How is that a bad thing? And how would it be improved by everyone making their own pencils?

That's a straw man. It's a good thing that there is specialization for tasks (automation is even more efficient) but with that comes other consequences. The organization always seeks to grow and expand, to create demand even if there isn't any. That is a consequence of the fact that the money it gets is more valuable to it than the services, since it can be spent on anything. Meaning it is more widely accepted so trading services for money is a net gain, and the more they do it the better for them. However on the collective level, this results in exploiting any externalities that they can including people's attention, free time, the planet's resources, polluting etc. The incentive is always to expand at the expense of the environment, until ecosystem collapse is threatened (see for example logging forests, etc. or yeast making beer). In short, the tragedy of the unmanaged commons.

Thanks for asking, I don't think I've been able to tie it all in under one overarching picture so clearly before.

Externalities and long term planning are known issues. They can be managed by the government to some extent.

Really it all comes down to managing incentives. Obviously capitalism isn't perfect, but I doubt there is a better alternative. Any other system will have the same issues and complexities. Even trying to solve issues with government like I did above isn't necessarily better, since governments create their own messy web of incentives and complexities.

Maybe there is no solution. For billions of years populations have wanted to expand and been kept in check by eventual predators and death etc. We humans may be driving towards the same fate.