Reading Comprehension

PT138 · S1 · P3 · Q22 The Invisible Hand

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David Warsh’s book describes a great contradiction inherent in economic theory since 1776, when Adam Smith published The Wealth of Nations.

Topic

The conflict between two foundational economic ideas—Adam Smith’s Pin Factory (increasing returns to scale) and Invisible Hand (competition)—and how the struggle to mathematically represent increasing returns shaped economic theory.

Framework

Old / New (With elements of Highlight Noteworthy, but primarily Old / New)

Main Point

For almost two centuries, economic theory favored the easily modeled idea of diminishing returns (ignoring increasing returns and the Pin Factory) because it was more mathematically manageable, until late 20th-century advances finally brought the concept of increasing returns into mainstream economics. The Most Valuable Sentence(s): The last paragraph has the most direct statement of the main point:

P1: Introduction—The Central Contradiction

Warsh’s book highlights an old contradiction in economic theory going all the way back to Adam Smith: the opposing ideas of the Pin Factory (increasing returns from specialization) vs. the Invisible Hand (the market’s reliance on competition).

P2: Explaining the Pin Factory and Invisible Hand

This paragraph dives deeper into Adam Smith’s two famous examples: the Pin Factory (showing how specialization and scale make production more efficient) and the Invisible Hand (showing how personal self-interest leads to public benefit through competition).

P3: Explaining the Contradiction

Here, the passage spells out why these two ideas clash: increasing returns favor big firms and lead to monopolies, while the Invisible Hand requires lots of competitors—so they can’t both work together in a free market. Economic theory, therefore, depended on the assumption of diminishing (not increasing) returns.

22.

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

In some industries, there are
Weak Impact
This gives some evidence of the existence of a smaller business having monopoly, which goes against the author's general connection between larger businesses and monopoly. But it has pretty weak strength, since it sounds like the smaller business may just have a local monopoly because there aren't competing larger businesses in this certain geographical region.
20% picked this
As the tasks workers focus
No Impact
This answer's focus on narrowness of tasks and size of workers' salaries has no direct impact on the conversation about larger businesses having more access to increasing returns and that trending towards monopoly power.
1% picked this
When an industry is dominated
Strengthens, if anything
This answer still goes along with the author's suggested relationships: "increased size -> more increasing returns -> smaller firms who can't keep up with lower costs disappear -> industry becomes dominated by just a few players -> monopoly" In order for this sort of idea to weaken, it would need to say that once an industry is dominated by only a few players, the other ones can't drive each other out of business, and so it never gets down to being dominated by only one company (a true monopoly).
12% picked this
The size that a business
No Impact
This is the classic wishy-washy answer we see on Strengthen / Weaken tasks that feels like, - differences exist - things happen - changes occur It just provides a vague idea that doesn't have any clear impact. Even if the threshold for achieving increasing returns varies widely from industry to industry, it might still be true that the bigger companies have more increasing returns than the smaller ones, which is all the author is saying about that.
8% picked this
Correct
If a business has very
Why this is right
This is tough to like on a first pass, in part because we need to use or remember the sentence before the author starts talking about monopoly: the bigger the pin factory, the more specialized its workers can be, and thus the more productive (more pins per worker) each worker can be. This was the author's basis for the first connection in her causal chain: "increased size -> more increasing returns -> smaller firms who can't keep up with lower costs disappear -> industry becomes monopolized by just a few players". This answer is going against that link by saying, "Sure, as you get bigger, you get more specialized, and so you might derive more productivity out of each worker. But -- that doesn't necessarily give your business some comparative advantage over smaller businesses. After all, there are also downsides to becoming more specialized, such as your workers hate their repetitive, specialized jobs and so they more frequently quit and so you more frequently have to pay to find / interview / hire / train new workers." This answer doesn't directly speak to monopoly power; it tries to kill that causal chain farther upstream, denying the basic starting point that bigger businesses, due to their greater ability to specialize workers, start to have an important economic advantage over smaller businesses. This is definitely a "best available" answer situation, where the others don't do anything or go the wrong way, so this one ends up winning by comparison.
Skill tested: Weaken · how this choice captures the passage's function is the move to repeat next time.
59% picked this

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