Milton Friedman, the recently deceased economist and Nobel Laureate, once asked the public this simple question: "How do you make a pencil?" By appearance it's a simple object. Yet, no single person on Earth could possibly make one. Amazing? Not at all. The lead (or graphite) is produced from a factory; the wood is felled and cut; an eraser is made from raw materials and rubber; the metal to hold the eraser is manufactured from iron ore mined throughout the world; the yellow paint is produced by a paint factory, and the glue holding the pieces together is made by yet another separate entity. And so on.
A pencil is made by literally thousands of people, all operating within a complex network spanning across the world. Even more amazing, no single person controls it—each separate entity is acting of its own volition, and reliant on the systems of market-based trade to bring it all together to create that simple object.
Within the course of human history, this is a truly radical idea.
Adam Smith, widely considered to be the father of economics, was a contemporary of the founders of America. His book, The Wealth of Nations, was published in 1776 and widely read by Franklin, Jefferson, Washington, and myriad other American founders. Smith's contention that market forces drive the mutually beneficent (and efficient) creation of wealth for a society (he called "the invisible hand") was a provocative new idea, and clearly influenced the Declaration of Independence, the Constitution, and the Bill of Rights as they were penned. These men were rogues and these ideas upended traditions of autocracy and monarchy. These were true liberals.
To be liberal today is not the same as being liberal a hundred or even two hundred years ago. It is a contorted word now—perverted to mean the opposite of its original intention. To be liberal truly means to covet individual freedom, allowing each person to choose their own course—free of the government's will. To be liberal is to be skeptical of established authorities and to trust the wisdom of a broad, interconnected market of ideas over the wisdom of a single person or group.
While the very existence of America alone was a triumph of liberalism and a great leap forward for the world in the 18th century, the idea of liberty had many fights ahead. Even today, most markets in the developed world are not truly free. At best they're mercantilist—where the government often intervenes to regulate trade and commerce. And the majority of developing nations today still fall under the rule of dictatorship and stymieing socialism.
As concepts, democracy and capitalism are both adjectives of liberty. Likewise, liberty is an adjective of the concrete practices of democracy and capitalism. In fact, numerous studies have shown markets are more efficient and stable when all participants—educated and ignorant, from all regions, of all genders and races, participate. Therefore, as the economy becomes more global, as more people of all kinds join in, so too is the world becoming more liberal. In short, there are few better examples of the importance of liberty than in observing the proliferation of capitalism.
How do you make a pencil? Through free market economies based on the core idea of liberty…these are some of the most powerful ideas in humankind's history, and the foundation of the United States' origin.
Have a happy Thanksgiving.
If you would like to contact the editors responsible for this article, please click here.
*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.