How a pencil refutes centralized circular economy?

What has famous Milton Friedman pencil case to do with circular economy and integrated reporting, this is a topic of this post.

Milton Friedman “pencil case” can be found in his book “Free to Choose”. Shorter but explanatory enough version can be found on this Youtube video. What can be understood even by undergraduate is that no such person, no such intelligence no such power exists that could understand and organize all steps in production of even a simple pencil. A cooperation of thousands of producers from around the world from steel miners, loggers, graphite and brass producers, colour producers, truck drivers and shopkeepers (to name just few of them) that do not know each other and that might even hate each other for various reasons, cooperate unintentionally so that at the end I can buy a pen for few cents.

With such purchase I pay for a tiny fraction of an effort of thousands of workers along the pencil line not having a slightest idea who they are, where they are and what they care about. In the moment of purchase I’m in an indirect relation with all of them. I’m influencing their lives and they are influencing mine. We are all in well-connected circle. This circle is well-connected despite there is no external force, no external headquarter, no central planning authority that would or even could draw the lines of such circle.

As the matter of fact the circle does not end with me. I could use such pencil to draw a picture that makes someone happy. I could draw a licence plate of a car that run away from an accident with such pencil. And I could sooner or later deposit it as waste that would produce some heat for local district heating facility serving their clients with hot water, that would allow worker to feel clean while assembling pencils in local workshop.

All mentioned activities and zillions of others not mentioned but equally important for the life of one single pencil happen as a result of thousands of individuals searching for personal marginal utility, personal benefit. No central authority calculates steps, relations between them or values of each transaction. The logger in Amazonia takes care of his salary; the owner of Amazonia wood plant cares about the margin that he can achieve by selling wood; but neither of them knows anything about the happiness that was induced by my drawing from a pencil they have unintentionally co-produced. All they know are prices they can achieve and all I know is a price I have to pay to get a pencil. Pencil is emergent property of vastly complex circle of activities that could in principle not be administered through any central authority.

That is why present centrally planned circular economy program of European Union is not only futile but even counterproductive. Circularity of economy happens exactly because no central authority interferes. When central authority interferes, like in Soviet Russia or in any other similar regime (like EU at the moment), not only circularity breaks, but economy as such as well. Economy exists only as circular.

While it is clear that circularity cannot be centrally planned and that it rests on individual/personal decisions directed by information provided by prices, that does not mean that individuals involved in such circularity do live only in one dimension only, a dimension of pencil/price. Humans are neither homo-pencilis nor homo-economics. When utilizing pencil we do not only spread around information directly related to the pencil price, but a vast number of related information (that all have a certain value for certain markets or audiences). We show pride that allows us to gain friends that might help us sell our services. We show our precision with sharp pen that allows our boss to trust us better. There are many products/effects of such pen for our personal economy. We could report such effects (not all positive at all) in the form of integrated report.

As much as individuals are not narrow single utility (greed) creatures despite we all look for cheapest goods to buy and highest price to achieve when selling our abilities, so pencil producer also operates in vastly complex input-output framework and not only as purchaser of wood and seller of assembled pencils. Pencil producer does not only take care about the flow of natural capital inputs and outputs but as well about social, human, intellectual, manufactured and financial capital flows and results. Pencil producer might deposit large sums of financial capital in local bank enabling a local start-up to place a new product on market. He might lay out couple of workers that become criminals raising social cost for that pencil producer as well. He might find a price of wood needed to assemble pencils as to expensive and thus develop a production of cheaper wood replacement material from used plastic waste. He is in charge to decide about all capitals he is in charge of and of all effects produced by them. No other authority be it local community, environmental agency, European Union or United Nations can or should decide instead of him. But at the same time since he understands the value of information he provides, he reports. He reports not to satisfy any governmental agency, but to satisfy needs expressed in value chains of his company. It has to be noted that in totalitarian economies dictators are important elements of his value chains, so he reports primarily to them and not to customers. For the same reason he reports primarily to various national and supranational agencies in contemporary EU and USA. But this is already another story for another post.

What I want to point out is that principal agents of economy, companies, are solely obliged to report. Only those should report that are agents of production since they are a part of circular economy and albeit not understanding the overall complexity at least participate in it. Institutions that observe this circularity from outside like governments, governmental agencies, various NGO’s and similar, that neither participate in economy in productive way (they only absorb taxes) nor can understand circularity (as no one can understand it), should be silent both about circular economy and about integrated reporting.

Andrej Drapal