A New Life for Milton Friedman’s Pencil

“Look at this lead pencil. There is not a single person in the world who can make this pencil.” 

That was Milton Friedman 16 minutes into the first installment of “Free to Choose,” the 1980 television show by the Nobel Laureate and his wife, Rose Friedman. For the next two minutes he told the remarkable story of how the pencil is produced. Here is an excerpt:

“The wood from which it [the pencil] is made, for all I know, comes from a tree that was cut down in the state of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make steel, it took iron ore. This black center—we call it lead but it’s really graphite, compressed graphite—I’m not sure where it comes from, but I think it comes from some mines in South America. This red top up here, this eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native! It was imported from South America by some businessmen with the help of the British government. This brass ferrule? I haven’t the slightest idea where it came from. Or the yellow paint! Or the paint that made the black lines. Or the glue that holds it together. Literally thousands of people co-operated to make this pencil…”

I was captivated. It seemed magical.

Later I learned the Friedmans used the story as a tribute to Leonard Read, who founded the Foundation for Economic Education in 1946, who was serving as its president in 1958 when he published “I, Pencil.” Read’s version was wonderfully told from the point of view of the pencil itself. “I am a lead pencil… Simple? Yet, not a single person on the face of this earth knows how to make me.”

Of course, the main point of the story has little to do with the pencil. There was a larger objective. According to Friedman:

“I know of no other piece of literature that so succinctly, persuasively, and effectively illustrates the meaning of both Adam Smith’s invisible hand—the possibility of cooperation without coercion—and Friedrich Hayak’s emphasis on the importance of dispersed knowledge and the role of the price system in communicating information that ‘will make the individuals do the desirable things without anyone having to tell them what to do.”

So that’s how Friedman and Read elevated the pencil, the simple pencil, to a symbol of free market capitalism. 

I was inspired by the pencil story as a teenager. I went on to study economies, earn a PhD, and eventually teach my own university economics courses. I often oopened my courses with similar stories about the power of markets. I wasn’t the only one. “I, Pencil” and Free to Choose, were incredibly important in shaping the attitudes and behaviors of people in the 80’s and 90’s.

But 65 years have passed since “I, Pencil” was first published and it has been more than 40 years since “Free to Choose” was released. Although I no longer teach economics, I have been thinking about the pencil story and how it would be received by learners around the world today.

Sure, I think it is still relevant and useful, but it is no longer capable of standing alone in defense of free markets. Too much is left out. In today’s complex and ever-changing world, it can be nothing more than a starting point for understanding business.

Today the story would invite critical reflection and discussion. Learners have access to more information. They can fact-check statements, assumptions and fill in missing pieces. They can immediately track down information about the market size and gather insights to assess its potential in different parts of the world. 

More importantly, I believe students today are more likely to ask tough, higher level questions. To what extent are the trees reforested? What are the ecological implications of open pit graphite mines and how are workers treated in them? Are there more sustainable alternatives to pencils and if so, how can they accelerate the transition? Pencils are not the biggest consumers of wood, graphite or rubber, but each of the markets have unique and important challenges related to the environment and sustainability. 

Given that the market system is now more widely accepted, the simple version of the pencil story could also lead to a more nuanced discussion about the respective roles of business and government. Tim Harford, also known as the “Undercover Economist,” points out that the pencil is actually “the product of a messy economic system in which the government plays a role and corporate hierarchies insulate many workers from Friedman’s ‘magic of the price system.’”

In the end, I think stories about how things are made are particularly helpful when teaching “globalization,” which is getting more complex and challenging to teach. Because global processes can be abstract and difficult to comprehend, it helps to develop concrete examples. Better yet, let the students do it. At the Darla Moore School of Business at the University of South Carolina, a GBSN member who’s highly recognized for excellence in teaching international business, students are asked to map global value chains for familiar products. Researching how specific things are made can help students anywhere to be better managers, consumers, and global citizens. At GBSN, we are working with the school’s Sonoco International Business Department to make their teaching resources available to schools around the world. 

So, the pencil story stands, but no longer as a beacon of free enterprise. Instead, it serves as a starting point for critical discussions about business and government, globalization, and sustainability. And, just perhaps, will enable us to think about and discover new market-based approaches that better serve society. 

• GBSN CEO