Wealth of nations, Chapter 1

In a continuing effort to educate myself and better understand the economic collapse we seem to be witnessing all around us I have been concentrating on economics in my studies as of late. Probably the first book on economics to gain wide acceptance as a scientific study was Adam Smith’s Enquiry into the Wealth of Nations. Smith’s book is still studied today and many believe it to be one of the cornerstones of capitalism even though it was written over a ten year period from 1766 to 1776. It was instantly widely read and acclaimed and is still studied in universities around the world today. Most conservatives even today consider it the final word on free markets and laissez faire theory.

It is a brilliant attempt at organizing and formulating economic theory from the observations Smith made about life all around him. However, to suggest that it is applicable to modern economics as anything other than a study of the beginnings of the field of scientific economic theory is to ignore reality. I will build on this theory a little more in posts coming in the future.

Book 1 Chapter 1- The division of labor

Smith’s idea, probably rather novel at the time, concerning the division of labor is one of the cornerstones of his economic system. The basic premise is that by the intelligent division of labor productivity is vastly improved. While I won’t attempt to argue with this idea it is worth noting that modern mechanized methods have turned this concept into an infinitely more powerful one than Smith ever dreamed. In his example whereby pins are manufactured he compares the productivity of one rather unskilled laborer with the productivity of ten specialized workers.

In his example the one unskilled laborer would be lucky to produce one or two pins in a day while the skilled laborers, by dividing the labor amongst wire straighteners, cutters, sharpeners for the point, men who make the heads, men who install the heads, and even those who package and sort the pins the production is vastly improved. In Smith’s example a group of ten such men could make about twelve pounds of pins in a day. This twelve pounds would equate to around 48,000 pins in a day. If this productivity is divided by the ten workers who produced it some 4,800 pins per worker per day are produced. Smith compares this with the 1-20 that an unskilled worker working alone might possibly produce.

All of this is very well taken and tends to support his ideas about labor being the real basis for the cost of products. In other words, according to Smith’s reasoning since the division of labor equals greater productivity then it tends lower the real cost of goods. This is a reasonable assertion, even an ingenious one in Smith’s day considering he spells out this common sense calculation in terms easily understood and clearly defined. One of the other basic tenets of Smith’s economic theory is that the market tends to balance wages and reward aquired skills, either directly to the worker or indirectly to the employer who hires and trains the worker.

We can hardly blame Smith for failing to predict or understand the mechanization of production that would come about in the next two centuries. However, let’s take Smith’s analogy of the pins and move it forward to this century. In the early 80’s I worked in a factory that produced straight pins and sewing notions of all kinds. I worked on a line that produced straight pins. Each machine made different types of pins from wire so I will have to generalize but on average each machine ran some 100 pounds of pins in an eight hour shift. There was one operator/jobsetter that maintained and repaired the machines for each row of machines. Each row of machines contained 14-16 pin making machines so this conservatively equates to some 1400 pounds of pins produced by one man’s labor in an eight hour shift. Since the plant itself ran three shifts this equates to 4200 pounds of pins in one day split amongst three workers, or 1400 pounds of pins per worker. If we use Smith’s numbers of 4000 pins per pound we come to some 5,600,000 pins per worker. This is a 1166% improvement in pin production per worker.

What is the net result of this massive increase in productivity? Beyond the drop in relative “dearness” as Smith would put it of pins, the theory that labor is the true basis for real costs is clearly debunked and outdated. Smith had no way of knowing that such massive increases in productivity would be possible, much less begin to understand what they would do to his theories about the value of labor but it is clear that labor is no longer the true source of value in costs; the mathematical realities of mechanized production have forever changed this ratio. I would further surmise that robotics, PLC controls, and computerized production systems have probably increased this ratio even more dramatically; to the point that one man’s maintenance for automated pin producing machines probably has increased this ratio by another factor of ten since the 80’s. Today we are probably looking at a 10,000% increase in productivity per worker in manufacturing pins since Smith’s day.

The basic premise of this chapter in Smith’s book is aligned towards showing that each improvement in production filters down to the bottom layers of society. His argument that the lowliest laborers in industrialized nations of his day lived opulently compared with the kings of savage lands might have been feasible in Smith’s day but in our times it seems to fall somewhat short of his predictions of trickle down opulence. Can anyone actually suggest that this 10,000% increase in productivity of pins has trickled down to the people who actually make the pins? Are people who do the maintenance on today’s modern manufacturing equipment 10,000 times better of financially than they were in Smith’s day? Obviously, a 10,000% increase in productivity has to benefit someone, so I wonder who this particular one has benefited. Maybe some of our modern CEO’s could take a stab at answering this one…..