Organizational Capital - Adam Smith and The Division of Labor

Adam Smith and The Division of Labor

Perhaps the most famous example is the division of labor as illustrated by the pin factory Adam Smith described in the first chapter of The Wealth of Nations. Smith explained how the process of making a pin was divided into as many as 18 separate steps, including: drawing out the wire, straightening the wire, cutting it, pointing it, grinding the unpointed end in preparation for adding the head, making the head, affixing the head, whitening the pin, and packaging it (putting the pin “into the paper”). Labor was divided by assigning one or more of these discrete tasks to a single worker. In this manner, Smith assures us, ten men could make some 48,000 pins a day, whereas if each man had “wrought separately and independently…they certainly could not each of them have made twenty.” By dividing the tasks among the ten workers, production was increased from, at most, 200 pins a day to 240 times that number.

This huge productivity improvement was achieved without any additional physical inputs – that is, without increasing the number of workers, the size of the factory, or even the number or quality of the tools. In fact, by picturing the factory just before the tasks were divided, we can see that the number of tools needed would actually have been reduced. Imagine each man working separately, making complete pins by himself. Each man needs the whole array of tools used to draw the wire, cut it, point it, and so on, so that ten complete sets of tools are required. After dividing the tasks among the workers, however, only a single set of tools is necessary.

The division of labor is an example of organizational capital; knowledge that, when applied, can increase productivity as much as (and perhaps more than) introducing machinery. In fact, the division of labor was a necessary precursor to the invention of the machines so common in modern factories. One can scarcely imagine, for example, how to design a single machine capable of making a complete pin. Yet one can readily conceive of a machine that can cut wire into predetermined lengths, of another that can put a point on each of the cut segments, and so on. The exercise of separating the pin-making process into distinct tasks made possible the automation of those tasks; organizational capital begets physical capital.