By James Pethokoukis

Adam Smith begins The Wealth of Nations with perhaps its most famous bit: an explanation of the concept of division of labor via a description of a pin factory:

I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day.  There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.

It turns out we can also learn quite a bit about economics through the production and evolution of a similar product: the humble nail. In the new NBER working paper “The Price of Nails since 1695: A Window into Economic Change,” Wellesley College economist Daniel E. Sichel explains that nails used to be a precious commodity. In the 1700s, he notes, abandoned buildings were sometimes burned down so the nails could be more easily recovered. And even a century later — when their price had already fallen significantly — it would never do to let a nail go to waste. Sichel highlights the following passage from the 1935 book, Little House on the Prairie, about life in 1870s Minnesota as the narrator watches her father roof their log house:

Now Pa carefully took the nails one by one from his mouth, and with ringing blows of the hammer he drove them into the slab. It was much quicker than drilling holes and whittling pegs and driving them into the holes. But every now and then a nail sprang away from the tough oak when the hammer hit it, and if Pa was not holding it firmly, it went sailing through the air.

Then Mary and Laura watched it fall and they searched in the grass till they found it. Sometimes it was bent. Then Pa carefully pounded it straight again. It would never do to lose or waste a nail.

But the price of nails continued to decline, and today they are treated as disposable. That reality is the result of both lower material prices and higher productivity (bold by me):

[Nails] are a basic manufactured product whose form and quality have changed relatively little over the last three centuries, yet the process for producing them has changed dramatically. Accordingly, nails provide a useful prism through which to examine a wide range of economic and technological developments that touch on multiple areas of both micro- and macroeconomics. Several conclusions emerge. First, from the late 1700s to the mid 20th century real nail prices fell by a factor of about 10 relative to overall consumer prices. These declines had important effects on downstream industries, most notably construction. Second, while declining materials prices contribute to reductions in nail prices, the largest proximate source of the decline during this period was multifactor productivity growth in nail manufacturing, highlighting the role of the specialization of labor and re-organization of production processes. Third, the share of nails in GDP dropped back from 0.4 percent of GDP in 1810—comparable to today’s share of household purchases of personal computers—to a de minimis share more recently; accordingly, nails played a bigger role in American life in that earlier period. Finally, real nail prices have increased since the mid 20th century, reflecting in part an upturn in materials prices and a shift toward specialty nails in the wake of import competition, though the introduction of nail guns partly offset these increases for the price of installed nails.

The post What we can learn about economics from nails (and nail guns) appeared first on American Enterprise Institute – AEI.