Adam Smith's pin factory vs. his invisible hand

[WillJ]

Will, I think you misinterpret what I said. Perhaps I said it wrong, but I meant that these are separate items and therefore must be considered separately and therefore are not contradictory

Right, isn't that what I said?

Edit: Oh, and keep in mind you mentioned that one deals with increasing costs, and the other with decreasing costs, but you didn't explain why (and FYI, Warsh, Stigler, and Romer all say the same thing as you, but they are equally mysterious with regard to their explanations). Keep in mind that I'm still wondering how either of the items deal with either one of those things.

 

[Unser Giftzwerg]

"Can anyone show me what I'm missing here?"

Apologies if you think my contribution is a 'pet peeve', unworthy of my answer to the question set by WillJ above.

If the quandry faced is a possible contradiction between the division of labour in the pin factory example (though I believe the full significance of Smith's reporting what was widely noticed by many since Plato and Petty wrote about it has to be taken with his example in BookI of the manufacture of the day labourer's woolen coat) and what WillJ reports as the 'theorem of the invisible hand' from George Stigler of Chicago University, I answered with the obvious: if there was no such theorem, even theory, of 'an invisible hand' remotely worthy of the significance given to it by Stigler or his Chicago colleagues (or indeed David Warsh) then his quandry disappears in an instant.

I noted in his contribution the following: "David Warsh is just a journalist, so I would have reason to be skeptical, except that George Stiger and Paul Romer (two major economists) also saw a contradiction."

I took it that WilllJ was an economist and felt it appropriate to disparage 'journalists' and take seriously economists. Well, I too am an economist, not a journalist, and state with conviction that George Stigler and Paul Romer, both faculty members in their careers at Chicago, on this subject at least (the alleged theory of 'the' invisible hand and Smith's affinity with neoclassical economics) were woefully wrong.

My authority for my assertion is Wealth of Nations, Moral Sentiments and Lectures in Jurisprudence, and most certainly not anythig as trivial as a 'pet peeve' on my part.

I am sorry if I took you the wrong way, but you seemed very angry at those people who criticized Adam Smith. And from your tone t seemed to me you listed among those villains one WillJ.

 

[Mise]

Edit: Oh, and keep in mind you mentioned that one deals with increasing costs, and the other with decreasing costs, but you didn't explain why (and FYI, Warsh, Stigler, and Romer all say the same thing as you, but they are equally mysterious with regard to their explanations). Keep in mind that I'm still wondering how either of the items deal with either one of those things.

My guess is, in the Pin Factory model, as the company gets bigger and therefore (although I don't think it's a "therefore" but apparently Adam Smith does), cost per unit falls (more units produced per unit of labour), but the price of each unit stays the same, hence increasing returns to scale.

In the perfectly competitive market, if a company gets bigger, there is a saturation of goods in the market, so the price falls, even if costs also fall. Hence there is a decreasing return to scale. Not sure how that explains the increasing cost part though...

 

[JerichoHill]

The cost function for a product is curvi-linear, and shaped like a banana resting on a table in the shape of a u.

Decreasing costs (increasing returns to scale), constant (scale, costs), increasing costs, decreasing returns to scale). Basically, you decrease costs by using more efficient inputs, but at some point your returns to scale dont correct for inferior inputs (like lazy workers) that you hire (non-optimal employment).

Anywho, those two guys are wrong. Adam Smith told stories to illustrate because back then, that's how you analyzed things (logic) rather than math (no calculators, well, not electronic multi-function ti-92s!)

 

[Gavin Kennedy]

WillJ: For the ‘increasing returns’ relationship to exist there is no need for ‘an invisible hand theorem’ (or any similar theorem) to operate, nor can I see how its existence would make any difference. In this sense I consider the increasing returns conundrum not to be important in an economy. The division of labour does not lead to increasing returns of the kind that offers the spectre of the entire market for pins, say, finally being captured in one factory, any more than increasing returns from planting on a single acre would mean the entire world’s food could be grown there (except in a ‘last person on Earth’ scenario). Regular predictions of large firms replacing small firms and the demise of small businesses appear in the media, but for over a hundred years, when large firms have got so much larger (with more to come), the demise of the small firm has been put off each decade. In fact, in the UK, for example, small and medium-sized enterprises are still the largest employers of labour, and for one expect them to continue to do so. In state organisations too, specialisation ensures that no one department replaces every other.

Knowledge is a non-rival good, but we also have the phenomenon that no one person can possibly know more than a small percentage of the available knowledge, even if that person knew more about everything that anybody else, and that discrepancy is getting worse and will continue to do so. In Smith’s day, professors taught several subjects and could produce valuable work across several disciplines; today that situation is rare – even getting disciplines to talk to each other is extremely difficult.

A private economic good is defined as having excess demand at zero price; knowledge is not absolutely ‘free’; there are costs in acquiring and accessing it and its delivery can be rival (only so many seats in a library, or hits on an Internet site). Public non-rival goods have costs of provision (those like the air we breathe is an obvious exception), and that immediately runs into scarcity problems and rivalry, whether funded by taxation or prices. Knowledge about how to design and manufacture is non-rival; the provision of such goods from that knowledge is rival. If the civilisation was to collapse catastrophically, even though the accumulated knowledge of the millennia that have passed continues to exist, it may take the small numbers of survivors millennia to benefit from that knowledge and return to anything remotely civilised.

On David Warsh’s book, I too was impressed when I read it in the summer, though I did not agree with his presentation in several places of the Chicago myths about Smith’s works, and I wrote and told him so (and why). He published a version of a paragraph I wrote on his website (http://www.economicprincipals.com/issues/06.12.24.html) and we have corresponded since, and reached a degree of friendly agreement. As so often happens in economics, people associate their ideas with Smith, even when they would stand on their own without claiming an endorsement from him. I think David Warsh’s book is well worth reading and discussing – but let’s leave Smith out of it, at least as he is currently quoted.

 

[Whomp]

Thanks to the contributors in this thread. Great discussion on something that influences my daily life.
This quote strikes a chord with me because, like the UK, the US has been driven by the small to medium size business. From my recollection, 95% of job creation comes from these firms.

Regular predictions of large firms replacing small firms and the demise of small businesses appear in the media, but for over a hundred years, when large firms have got so much larger (with more to come) , the demise of the small firm has been put off each decade. In fact, in the UK, for example, small and medium-sized enterprises are still the largest employers of labour, and for one expect them to continue to do so.

However, there seems to be deep concern around this forum on the Wal Mart impact and comments like this from magazines like Fast Company.

It's Wal-Mart in the role of Adam Smith's invisible hand. And the Milwaukee employees of Master Lock who shopped at Wal-Mart to save money helped that hand shove their own jobs right to Nogales (Mexico). Not consciously, not directly, but inevitably. "Do we as consumers appreciate what we're doing?" Larrimore asks. "I don't think so. But even if we do, I think we say, Here's a Master Lock for $9, here's another lock for $6--let the other guy pay $9."

Charles Fishman (cnfish@mindspring.com) is a senior writer at Fast Company. Andrew Moesel provided research assistance for this story.

http://www.fastcompany.com/online/77/walmart.html