I, Pencil

A state can nationalize a factory. It has no mechanism for nationalizing a mind.

We seem to have a sudden rash of interest in socialism, which is a great opportunity for both sides to do a bad job of explaining socialism and capitalism.

A quick reminder. Capitalism is often defined as a capital-controlling means of production. And socialism is some version of State control of the means of production. Or the state persuading the workers that the workers control the means of production - see Animal Farm.

When debating profit and fair wage, they always seem to gravitate to the business of making pencils.

In either case of socialism or capitalism, we discuss the “Control of means of production”. My take is that the real means of production is knowledge. This is the argument in Defoe’s novel Robinson Crusoe. Up until Defoe’s book, people thought of Adam Smith and factories controlling slaves or labor. Defoe’s little island example demonstrated that a single individual could improve their productivity through innovation and build their own productive society. Moving from starvation to leisure.

I think knowledge is really the means of production. If knowledge is the means of production, then how can a socialist control it? Thomas Jefferson realized this and changed “Life, liberty and property” to “Life, Liberty and the Pursuit of Happiness”

Since we produce fewer pencils and more knowledge today, as much as socialists wish to control the means of production, they really can not without inducing those with knowledge via price, which leads to profit. Profit means some people being paid more than others. If you pay a few more than others, those few reveal their knowledge, and then everyone benefits more.

A Tweet that went Viral. A socialist student tells Ben Shapiro that the profits of a pencil company belong to the workers. Give me the machinery and the raw materials, he says, and without me you have a pile of wood, paint, graphite, rubber, and aluminum. Capital needs labor infinitely more than labor needs capital. Shapiro answers that he has millions of people willing to do the work voluntarily, and that money is just stored labor anyway. One of us is completely wrong, he says, and I am pretty sure it is not me.

A socialist student explains to Ben Shapiro why the profits of his company should belong to the workers...

He was left in shock by the response he got.

"Imagine you have a pencil factory and I am a worker. You can have all the machinery and all the raw materials, but without me, you have nothing but a pile of wood, paint, graphite, rubber, and aluminum."

"If you're a single person trying to assemble pencils, you're not going to get very far. You need workers. Capital needs labor infinitely more than labor needs capital."

Shapiro:

"But the thing is, I do have them. I have millions of people willing to do it voluntarily for me."

"I fundamentally disagree with that distinction between capital and labor. Capital is just a word for money. And money doesn't grow out of the ground."

"Money only has value because at some point it was exchanged for labor. If I buy machinery, I'm investing my labor, because the money didn't just appear out of nowhere."

"One of us is completely wrong. And I'm pretty sure it's not me."

They are both arguing over the pencil. Neither of them can make one.

That was Leonard Read’s point in I, Pencil, written in 1958. Not one person alive knows how to make a pencil. The logger does not know the chemistry of the lacquer. The graphite miner has never seen a ferrule press. The owner cannot fell a tree, mill a slat, or run a freighter. The knowledge sits scattered across thousands of people who will never meet, who do not share a plan, and who mostly do not care about pencils. The pencil shows up anyway. Price is what does the coordinating.

Indispensable is the normal condition of an input. Workers do not get profits because their labor cannot be removed. Nothing in the process can be removed. Take out the graphite, and you have a painted stick. Cut the power and the line stops. Being necessary is not a claim on the residual, or every supplier and every utility would have one too. Workers receive what they can contract for in a competitive market. Owners receive the residual because they assembled the arrangement, advanced money before a single sale, and accepted the loss if nobody bought. That is not a ranking of moral desert. Nobody has to argue the owner worked harder.

The measurement is the part that cannot be built. Assign profits politically, by contribution, and someone has to measure each person’s true contribution. Name that someone. No committee, no agency, no ministry holds the knowledge to do it, because the knowledge is not in one place to begin with. The market’s answer is imperfect, and everyone knows it. It also emerges from millions of separate choices instead of one imposed theory of who deserves what. Markets rarely fail for lack of demand. They fail when the signals do not integrate.

And the door is open. Any socialist can assemble a competing firm, buy the machines, and bid for labor in the same market. That is what voluntary exchange means. It does not check your politics at the entrance.

Why are we still talking about pencils? Which brings me back to a more important point. The scarce input now is knowledge. One person knows something, sells it at a price, and everyone with less knowledge lives better for it. But you cannot conscript what is in a person’s head. (Maybe Anthropic can). You can command hours. You can command attendance. You cannot command insight, and you cannot audit whether the best version of it came out. Paying more is the one method that reliably persuades people to release what they know. A state can nationalize a factory. It has no mechanism for nationalizing a mind.

That is the argument worth having, and the clip never gets near it. When the cost of expert-level work collapses, the gap between who knows and who does not becomes the market itself. The measurement problem gets harder from here, not easier. Try assigning a contribution share in a firm where the output is judgment, the tools are rented by the token, and the productive asset walks out at six.

The pencil factory is a comfortable place to argue. Two men, one building, a visible pile of parts, and a number to split. Almost nothing valuable is made that way now. The wood and the graphite were always the easy part.

If AI flattens knowledge, the socialists might just get enough of an edge. I wonder if Bernie Sanders realizes AI is labor’s friend, not its enemy?