Adam Smith's Pin Factory

Adam Smith - Our Founding Father

INTRODUCTION

 

This essay on Adam Smith and his famous example of a pin factory also serves as an introduction to some of the themes in the over 100 essays in this blog.

 

Adam Smith wrote the Wealth of Nations during the beginning of the Industrial Revolution. It was published in 1776. The dynamics of the Industrial Revolution continue to be a disruptive force; because of AI, it might be even more disruptive in the future.

 

ADAM SMITH’S PIN FACTORY

 

Adam Smith’s description of a pin factory is on the first page of The Wealth of Nations.  (Chapter 1 – “Of the Division of Labour”)  Drawings of pin factories of this period show workers using hand tools. Smith says the process can be broken down into 18 distinct steps, including packaging the pins. Smith mentions that pin factory workers were poorly paid, despite their high productivity. 

 

Adam Smith says he visited a pin factory employing 10 men who produced 48,000 pins per day, or 4,800 pins per worker. If each of the ten workers had done all the steps themselves, Smith says each worker could produce only 10 or 20 pins per day if he worked by himself. So the pin factory supposedly replaces 2,400 to 4,800 pin makers.

 

It is hard to believe that someone could survive producing 10 or 20 pins a day.

 

It is highly unlikely that Smith visited a pin factory. But the increase in output and labor productivity was meant to illustrate one way a society could raise output and increase the standard of living of all people, not just the wealthy and powerful. 

 

This implied reduction in unit cost or average cost (AC) and the huge increase in quantity produced do not just replace older methods of organization and production. They increase the potential “extent of the market.” Existing users not only buy more pins at the lower price but also think up new ways to use cheaper pins. The geographical limits of the pin market expand; contemporary and future reductions in transportation costs further expand domestic markets and increase exports.

  

Adam Smith is considered the Father (or maybe Godfather) of economics. The Wealth of Nations discusses how markets work; it contains examples of changes in supply and demand. But there is little discussion about the concepts of cost and price. No unit price of production or market price are given in the pin factory example. There is little consideration of how prices change, except when they increase because of the interference of government with tariffs and protected monopolies like the East India Company.

 

ADAM SMITH AT THE BEGINNING OF THE INDUSTRIAL REVOLUTION

 

As Adam Smith says, there are limits to specialization and division of labor, and thus limits to reducing unit costs.  But the major source of these limits is not “the extent of the market.” It is the limit of relying solely on the division of labor using pre-industrial production technology. As a source of the continuous increase in the “wealth of nations,” Adam Smith’s pin factory was a one-time increase in productivity due to an organizational change. All that was about to change.

 

Adam Smith ignores another common way to increase productivity and output. England had thousands of waterwheels and windmills that drove machinery that did many tasks, including grinding grain, producing beer, and pulping cloth fibers for paper. But power was limited and a waterwheel could only drive one operation.

 

Adam Smith’s pin factory is his only clear example of how an economy can grow through one type of innovation. But what is missing is any discussion of the Industrial Revolution or steam engine power-driven machinery, which had begun during Adam Smith’s lifetime. This is odd. Adam Smith knew James Watt, a brilliant engineer and mechanic who greatly increased the efficiency of steam engines. Both worked at the University of Glasgow at the same time. Smith was instrumental in hiring Watt. Watt patented his steam engine just as Smith began writing The Wealth of Nations.  A friend of Adam Smith invested in James Watt’s company to produce his new steam engines.  (The same friend, William Small, was also Thomas Jefferson’s college tutor.) Adam Smith knew Mathew Boulton, the industrialist who convinced Watt to set up a company and factory to produce his steam engine. It was the beginning of the Industrial Revolution.

 

Smith mentions “fire-engines” (steam engines) once in the entire book, on page 1, but only to illustrate how workers might improve the working of machines. His example is now considered a myth. He makes a vague statement about “proper machinery,” followed by the sentence, “It is unnecessary to give any examples.”

 

Almost all economic activity requires specialization, division of labor, and coordination. In the past, this was based on many factors – gender, age, class, caste, ethnic group, religion. In the Industrial Age, this means power-driven machinery beyond wooden machines driven by waterwheels, specialization by company, and coordination of long supply chains.

 

A capital goods sector would specialize in producing larger, faster, more efficient power-driven machinery with metal parts. Production became capital intensive; companies became much larger to realize economies of scale. Steam engines meant companies no longer had to be located along rivers or streams.

 

In summary, Adam Smith's mental framework is that of someone living in the pre-industrial world. His pin factory is an intermediate step from an individual worker using simple hand tools to a power-driven factory using machine tools and his division of labor. His division of labor will be applied to the machine tools, becoming more specialized at each stage of production, leading to magnitudes of increases of output at lower unit cost.

 

STEAM ENGINES DRIVE THE BEGINNING OF THE INDUSTRIAL REVOLUTION

 

Boulton and Watt began producing Watt’s steam engine in 1776, the year Wealth of Nations was published. The cylinders of the steam engines were bored to small tolerances by the advanced metal-working machines of John Wilkerson. Wilkerson worked closely with the Darby family, who had innovated new ways (coking) to produce larger and cheaper amounts of iron.

 

By 1800, Boulton and Watt had produced 496 steam engines.

 

The breakdown of how these 496 engines were utilized includes:

• Mill Machinery: 308 engines driving rotary machinery in factories and mills.
• Reciprocating Pumps: 164 engines for pumping water, mostly in mines.
• Blast Furnaces: 24 engines serving the iron industry.

 

Wikipedia, “Steam power during the Industrial Revolution”

 

An early user was Josiah Wedgwood.

 

Adam Smith does not discuss any of this.

  

Economic theorists would continue to ignore the reality of the Industrial and Information Revolutions because the central dynamic – continuous, disruptive innovation leading to new production technology, lower average cost, and new corporate structures – would destroy their key models of perfect competition and general equilibrium. 

 

PIN-MAKING GETS MECHANIZED IN AMERICA

 

Pin production met the Industrial Revolution in the 1830s.

 

Some pins were made in America, most in prisons and almshouses. At a New York almshouse, Dr. John Howe, the resident physician, observed pin making and began to invent a machine to mechanize the process. He made his first machine in 1832. In 1835, the Howe Manufacturing Company was established with capital from New York merchants.

 

One of Howe’s pin machines could produce about 24,000 pins in an eleven-hour day.

 

Much of the decrease in costs occurred in the packaging of the pins.  About half of the workforce packaged the pins. At first, the pins were “put out” to nearby families. Then the invention of a hand-powered packaging machine brought the operation into the factory. In 1856, a machinist at Howe invented a powered pin-packing machine.  Before his invention, women were paid $1.25 a day to pack about 150 packages; with his invention, women could pack 200 packages a day and were paid only $.75 a day.  (The story of Howe Manufacturing is from Steven Lubar, Engines of Change:  An Exhibition on the American Industrial Revolution, 1986, 56.)

 

By the late 1970s, two hundred years after The Wealth of Nations, manufacturing plants using computer-driven automated machinery could produce 800,000 pins per worker per day. This is about 16 times as many as in Adam Smith’s pin factory.

 

EXTENSION TO SIMILAR PRODUCTS

 

In the United States before the early 1800s, when nails were mass-produced by machines, they were very expensive. If a family built a house using nails and decided to move west, they would often burn down the house to recover the nails for the next house. It is one reason there are so few "vernacular" houses in existence in America before the early 1800s.

 

Mechanizing nail production had an even greater impact than mechanizing pin production. Cheap nails revolutionized construction. They made possible the balloon-frame method of home building, where pieces of lumber were nailed together to make the house’s frame. In the long-run, the result was mass home ownership and the American suburb.

 

The story of the continuous improvement in the quality and variety of pins, and the decrease in the average (unit) cost, was repeated for related products. Besides nails:

 

Spikes – critical input in the building of railroads.

Rivets – made the mass production of airplanes possible.

 

Specialization and the division of labor in the Industrial Revolution depends on the knowledge and skills of workers and management (education), and the division of production by geography (comparative advantage – Ricardo) creating global supply chains.

 

We are at the beginning another manufacturing/information revolution driven by robots and AI models. Despite the huge amount of commentary and forecasts no one knows where all this is going. We will need people like Adam Smith and the members of the Scottish Enlightenment to guide the way.

 

EXTREME SPECIALIZATION AND DIVISION OF LABOR IN THE INDUSTRIAL REVOLUTION

 

The extreme example of division of labor in the modern era was Ford. But it was the machines that became more and more specialized. Henry Ford and his engineers designed the machinery to produce Model T Fords. Combined with the moving assembly line, Ford could produce magnitudes more cars (from 10,000 to 100,000 to one million) at lower unit cost. By 1927, the Model T was the same car Ford first produced in 1907; it looked like an antique compared to the modern-looking cars containing innovations of General Motors and Chrysler. Ford was losing money and market share. He was forced to shut down his entire company, lay off 70,000 workers, design a new line of cars, and an entire new set of machines to produce them.

 

Ford never regained its dominant position in the American car market. American car manufacturers relied on model design changes, new features and higher prices to increase sales and profits. They stopped producing cheap, basic transportation, partly because of inefficient manufacturing and poor quality control. They would lose sales and market share to foreign companies, led by Toyota, that concentrated on better manufacturing, better inventory management and excellent quality control.

ADAM SMITH AND THE AMERICAN REVOLUTION

 

The Wealth of Nations was published in 1776. Adam Smith and his intellectual circle influenced the American thinkers who wrote the Declaration of Independence.

 

Adam Smith and the members of the Scottish Enlightenment articulated many of the political and philosophical ideas that influenced the thinking of America’s Founding Fathers. Phases in the preamble to the Declaration such as “We hold these truths to be self-evident” and “pursuit of happiness” were taken from the writings of progressive thinkers in Scotland. Adam Smith was prescient when he said that the individual freedoms of Americans and lack of government “mercantilist” policies would one day make America a rich and powerful nation. 

 

It is argued in another essay that the American Revolution, and the radical structure of the new American government, gave America a society that was the best political and social foundation to initiate the Industrial Revolution in the long run.

 

CONCLUSION
 

Specialization with hand tools can go only so far. But what if power-driven machines continued to become faster, more reliable, more accurate, and more specialized? Production per plant would go up tremendously and average unit cost would continue to decline. Competition would be disruptive; there would be no equilibrium. The Industrial Revolution would be a “permanent revolution.” 

 

Specialization and division of labor does not lead to the Industrial Revolution. Production needs power-driven machinery and continuous improvement in machine tools, machinery, and organization. Machine tools make metal machine parts. New and more powerful sources of energy and heat are created. All of this, and more, is managed in new organization forms like factories, new types of management, and new types of internal controls.

Further comment about Adam Smith. Most of Smith's book was an argument against mercantilism and restrictions on international trade. At the heart of England's trade policies was the Navigation Acts. They restricted the development of the economy of England's North American colonies. American resentment and anger were a contributing factor to the American Revolution. Smith opposed England's policy of not negotiating with the Americans and then England's attempt to suppress the Revolution.

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For an excellent example of an innovative entrepreneur at the beginning of the Industrial Revolution in England, see

Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution.

Josiah Wedgwood was one of the first manufacturers to install a Watt steam engine.

For the story of the how the Industrial Revolution began in England in the late 1700s, see 

The Beginning of the Industrial Revolution in England

For the argument that the United States was well-positioned to benefit from the Industrial Revolution, see

The Beginning of the Industrial Revolution in America

For some of the historical developments that made the Industrial Revolution likely in England, see

England in the 1600s: The Beginning of England's Rise to Global Power and Wealth

The above essay explores the roles of the English East India Company (EIC) in Asia and the Navigation Acts in America and the West Indies in making England a global economic power. It gives context to the next two essays.

For a more detailed look at the English East India Company, and why it was the first modern multinational corporation, see

The English East India Company:  Trade with India and Asia

For the story of America's new revolutionary form of government and an outline of the first decades of American economic growth and development,

A New Nation:  America From 1789 to 1860

Further commentary on the dynamics of America's economic development:

How America Industrialized and Became Wealthy

A Stylized Model of Innovation:  The Dynamics of Capitalism

Alice in Wonderland and the Origins of Silicon Valley

For the story of how England lost its economic leadership, see 

Innovate or Fall Behind:  A Cautionary Tale:  England and the Industrial Revolution

There are a number of essays on American History and American Economic History including

The Stock Market Crash of 1929 and the Beginning of the Great Depression

For a list of all posts with links, see 

List of Posts by Topic

There are more essays on American History and American Economic History. Essays on information, innovation, and how markets work. Essays on business, finance and economics. A series of essays on demographics, population projections, and speculations on how decreasing and aging populations will interact with the economics of individual countries and the global economy.

Also a series of essays on demographics, population projections, and speculations on how decreasing and aging populations will interact with the economies of individual countries and the global economy. 

Essays on a variety of historical topics, including the Industrial Revolution, Rome, and Europe in the World War I period.