David Warshs book describes a great contradiction inherent in

Question

David Warsh’s book describes a great contradiction inherent in economic theory since 1776, when Adam Smith published  The Wealth of Nations.  Warsh calls it the struggle between the Pin Factory and the Invisible Hand.

Using the example of a pin factory, Smith emphasized the huge increases in efficiency that could be achieved through increased size. The pin factory’s employees, by specializing on narrow tasks, produce far more than they could if each worked independently. Also, Smith was the first to recognize how a market economy can harness self-interest to the common good, leading each individual as though “by an invisible hand to promote an end which was no part of his intention.” For example, businesses sell products that people want, at reasonable prices, not because the business owners inherently want to please people but because doing so enables them to make money in a competitive marketplace.

These two concepts, however, are opposed to each other. The parable of the pin factory says that there are increasing returns to scale—the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. But increasing returns create a natural tendency toward monopoly, because a large business can achieve larger scale and hence lower costs than a small business. So given increasing returns, bigger firms tend to drive smaller firms out of business, until each industry is dominated by just a few players. But for the invisible hand to work properly, there must be many competitors in each industry, so that nobody can exert monopoly power. Therefore, the idea that free markets always get it right depends on the assumption that returns to scale are diminishing, not increasing.

For almost two centuries, the assumption of diminishing returns dominated economic theory, with the Pin Factory de-emphasized. Why? As Warsh explains, it wasn’t about ideology; it was about following the line of least mathematical resistance. Economics has always had scientific aspirations; economists have always sought the rigor and clarity that comes from representing their ideas using numbers and equations. And the economics of diminishing returns lend themselves readily to elegant formalism, while those of increasing returns—the Pin Factory— are notoriously hard to represent mathematically.

Many economists tried repeatedly to bring the Pin Factory into the mainstream of economic thought to reflect the fact that increasing returns obviously characterized many enterprises, such as  railroads . Yet they repeatedly failed because they could not state their ideas rigorously enough. Only since the late 1970s has this “ underground river ”—a term used to describe the role of increasing returns in economic thought—surfaced into the mainstream of economic thought. By then, economists had finally found ways to describe the Pin Factory with the rigor needed to make it respectable.    1 
 1. Which one of the following most accurately expresses the main point of the passage?

(A) Mainstream economists have always assumed that returns to scale are generally increasing rather than decreasing.
(B) The functioning of the Invisible Hand is accepted primarily because diminishing returns can be described with mathematical rigor.
(C) Recent developments in mathematics have enabled the Pin Factory to be modeled even more rigorously than the Invisible Hand.
(D) Adam Smith was the first economist to understand how a market economy can enable individual self-interest to serve the common good.
(E) Economists have, until somewhat recently, failed to account for the increasing returns to scale common in many industries.

2 
 2. The author’s attitude towards the idea that the Pin Factory model should be part of the mainstream of economic thought could most accurately be described as one of

(A) hostility
(B) uncertainty
(C) curiosity
(D) indifference
(E) receptivity

3 
 3. The main purpose of the fourth paragraph is to

(A) critique a theory purporting to resolve the tensions between two economic assumptions
(B) explain a difficulty associated with modeling a particular economic assumption
(C) outline the intuitions supporting a particular economic assumption
(D) describe the tensions resulting from attempts to model two competing economic assumptions
(E) refute an argument against a particular economic assumption

4 
 4. It can be inferred from the passage that the Pin Factory model would continue to be an “underground river” ( Highlighted ) were it not for

(A) the fact that economics has always been a discipline with scientific aspirations
(B) David Warsh’s analysis of the work of Adam Smith
(C) economists’ success in representing the Pin Factory model with mathematical rigor
(D) a sudden increase in the tendency of some industries toward monopoly
(E) a lowering of the standards used by economists to assess economic models

5 
 5. The reference to railroads ( Highlighted ) serves to

(A) resolve an ambiguity inherent in the metaphor of the Invisible Hand
(B) illustrate the difficulty of stating the concept of the Pin Factory with mathematical rigor
(C) call attention to the increasing prevalence of industries that have characteristics of the Pin Factory
(D) point to an industry that illustrates the shortcomings of economists’ emphasis on the Invisible Hand
(E) present an example of the high levels of competition achieved in transportation industries

6 
 6. Which one of the following best illustrates the concept of increasing returns to scale described in the second paragraph of the passage?

(A) A publishing house is able to greatly improve the productivity of its editors by relaxing the standards to which those editors must adhere. This allows the publishing house to employ many fewer editors.
(B) A large bee colony is able to use some bees solely to guard its nectar sources. This enables the colony to collect more nectar, which can feed a larger colony that can better divide up the work of processing the nectar.
(C) A school district increases the total number of students that can be accommodated in a single building by switching to year-round operation, with a different quarter of its student body on vacation at any given time.
(D) The lobster industry as a whole is able to catch substantially more lobsters a day with the same number of traps because advances in technology make the doors to the traps easier for lobsters to get through.
(E) A large ant colony divides and produces two competing colonies that each eventually grow large and prosperous enough to divide into more colonies. These colonies together contain more ants than could have existed in one colony.

7 
 7. The passage states which one of the following?

(A) The only way that increasing returns to scale could occur is through increases in the specialization of workers.
(B) Economics fails in its quest to be scientific because its models lack mathematical rigor.
(C) The Pin Factory model’s long-standing failure to gain prominence among economists was not a problem of ideology.
(D) Under the Pin Factory model no one is in a position to exert monopoly power.
(E) Adam Smith did not recognize any tension between the Pin Factory model and the Invisible Hand model.

8 
 8. Which one of the following, if true, would most undermine the connection that the author draws between increased size and monopoly power?

(A) In some industries, there are businesses that are able to exert monopoly power in one
geographical region even though there are larger businesses in the same industry in other regions.
(B) As the tasks workers focus on become narrower, the workers are not able to command as high a salary as when they were performing a greater variety of tasks.
(C) When an industry is dominated by only a few players, these businesses often collude in order to set prices as high as a true monopoly would.
(D) The size that a business must reach in order to begin to achieve increasing returns to scale varies widely from industry to industry.
(E) If a business has very specialized workers, any gains in productivity achieved by making workers even more specialized are offset by other factors such as higher training costs and increased turnover.

armaankumar · Answer

PASSAGE BREAKDOWN

S1:  David Warsh’s book describes a great contradiction inherent in economic theory since 1776, when Adam Smith published The Wealth of Nations. Warsh calls it the struggle between the Pin Factory and the Invisible Hand.
 Simplification:  Introduces two opposing viewpoints: "The struggle between the Pin Factory and the Invisible Hand"

S2:  Using the example of a pin factory, Smith emphasized the  huge increases in efficiency  that could be achieved  through increased size.  
 Simplification:  Describes what the pin factory model is

S3: The pin factory’s employees, by specializing on narrow tasks, produce far more than they could if each worked independently. 
 Simplification:  Expands on the model of pin factory

S4: Also, Smith was the first to recognize how a market economy can  harness self-interest to the common good,  leading each individual as though “by an invisible hand to promote an end which was no part of his intention.” 
 Simplification:  Introduces the invisible hand model

S5: For example, businesses sell products that people want, at reasonable prices, not because the business owners inherently want to please people but because doing so enables them to make money in a competitive marketplace.
 Simplification:  Provides an example of the invisible hand model

S7: These two concepts, however, are opposed to each other. 
 Simplification:  Leading sentence to introduce the contradiction mention in S1

S8:  The parable of the pin factory says that there are  increasing returns to scale —the bigger the pin factory, the more specialized its workers can be, and therefore the more pins the factory can produce per worker. 
 Simplification:  Tells the simple story of the pin factory model

S9: But  increasing returns create a natural tendency toward monopoly , because a large business can achieve larger scale and hence lower costs than a small business. 
 S10: So given increasing returns,  bigger firms tend to drive smaller firms out of business , until each industry is dominated by just a few players. 
 S11: But for the invisible hand to work properly,  there must be many competitors in each industry , so that nobody can exert monopoly power. 
 Simplification:  S9, S10, and S11 explain the contradiction

S12: Therefore, the idea that free markets always get it right depends on the  assumption that returns to scale are diminishing, not increasing. 
 Simplification:  States an assumption going against the pin factory model

S13: For almost two centuries, the assumption of diminishing returns dominated economic theory, with the Pin Factory de-emphasized.  S14: Why? As Warsh explains, it wasn’t about ideology; it was about following the  line of least mathematical resistance . 
 Simplification:  Sets up a rhetorical question to explain the reason of the assumption mentioned S12 and S13

S15: Economics has always had scientific aspirations; economists have always sought the rigor and clarity that comes from representing their ideas using numbers and equations.  S16: And the economics of diminishing returns lend themselves readily to elegant formalism, while those of increasing returns—the Pin Factory— are notoriously hard to represent mathematically.
 Simplification:  Explains why the assumption of diminishing returns dominated economic theory

S17:  Many economists tried repeatedly to bring the Pin Factory into the mainstream of economic thought to reflect the fact that  increasing returns obviously characterized many enterprises , such as railroads. Yet they repeatedly failed because they  could not state their ideas rigorously enough.  
 Simplification:  Explains why economists who tried to emphasize the pin factory model failed

S18: Only since the late 1970s has this “underground river”—a term used to describe the role of increasing returns in economic thought—surfaced into the mainstream of economic thought.  S19: By then, economists had finally found ways to describe the Pin Factory with the rigor needed to make it respectable.
 Simplification:  Explains why by 1970s the pin factory model surfaced into the main stream

ShishirKr · Answer

In question number 5, why option C has been eliminated ?

Sajjad1994 · Answer

Railroads are an example of an industry with increasing returns to scale, i.e. the pin factory idea. The example shows that economists were aware that increasing returns existed. They just didn’t pay much attention to increasing returns because they couldn’t model them.

(C) is wrong because railroads are just an example of increasing returns. The passage doesn’t say that such industries are becoming more common.

(C)  is wrong because railroads are just an example of increasing returns. The passage doesn’t say that such industries are becoming more common.

Sajjad1994 · Answer

Explanation

5. The reference to railroads (Highlighted) serves to

Explanation

Railroads are an example of an industry with increasing returns to scale, i.e. the pin factory idea. The example shows that economists were aware that increasing returns existed. They just didn’t pay much attention to increasing returns because they couldn’t model them.

(C) is wrong because railroads are just an example of increasing returns. The passage doesn’t say that such industries are becoming more common.

(A)  There’s no ambiguity in the invisible hand. It’s perfectly clear. And, railroads referred to the pin factory idea, not the invisible hand.

(B)  We have no idea why the pin factory was hard to model.

(C)  Railroads are just an example of increasing returns. The passage doesn’t say that such industries are becoming more common.

(D)  CORRECT.   Yes. The pin factory model is a better description of railroads. They don’t follow the invisible hand model, because railroads tend towards monopoly.

(E)  Increasing returns often lead to monopoly, not competition. See lines 25-26  (But increasing returns create a natural tendency toward monopoly)

Answer: D

Sajjad1994 · Answer

Explanation

8. Which one of the following, if true, would most undermine the connection that the author draws between increased size and monopoly power?

Explanation

The author states that increasing size tends toward monopoly because the larger company can have lower costs than a smaller company. The credited response will provide a reason that increased size may not be able to gain monopoly power.

A. No.  This does not weaken the claim that larger size would lead to monopoly by allowing the larger companies to cut costs.

B. No.  A lower salary for narrowly specialized workers would strengthen the claim that increased size would allow a company to cut costs.

C. No.  Collusion is not relevant to the discussion of whether increased size tends to monopoly.

D. No.  A varied size requirement across industries would not weaken the claim that increased size allows a certain company tocut costs more than another company in the same industry.

E.  Yes.   If the monetary gains of increased size are offset by training or other costs, such an increase in size would not allow a company to cut costs and gain monopoly power.

Answer: E

Sajjad1994 · Answer

Explanation

1. Which one of the following most accurately expresses the main point of the passage?

Explanation

The Bottom Line of the passage contains the main point. The credited response should state that the passage promotes the ideas of David Warsh who points out how an important contradiction in economic theory has made it difficult for the idea of increasing returns to become part of mainstream economic thought until the late 1970s.

A. No.  This choice contradicts the fourth paragraph, which states that diminishing returns dominated economic theory for almost two centuries.

B. No.  The passage deals primarily with the concept of increasing returns as described by the Pin Factory example.

C. No.  The passage does not compare the rigor of the mathematical models for the Invisible Hand and the Pin Factory.

D. No.  The passage deals primarily with the concept of increasing returns as described by the Pin Factory example.

E.  Yes.   This matches the bottom line.

Answer: E

Sajjad1994 · Answer

Explanation

3. The main purpose of the fourth paragraph is to

Explanation

The question asks for the purpose of the fourth paragraph. The bottom line states that the fourth paragraph argues that the difficulty of explaining the Pin Factory with math caused its de-emphasis in the field of economics.

A. No.  There is no theory that purports to solve the tensions between the Invisible Hand and the Pin Factory.

B.  Yes.   The inability of math to model the Pin Factory led to its deemphasis in the field of economics.

C. No.  The paragraph discusses challenges and does not offer support for the Pin Factory.

D. No.  The paragraph mentions the modeling of only one economic idea.

E. No.  The fourth paragraph states a reason that an idea has not made it to the mainstream but does not offer a refutation for that reason in this paragraph.

Answer: B

gotitright · Answer

" obviously characterized  many enterprises , such as    railroads   ." Isn't this referring to the fact that many industries with increasing return to scale model existed and one of the many is railroads?

egmat · Answer

Yes, you're 100% correct about what that sentence means. But watch what C does:

What the passage says: 
"Many enterprises had increasing returns, such as railroads"
= Many industries had this feature. Railroads is one example.

What C claims: 
"increasing prevalence of industries"
"Increasing prevalence" = becoming MORE common, growing in number over time

Simple parallel: 
I say: "Many animals are endangered, such as tigers."
This means: Many animals ARE endangered. Tigers is one example.
If an answer says: "to highlight the INCREASING number of endangered animals"
That's WRONG. I said many animals ARE endangered, not that endangered animals are GROWING in number.

Same problem here: 
Passage says: Many industries HAD increasing returns
C says: Industries with increasing returns were becoming MORE prevalent
The passage never says these industries were growing or becoming more common. It just says they existed.

C adds "increasing" (= growing over time) which isn't in the passage.

David Warshs book describes a great contradiction inherent in

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David Warshs book describes a great contradiction inherent in

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