Magazine | May 20, 2013, Issue


Nobody knows how to make a pencil, or a health-care system

Everybody knows the first words spoken on a telephone call — Alexander Graham Bell’s simple demand “Mr. Watson, come here. I want to see you.” April marked the 40th anniversary of the first cell-phone call, which was quite different in tone. Two research teams had been competing to bring the first real consumer cell phone to market, and the first mobile call was placed by Motorola engineer Marty Cooper to his chief rival, Joel Engel of Bell Labs. “Joel, this is Marty,” he said. “I’m calling you from a cell phone.” In other words: “You lose, suckers.”

It took nearly a century to get from Alexander Graham Bell’s conversation to Marty Cooper’s, even though the basic technologies of mobile phones — telephony and radio — date from the 19th century. Conversely, it took only 66 years for mankind to go from the Wright brothers’ flight at Kitty Hawk to Neil Armstrong’s stroll on the moon. Technology does not move in predictable ways.

But it does move.

We treat technological progress as though it were a natural process, and we speak of Moore’s law — computers’ processing power doubles every two years — as though it were one of the laws of thermodynamics. But it is not an inevitable, natural process. It is the outcome of a particular social order.

When I am speaking to students, I like to show them a still from the Oliver Stone movie Wall Street in which the masterful financier Gordon Gekko is talking on his cell phone, a Motorola DynaTac 8000X. The students always — always — laugh: The ridiculous thing is more than a foot long and weighs a couple of pounds. But the revelatory fact that takes a while to sink in is this: You had to be a millionaire to have one. The phone cost the equivalent of nearly $10,000, it cost about $1,000 a month to operate, and you couldn’t text or play Angry Birds on it. When the first DynaTac showed up in a movie — it was Sixteen Candles, a few years before Wall Street — it was located in the front seat of a Rolls-Royce, which is where such things were found 25 or 30 years ago. By comparison, an iPhone 5 is a wonder, a commonplace miracle. My question for the students is: How is it that the cell phones in your pockets get better and cheaper every year, but your schools get more expensive and less effective? (Or, if you live in one of the better school districts, get much more expensive and stagnate?) How is it that Gordon Gekko’s ultimate status symbol looks to our eyes as ridiculous as Molly Ringwald’s Reagan-era wardrobe and asymmetrical hairdos? That didn’t just happen.

In his classic short story “I, Pencil,” economist Leonard Read considers the incomprehensible complexity involved in the production of a simple No. 2 pencil: the expertise in design, forestry, mining, metallurgy, engineering, transportation, support services, logistics, architecture, chemistry, machining, and other fields of knowledge necessary to create a product so common, so humble, and so cheap as to have become both ubiquitous and disposable. Read’s conclusion, which is one of those fascinating truths so obvious that nobody appreciates them, is that nobody knows how to make a pencil. Nobody is in charge of the operation, and nobody understands it end to end. From the assembly-line worker to the president of the pencil company, thousands or millions of people have tiny, discrete pieces of knowledge about the process, but no coordinating authority organizes their efforts.

That is the paradox of social knowledge: Of course we know how to make a pencil, even though none of us knows how to make a pencil, and pencils get made with very little drama and no central authority, corporate or political, overseeing their creation. A mobile phone is a much more complicated thing than a No. 2 pencil, but both are the products of spontaneous order — of systems that are, in the words of the Scottish Enlightenment philosopher Adam Ferguson, the “products of human action, but not of human design.”

Complex though it is, the iPhone is also a remarkably egalitarian device: The president of the United States uses one, as does the young Bengali immigrant who sold me my coffee this morning. But you can bet that her children do not attend schools as good as those that instruct the Obama daughters. The reason for that is politics: not liberal politics, not conservative politics, not bad politics, but politics per se.

#page# The problem of politics is the problem of knowledge. The superiority of market processes to political processes is not in origin moral but technical. The useful knowledge in any modern society is distributed rather than centralized — and, as Read intuited and as modern scholars of complexity studies confirm, there is no way to centralize it. Ludwig von Mises applied that insight specifically to the defects of planned economies — the famous “socialist calculation problem” — but it applies in varying degrees to all organizations and all bureaucracies, whether political, educational, religious, or corporate. Markets work for the same reason that the Internet works: They are not organizations, but disorganizations. More precisely, they are composed of countless (literally countless, blinking into and out of existence like subatomic particles) pockets of organization, their internal structures and relationships to one another in a constant state of flux. Market propositions are experimental propositions. Some, such as the iPhone and the No. 2 pencil, are wildly successful; others, such as New Coke or Clairol’s Touch of Yogurt Shampoo, are not. Products come and go, executives come and go, firms come and go. The metaphor of biological evolution is an apt one, though we sometimes draw the wrong conclusion from that — Social Darwinism and all that nonsense.

Conservatives like to say “Markets work,” as though that were an explanation of anything. What we really are saying is: “Failure works.” Corporations are mortal. Failure is not only an important part of the market process, it is the most important part of the market process.

U.S. Steel was at the height of its power a behemoth, the largest American business, the first corporation in the world to have a market value in excess of $1 billion. It was formed out of the union of J. P. Morgan’s business interests and Andrew Carnegie’s steel empire. When Carnegie took payment for the interests he sold to Morgan — the equivalent of $6 billion in contemporary dollars — he received it in the form of 50-year gold bonds, documents that took up so much room that the bank in which they were deposited had to build a special vault to house them. U.S. Steel seemed to be a permanent thing, but it is today a shadow of itself, reduced to a mere division of another firm, surviving mainly in name, and that name reduced to grandiosity: U.S. Steel Corporation indeed, as though it were the U.S. Mint or the U.S. Army. It produces barely more steel today than it did in Morgan’s time, and it is well below Staples and Rite Aid on the Fortune 500. The decline of U.S. Steel was bad for the company’s shareholders and its employees, but it was good for people who use steel — meaning everybody else in the world. U.S. Steel was itself the product of an improved business model that had displaced older, less efficient competitors. Without the pressure and opportunity created by the possibility of failure, the U.S. steel industry — and the entire U.S. economy — would be (at best) stuck in the early 19th century. It seems paradoxical, but failure is what makes us rich. (And we are, even in these troubled times, fabulously rich.) We’d all be a lot worse off if corporations such as U.S. Steel lived forever (which is one more reason not to engage in bailouts).

#page# Politics creates the immortal corporation. Amtrak and the U.S. Postal Service are two institutions that would have failed long ago if not for government support — subsidies for Amtrak, the government-chartered monopoly on letter delivery for the postal service. The cost of their corporate immortality is not only the waste associated with maintaining them, but also the fact that their existence prevents the emergence of superior alternatives. No sane person would invest 12.5 percent of his income in Social Security in 2013, but we are compelled to do so, and so the bankrupt enterprise continues as though it were not tens of trillions of dollars underwater. A political establishment is a near-deathless thing: Even after the bitter campaign of 2012, voters returned essentially the same cast of characters to Washington, virtually ensuring the continuation of the policies with which some 90 percent of voters pronounced themselves dissatisfied. No death, no evolution. Outside of politics, human action is characterized by evolution and by learning. And what are we learning? How to take care of one another, which is the point of what we sometimes call capitalism. (Don’t tell Ayn Rand.)

It is remarkable that we speak and think about commerce as though competitiveness were its most important feature. There is, as noted, a certain Darwinian aspect to economic competition — and of course we humans do compete over scarce resources. But what is remarkable about human action is not its competitiveness but its almost limitless cooperativeness. Competition is one of the ways in which we learn how best to cooperate with one another and thereby deal with the problem of complexity — it is a means to the end of social cooperation. Cooperation exists elsewhere in the animal kingdom, but human beings cooperate on a species-wide, planetary level, which is a relatively new development in our evolution, the consequences of which we have not yet fully appreciated. If you consider the relationship of the organism to its constituent organs, the relationship of the organ to its cells, or the relationship of the single cell to its organelles, it would not be an overstatement to say that the division of labor is the essence of life itself: Birds do it, bees do it, but human beings do it better. The size and complexity of our brains evolved in parallel with the size and complexity of our social groups, which are just as much a product of evolutionary processes as our bodies are.

Thus, we do not have the U.S. Steel Corporation, a tightly integrated and hierarchical operation overseen by a CEO with an omniscient command of his operation. We have lots of U.S. steel corporations, and a worldwide steel industry, and many worldwide industries making products that are substitutes for steel, from aluminum to carbon fiber to nanotubes. But we do have the U.S. Postal Service, the Social Security Administration, and the government-school monopoly in your home town. These agencies underperform consistently when compared with such benchmarks of innovation as the software industry or the biotech industry. They fail because they attempt to substitute a single brain, or a relatively small panel of brains organized into a bureaucracy, for the collective cognitive firepower of millions or billions of people. Put simply, they attempt to manage systems that are too complex for them to understand. Complexity is humbling, but politics is immune to humility.

Which is something to keep in mind the next time somebody promises to “solve” our health-care challenges or unemployment. Washington is packed to the gills with people who believe that they have the ability to design an intelligent national health-care system, but there is not one who does — no Democrat, no Republican, no independent. The information burden is just too vast. Washington is not only full of people who do not know what they are talking about, it is full of people who do not know that they do not know what they are talking about. That is no model for social change. Your pencil and your phone are.

– Mr. Williamson is National Review’s roving correspondent. This article is adapted from his new book, The End Is Near and It’s Going to Be Awesome.

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