The Pin Factory Blog

Adam Smith’s Wealth Of Nations reference to pin making overshadowed the broader significance of this “trifling manufacture”, which had been “very often taken notice of”. Paucelle (2007) traced Smith’s sources to Diderot and d'Alembert’s Encyclopedie (1755), Duhamel’s Arts & Metiers (1761), and Macquer’s Dictionnaire portatif (1766), all detailing the long-established manufacture of L’Epingles (Pins).  Smith used these details to illustrate the direct association of the division of labour with sustained increases in productivity, leading to the wider consumption of the “necessaries and conveniences of life”, and, we now know, to unprecedented living standards in market societies.

Smith also illustrated his observation of the division of labour in the manufacture of the labourers’ common woollen coat. Briefly, it spread markets for many suppliers situated nearby, and far away, rather than confine its benefits to single workshops. Typically, gun manufacturing in the 18th century was highly segmented and, in time, similar sub-divisions appeared in the pin and printing trades too. Steam power, mechanisation and specalised hand-tools led to feeder developments, limited only by the extent of their growing markets. Michael Munger reports that in 1820 there were 11 pin factories in Gloucester, but by 1939 the number in the whole United Kingdom had shrunk to twelve, and by 1978 to only two, using automated and computer-driven pin-making machines, increasing output from each labourer in Smith’s report of 5,000 pins a day compared to modern daily outputs of 800,000 pins.

Smith illustrated the early effects on the division of labour on the gradual spread of general opulence.  He contrasted the household possessions and relative comforts of an 18th-century “industrious and frugal peasant” with the scant possessions of “ten thousand” indigenous people of Africa. He commented that these clear differences in everyday living standards were due to “the tools of all the different workmen employed in producing those different conveniences” and to the “variety of labour employed”, with the “assistance and cooperation of many thousands”, in contrast to the singular dependence of each “naked” native on themselves and a few compatriots nearby.

Brad Delong dramatised the stark gap between today’s Yanomamo stone-age, hunter-gatherers along the Orinoco River with modern New Yorkers along the Hudson River, by referring to the availability and access to products. New Yorkers have access to tens of billions of products supplied in complex product chains from across the entire globe, as against only several hundred for the Yanomamo people, limited as they are solely to whatever they can provide for themselves within their tribal territory. New Yorkers, in contrast, have access to the productivity of billions of participants they do not know, nor need to know.  The division of labour makes the case for markets where possible.

Gavin Kennedy blogs at Adam Smith's Lost Legacy.

The author of a blog, Decline of the Logos, has commenced a series of critiques of the Adam Smith Institute. His/Her “No 1” quote is unpromising as to whether he/she understands Adam Smith’s Wealth Of Nations, while quoting from it to find a quote “with “which annoy the Adam Smith Institute”. What an ambition!

Logos’s “no 1” quote is from Wealth Of Nations (WN 1.viii.11-12: 83-84):

“What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.

“It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it. In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment. In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.”

To Which Logos observes:

Smith is here observing that the freedom of contract between capitalist and worker is, in reality, no such thing. The relative levels of capital each holds distort the negotiation: the capitalist can always afford to hold out for longer. However, within procedural justice libertarianism, freedom of contract is interpreted as absolute: any Government intervention, whether it be through regulation of rights or wages, is an immoral intrusion into a private negotiation.

The above quote appears to indicate that Smith understands that the freedom to make contracts varies between capitalist and worker, in a manner dependent on their relative wealth. This particular freedom appears to be determined less by Government intervention and much more so by possession of capital. Being a strong believer in the power of freedom, I would advocate that some way be found to bring a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself. I am agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union.

The first thing to note here is that Adam Smith, writing in 1763-76, was observing the prevailing system of wage bargaining in the mid-18th century. It was not just a matter of relative “wealth’ that determined the outcome; the powers of local magistrates given them by Acts of Parliament, and the Combination Acts, contributed a great deal too. A lot has changed since then to the current situation in the 21st century. Not only has the law changed to allow wage bargaining (and much else), but also we have accumulated much experience of how trade unions operate in practice, some for the good of their members and some not so good. In so far as the, now defunct, ‘closed shop’ experiences are concerned, it was not freedom to bargain that was sanctioned, so much as restrictive trade union monopolies and, sadly, on occasion localized tyranny against individual employees. Also, the state continued to intervene, sometimes for the good and sometimes less so.

In the 18th century, Adam Smith observed what actually went on across the land. Local magistrates (a social set intimately identical with “merchants and manufacturers” and landowners) set low wage rates for many labourers. Adam Smith tended to despise their partiality. The State also prohibited freedom of assembly and strike-related “outrages”, with flogging though the streets, jail terms and transportation for transgressors (K. J. Logue, 'Popular Disturbances in Scotland, 1780-1815'). These and other examples of judicial outrages were known and commented upon by Smith within the strict and judicious self-censorship of the times. By the post-war decades of the 20th century, these had passed away, replaced by anti-liberty legislation enforcing the extra-judicial powers of trade union leaders (a phenomenon noted in Michel’s ‘Iron Law Of Oligarchy’, earlier in the century) and by the semi-corporate state established by Labourism in the 1960s.

Logos wants “a greater equality of freedom to negotiations between a capitalist and a worker, as an end in itself.” He/she is “agnostic as to how this can be achieved, whether it be through the State or through a non-state body, such as a trade union”. It is not clear exactly which age-group Logos is in, but any knowledge of post-war industrial relations shows that solving the dilemma of “freedom of contract” for firms and employees is a problem for which there have been many efforts, few of them successful.

How close Logos is to running a large (or small) organization is also an experience that might also inform him/her of the daily realities of 21st-century management, for which many reforms have been proposed (and tried), and all have failed. Cop-outs are not one of the workable solutions in the real world.

Logos concludes:

However, the Adam Smith Institute has recently put forward a proposal that runs counter to this aim of securing greater freedom of negotiation, which they have dubbed the ‘Self Employment Option’. This calls for greater use of the self-employed status amongst workers, which “sidesteps the burdens not only of PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“. The self-employed, being freed from the ‘burden’ of rights, will have less freedom in negotiation than the employed. It is difficult to interpret this in any other way than the ASI having a very different understanding of freedom of contract to Adam Smith.”

Where a total, all-embracing solution is not viable, we are left with partial tinkering. Where experience shows that what we have is not working, which is certainly the case for many firms and institutions that experience the problems created by, no doubt well-meaning measures, like “PAYE and NI, but also of unfair dismissal, discrimination suits, maternity and paternity leave, statutory sick pay and holiday pay“, it is very Smithian to offer suggestions, if only to experiment at the margin to see what works or doesn’t, and move on from there. Just because we cannot change everything, is no reason to oppose changing something. Blanket faith in all-or-nothing quick changes, with dire predictions of what could, might, or will happen as a consequence, is, with respect, very unSmithian.

ASI, as I understand it, is about pragmatism – including imaginative suggestions, which are what ASI does best – and I suggest, modestly, that Logos has some ways to go before its advice is credible, either in the selection of quotations from Adam Smith or in understanding the problems of 21st-century Britain.

This post originally appeared at Adam Smith's Lost Legacy.

‘Bad cases make bad law’ (Law 101). I have read many contracts and I have never ceased to be amazed at the casual approach to important contractual issues displayed by relatively high-paid executives in both private and public life. The reaction to Sir Fred Goodwin’s pension fiasco among members of the Government is born of the panic to remove him as quickly as possible as the fall-guy for the whole sorry mess.

The more the bank bosses were and are portrayed as culpable, the less the public would blame the Government, or so the politics of pass-the-parcel blame game feels like since last October. This Government is obsessed by being seen to be ‘doing something’, allegedly better than ‘doing nothing’ (though ‘doing right’ is the better strategy).

The ‘mere’ details of the severance arrangements slipped from view. Competent negotiators often say: ‘If you’ve got it in writing you’ve got a prayer; if it ain’t in writing you’ve got thin air.’  Sir Fred got it in writing. Lord Mandelson, the Chancellor, and the Prime Minister didn’t, and neither did their talented advisors. Double worse, it has come to light, and now they are squirming in deep manure.

Their reaction? As ever, they panic!  Harriet Harman threatens to over-ride the law because the Prime minister says so. How? By passing a new law, or introducing a new tax on high incomes, or perhaps something in the anti-terror laws, or how about the wartime laws on the seizure of German assets? Or don’t pay him and await his writ in the courts?

In short, more panic, more short-termism, and more of what got us into this mess.

Professor Gavin Kennedy is a fellow of the Adam Smith Institute and writes regularly here

Gordon Brown emphasised at this week’s PMQs that foreign banks that normally invested and managed funds in London had contributed to the ‘credit crunch’ by suddenly withdrawing their money back to their own countries, which severely reduced the funds normally available for British lending.

This had placed additional strains on British banks, because they could not completely replace the missing funds.

Perhaps the Prime Minister, and his Chancellor, might reflect on the wisdom of their knee-jerk reaction to the collapse of Iceland’s banks in the seizure of Iceland’s financial assets located in London, using the anti-terror laws to do so, which exacerbated the problems of Iceland’s banks and advertised the politically volatile impetuousness at the heart of Government.

Many foreign bankers did the sensible thing; they moved every last penny of their London deposits immediately, or as quickly as possible, just in case the same government seized their assets under one political pretext or another.

Once somebody’s assets were sequestrated by London’s government, breaking long-standing investment covenants necessary for London as a successful and safe centre for international finance, those who felt vulnerable did the ‘right thing’ by their own interests.   Whatever quiet assurances the Treasury offered to foreign banks and investors, clearly they were not believed.

This amounts, on Gordon Brown’s own admission in Parliament, to a self-inflicted, near-mortal wound to British banking and to the longer-term interests of the City’s international reputation.

Professor Gavin Kennedy is a fellow of the Adam Smith Institute and writes regularly here