Pins: Division of Labor is Limited by Transaction Costs

Jun 3, 2025

Explore how Adam Smith's insights on division of labor revolutionized pin production, leading to skyrocketing productivity. Ten workers specializing in pin-making now produce 800,000 pins daily, a staggering increase since Smith's time. This dramatic shift is driven by reducing transaction costs, enabling global manufacturing consolidation. Discover how these principles apply not only to pins but also across various industries, shaping market dynamics and fostering economic evolution. Specialization isn't just efficient; it's a game-changer for workers and consumers alike.

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INSIGHT

Division of Labor Increases Output

Adam Smith's pin factory example shows division of labor boosts productivity non-linearly with increasing returns to scale.
Specializing tasks in production vastly amplifies total output beyond sum of individual efforts.

INSIGHT

Transaction Costs Limit Labor Divide

The division of labor in production depends not on technical limits but on market extent.
Lower transaction costs expand markets, enabling more specialized labor divisions and higher productivity.

INSIGHT

How Division of Labor Raises Productivity

Division of labor raises productivity by reducing task switching, improving dexterity and encouraging specialized tool design.
These gains increase wages and decrease prices, benefitting workers and consumers alike.

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Adam Smith's pin factory example from "The Wealth of Nations" demonstrates how dividing labor into specialized tasks dramatically increases productivity. Ten workers specializing in different aspects of pin-making could produce 48,000 pins daily, while individually they might struggle to make even 20 pins each—a productivity increase of at least 240 times. This division of labor, Smith argued, is limited by the extent of the market.

Transaction costs—expenses associated with exchanging goods across distances—determine this market extent. As railroads, steamships, and eventually air freight reduced these costs, pin manufacturing evolved from numerous small local producers to global consolidation. The largest pin producer today, Prim-Dritz Corporation (headquartered in South Carolina), conducts most manufacturing in Asia. Modern pin factory workers now produce approximately 800,000 pins daily—200 times more than in Smith's era.

This transformation wasn't about "exporting jobs" but rather the natural evolution of specialized production. Multiple attempts to form price cartels in the pin industry failed as producers leveraging greater division of labor could always undercut competitors. The pattern we see in pins repeats across countless industries: as transaction costs fall, markets expand, allowing for increased specialization and productivity.

Understanding this relationship between division of labor and market size helps explain why some manufacturing concentrates geographically, why attempting to "bring back" certain industries is economically challenging, and why consumer prices have fallen for many goods. Smith's insight continues to provide a framework for understanding economic trends in our increasingly interconnected global economy.

Links:

Dutton, H. I., and S. R. H. Jones. “Invention and Innovation in the British Pin Industry, 1790-1850.” British Business History. 57 (1983): 175-193.
Jones, S. R. H. “Price Associations and Competition in the British Pin Industry, 1814-40.” Economic History Review. 26 (1973): 237-253.
Jones, S. R. H. “Hall, English, and Co., 1813-41: A Study of Entrepreneurial Response in the Gloucester Pin Industry.” Business History. 18 (1976): 35-65.
Liberty Fund: Adam Smith’s Pin Factory.
McNulty, Mary. “How Straight Pins are Made.” How Products are Made. ENotes.
Pratten, Clifford J. “The Manufacture of Pins.” Journal of Economic Literature. 18 (1980): 93-96.
Stigler, George J. “The Division of Labor is Limited by the Extent of the Market.” Journal of Political Economy, 59(1951): 185-193.

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You can follow Mike Munger on Twitter at @mungowitz