Modelling the Pin Factory – Understanding The Division of Labour Using A Stock-Flow Model – Part 1
Last week an unexpected visit to an exercise book factory in Kampala led me to see in a shot that It was possible to use a systems dynamics model to help understand the most famous business process model in all of economics – that of Adam Smith’s Pin Factory. I’m building the model in Stella (which im most familiar) and also struggling to mimic it in Minsky (which im not). The real aim here is to explore to what extent interactive models can be used as a teaching tool of the most basic building blocks of political economy, which might convince SFC blogging skeptics who dont trust anything until it is published in a DGSE/rational expectations believer refereed journal- which as one commentator has suggested is like getting an article critical of eugenics published in a 1930 Eugenics journal – and where are they now? A future model for example will examine joint production/fixed capital in a SFC model.
The factory was a hive of activity, in a space no larger than a 7/11 several dozen people were working. The process was highly labour intensive and involved a massive division of labour into over 10 steps to make an exercise book. There was only one piece of powered equipment operated by one man, a printer for covers and to line paper, but apart from that the only other capital equipment (all human powered) was brushes for glue, and cutters to size paper. Most of the other steps in the operation involved no or almost no capital what so ever. The firm manufactured its paper off site so it was a perfect model of vertical integration, taking each of the steps necessary to transform a raw primary material, wood, through to final consumer product.
Adam Smith used the Pin Factory illustration to demonstrate his central economic theory, and claimed innovation, that the main cause of growth was the division of labour, and that it was the division of labour itself that spurred capital and process innovation. Others, notably John Rae (the Scottish Canadian economist not the similarly named biographer of Smith) claimed that Smith had got the causation the wrong way round, that it was invention that spurred growth and that invention caused the division of labour.
The ability to create a model offers the intriguing possibility to test (to some extent) who was right. In fact the term ‘division of labour’ covers several different process innovations each with different effects – so perhaps bother were?
This series will be divided into a number of parts with references:
In the next part ill look at the origins of the Pin Factory model and the idea of the Division of Labour in Physiocratic thought. Why the Pin Factory was chosen over other (seemingly more obvious) factory models for the C18, such as a textiles factory, and what Adam Smith’s particular innovation was in studying the division of labour.
In the third part ill explore the attempts other early political economists made to fill in the missing links in Smith’s concept, because rather frustratingly Smith did not really explain why the division of labour led to efficiency savings. In particular we will explore the relationship between the Division of Labour and capital advanced, which the Says (father and son) laid stress on.
In the fourth part we will explore Rae’s alternative view.
In the fifth part we will look at the concept of the ‘production function’ – and the problems of defining a production function involving multiple process steps some of which are labour only. Von Thünen- the inventor of the production function – created the solution, which he had etched on his grave.
There may be several other parts – as the model is open ended and can easily be extended, but this is enough for an initial plan. I hope to find time to explore Smith’s much neglected macro insight, that the extent of the division of labour was limited by the size of the market, as well as Ricardos intriguing suggestion that the division of labour may boost growth in monetary terms but values remain the same.
Most of economics treats the production process - such as in a factory – as a black box. You have a matrix of inputs, and a matrix of outputs, and what happens in between must be. But what happens in between takes time, and requires modelling of state and delay, requiring an SD approach. Very few in an economic context have explored inside that black box and its connection to the division of labour; but honorable mentions must go to Babbage, Böhm von Bawerk and Goldratt. We will explore their contributions throughout where appropriate.
The series will start properly tomorrow if all goes to plan.