Here’s a note to a new correspondent.
Mr. B__:
Thanks for sending along Dani Rodrik’s new paper “What the Mercantilists Got Right.”
As usual, Rodrik writes engagingly. But I’m afraid I don’t share your positive assessment of his attempt to find merit in mercantilism.
He immediately gets off on the wrong foot by arguing that the lesson of the “I, Pencil” story, as told by Milton Friedman, is today moot, or at least seriously incomplete, given that most pencils are now made in China, and that Beijing (according to Rodrik) uses subsidies, currency manipulation, and other interventions to increase pencil production in China. Forget that Rodrik never bothers to wonder which particular industries in China are necessarily being made smaller than otherwise given this state-engineered expansion of the Chinese pencil industry. Instead, recognize that Rodrik misses the essential point of “I, Pencil.”
This point is that the production of that seemingly simple product requires the use of vastly more knowledge than can be had by any one person or committee of persons. Beijing might well have arranged for China to become the world’s leading final assembler of pencils, but it did not eliminate the necessary roles played by specialists from around the globe each to perform his or her individually tiny share of the work required to produce pencils.
Person A had to design the chainsaw for felling the cedar tree – person B to help drill for the petroleum that’s refined into fuel for the cargo ships that bring to China the rubber and pumice for the pencils’ erasers – persons C and D to pilot those ships – persons E and F to design and produce the software used to navigate those ships – person G to write the insurance contract making the operation of those ships economically feasible – person H to help make the dyes that turn paint yellow – person I to engineer, and person J to manufacture, the glue that’s in the pencil – person K to help make the electrical wiring that transmits power to the pencil factory – person L to know where to find graphite for the “lead” – persons J, … X, Y, Z….
The number of such persons is surely in the hundreds of millions. Each must be motivated to produce what he or she produces and to be guided to produce in ways that are coordinated with the many other persons whose efforts contribute to the production of pencils. This coordination is done overwhelmingly by prices and other market signals.
Even if – as is highly unlikely – every function for producing Chinese-made pencils is performed in China, the process for this production is not, and cannot have been, consciously designed and directed by government officials. That process requires market signals. And to the extent that Beijing overrides market signals with conscious diktats, you can be certain that the Chinese are producing pencils wastefully, at inordinately high costs, thereby making their economy less productive and the Chinese people less prosperous.
Rodrik errs on several other fronts, but his failure to grasp the essential point of “I, Pencil” is a sufficiently telling symptom of his misunderstanding of market processes and trade.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
