The productive efficiency of U.S. blacksmiths in the late nineteenth century: an input-distance-function approach

The productive efficiency of U.S. blacksmithing establishments rose slightly between 1850 and 1880. Specifically, a typical blacksmithing shop in 1880 was able to produce the same value of output as a shop in 1850 using 8.6% fewer factor inputs. We decompose this modest increase in productive efficiency into changes in technical efficiency and changes in scale efficiency, controlling for technological progress and assuming allocative efficiency in combining inputs. We find that the average technical efficiency of blacksmith establishments was essentially constant throughout the period, implying that almost all of the gains in productive efficiency were due to improvements in scale efficiency occasioned by more fully exploiting increasing returns. Although smaller blacksmith shops were more technically efficient than larger ones, they were much less scale-efficient. Combining technical and scale efficiency, large shops were productively more efficient than small shops, and this contributed to the decline of entrepreneurial blacksmithing in the second half of the nineteenth century. These findings are robust to alternative definitions of output and the measurement of labor inputs. Our results thus provide evidence in support of an important role for the scale of production in explaining the transformation of blacksmithing from an exclusively artisanal trade to a mixture of large-scale, factory-based manufacturing and small, specialized service-oriented operations.