It used to be a mistake. You purposely shrink something you made out of wool yarn. So you knit whatever you want (hat, purse, slippers) quite big out of wool. Then you wash it in your washing machine till it shrinks enough and the fibers meld together like a felt. Shape it and let it air dry. There is a little more of a science to it than my description, but that is basically it.

interesting but makes sense since it looks so flat. thanks.

I was told the action of the clothes washer and the dryer of the heat cause the yarn to fuzz and tighten up, creating a very tightly woven effect.

It seems they do not have you put the item in the dryer because you lose control of the amount of shrinking that way -- which might be fine for a purse, but not a hat or slipper.