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In this relatively short introductory paragraph, we learn that there has been a problem in economic
theory since the publication of Adam Smith’s The Wealth of Nations. The problem, as described by
David Warsh, involves a contradiction between two concepts: the “Pin Factory” and the “Invisible
Hand.” Since neither concept is defined, you should expect to learn more about them in the
The second paragraph provides a much-needed contextual background to the discussion in the first
paragraph. Here, the author summarizes the views of Adam Smith, who used the example of a pin
factory to illustrate how growth enables—and is enabled by—greater specialization of labor. Smith
also argued that the free markets work as though “by invisible hand” to provide people with goods at
reasonable prices. Given the earlier emphasis on the Pin Factory and Invisible Hand parables, it may
be worth notating each concept as “PF” and “IH.”
This paragraph explains why the Pin Factory and the Invisible Hand are opposed to each other:
The Pin Factory model presupposes increasing returns to scale—the bigger the factory, the more
specialized its workers can be, and the more products they make. Unfortunately, the success of
larger businesses creates a natural tendency towards monopoly, which distorts the free market. In a
nutshell, the Invisible Hand model presupposes diminishing returns to scale, whereas the Pin Factory
model assumes the opposite.
While this argument is not directly attributed to Warsh, we can safely assume that the author is
paraphrasing an argument Warsh made in his book.
The fourth paragraph describes why the Invisible Hand model has dominated economic theory. Here,
the author explicitly attributes the explanation to Warsh: unlike the Pin Factory model, the economics
of diminishing returns can be described with mathematical rigor. The Pin Factory model, by contrast,
has been difficult to represent mathematically.
The last paragraph elaborates on the economists’ failure to account for the Pin Factory model,
despite evidence that increasing returns to scale are common in many industries. The author
concludes by remarking that, by the 1970s, the economic model of increasing returns was finally
described with the mathematical rigor needed to make it respectable.
There are four Viewpoints outlined in this passage: those of David Warsh, Adam Smith, the
mainstream economists, and the author. The bulk of this passage discusses the views of David
Warsh, who is introduced in the first paragraph and whose arguments are discussed in the third and
fourth paragraphs. Adam Smith’s theory is briefly outlined in the second paragraph. The passage
also alludes to the mainstream economists’ initial ambivalence towards, and ultimate embrace of,
the Pin Factory model, though their views are not discussed in any detail. The author’s perspective
on these issues appears closely aligned with Warsh’s, but there is a subtle (but crucial) distinction:
where Warsh attempts to provide an explanation for a particular phenomenon in economic theory, the
author seeks to describe that phenomenon and put it in historical perspective.
The general Structure of the passage is as follows:
Paragraph 1: Introduce two key concepts—the Pin Factory and the Invisible Hand—and
present Warsh’s claim that they are in conflict.
Paragraph 2: Summarize Adam Smith’s use of the terms introduced in the preceding
Paragraph 3: Explain why the Pin Factory and the Invisible Hand are incompatible with
Paragraph 4: Present Warsh’s explanation as to why the Pin Factory model failed to gain
prominence among economists for a long time.
Paragraph 5: Elaborate on the economists’ initial failure to account for the Pin Factory
model, and point to its eventual acceptance.
The author is respectful of Warsh’s position, receptive of both economic models, and relieved that
the Pin Factory model has finally been described with mathematical rigor. The Tone is scholarly and
impartial, rather than speculative or polemic.
The passage presents two central Arguments. One of them seeks to explain why the Pin Factory
and the Invisible Hand models are incompatible with each other (third paragraph). The other focuses
on why the Pin Factory model failed to gain prominence among economists for a long time (fourth
paragraph). Due to their explanatory potential, both arguments are inherently causal.
While there are several other views expressed throughout the passage (Adam Smith’s, the
mainstream economists, etc.), these views do not contain the requisite elements of argumentation.
The Main Point of the passage is to describe a particular contradiction inherent in economic theory
and argue that, until recently, mainstream economists have been unable to account for the Pin
Factory model with the requisite mathematical rigor.