Adam Smith wrote during a time of industrial revolution, increasing economies of scale (especially with the textile industry), invention of the steam engine in 1769, massive city growth and urban concentration, and the establishment of "manufactories" or centers of production from which the capitalist owned everything including hired labor.
Smith was very impressed by the increases of productivity that could be gained from division of labor and was the first to formally distinguish between profits originating from merchant capital (in exchange) versus industrial capital (from production). During his time, new technologies were being applied to the manufacture of several industries including textiles, agriculture, transportation, and steel. Smith illustrated the advantages of specialization and division of labor by using a pin manufacturing example. For example, Smith observed that using the right tools, one person living in the 1770s could make 20 pins per day. However, if that particular pin making operation could be broken up into a number of individually small operations in which workers specialize (i.e. one to cut the wire, a second to straighten it, a third to put a point on it, a fourth to grind it, a fifth worker to put finishing touches on it, etc.), then ten people could significantly increase their output by making up to 48,000 pins per day. Even better yet, if a large specialized labor market was available, an entire factory could produce and sell millions of pins per day.