Adam Smith's Pin Factory
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 the packaging the
pins. He mentions that pin factory workers were poorly paid, despite their high productivity. This contradicts the economic assumption that higher productivity (output per worker) leads to higher wages.
Adam Smith goes on to say he visited a pin factory employing 10 men who produced 48,000 pins per day. If ten workers did every step themselves, Smith says they could each produce 10 or 20 pins per day. So the pin factory replaces up to 4,800 pin makers. The increase in labor productivity (output per person per day) is as high as 50 times that of individual pin makers.
Adam Smith goes on to say he visited a pin factory employing 10 men who produced 48,000 pins per day. If ten workers did every step themselves, Smith says they could each produce 10 or 20 pins per day. So the pin factory replaces up to 4,800 pin makers. The increase in labor productivity (output per person per day) is as high as 50 times that of individual pin makers.
The 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.” (Chapter 3 – “That the Division of Labour is
limited by the 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.
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 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 dead end, a one time increase in productivity due to an organizational innovation. All of that was
about to change.
Smith seems to ignore the active role that owners and mangers play in reorganizing production.
Smith seems to ignore the active role that owners and mangers play in reorganizing production.
Adam Smith’s Pin Factory is his only clear example of how an
economy can grow through innovation. But
what is missing is any discussion of the Industrial Revolution or power-driven
machinery, which had begun during Adam Smith’s lifetime. Adam Smith knew James Watt, a brilliant
mechanic who greatly increased the efficiency of steam engines. Watt began patenting his improvements in 1769, seven years before the publishing of 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 Smart, was also Thomas
Jefferson’s college tutor.) A capital goods sector would specialize in
producing larger, faster, more efficient power-driven machinery. Production
became capital intensive; companies became much larger, the new technology created economies of
scale. Economic theorists would continue
to ignore the reality of the Industrial and Information Revolutions because the
central dynamic – continuous innovation leading to new production technology, lower average cost, and new corporate structures – would destroy their key models of perfect competition
and general equilibrium.
Further History – America
The reduction of the average cost of pins, combined with the
continuing decrease in the cost of long-distance sea transportation, led to
exports. Before the 1840s, almost all of
the pins sold in America
were imported from Great Britain.
The more open, democratic society of America
contributed to American industry developing differently than in Great
Britain. Alexis de Tocqueville, in his visit to America in the 1830s, was struck by the American penchant to get ahead by “tinkering.” He wrote, in Democracy in America, that Americans seek “every new method that leads to wealth by a shorter path, every machine that shortens work, every instrument that diminishes the cost of production.” (Alexis de Tocqueville, Democracy In America, 1835. Translated and Edited by Harvey Mansfield and Delba Winthrop, 2000, p. 436.) Less constrained by class and facing higher labor costs, Americans
tended to think in terms of power-driven mechanical production, not just
specialization of labor with hand tools.
This is what happened in pin-making.
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. But there was a
problem. English pins produced by
English hand labor were cheaper. Howe
was able to get tariff protection while the company increased the productivity
of its machines to reduce unit costs.
Some 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, p. 56.)
Nails – revolutionize the construction of buildings,
especially residential. (Hand-made nails were expensive. In colonial America, families preparing to move would often burn down their houses to recover the nails and bring them to their new homes.)
Spikes – critical input in the building of railroads.
Rivets – made the mass production of airplanes possible.
By the late 1970s, two hundred years after The Wealth of Nations, manufacturing plants using computer-controlled automated machinery could produce 800,000 pins per worker per day. This is 160 times as many as the 5,000 pins per worker per day produced in Adam Smith's pin factory. Similarly, in cotton textile mills, a weaver using shuttle-less looms in the 1970s could produce 200 times as much cloth per hour as a hand-loom weaver in Adam Smith's day. Cotton cloth in pre-industrial England was a expensive as silk imported from China. Only the rich could afford it.
By the late 1970s, two hundred years after The Wealth of Nations, manufacturing plants using computer-controlled automated machinery could produce 800,000 pins per worker per day. This is 160 times as many as the 5,000 pins per worker per day produced in Adam Smith's pin factory. Similarly, in cotton textile mills, a weaver using shuttle-less looms in the 1970s could produce 200 times as much cloth per hour as a hand-loom weaver in Adam Smith's day. Cotton cloth in pre-industrial England was a expensive as silk imported from China. Only the rich could afford it.
Conclusion
Implicit in The Wealth of Nations is a conflict
between the Invisible Hand and the Pin Factory.
Competition among a sufficient number of small producers and many consumers,
without technological progress, will lead to a “natural” (equilibrium) price
and output. Smith, Malthus and Ricardo
believed that in the long run an economy would reach a maximum equilibrium and
per capital income would stop growing.
Later, economists developed theory that this would occur if there were
diminishing returns and subsequent rising marginal cost. But the Pin Factory gives an early example of
a mechanism that lead to increasing returns and diminishing average cost. But there are limits. 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? New products could be produced. Waves of new production techniques and new products would follow one another. Average unit cost would continue
to decline. There would be no
equilibrium. The Industrial Revolution would
be “permanent revolution.”
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See related posts:
Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution.
The Beginning of the Industrial Revolution in America.
How America Became Wealthy: Introductory Remarks.
A Stylized Model of Innovation: The Dynamics of Capitalism.
For the story of how England lost its economic leadership, see A Cautionary Tale: England and the Industrial Revolution.
The economics tutorials in Pages present a complete course in economics, an alternative analysis to that found in standard textbooks. They emphasize the dynamics of an industrial/informational capitalist economy, the resulting industry and organizational structures, and the role that information plays in innovation and the functioning of markets.
For a list of pages (economics tutorials) and posts, see Guide to Pages and Posts.
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See related posts:
Josiah Wedgwood, the Wedgwood Pottery Company, and the Beginning of the Industrial Revolution.
The Beginning of the Industrial Revolution in America.
How America Became Wealthy: Introductory Remarks.
A Stylized Model of Innovation: The Dynamics of Capitalism.
For the story of how England lost its economic leadership, see A Cautionary Tale: England and the Industrial Revolution.
The economics tutorials in Pages present a complete course in economics, an alternative analysis to that found in standard textbooks. They emphasize the dynamics of an industrial/informational capitalist economy, the resulting industry and organizational structures, and the role that information plays in innovation and the functioning of markets.
For a list of pages (economics tutorials) and posts, see Guide to Pages and Posts.
Another awesome article. Very detailed and informative. Thanks for sharing!
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What are Adam Smith's views on technology?
ReplyDeleteProductivity of Engineering activities and systems Industrial Engineering - Introduction
Adam Smith's main reason for writing The Wealth of Nations was to attack government control of and interference in the economy, which he believed was opposed to an "enlightened" view of society.
DeleteExcept for a brief mention of "fire-engines" (steam engines) in Chapter 1, he says virtually nothing about technology or the beginning of the Industrial Revolution. This is odd. He knew about James Watt and early industrialists. He lived long enough to include comments about the new steam-engine powered industrial machinery in the many editions released in his lifetime. But he didn't. So his economics, and the economic theory building on Smith's analysis, does not address the dynamics and structure of an industrializing economy.
For a case study on how the Industrial Revolution began, you might want to see my post on Josiah Wedgwood.
DeleteThank you for the reply.
Delete"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 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 dead end, a one time increase in productivity due to an organizational innovation. All of that was about to change."
Delete"Limit of relying on the division of labor using pre-industrial production technology." This is an important point. The technologies are changing and improving. So new technologies still need organizational innovations. Organizations also change due to attitudes of its members. So productivty can sometimes go up, may stagnate or even decline due to organization issues and needs managing organization issues. Adam Smith certainly indicated one direction. Marshall discussed more about industrial economy.
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