This is an explanation for passage 3 of LSAT 68, the December 2012 LSAT. This passage is about how David Warsh realized that two of Adam Smith’s most important ideas are contradictory.
This section has paragraph summaries and an analysis of the passage, links to the explanations for the questions are below.
Paragraph Summaries
- Warsh found a contradiction in economic theory.
- Smith discussed efficiency gains from increased size (the pin factory), and also discussed how the invisible hand guides marketplaces.
- Efficiency gains from size hurt free markets, which require many participants.
- Economists assumed diminishing returns, because the math was pretty.
- Better math has allowed economists to model the ‘underground river’ of the pin factory
Analysis
This is a technical discussion of economic theory. There are things you don’t have to know. The most important thing is to have a clear sense of what ‘pin factory’ and ‘invisible hand’ refer to.
The main ideas are the pin factory and the invisible hand. In a pin factory, the factory became more efficient when the it grew and workers specialized. Bigger ➞ more efficient. I.e. a small factory produces iPads for $600, a giant one produces them for $100. This can lead to monopoly.
The invisible hand describes the idea of a marketplace. People act out of self-interest and produce public benefit. For example, businesses compete to offer low prices in order to win customers. They don’t offer low prices out of the goodness of their hearts, but the effect is the same.
The Pin Factory And The Invisible Hand Conflict
If businesses grow large and efficient, then there will be fewer businesses. This reduces the competition necessary for the invisible hand.
So the pin factory and the invisible hand are conflicting forces. This doesn’t mean the ideas are wrong. It just means the two things work against each other in the real world.
Lastly, economists ignored the pin factory until they could describe it mathematically.
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