Nobel Prize–winning economist Milton Friedman explains the power of the free market using the “pencil” analogy—inspired by the original 1958 essay I, Pencil by Leonard E. Read.
the full story
The basic principles of free market as Adam Smith taught them to his students in this university are really very simple.
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 graphite, compressed graphite. I’m not sure where it comes from, but I think it comes from some mines in South America.
This red top up here, the eraser, bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native. It was imported from South America by some businessmen, with the help of the British government.
This brass ferrule, 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 those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no commissar sending out offices from 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.
Sources
- Watch the original speech: https://www.youtube.com/watch?v=67tHtpac5ws
- Read the original essay: I, Pencil” by Leonard E. Read
Dig deeper!
- Read the original 1958 essay “I, Pencil” by Leonard E. Read from which Friedman’s speech was based on.
- The pencil story is a modern illustration of an “invisible hand” concept that drives the wealth of a nation, first described by Adam Smith in 1776. To learn more on this economic principle, visit Adam Smith Institute website or read his original book “An Inquiry into the Nature and Causes of the Wealth of Nations” in the Library of Economics and Liberty (Econlib).
- If you’re curious to learn more about the ideas behind the free market, we invite you to explore this helpful article from Investopedia: Free Market Definition. It offers a clear explanation of how free markets operate—where prices are determined by supply and demand, and businesses compete freely without heavy government intervention.
Classroom activity
Objective:
Students will explore how the free market enables global cooperation and interdependence without central coordination, using the example of a simple pencil.
Duration:
60 minutes
Materials Needed:
- Sprouts video: The Magic Behind a Pencil
- One pencil per group
- World map (digital or physical)
- Markers or sticky notes
- Chart paper or whiteboard
Steps:
1. Introduction and Video Viewing (10 minutes)
Start by holding up a pencil and asking: “How many people do you think it takes to make this?”
Let students guess. Then say: “Let’s watch a short video that might surprise you.”
Play the Sprouts video.
2. Group Mapping: Tracing the Pencil (15 minutes)
Divide students into small groups. Each group uses a map to trace the journey of the pencil’s materials (e.g., wood from the U.S., graphite from South America, rubber from Asia). Mark each location and identify its role in pencil production.
3. Group Presentations and Synthesis (10 minutes)
Groups present their maps and discuss: Who was involved? Were they coordinated by one authority?
The teacher guides students to recognize the decentralized nature of this cooperation.
4. Whole-Class Discussion: The Free Market (15 minutes)
Discuss:
- What connected all these people?
- What role did prices and trade play?
- Could this have happened under a centralized system?
5. Reflection and Sharing (5 minutes)
Students individually write a short reflection: “What does this pencil teach me about the world economy?”
Volunteers share their thoughts to close the session.
Collaborators
- Script: Jonas Koblin
- Cartoon artist: Pascal Gaggelli
- Producer: Selina Bador
- Voice artist: Matt Abbott
- Coloring: Nalin
- Editing: Peera Lertsukittipongsa
- Publishing: Vijyada Songrienchai
