The Perils of the Pin Factory

Many people and most economists can quote one or two passages from Adam Smith’s great book, The Wealth of Nations (WN). The shadow of ‘the invisible hand’ and ‘the conspiracy of merchants’ loom large over the contemporary mind – at least in the West. Smith is enthusiastically promoted as the prophet of profit, the defender of laissez faire capitalism, and in particular as an enthusiastic booster of international free trade. This image belies much that appears in WN, a large and complex work steeped in historical and comparative argument, and not a few inconsistencies. When read alongside his other works, some unpublished in his lifetime, notably The Theory of Moral Sentiments and the Lectures on Jurisprudence, Smith leaves the self-interested apologists for free enterprise in the dust.

WN famously begins with an analogy, the pin factory. We are told how total production in the factory can be radically increased by subdividing the many separate tasks involved and allocating each to workers who specialise in only one. A later example would be the production line in a car factory. The economies of mass production, based on a detailed division of labour, came to dominate capitalism in the two centuries after Smith. But this only occurred because of the parallel growth in mass consumption, a case of a virtuous positive loop, since as Smith was careful to stress, the gains from specialisation depended on the extent or scale of the market. It was no use producing more and more if you couldn’t sell it, as Henry Ford was quick to realise.

The competitive scramble to grow the market for their products led capitalists in each country to chase customers in other countries. Revolutions in transport and communications in the century after Smith’s death  facilitated an explosive growth in international trade during the nineteenth century. The extension of the benefits of specialisation to the international scale was formalised by Smith’s successor, David Ricardo. The theory of comparative advantage, whereby nations are encouraged to specialise in those industries for which their capitalists have the greatest comparative advantage or smallest disadvantage has radically reoriented the nature of the world. Colonisation by the militarily and economically advanced nations ensured that this pattern of international specialisation would permanently favour the strong over the weak. Those countries like Canada, Australia and Argentina that offered strategically located natural resources of minerals and land, and where predominantly white settlers pushed aside Indigenous populations, fared relatively well – but only as long as their economies continued to specialise within fairly narrow confines. This precondition was met by compliant local elites happy to clip commissions along the way.

This pattern of US-led globalisation peaked during the 1970s to be overtaken in the decades that followed by a partial rewiring of international specialisation, as a number of Asian nations, culminating in the rapid growth of China and India in the current century. A new international division of labour has arisen but one in which most poor and middle-affluent countries like Australia continue to be locked within traditional industrial straight jackets, economies within which political power – coercive, agenda and hegemonic – over governments still resides in elite hands. Four decades of neoliberalism or market fundamentalism has tightened the screws of specialisation, within and between countries.

Well, what’s wrong with this. Doesn’t the theory of comparative advantage prove that everyone gains from free trade within and between countries. Doesn’t the logic of the pin factory still hold? Well, no. Trade is not free. That was Smith’s point about the conspiracy of merchants. Monopoly power perverts the dream of free competition that inspired Smith’s hopes. Markets, including financial markets, are ruthlessly manipulated to extract rents or super profits for the powerful. Multinational corporations organise their commercial activities and accounting  practices to extract huge rents from consumers and citizens across the globe. Smith was crystal clear that one of the key functions of government was to supply those necessary products and services that profit seeking entrepreneurs (capitalism in word and deed hadn’t been invented when he wrote) would never provide because they didn’t return a profit. The turn to neoliberal social and economic policies ignores the policy advice of the icon whom they deify and wheel out to justify their anti-social actions.

One of the areas that Smith highlighted as prime targets of government intervention was mass education, precisely because he traced a direct link between productivity growth due to the division of labour with the stultifying effects of mindless, repetitive tasks on workers. He also foresaw the macro-political consequences of the growth of a low-skilled, stupid, angry and alienated class of workers as a rising threat to the stability of the liberal (but not yet democratic) society that had accidentally emerged in northern Europe, especially Britain. Decades later Karl Marx made similar prognostications but this time with hope in his heart and a gleam in his eye.

Another of Smith’s key tasks for government was defence of the nation. He was quite openly in favour of restricting trade with potential enemies and in particular protecting technological advances that could be put to military use. Universal free enterprise was not the absolutely prime and prior aim of his political economy. Government was not a useless and indispensable drag on the wealth of nations and prosperity of its people. Taxation to adequately fund the basic functions of government that he outlined – and regulations to curb the conspiracy of merchants – was not only morally and politically valid, it was absolutely foundational for the stability of the commercial societies of his day.

The emergence and growth of capitalism in the long nineteenth century after Smith’s death in 1790 led to an unprecedented period of economic and population growth, a global division of labour laying the foundations for the existential threats that we now in the twenty-first century have to deal with – climate change, pandemics and geopolitical conflict. Interestingly, observers and participants in the first great era of globalisation argued that the increasing interdependence between nations caused by specialisation in the Victorian and Edwardian ages would render wars between nations redundant if not impossible. War makes everyone a loser, so no one has an incentive to wage it. This comfortable conceit was rudely broken by the guns of August in 1914. (Smith was never so sanguine, as he believed that history showed that war would always be in the arsenal of the dominant military power and so supported Britain’s reliance on the Royal Navy.)

A similar argument was put by New York Times columnists, Thomas Friedman in 2011, in his book, The world is Flat. Globalisation following the demise of the Soviet Union was a pacific, leveling or equalising force for universal peace. It didn’t take long for that one to implode. War has been a continual running event somewhere in the world since the end of World war II. As he wrote Friedman was also spruiking continuation of American-led wars in Iraq and Afghanistan. Today, an old-style war of territorial aggression is underway in the Ukraine. One side – Western Europe – is living the downside of the international division of labour, in the form of over-dependence on Russian gas that is being turned off in an attempt to freeze the EU into abandoning Ukraine.

The current pandemic is providing another masterclass on the perils of the pin factory. Fractured supply chains have and are disrupting the normal free flow of goods between and within nations. As always, the greatest hardships are being felt in the poorest countries, those that have also been at the end of long queues for vaccines against Covid. But even in the advanced economies bottlenecks and interruptions to the international movement of migrant workers are forcing severe shortages and general inflation, currently exacerbated by the fallout from the Russian invasion of Ukraine and mutual retaliation between Russia and the West.

The world today is distinctly not flat. Globalisation has cultural, political, environmental and historical trajectories that do not all align with dominant economic forces of the day. The forces of nationalism, in particular, are coming up against the neoliberal dream of the leveling rule of free markets in a world where politics and national borders supposedly wither away. Global political geology is continually marked by the ceaseless upheavals of the social landscape. The new despotisms arising in authoritarian capitalist nations like Poland, Turkey, Hungary, Russia and China have different historical antecedents and drivers but together give the lie to simplistic economistic accounts of the progress or wealth of nations.

This underscores the real contribution of Adam Smith, the moral philosopher, historian and political economist: the economy is not a separate sphere of social interaction. Economic models that assume otherwise are radically underspecified and are poor, indeed dangerous, bases on which to form and implement public policy. Smith felt that the increasing power of the entrepreneurial class was unlikely to be fully curbed but had hopes that it could at least be ameliorated by the legitimate authority of government and independence of the rule of law. Elsewhere he pours cold water on this, pointing to the structurally embedded nature of power inequalities in England’s commercial society. Perhaps he was too optimistic. But let him have the last word (from Book IV of WN):

The violence and injustice of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy. But the mean rapacity, the monopolising spirit of the merchants and manufacturers, who neither are, nor aught to be the rulers of mankind, though it cannot perhaps be corrected, may very easily be prevented from disturbing the tranquillity of anybody but themselves.