February 1, 2025
That’s good because economics is primarily about social cooperation. And Read’s classic conveys several key points about social cooperation in just a few memorable pages:
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No one could make a pencil on their own
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The simple no. 2 pencil takes years to make
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Pencils are a result of international cooperation
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To coordinate the whole thing, you need private property, prices, profits/losses—the “3 P’s”
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When you have the “3 P’s,” you get the “3 I’s”—information, incentives, innovation
Keep reading Read for these lessons.
But it is profitable to read Read, organizationally—or, one might say, “New Institutionally,” too.
Read discusses the myriad exchanges that comprise the social cooperation that give us the no. 2 pencil. Yet, interpreting each of these as a spot exchange is a mistake.
Read writes:
Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!
In just one paragraph, it’s clear that Read’s bustling economic scene is made possible not only by simple spot exchanges, but also by long-term contracts, short-term contracts, relational contracts, contracts that stipulate many attributes of a good, contracts that contain some (but not all!) provisions for failure to perform, and the exchange of hostages—to list only a few of the ways buyers and sellers order their agreements. Some of these contracts will also contain complex rules for adjusting prices in the face of contingencies.
All of these contracts are incomplete because the world is complex and resources are scarce. Incompleteness leaves the door ajar to opportunism, which in certain cases may mean that vertical integration arises as a solution. We might wonder which of Read’s activities are carried out within a single firm and which are conducted between firms.
Speaking of firms, we’ll see a diverse variety here too. Some are flat. Some are intensely hierarchical. Some are multi-divisional. Some produce only one product, but others exhibit seemingly inexplicable corporate diversification. If we opened the “lid” of these firms, we’d see some are notably capital-intensive, while others mostly coordinating large numbers of office workers using little more than their minds.
Implicitly, we’re also reading about a host of labor contracts, ranging from piece rates to golden parachutes for mining company executives to independent contracting. Moreover, all along this seething “supply web,” people are “being paid in money and drugs,” to quote my intrepid Mere Economics co-author. We could ask why the “money-drug mix” varies across by occupation.
Clearly, there is a sophisticated legal system that undergirds “all the stages” comprising the production of this pencil. We could inquire about how much of this legal system is privately ordered, as how Vietnamese firms were known for eschewing the inadequate courts or how Medieval traders did the same thing. If we asked whether state enforcement was crucial for all this international trading, we’d find the answer is “no.” And since the production effort is international, we might wonder about the comparative corporate governance of the companies involved.
It seems like entrepreneurs are largely free to enter in Read’s story, so the tale takes place (again, implicitly) in what Douglass North called “open-access societies”—those in which “economic entrepreneurs are allowed to challenge entrenched businesses” (unlike in North’s limited-access societies).
Obviously, and in sum, Read’s famous story is not about the a boring world of frictionless exchange, but about measurement, information asymmetry, potential deception among trading partners, wealth dissipation, and various other forms of transaction cost. We could ask, with Douglass North and John Wallis, how much of the economic activity in Read’s tale is concerned purely with facilitating exchange.
As a pedagogical opening, there’s more to Read’s classic little tale than meets the eye. And from a research perspective, we’re clearly only beginning to scratch the surface of how people organize the affairs of commercial life in their ceaseless pursuit of the gains from trade.