Milton Friedman: The free market price system promotes cooperation and harmony among those with no common interest

Milton Friedman’s illustration of a pencil makes the point in a clear way.

Milton Friedman – Lesson of the Pencil

Uploaded by on Nov 13, 2009

Milton Friedman uses a pencil to illustrate how the free market price system promotes cooperation and harmony among those with no common interest.

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November 21, 2006

Milton Friedman 1912-2006

Milton Friedman’s book “Free to Choose”, co-authored with his wife Rose, was among the first tracts I’ve read on the topic. I don’t remember exactly when I read it, probably in college. I would not be able to explain well the intracacies of monetarist policies and its alternatives, but Friedman’s simple message about free markets has always stuck with me.

He summed up the workings and the benefits of free markets with a simple idea: a pencil. Here is Friedman in his own words, taken from a transcript of a TV version of “Free to Choose”:

“Look at this lead pencil, there is not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it’s 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 the steel, it took iron ore.

“This black center, we call it lead but it’s really compressed graphite, I am not sure where it comes from but I think it comes from some mines in South America. This red top up here, the 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 businessman with the help of the British government. This brass feral – 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 cooperated to make this pencil. People who don’t speak the same language; who practice different religions; who might hate one another if they ever met. When you go down to the store and buy this pencil, you are, in effect, trading a few minutes of your time for a few seconds of the time of all of those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no Commissar sending out orders from some central office. It was the magic of the price system – the impersonal operation of prices that brought them together and got them to cooperate to make this pencil so that you could have it for a trifling sum.

“That is why the operation of the free market is so essential. Not only to promote productive efficiency, but even more, to foster harmony and peace among the peoples of the world.”

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