Could YOU make a pencil?

I’ve often thought that if I were accidentally transported back a thousand years, I’d probably not be much use.

Sure, I’d know about all these amazing things the modern world has. But could I show anyone? Could I build any of them?

I have no idea how a gun works, how modern medicine heals people, how to make an oven, a lightbulb, or a car.

I couldn’t even make a simple lead pencil to be honest. No clue where to find lead, or how to mine it. Hopeless at woodwork, which needs to be pulped and re-cast anyway. And put them together in a usable form? No chance.  

It’s an interesting thought experiment – what could you invent if you woke up in the year 1020 instead of 2020? Send any fun or useful ideas you have to

Before you do though, you’re probably wondering where I’m going with this.

Well the point is that things that we take for granted, and casually assume to be quite simple, are in fact impossibly complicated, requiring unfathomable skill, and above all, a free market – like a pencil.

You’ve got the miners, the mining tool suppliers, the logistics services delivering parts and produce, the scientists for discovering the properties of lead, the woodworkers, and the assemblers, who collect all the necessary streams together and finally, craft the pencil, applying some red paint and a golden “2B” insignia on the side.

It needs a whole host of different companies with different people, skills, goals, and locations to achieve something as basic as a pencil.

Don’t even think about a toaster, or a car.

What is the value of a pencil?

Whatever the market will pay for it.

And who decides that? All the people mentioned above. They charge all the other people in the chain a bit more than they themselves were paid.  

If the price is too high, they won’t sell many pencils and either a competitor will undercut them, or they’ll be forced to do it more efficiently, somewhere down the line.

A nation’s economy is the most complex thing of all.

For centuries, economists of the highest calibre have tried to understand it, explain it, and say how to manage it – and none of them have ever got it completely right. That’s because it’s made up of living beings (us), and we change in unpredictable ways.

Thus, the implicit bartering between supplier and consumer which determines the price of everything we can buy is the only way to set prices.

That’s why socialism fails, and that’s why Corbynism was rightly rejected by the country last week.

People spend all their time pointing out how useless the government is at getting stuff done – “schools are failing, the NHS is crumbling, the HS2 rail link is over budget and massively delayed” etc… So why on earth would they vote for a government that wants to take on more responsibility?

Like it or not, we get pretty much the best we can in a free market.

Competition is the ultimate check on bad business.

If the government takes over things, then there isn’t competition any more. As the only player in rail, water, power, and post, the government has no incentive to do things cheaply or well, because it can’t ever be undercut or outdone. Of course there are other incentives, and not every nationalisation has been a disaster, but this is the general rule.

Even if the government came in and lowered prices for train commuters – how would it sustain this? By paying drivers less, or by subsiding it with taxpayers’ money?

The money always has to come from somewhere, the government can’t just decree lower prices – all the suppliers, metal workers and security guards would be forced out of business because the government (now its only customer) refuses to pay them enough, to cut costs for the commuters.

Socialism has always ended up disappointing its own laudable goals for exactly this reason. No government can allocate resources and set prices better than the free market can.

Of course there are plenty of problems with free market capitalism – the ones which the left and socialists always mention, and they are right to. And there are well-run examples where nations have partially or totally nationalised railways, which are seriously high class – Switzerland’s SBB and Austria’s ÖBB spring to mind.

But it would be a mistake to assume that socialism is the cure for those problems. History has shown, in Maoist China, Cambodia and Venezuela that socialism causes more harm than good because it inhibits the free market. Government control of the “means of production” and nationalisation of all industries has been pretty satisfyingly proven to be a bad idea.

It thinks the pencil is simple, it falsely believes that you can tell economies and markets what to do, what to make, and what price to sell. And that flaw undermines all of its noble goals and claims of moral superiority.

While Brexit undoubtedly played a large or dominant part in swinging the vote in the Conservatives’ favour, it was not the only reason. A rejection of Jeremy Corbyn’s hard-left socialist policies must also have been a factor. Many are old enough to remember the dark times of the socialist seventies in the UK, and will have been incredibly relieved to have avoided such a risk again.

And so now, Boris has his majority. Such a big majority that he could even sideline the hard-Brexiteer  European Research Group (hopefully) and pursue a softer form of Brexit, and his speech in front of 10 Downing Street was encouraging in that regard – speaking kindly to Remainers and emphasising the benefits of a friendly and close relationship with the EU.  

The National Health Service

The anti-socialist argument is not always that clear-cut though. The NHS, for example, delivers world-leading care, free of charge and without extraordinarily high taxes. No it’s not perfect, yes it’s under strain from underfunding, no the Conservative spending plans may not be enough.

While the NHS is a brilliant concept, it’s important to think of it as a free-market dividend, something extra that we can have because our economy has been a strong, free market for so long. Socialism, somewhat ironically, would risk that.

Having said that, there is one part of the health industry that is still totally private, and I’m glad – medical research. The government and regulators oversee R&D companies by rigorously trialling each new drug to make sure that it is effective and doesn’t have more harmful side-effects – but there is no national programme mandating which drugs to come up with and which problems to solve.

I’ve been saying that an economy is a complex organism too intricate and unpredictable for a single government, department or committee to direct.

Well that is only more true for the human body, and the health of the population.

Science, patent law and the stockmarket together make sure that pharma R&D is a rapidly developing, cutting-edge industry – not playing it safe, but pushing the boundaries. Many will fail, but some will be crazily successful. Creative destruction is probably more present in pharma R&D than in any other industry.

It’s a tough market to be in though. It requires very high levels of knowledge and experience, a deep understanding of the regulatory process and trialling criteria, and a constant attention to current events and tiny details.

It’s not the stockmarket for amateurs.

Luckily, our very own Gerard Pontonnier has everything mentioned above in abundance. He took Viagra from conception to blockbuster status, and the same for Lipitor (the bestselling drug of the last two decades). He doesn’t just understand the regulatory process, he worked for the regulator itself. And with experience working for an investment bank, he is literally one of the best qualified guides to help investors in this market.

The potential profits for those who follow Gerard’s informational advantage are huge.

One of his picks is expecting green light trial results before this year is out, so there is no time to waste. The preliminary results caused its stock price to shoot up 466%… What do you think will happen when they’re confirmed in the next few days?

I know what I think.

Wishing you all a very enjoyable and profitable Christmas period,

Kit Winder
Investment Research Analyst, Southbank Investment Research

Category: Commodities

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