I, Nutella: No one knows how to make the Nutella

Another example of simple product, the Nutella, the international brand name of a hazelnut chocolate spread, that depends on the complex chain of international division of labor.

In a latest study, the OECD uses the Nutella as an example of global value chains.

And in the tradition of Leonardo Read’s classic I, the Pencil, where “not a single person on the face of this earth knows how to make” the pencil, the same applies to the Nutella

From the Atlantic: (hat tip Scott Lincicome)

Some 250,000 tons of Nutella are now sold across 75 countries around the world every year, according to the OECD. But that’s not what’s amazing about it. Nutella, it turns out, is a perfect example of what globalization has meant for popular foodstuffs: Not only is it sold everywhere, but its ingredients are sourced from all over the place too.

Even though Ferrero International, which makes the stuff, is headquartered in Italy, it has factories in Europe, Russia, North America and South America. And while certain inputs are supplied locally—like, say, the plastic for the bottles or milk—many others are shipped from all over the world. The hazelnuts are from Turkey; the palm oil is from Malaysia; the cocoa is from Nigeria; the sugar is from either Brazil or Europe; and the vanilla flavoring is from France.

The OECD mapped it all out. Have a look:

Quote of the Day: I, Coffee

For instance, even the relatively simple GVC [global value chain] of Starbuck's (United States), based on one service (the sale of coffee), requires the management of a value chain that spans all continents; directly employs 150,000 people; sources coffee from thousands of traders, agents and contract farmers across the developing world; manufactures coffee in over 30 plants, mostly in alliance with partner firms, usually close to final market; distributes the coffee to retail outlets through over 50 major central and regional warehouses and distribution centres; and operates some 17,000 retail stores in over 50 countries across the globe. This GVC has to be efficient and profitable, while following strict product/service standards for quality. It is supported by a large array of services, including those connected to supply chain management and human resources management/development, both within the firm itself and in relation to suppliers and other partners. The trade flows involved are immense, including the movement of agricultural goods, manufactured produce, and technical and managerial services.

This version of Leonard Read's "I, Pencil" or in the above "Nobody knows how to make a coffee" is from UNCTAD, World Investment Report 2013, p. 142. (hat tip Econolib's Professor David Henderson)

Quote of the Day: I, Coke: No One Knows How to Make a Can of Coke

The number of individuals who know how to make a can of Coke is zero. The number of individual nations that could produce a can of Coke is zero. This famously American product is not American at all. Invention and creation is something we are all in together. Modern tool chains are so long and complex that they bind us into one people and one planet. They are not only chains of tools, they are also chains of minds: local and foreign, ancient and modern, living and dead — the result of disparate invention and intelligence distributed over time and space. Coca-Cola did not teach the world to sing, no matter what its commercials suggest, yet every can of Coke contains humanity’s choir

This is from Kevin Ashton at the Medium.com, who unknowingly presented the concept of American economist and founder of Foundation of Economic Education Leonard Read’s the classic “I, Pencil” [essay, movie] via the Coke. (hat tip Chuck Grimmett at the FEE)

“I, Pencil” explained by Milton Friedman

Video: I, The Pencil: The Movie

Fantastic remake of Leonard Read's "I, the Pencil" produced by the Competitive Enterprise Institute 

[hat tip Prof Steve Horwitz at the Coordination Problem.org]

Video: I, Smartphone (Made Everywhere)

This is video is the modern day representation of Leonardo Read's must read classic I, Pencil.

Two points here:

One, nobody knows how to make a product on their own or the folly of self-reliance as peddled by politicians. This emphasizes the importance of the division of labor (or Prof. Kling's Patterns of sustainable trade and specialization).

Second, division of labor implies that products have been "made everywhere", which today, extrapolates to the global supply chain networks or "globalization"--which is why politically colored claims of "Made in China" have been utterly fallacious.

Libertarian Legacies of Henry Hazlitt and Leonard Read…

…in the account of Professor Gary North at the lewrockwell.com

Henry Hazlitt…

Like so many people who came to an understanding of the free market in the 1950s and 1960s, Henry Hazlitt was an influential figure. He had been an influential figure for at least 30 years. He is most famous for his book, Economics in One Lesson, which he wrote in 1946. But he was a New York Times columnist at the time he wrote that book. H. L. Mencken once said that Hazlitt was the only economist who knew how to write.

Hazlitt never went to college. He wrote his first book, Thinking as a Science, when he was 20 years old. That was the same year that he went to work for the Wall Street Journal. That was in 1915. To say that Hazlitt had a long writing career does not begin to convey just how long it was. His final article was published in 1988. He died in 1993 at the age of 98.

I did not meet him until I went to work for the Foundation for Economic Education in 1971. But I had been reading his materials ever since the late 1950s. I was a latecomer in this process. It is safe to say that anyone who called himself a libertarian in 1960 had been influenced, directly or indirectly, by Hazlitt. I suspect that this is still true.

Hazlitt was one of the early American promoters of the writings of Ludwig von Mises. He was convinced in the late 1930s that Mises was right, and that the New Deal was wrong. He wrote a positive review of Mises's book, Socialism, for the New York Times Book Review in 1938. This book had been published in South Africa in 1936, although it had been available in German since 1922. I think it is safe to call him an early adopter. He understood the magnitude of what Mises had been teaching long before most American economists had read Mises's books.

Hazlitt's critique of John Maynard Keynes, published in 1959, The Failure of the 'New Economics,' is a comprehensive and thoroughly readable critique of Keynes's General Theory. It was ignored by the academic profession, possibly because it was so thorough in its criticisms, but probably because Hazlitt was noted as a financial journalist, not as a professor of economics somewhere. He did not have the right credentials, so the academic community ignored him. I don't think this bothered him in the slightest.

He was always enthusiastic. He was always extremely lively. In this sense, he reminded me of Murray Rothbard and Burt Blumert, the co-founder of the Center for Libertarian Studies. I never saw him dejected in any way.

I suppose my best recollection of him was late in his life, when he was in a retirement home. At his age, there were not many men in the home. He remarked, twinkle in his eye, that a lot of the ladies in the home made a fuss over him. Then, coming to his senses, he added, "but don't tell Frances." Frances was Mrs. Hazlitt. He was altogether a sensible man.

Again, the lesson is clear: stick to your knitting, and stick to your guns.

Leonard E. Read…

If anyone deserves the title of the founder of libertarianism, it is Read. He was a born promoter. He was the head of the Chamber of Commerce in Los Angeles in the 1930s. He had never gone to college. He was an effective speaker, and in later years, he proved to be an effective writer. He was never a back-slapper, but he was never confrontational, either.

His story of how he was converted to a free market position made an impression on me. He had gone to see the head of the Pacific Gas and Electric Company, William Mullendore. He went there, as he said, "to straighten out this fellow." By the time he had spent a couple hours being taught the principles of voluntarism, he realized that the worldview which he had held when he walked in the door was wrong.

From that day on, he was not really in alignment with the Chamber of Commerce. The chamber was always ready to promote government intervention in favor of business. From that fateful meeting onward, Leonard Read was not.

A decade later, he turned down a job heading the International Chamber of Commerce, which would have paid him $100,000 a year, which in 1946 was a fortune. Instead, he started the Foundation for Economic Education. He had contacts with rich men because of his time spent in the Chamber, but he always attempted to establish a broad-based support for the organization. FEE was not a rich men's plaything. In 1956, he launched the magazine which served as the major source of recruiting for the libertarian movement for the next 20 years: The Freeman. William F Buckley had wanted to buy it, but Read owned the name, and a year after Buckley started National Review, FEE started publishing The Freeman.

While Read was not a trained economist, he had a very clear understanding of how free markets operate. He wrote an article which I regard as the finest statement of the principle of the division of labor that has ever been written. It is called "I, Pencil." It is the story of how nobody knows how to make a pencil. A simple pencil is such a complex device that it takes coordination and cooperation beyond anyone's ability to comprehend in order to produce a simple pencil.

This insight has persuaded an untold number of people of the power and creativity of the free market. What was also creative about the article is that he wrote it as a narrative given by a pencil. He listed his own name only with these introductory words: "as told to."

He also wrote a classic little book, which is unfortunately out of print, Elements of Libertarian Leadership. He wrote many other books, and numerous collections of essays. He never stopped writing, almost until the day he died at the age of 84.

Here is the same lesson: stick to your knitting, and stick to your guns. He turned down a lot of money in 1946 to do this.

Both libertarians were not trained economists; Hazlitt even “never went to college”, yet both came out with classic economic books and articles. Bottom line: economics can be self-learned. Try the Mises Institute

Video: Christien Meindertsma on the Economic Value of Pigs

Here is a fascinating talk by Ms. Christien Meindertsma on TED, about the economic value of Pigs. I mean the animal (oink oink) variety and not the debt plagued acronym of peripheral European countries.

Ms.Meindertsma's talk somewhat resembles Leonard Read's I, Pencil except that she focuses on the pig as a product than as part of the market process [pointer to Mike Du]



Some passages:

The market process of pigs (bold emphasis mine-from TED)

And what I was curious about -- because historically, the whole pig would be used up until the last bit so nothing would be wasted ... and I was curious to find out if this was actually still the case. And I spent about three years researching. And I followed this one pig with number "05049" all the way up until the end and to what products it's made of. And in these years, I met all kinds people, like, for instance, farmers and butchers, which seems logical. But I also met aluminum mold makers, ammunition producers and all kinds of people. And what was striking to me is that the farmers actually had no clue what was made of their pigs, but the consumers -- as in us -- had also no idea of the pigs being in all these products.

The pig's economic value: (bold emphasis mine)

In total, I found 185 products. And what they showed me is that, well, firstly, it's at least to say odd that we don't treat these pigs as absolute kings and queens. And the second, is that we actually don't have a clue of what all these products that surround us are made of.

And you might think I'm very fond of pigs, but actually -- well, I am a little bit -- but I'm more fond of raw materials in general. And I think that, in order to take better care of what's behind our products -- so, the livestock, the crops, the plants, the non-renewable materials, but also the people that produce these products -- the first step would actually be to know that they are there.

We can't surely know everything. But we can understand the market process. And that's why markets are indispensable.

As Leonard Read writes,(emphasis added)

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred.

How Capitalism Saved The Chilean Miners

Daniel Henninger at the Wall Street Journal asserts that the successful rescue of Chilean miners as signifying victory for capitalism.

Mr. Henninger writes, (bold emphasis mine)

This profit = innovation dynamic was everywhere at that Chilean mine. The high-strength cable winding around the big wheel atop that simple rig is from Germany. Japan supplied the super-flexible, fiber-optic communications cable that linked the miners to the world above…

In an open economy, you will never know what is out there on the leading developmental edge of this or that industry. But the reality behind the miracles is the same: Someone innovates something useful, makes money from it, and re-innovates, or someone else trumps their innovation. Most of the time, no one notices. All it does is create jobs, wealth and well-being. But without this system running in the background, without the year-over-year progress embedded in these capitalist innovations, those trapped miners would be dead.

In short the technology, instruments and expertise used to save the trapped miners had been a product of capitalism.

This reminds me of the great classic, “I, Pencil”, from Leonard Read which states that market, using the pencil as example, is driven by spontaneous order: No no one exactly knows how to make the pencil in the entirety, yet people using division of labor, specialization and voluntary exchange concertedly allows the pencil to be produced and be used by us, the consuming public.

Here is an excerpt from Mr. Read, (bold highlights mine)

Actually, millions of human beings have had a hand in my creation, no one of whom even knows more than a very few of the others. Now, you may say that I go too far in relating the picker of a coffee berry in far-off Brazil and food growers elsewhere to my creation; that this is an extreme position. I shall stand by my claim. There isn't a single person in all these millions, including the president of the pencil company, who contributes more than a tiny, infinitesimal bit of know-how. From the standpoint of know-how the only difference between the miner of graphite in Ceylon and the logger in Oregon is in the type of know-how. Neither the miner nor the logger can be dispensed with, any more than can the chemist at the factory or the worker in the oil field — paraffin being a byproduct of petroleum.

Here is an astounding fact: neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

Capitalism is almost always the unheralded and unappreciated hero, for incidents like the successful rescue of Chilean miners, but has undeservingly served as the scapegoat for failures of the political order.