by Gene Callahan
“What may not be obvious is the way these two concepts [pin factory and invisible hand] stand in opposition to each other. The parable of the pin factory says that there are increasing returns to scale — the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. But increasing returns create a natural tendency toward monopoly, because a large business can achieve larger scale and hence lower costs than a small business. So in a world of increasing returns, bigger firms tend to drive smaller firms out of business, until each industry is dominated by just a few players.”
And, of course, this monopolistic competition wrecks the operation of the invisible hand, per Krugman.
What is shocking here is that Smith very explicitly denies that an extensive division of labor requires monolithic factories — in fact, he states that it is only in “trifling” instances that this will happen:
“It is commonly supposed to be carried furthest in some very trifling ones; not perhaps that it really is carried further in them than in others of more importance: but in those trifling manufactures which are destined to supply the small wants of but a small number of people, the whole number of workmen must necessarily be small; and those employed in every different branch of the work can often be collected into the same workhouse, and placed at once under the view of the spectator. In those great manufactures, on the contrary, which are destined to supply the great wants of the great body of the people, every different branch of the work employs so great a number of workmen, that it is impossible to collect them all into the same workhouse. We can seldom see more, at one time, than those employed in one single branch. Though in such manufactures, therefore, the work may really be divided into a much greater number of parts, than in those of a more trifling nature, the division is not near so obvious, and has accordingly been much less observed.”
In fact, as Smith’s example of the laborer’s woolen coat shows, he thought of the real division of labor as being carried out across the whole globe, across many, many years, and among a multitude of enterprises. Whereas Smith saw the progress of the division of labor as depending on the “extent of the market,” Krugman translates that to “the size of the factory”!
Now, perhaps Smith was wrong, and an increasing division of labor eventually really does require giant, monopolistic enterprises, as Krugman sees things. But it is not very informed or honest (take your pick) of Krugman to suggest that this is the straightforward meaning of what Smith wrote.