, anyone studying the "simple" mail delivery network would have understood the complex nature of network value.)

The US phone network was swiftly privatised - whereupon it became an abusive monopoly which needed to be broken up because it wasn't providing competitive services.

Undersea cables - necessary for delivering the human voice around the world - were initially funded by both private companies and governments. But the huge capital outlays and (again) national security implications meant that governments around the world were deeply involved in their creation.

The phone network is not an example of a market free of government interference.

they deliver an event visually and in motion to any person’s home when it is happening;

The Telstar Satellite - the first modern communications satellite was a mixture of private and public investment. Carried on the back of the US Government's rocket ships. Now, that was in the early 1960s - the original essay was published in 1958.

The radio and TV networks in the USA were mostly privately financed. But they were tightly regulated.

Herbert Hoover - the then Secretary of Commerce - declared that radio was "probably the only industry in the nation that was unanimously in favor of having itself regulated."

What is regulation if not a subsidy? Rather than privately prosecute people and companies interfering with radio-wave transmission, the public took on that responsibility.

they deliver 150 passengers from Seattle to Baltimore in less than four hours;

I assume this is talking about railroads. I'll happily grant this one! The USA's railroad network was almost entirely privately financed and managed.

It is worth noting that Amtrak started in the 1970s with $40 million in direct aid. The subsidy is now measured in the billions.

they deliver gas from Texas to one’s range or furnace in New York at unbelievably low rates and without subsidy;

This is simply untrue. The petroleum industry has been subsidised for over one hundred years. In particular, the depletion allowance was sponsored by a Texan senator.

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!

This is such a bizarrely worded claim, it's hard to unpick its contrived nature. It is supposed to tell us that the government provided postage network is inefficient compared to the privatised oil companies - it actually tells the opposite story.

In 1958 - when this essay was published - it cost 4 cents per ounce to mail a letter in the USA. That cost is the same whether you're posting "across the street" or across the country. That distance could be as high as 2,900 miles. Not bad for 4 cents!

The distance from the Gulf to the USA is around 3700 miles - appreciably higher, but not dramatically so. I couldn't find the cost of shipping oil in the 1950s - so I'll take the author's word on the prices.

In 1945, FDR engaged in financial support for Saudi Arabia because securing oil was vital for national security.

There is a long, complicated, and bloody history of the Iranian oilfieds - and state support for the general oil industry is documented above.

At the moment, the US Postal Service receives zero direct subsidy - although it is losing money.

Closing thoughts

There's a beautifully simple story behind "I, Pencil" - the world is so complex that only the free-market can delivery reasonably priced goods and service. Government spending is wasteful.

I have spent many years working for private companies - large and small - the level of waste there would shame any government department.

I'll leave you with the words of the US President:

Florida got $12.6 billion in federal money last year—from Nebraskans, and Virginians, and New Yorkers, and Alaskans, with their Eskimo poetry. 12.6 out of a state budget of $50 billion, and I’m supposed to be using this time for a question, so here it is: Can we have it back, please?

One thought on “Some criticisms of "I, Pencil"

  1. RobAl says:

    Tim Harford reaches a similar conclusion:

    HARFORD: Clearly, in a modern economy, a tremendous amount of the infrastructure that we rely on has been paid for by taxpayers and coordinated in some way by state government, local government, or by the federal government. Some of these things could be provided privately. But, as a matter of fact, they are provided by government and they seem to be provided reasonably well.

    freakonomics.com/podcast/i-pencil/

    He argues that the lesson we should take is different – that fixing big problems in the world takes more than any one person or government can do.

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