"Smith conceived of the process of increasing production as 'division of labor' into more and more steps, with each laborer specializing in a smaller slice of the process. But the real revolution took place in the early 1830s, in the U.S., in the mind of a distracted doctor, John Howe."
The young woman looked frightened. All I did was ask some pointed questions.
"Why do you have 35 kinds of energy bars, but only one brand of straight pins? And why are those made in China? Why aren't your pins made in America?"
This Kerr drug store was the final stop of my ten "observations," so I had the rap down pat. The poor clerk said, "You can talk to the manager, if you want." The manager came over, after the clerk whispered to him at the far end of the aisle, prepping him on this crazy pin-guy. "Is there a problem?"
"I'm not sure. Do you think it's a problem that you have 35 brands of energy bars, but only one brand of pins?"
He pondered this. I bet he also pondered calling security. "Did you want a different kind of pin? You might go to a shop that sells sewing supplies. We are a drug store."
I persisted: "Yes, but you do sell pins. Why don't you sell American pins? Why are you selling Chinese pins?"
He saw a way out: "Sir, I really don't know. Our purchasing people handle stock. We could order American pins, if you want; have them within two weeks. Do you want to order them?"
The crowning moment! I pretended to think it over. Then, I got to say it: "No. I'll just stick with these."
The Extent of the Market
The point of my "field research" had been to check prices and types of pins available at stores in Raleigh, North Carolina where I live. I'll tell you why in a minute. First, let me report my results.
So, in my area at least, the market appears to be dominated by Singer. Singer is, or was at one time, an American company. But if you read the fine print on the back, you'll see that the Singer brand name on the front is really just that: a front. The pins are "distributed under license" by Dyno Merchandise, Pampano Beach, FL. The labels ("Warning: Sharp product! Keep away from children") on the pins are printed in three languages, English, Spanish, and French. And as the last of these notes, the pins themselves are "Fabrique en Chine."
The reason I had become interested in pins was a passage from Adam Smith. Not the one about the pin factory, though that one is interesting in its own way. No, my interest was in Smith's observation about the "extent of the market."
... As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for. [Adam Smith on the origins of division of labor: Bk I, Chapter 3; emphasis added.)
The market Smith was talking about was the number of potential (and, in an important sense, actual!) customers for the product in question. As the ability of transport and communications to handle trade increases, the size of factories increases. Let me say that again, because it is so obvious it's confusing. As the number of potential customers you can reach expands, and the costs of shipping and handling fall, factories become fewer and larger. There is far more capital investment in these factories, but fewer workers. And output increases ten-fold, a hundred-fold, a billion-fold.
Let's return to Smith's original intuition, and think of a village artisan. One person, in a shop, making pins. He picks up the wire, spools out a length of it, and then cuts it into pin-size pieces. He sharpens one end of each pin, and flattens the other end for the head, and so on, until the pins are finished and packaged.
These pins are expensive, and one artisan is easily able to supply all the pins demanded in the small village, at that high price. The situation appears to be stable, but it actually isn't. Imagine that the pin-maker gets one large order, even slightly more than he can handle by himself. So, to handle the excess, he hires a temp, a guy who comes in and takes over the second half of the production process. Now, the owner performs the first few tasks, and the other man finishes the pins and packages them.
And our pin artisan, a thoughtful man, notices something strange. The two men don't produce twice as many pins; instead, they produce three times as many pins. And, after a couple of days, as each grows more proficient at a smaller number of more specialized tasks, the two men might produce five times as many pins.
At this point, though, they have a problem: too many pins! After they have filled that one large order, the two men can produce far more pins than is normally demanded in the small village where they live. A pin-maker in this situation might view this as a disaster—what a waste to have all these extra pins! How can he possibly sell them all, living in such a small village? He dismisses the temp and returns to the old ways of making pins. But a more ambitious pin-maker might respond differently.
Adam Smith on the origins of division of labor: Bk I, Chapter 1, par. I.1.3:
To take an example, therefore, from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker; a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper... I have seen a small manufactory of this kind where ten men only were employed... Those ten persons... could make among them upwards of forty-eight thousand pins in a day.
First, he cuts the price of pins—even at the lower price, profits can be higher because of the increased productivity of the division of labor. So, he sells more pins even in his own village, because the price is lower.
Second, the pin-maker is led, without even really thinking about it, to try to increase the size of his market. He hires a third worker, and spends part of his own time on the road, collecting orders. He doesn't do this because he enjoys it, necessarily. He does it because he has to, to stay in business and avoid drowning in pins (if that can happen). Given his advantage in price, though, he finds these orders easy to get, and the process continues: more steps in production, more division of labor, lower costs, lower prices, larger markets, more sales. The division of labor is limited by the extent of the market. Expand the market and it becomes increasingly profitable to have workers specialize.
Third, as workers' tasks become more specialized, it becomes profitable to design and use specialized tools to aid in the particular individual tasks of each worker. So it is not only the workers who become more specialized but the tools.
Fifty years before Smith wrote Wealth of Nations, pins in England were made in small "manufactories" in Bristol, Gloucester, and London, the centers of demand. By the 1760s, pin-making became a decentralized cottage industry, in part because sewing and other activities using pins had also become more decentralized. And this is the period where Smith formed his impression: he saw pins being made by 3-6 men, in a small shop, each of whom performed several tasks at different points in the production process. Smith's widely quoted conclusion, which was actually just a quick estimate, was that there 18 different steps in the pin-making process.
Smith conceived of the process of increasing production as "division of labor" into more and more steps, with each laborer specializing in a smaller slice of the process. But the real revolution took place in the early 1830s, in the U.S., in the mind of a distracted doctor, John Howe. Howe recognized that dividing the tasks of human laborers into smaller discrete steps was not a process that would work forever. Instead (and this is my metaphor, not his) Howe turned to calculus.
John Ireland Howe, who patented a pin-making machine in 1832, should not be confused with Elias Howe, whose sewing machine was patented in 1846.
In mathematics, calculus is a technique for analyzing and representing change. And a product changes as it moves through the steps in the production process. At each stage, a workman adds something, or takes something away, or performs some operation that changes the product. Division of labor involves using more steps, each one of them smaller than before. The logic of calculus is that at some point, each discrete step gets small enough that as you take smaller and smaller step, the process gets closer and closer to being continuous.
Adam Smith focused on how specialization can emerge from the extent of market, even when workers are similar or identical. David Ricardo focused on inherent differences between workers that led to specialization via comparative advantage. See Russell Roberts's essay on specialization and comparative advantage, "Treasure Island: The Power of Trade. Part I. The Seemingly Simple Story of Comparative Advantage".
What Howe did for pin-making was to make the discrete steps smaller and smaller. In Adam Smith's terms, the division of labor made each worker's set of tasks more and more specialized. And workers could devise more and more specialized capital, such as tools or machines, to increase their productivity in that step of production. At some point, the process itself changed fundamentally. Instead of adding better and better tools for each step, it became profitable to mechanize the entire process using a fundamentally different type of tool, the assembly line. Fewer and fewer workers were needed to a point where workers became unnecessary in the fashioning of the pins or the good in question and the continuous process could be run by tools themselves. The machines of the assembly line are the limiting case of dividing labor into more and more steps.
By 1833, Dr. Howe had patented his design and built a fully functional pin-making machine. By 1840, he had improved the design by making the machine have a rotary action, involving even fewer points of human interaction and far greater production. Interestingly, the most complex stage of production was packaging them: taking the finished pins and forcing them through folds in a piece of cardboard. Packaging was still done by hand decades after the manufacture of pins was fully automated.
Today, most pin manufacture has moved to Asia. Your first impulse might be to nod and think, "Sure, cheap labor." But that is not an important part of the story. Pin manufacturing is highly capital intensive. Smith's insight on the division of labor, and Howe's idea of making the process continuous and making labor more productive, have combined to expand the market for Chinese pins to the whole world. The number of workers engaged in pin manufacture in China has fallen, not risen, as pin output has expanded. And wages have increased more than ten-fold, as productivity has exploded.
The interesting thing is Adam Smith didn't foresee, and we don't really understand, the implications of the division of labor, and its interaction with the "extent of the market," as production becomes more capital intensive. It would appear that dividing tasks into smaller, more specialized units would increase employment. That is, instead of 1,000 different pin shops, where artisans work away making just a few pins per day, we now have perhaps 100 factories, each employing 18 people making pins, in different stages. Total employment in the industry has gone from 1,000 to 1,800, with the huge increase in output being absorbed by the expanded market because of the new, lower price.
But as the division of labor proceeds, the net effect on employment in the pin industry turns negative, first slowly and then very sharply. And the degree of specialization itself decreases, in the pattern of a "u-shaped" curve. Recall: at first we had an artisan, making the entire pin. Then we move to 18 different tasks, with a worker having specialized in each step. But then, as the process is automated, specialization once again declines: there are only a few workers, with general knowledge of the production process, overseeing the automated production line. Their main job is to intervene in the process only when something breaks down.
The number of people employed in the "industry" is only a tiny fraction even of the original work force of artisans. This in turn allows employment in new industries to expand, industries that wouldn't exist without the productivity driven by the division of labor.
I could make my own pins. Working hard, with some wire and some cutters and a file to sharpen them, I might make 100 or more pins a day. But my time is too valuable to spend that way. Likewise, we could make pins in my home state, North Carolina. But the amount of capital required to be competitive with world prices of 10,000 pins for $1 would be... well, it would be a lot. Too expensive, given all the other profitable investments available for capital in North Carolina. The same is the true for the U.S. as a whole: we could make our own pins, but it's cheaper to buy them, and exploit our own comparative advantage in activities where division of labor works for us, rather than against us.
So, the next time you think about some foreign product, or even if you actually buy some Chinese pins, rest assured. It's okay to stick with those.