Sunday, July 08, 2007

How To Misread the Famous Pin Factory

Stumbling and Mumbling is a lively economics Blog, run by Chris Dillow, a Marxist of 25 year’s standing (according to his post last week, 5 July), who bills his Blog as ‘A Fanatic not and Extremist’. I read it almost everyday because he has interesting and well written things to say about economics (can’t say the same for some of political posts, but, who’s perfect?).

This weekend Chris Dillow turns to the new Harriman House edition of Adam Smith’s Wealth Of Nations, which I reviewed last week, 4 July, and, following correspondence since with Professor Jonathan Wight, who wrote the Introduction to the edition, and who kindly sent me his paper on the invisible hand, I shall be posting about in the coming week.

Chris Dillow writes: “Smith on growth and companies”, in which he criticises George Osborne, MP, in the leadership team of the UK Conservative Party. He criticises George Osborne, inter alia, “who shows no sign of ever having read Smith, or indeed of ever having spoken to someone who has.” I could not possibly comment on the validity of this allegation, knowing nothing about George Osborne or the extent his knowledge of Adam Smith (I haven’t read Osborne’s Foreword), but I can comment on Chris Dillow’s interpretation of Adam Smith’s writing on the division of labour and the behaviour of ‘corporations’:

The problem is, Smith's account of [the division of labour] process gives no place for Osborne's paymasters, companies.”

In response, Chris seems to restrict the benefits of the division of labour to independent hunters in ‘tribes of hunters or shepherds’ or to artisans, but not, for some strange reason, to companies (presumably even those run by Marxists)

Chris writes:

The first sentence of the Wealth of Nations is:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.”
In turn, the division of labour is the result of a natural human impulse. It is "the necessary, though very slow and gradual, consequence of a certain propensity in human nature...; the propensity to truck, barter, and exchange one thing for another.

For example: “In a tribe of hunters or shepherds [?] a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions; and he finds at last that he can in this manner get more cattle and venison, than if he himself went to the field to catch them. From a regard to his own interest, therefore, the making of bows and arrows grows to be his chief business, and he becomes a sort of armourer. Here we have an account of how men, given freedom, will develop the division of labour, markets and hence prosperity.

But there's a problem. In the real world the division of labour is mediated not merely by market exchange but by hierarchically-ordered companies. In Smith's famous pin factory the drawer of the wire does not sell his product to the straightener of wire, but is ordered to hand it over.”

He continues, developing a theme that “the division of labour might not promote prosperity” when companies are formed (capitalism).

This is a highly problematical assertion, especially when Chris bolsters his case by selectively quoting from Smith’s criticism of joint-stock companies, as if the problems Smith’s alludes to about the ‘Chartered Trading Companies’ in the 18th century were analogous to shareholder companies in the 19th thru 21st centuries.

Chris quotes Smith:
The directors of such companies, however, being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail.” Book V ch 1.107 - which is the online edition) [You will find the quotation in the Glasgow Edition at WN V.i.e.18: p 741; in the new Harriman edition: p 483; or in Edwin Canaan’s (classic) 1937 edition, pp 699-700)]

The contexts in which these and similar quotations should be understood cannot be separated from the institutional forms of the joint-stock trading companies, such as the East India Company to which Smith refers, and should not be attributed to the joint-stock shareholder companies of 19th century capitalism and beyond. These, unlike their 18th-century counterparts, are highly regulated by the Company Acts (as anybody running a limited company, let alone a Plc. can testify).

Smith’s critique of the corrupt colonial trading companies, granted monopoly status by Royal Charter or Acts of Parliament, and mostly operating up to a year’s return sailing time in, say, India (and therefore basically unsupervised, which is, universally, a sure recipe for malfeasance, perfidy and cruelty. Smith’s critique cannot be transferred with integrity by assumption to all joint-stock operations.

Indeed, Smith speaks highly of both the Bank of Scotland (1695) and the Royal Bank of Scotland (1727), which were joint stock companies but neither had monopoly privileges. And for Smith that was the crucial difference; competition is one protection against directors acting against the public interest, and this applies to artisan tradesmen, partnerships, modern companies and multi-nationals (and to entities in Soviet-run economies).

Chris argues further than companies (presumably as he defines them by his misinterpretation of Adam Smith) operate a ‘variant of the division of labour [that] might not promote prosperity’. This is a weak case from reading Smith on the division of labour. In his day, most workshops were fairly small affairs; owners of forges, pin factories, nail-makers, tanning works, spinning or weaving sheds, shipbuilders, coal mines, carriage makers, wheel makers, wholesale traders, and such like, employed a few to 20 or so employees.

Chris says: ‘In companies, we lose one of the benefits of the division of labour - that in focusing men's knowledge upon a single object, they are more likely to "find out easier and readier methods of performing their own particular work."
It's easy to see how self-employed artisans have an incentive to improve productivity. But workers employed by others need not have such an incentive, or indeed the freedom to find such methods

Now given that Smith (WN Book I, chapters 1,2, 3) makes the point that the natural outcome of the division of labour was, initially at least, a rise in labour productivity. This increase employment for labourers, and because to do so requires a division tasks among more than one person(!), it is inevitable that an artisan, noting how to gain the benefits from a division of labour (incentives!) would have to increase the numbers employed in his shop. Therefore, to leave the benefits of the division of labour to a self-employed artisan alone would only take the division of labour so far on Chris’s argument. This was an improvement on single-labourer operations, but is no way to ensure increasing returns. Indeed, the productivity gained from the division of labour, while significant even under the conditions of employing 10-20 labourers, would soon maximise.

Smith's 'third' advantage of the division of labour (after ‘dexterity’ and ‘time saving’) is ‘the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many’ (WN I.i.5: p17). Smith’s examples were examples of what he saw in the small workshops of his time; this process was not limited to that situation.

In a later paragraph (which in view of Chris Dillow’s strictures against George Osborne’s alleged 'restricted' reading of Wealth Of Nations), he implies that he has read it), Smith writes:

‘All the improvements in machinery, however, have been the inventions of those who had occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them because the business of a peculiar trade [e.g., ‘philosophers’] (WN I.i.9: p 21).

The 19th century experience of pin-making, with power-driven machinery, saw output per worker, operaitng machines that did most of the operations previous done by 18 men in the 18th-century pin factory, were done by a handful of men who produced millions of pins, in 20 pin factories compared to the hundreds of such plants in Smith's day.

Moreover, the whole history of the inventions of machinery (James Watt) and new labour processes (Wedgwood, etc.,), show that companies, employing scores, hundreds and thousands, have every incentive to search for new divisions of labour, new sources for their supply chains, and new products, and looking at what has been achieved in productivity, this clearly happened under capitalism.

Whatever Chris Dillow’s points are, they are not supported either by Smith’s text nor in history and nor by experience today.


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