Customer Reviews

The Visible Hand: The Managerial Revolution in American Business

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Chandler give a fascinating review of America's physical history, with emphasis on the development of the coal, railroad, steel, and telegraph industries in making the transportation and communication revolutions possible. The birth of this infrastructure made the rise of mass production and mass marketing possible. The most interesting changes which resulted were in the evolution of the managerial structure and science which became necessary, and which in turn made the transformation of our world possible. "Big business" became not only possible, but essential. That this was an evil system driven by greed is a myth. The book gives detailed descriptions of the birth and growth of many large companies including the big railroads, US Steel, Standard Oil, Singer, MacCormack, DuPont, etc. It is a fascinating narrative.

The Visible Hand is so widely used that I had it as assigned reading in three separate graduate classes, in both Economics and History classes. The fact that economists and historians find this book so useful speaks to its best attributes. The Visible Hand examines business history from an economic perspective. Many historians have so little understanding of economics that they cannot sort out the economic angles of history. Chandler focuses on the right issues (accounting methods, finance, entrepreneurship, public policy, technology) and applies enough common sense economics to do some good analysis.

The main problem with The Visible Hand is that its theoretical analysis is limited to the more obvious common sense insights of economics. Chandler aims at contrasting the Invisible Hand of markets with the idea of conscious planning in organization. While there is much merit in this approach, there is more to the analysis of markets and organizations that you find in this book. Economists have discovered many subtle differences and similarities between markets and organizations, more than you find in The Visible Hand. Consequently, the quality of its analysis varies.

I agree with the emphasis that Chandler places on accounting methods. However, Chandler sees finance capitalism as phase, which gave way to managerial capitalism. I disagree with Chandler on so called managerial capitalism. He underestimates the importance of financial factors both between and within `managed' organizations, and misconstrues the nature of private sector bureaucracies. There are important differences between private and public bureaucracies of which Chandler seems unaware. Furthermore, Chandler does not fully appreciate the role of public policy in shaping modern American corporate organization.

While I find its theoretical analysis weak, I do not doubt the value of this book as a resource on American business history. This is a work of great breadth and, at times, meticulous detail. There is also some good analysis here. The Visible Hand is not for everyone. However, Business Historians, Economic Historians, and IO Economists should read this, even if it is not assigned in graduate school. I rate it at five stars as a history, three stars for theory, for an average of four.

This is basically the business history of the United States (in fact, I read this book for a class entitled that). It traces the story of how the visible hand of management in business replaced what Adam Smith called the invisible hand of market forces. The content is very in depth and only the most serious economic historian would find this a good book to read.

The book is divided into the following sections:

--The traditional processes of production and distribution (plantations, textile mills, factories, etc.)

--The revolution in transportation and communication

--The revolution in distribution and production

--The integration of mass production with mass distribution

--The management and growth of the modern industrial enterprise

It should be noted that Alfred Chandler, Jr. won the Pulitzer and Bancroft awards for this book.

This superb book is an exceedingly well documented and well written description and analysis of the birth of a major contemporary institution, the modern corporation. As Chandler points out, this is an American story. The modern multiunit, vertically integrated corporation run by professional managers emerges in the USA and assumes its modern form by the eve of WWI. Chandler distinguishes carefully this form of "managerial" capitalism from other forms of capitalism. A major distinction is between this (and other) form(s) of large scale capitalism and a Smithian market capitalism characterized by multiple price interactions at many levels of production and distribution. In the large, integrated enterprises Chandler describes many of the market tranactions are replaced by internal, administratively managed transactions under the direction of specialist managers and central coordination. Hence the replacement of Smith's invisible hand with "The Visible Hand" of the title. Other alternative forms of large scale capitalism discussed by Chandler include "entrepreneurial capitalism" in which even large enterprises are dominated a single figure, a small number of figures, or a family, and "finance capitalism" in which enterprises are controlled by financiers as opposed to professional managers. Both these forms appear in various industries in Chandler's descriptions, often as precursors of modern corporations.
Chandler begins with a discussion of economic organization in the USA in the early 19th century, stressing that even with national expansion and improvement of waterborne transportation, the economy remained largely Smithian in nature. Chandler is something of a technological determinist. With the development of steam power, particularly steam railroads, and telegraphy, the stage is set for the evolution of the modern corporation. These technologies produce an enormous expansion of both the volume and speed of economic activity. In turn, the huge increases in economic volume and velocity made possible, perhaps even demanded, the emergence of large enterprises integrating many aspects of the transport business. The advantages of eliminating transaction costs drove the railroads into larger and larger forms with 'roads' assimilating many of the functions carried out previously by small businesses. In the process, the railroad companies developed many of the features of corporate organization and governance that characterize modern businesses.
The managerial practices of the great railroad companies would subsequently be carried into other industries. Again, Chandler sees this as being driven at least partly by technological improvements. The emergence of capital intensive, continuous production technologies in many industries would favor vertical integration and bureaucratic management. The enormous increase in volume of business made possible by transport and communications industries also made possible close integration of production and distribution in many industries, leading to further development of integrated corporations run by professionals. Chandler is careful to point out the complex aspects of the story. The Sherman anti-trust act, for example, is seen as actually accelerating the development of integrated corporations in many fields because it made horizontally organized cartels legally risky. By the eve of WWI, the major actors within and contours of many major industries had assumed their modern form.
Chandler is describing a fundamental change in the American and indeed world economy. As he points out, a businessman of the 1830s would not have felt out of place in the counting house of a 15th century Italian merchant. This same businessman would, however, have found the offices of the Pennsylvania Railroad of 1880 quite foreign. Chandler describes very well the transition from the world of Adam Smith to the modern economy where many sectors are dominated by large, bureaucratic oligopolies.

This is one of the best books on the history and emergence of management. I consider this to be a follow up of Adam Smith's "The Wealth of Nations". Adam smith talks about the role of the market dynamics on business - the invisible hand. Chandler convincingly makes the case that the advancements in transportation and communication coupled with production and distribution fundamentally changed the business dynamics. Pre-1850 businesses were small, local and lacked managers. The owners and managers were the same in most cases. The post-1850 business required a new managerial class that was seperate from the owners. These were salaried full time employees who looked after sales, distribution, finance, production and other aspects of the new business model that was national in scope and dealt with more than a few products. The size and the growth was so significant that the old model stopped working. Chandler does a great job of tracing this history and putting everything in perspective.

A great read if you love history of management.

Some books are worth reading because they are grand and insightful, even if the writing is a bit stale and dry. "The Visible Hand" falls into that rare fraternity of non-fiction; a book that is tough to get through, but will forever alter how you perceive a given subject, in this case, the early economic development of the United States.

The main themes addressed by Chandler are: 1) the rise of the railroads and the consequent development of modern management; 2) the creation of a national mass communication network, along with the rise of mass production in certain industries thanks to technology and process improvements; and 3) the appearance of mega-corporations, through horizontal (merger) and vertical integration, in those industries best situated to take advantage of combining mass production with rapid national and often global transportation networks.

Before the railroads, the author, Alfred Chandler, writes, there were no large organizations in American business, southern slave plantations included. The largest of private enterprises, such as the textile factories of Lowell, Massachusetts, were owner / operated and employed, at most, a hundred workers. The railroad changed everything. Enormous amounts of upfront capital was required to build them, which led to the rise of banks, the growth of the stock market, indeed, the birth of Wall Street. Workforces measured in the thousands were necessary, ushering in the long and steady shift from farms to industrial enterprises that fundamentally altered the national social landscape. And, most critically and wholly new to American business, to ensure that trains and passengers moved efficiently and safely, a network of specialized, salaried managers were vital, who over the years developed modern cost accounting and organizational principles to better manage the sprawling behemoths. In sum, from the development of the railroads and their management structure sprung the greatest economic colossus of recorded history -- the United States.

The speed and reliability of transportation and communication brought by railroads and the closely associated telegraph industry radically transformed the distribution of goods, Chandler argues. Beginning with the commodity trade, grain and cotton in particular, highly efficient and above all extremely rapid national transportation and communication networks were created. After the commodity markets came national wholesale operations, which were then trumped by mass retailers, such as department stores, like Macy's and Woolworths, then mail order houses, like Sears Roebuck and Montgomery Ward, and finally chain stores. In all of these operations, "economies of scale and distribution were not those of size but of speed. They did not come from building larger stores; they came from increasing stock turn." Sear Roebuck, in particular, reads like the Amazon.com of the late nineteenth century, suddenly offering unprecedented selection and customer service to a huge, rural and theretofore underserved customer base. The numbers tell the tale: revenue grew from $138,000 in 1891 to $38M in 1905, when they were fulfilling 100,000 orders a day, leveraging a core competence in packaging and shipping.

Next, certain industries experienced rapid and massive consolidation, but only those that could profit from capital intensive and energy intensive continuous process manufacturing. In short, speed mattered much more than size. All the revolutionary developments could be tied to the velocity and volume at which materials could flow through the economy. In industries where major increases in speed and volume were not possible for structural reasons, such as apparel, woodworking or leather, there was no revolution in production. These industries could always grow their factories bigger, but not faster -- and faster is all that really mattered. Industries that relied on continuous process manufacturing and/or required a lot of heat -- industries such as steel and other metals, chemicals, distilling and oil -- experienced huge jumps in productivity thanks to new and more reliable sources of energy (coal or electric) and new machinery properly configured in factories that maximized speed and throughput. It call came down to new machines, better raw materials and the intensified application of energy. Those firms that could profit from those innovations ultimately gained an upper hand by increasing volume and speed of production. In these industries, the first mover advantage proved powerful as an effective, national marketing organization -- advertising, sales and, where applicable, servicing -- was difficult to emulate and served as a powerful barrier to entry. Backward integration into raw materials production was often a result of ensuring supply rather than securing a lower price. Finally, Chandler writes that the competitive outcome in these industries was usually oligopoly rather than monopoly, largely because a few large integrated firms emerged simultaneously and/or large, integrated firms in adjacent markets branched out and competed with the entrenched leader (i.e. chemical companies expanding into soap).

Chandler's basic thesis is that managerial capitalism -- the growth of business and economic activity owing to salaried, professional managers -- is the primary explanation for the dramatic rise of the industrial enterprise in America and then the rest of the world. He maintains that economists and historians have long preferred to study entrepreneurial capitalism (the role of Robber Barons or creator/innovators, depending on your political viewpoint) and financial capitalism (the role of banks and finance), but that both of these matter much less than managerial capitalism, the expansive, vertically integrated enterprise serving a national or global market with mass production and mass distribution, usually with products that could be produced with continuous production technology. It's a powerful argument.

This book discusses a variant of the "theory of the firm" when applied to monopolistic competition. In a nutshell, how and why does a corporation exist when there are no internal prices for transactions within the corporation (think how corporate department A does not hire department B within the same corporation, so no prices exist, which is sometimes why corporate life for those working there is a waste of time and money)? Also when a corporation is a monopoly, there is no "invisible hand" nor "perfect competition" but the corporation, within limits, can do as it pleases. The book is a bit dated since it assumed vertical integration (think Ford River Rouge factory) and highly hierarchical organization is the norm, when in fact corporations have become more "horizontal" and "flat". BTW I have not read this book, but have read other books that refer to this book and can infer things.