“If socialism ever earns a final epitaph, it will be this: Here lies a contrivance engineered by know-it-alls who broke eggs with abandon but never, ever created an omelet. “- I, Pencil
In Adam Smith’s 1759 tome, “A Theory of Moral Sentiment”, the Scottish economist describes a Man of the System who is very wise of his own conceit, who imagines that he “can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard.” This man of arrogance is every authoritarian, dictator, fascist, socialist, and yes, even presidents of democracies and republics. Each believes that they can devise the perfect plan to organize society for the benefit of mankind. How wrong they have been. The world is littered with mass graves from these failed experiments. The truth is, societies were developed spontaneously, not by design.
While human design is directed by man, spontaneous order is the emergence of organization seemingly out of thin air. But the real miracle is the order that results through the cooperation of billions of people worldwide as each individual pursues their own self-interest. Motivated by personal selfishness, but tempered by the rules of the game, the unintended consequence of freedom is an organized society.
In Leonard Reed’s 1958 essay, “I, Pencil”, Reed tells the story of spontaneous order through the eyes of a pencil. He shows how no one has the knowledge to create from scratch the everyday pencil. The number of individuals, inventions, and ingenuity needed to produce a pencil is astronomical. So, what made the common pencil? Dispersed Knowledge, the Price System, and the Invisible Hand.
Not one single person has complete knowledge of anything. Each person holds only partial information. It takes the actions of billions of individuals acting independently to create the goods and services provided in society. Full information cannot be gathered and handed over to an authority because preferences and resources are in constant flux. And as you will see, knowledge in the marketplace is best reflected in prices.
Prices are determined by supply and demand which directly reflect the desires of consumers. Prices guide the production and distribution of goods by determining which items should be produced and in which quantities. Prices are constantly adjusting to reflect changes in consumer preferences. Profits and losses are important signals that provide the necessary feedback to capitalists and entrepreneurs about whether resources are used to their fullest value. Yet value is subjective and based not just on price, but on the desires and needs of diverse individuals.
Adam Smith’s book, “The Theory of Moral Sentiment” also produced another metaphor called the Invisible Hand. This is reflected in the free market system where individuals choose what they will produce and consume while unintentionally providing the goods and services that benefit society. The pencil was never the goal of the businesses that independently decided to cut down trees for wood, or mine rock for graphite. The pencil was the outcome of another creative entrepreneur, who saw a need and gathered the necessary components to produce that product. This is how the interests of society are best met. By people working in voluntary cooperation to create the goods of the world.
The Rules of the Game are defined by the laws and contracts that exist in society along with the social mores that determine which behaviors are acceptable and which are not. The principles of private property, limited government, and free competition provide the best environment for supplying the needs of a diverse society while profiting the businesses that do the best job.
The people who make the pencil, also make everything else in society. Adam Smith’s Man of the System concluded by saying, “In the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.” People are not marionettes to be controlled by their puppet masters, but free hearts and minds that do best when they are left alone.
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