The Visible Hand: The Managerial Revolution in American Business by Alfred Chandler

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Introduction

In his book, The Visible Hand: The Managerial Revolution in American Business, Alfred Chandler writes about modern capitalism and the role large scale business enterprises as played in its transformation. Chandler is a renowned and distinguished business historian who as developed numerous ideas on the reasons why there is some type of dominance by the major businesses in American transportation, communication, and other central sectors of distribution and production.  He describes a managerial revolution that is characterized by force and conviction. He refers to this as the visible hand of management and describes how these ideas have replaced the invisible hand that had been introduced by Adam Smith. Chandler makes a major focus on the fundamental shift by the managers running large enterprises and how they have exerted influence in the establishment and determination of size and concentration, especially in the American industry. He makes references to the critical issues of the quality of entrepreneurship, availability of capital, and public policies. This paper will take a look at Chandler’s main perspective and how he derives and relates them to the current market condition in the American and global industry.

Analysis

In the book, Chandler develops an argument that depicts the American business history to have taken two main phases; pre-1850 and post-1850. According to his findings, the first phase represented the market economy. The phase was characterized by what economists refer to as healthy competition. The second phase was marked by market representation characterized by what he refers to as managerial capitalism. He also describes how the two phases transitioned and are where he develops his ideas on the American business enterprise. Here he describes how operations in companies are transferred from the owners or partners to a salaried manager. This called some necessary requirements into the operation of what he refers to as the first truly modern enterprise (Chandler, 1990). The requirements include complex and vast systems for operations. He describes the how there is also a need for the development of new management methodologies. The railroad acted as a catalyst for what was to become the managerial revolution.

According to Chandler, the railroad played a major role in the development of the American business. He believes that the railroad helped in the development of all types of business as it provided for efficient transportation. Railroads were among the first organizations that had multiple units there were dispersed to different geographical places. The organization, therefore, needed well-defined job functions. This, therefore, saw the called for the development of lines of authority and communication laid out in the organization charts. The new structures also the introduction of multiple players of management. Chandler notes that the most important contribution of railroad management is cost accounting. This introduced the utilization of data, this is whereby railroad managers began to accurately track trains and estimate the cost per ton. This enabled the managers to establish the appropriate rates basing on the found estimates. This kind of management influenced the changes seen in other industries. More and more industries begun to set up strategies for reducing the cost associated with transportation. According to Chandler, without the railroad, innovative management methods could not have developed into what we know today (Chandler, 1990).

Chandler states that the pre-1850 phase was characterized by what he refers to as traditional forms of enterprises. He describes three primary models namely the spring Armory, the Lowell textile factories, and the Southern plantations. The Southern plantations were the first enterprises to set up management systems to provide for production processes. The plantations saw a kind of organization that was characterized by work gangs being assigned duties. The farms also had overseers whose main duty was to overlook or manage the foremen, while the foremen overlooked the work gangs. Moreover, the plantations also had some kind of accounting system that saw the exclusion of cost accounting. No one seemed to bother about this. The Lowell textile factories were considerably established and orderly. The factories had managers who were more focused on improvement of productivity and increasing profit margins. The managers were in charge of supervising the workers they were therefore supposed to have extensive knowledge on the company’s organization especially the production. They also kept comprehensive reports on the company’s transactions. There were tasked with analyzing those transcripts and establish favorable operating costs. At the other hand, the Springfield Armory was the one company that was the closest to what can be considered a modern enterprise. The company was among the first American business to introduce an internal specialization of labor during its period (Chandler, 2001). The enterprise has three auxiliary shops that acted as the sources of materials for the central shop. The central shop was where the guns were assembled and made ready for sale. Each of the auxiliary shops has a manager that was tasked with general management of the workers. The records of the operations were comprehensively stored and could be reviewed regularly by the superintendent. However, the company did not introduce any kind of cost accounting. Nonetheless, Chandler believes that this company had the best management compared to the rest of the two models (Chandler et al., 2009).

In order to broaden our understanding on the modern business enterprises, Chandler points out the flaws in the model of perfect competition. He believes that the perfect competition model is a model of a market that only becomes competitive if; buyers and sellers have enough knowledge of exchange opportunities, that there is no product differentiation or there if there is perfect competition, and if  no seller or buyer is powerful enough to dictate or control the market

A state in which buyers and sellers have not exploited all exchange opportunities or acted on their knowledge is a state of no competition and low creative value. Moreover, this state brings about less innovation in a sense that there will be no way to achieve better technology better methods of organization or means to establish the best inputs. Such models tend to be limiting the business that they cannot even make any price cuts. Chandler believes that such organizations cannot describe a modern business enterprise. Modern business models all focused on how to deal with competition and how to engage buyers and sellers with an aim of completing the knowledge of exchange opportunities. However, Chandler notes that perfect competition does not enable an enterprise to understand the demand of their product, the necessary inputs, the necessary organization, or which technology to utilize (Smothers et al., 2010).

Chandler describes how the frameworks of the perfect competition models differ from each other and how the differences bring about economic efficiency or inefficiency. He further explains what causes market imperfections which include; limited number if sellers, product differentiation, and insufficient information. According to him, a market that is characterized by rivalry is a market that has imperfect competition. This kind of analysis may lead to inaccurate conclusions if used to analyze the business history. For instance, if this is the case, the American steel industry of 1875-1898 that saw the rise of Carnegie Steel was a time of imperfect competition. This will mean that the drop of the steel rails from $160 to $17 from 1875-1898 was inefficient.  Analysts have commented on Chandler’s that his model on perfect completion is somewhat accurate but his error occurs when he compares and equates it with neoclassical economics. Critics believe that there is a huge difference between the invisible hand of the market and what Chandlers refer to as perfect competition. These critics seem to uphold the Visible Hand as this idea is its foundation (Khurana, 2010).

Various have studied Chandler’s works and developed ideas, such scholars in Ludwig von Mises. Ludwig works in conjunction with the Austrian school and develops ideas on the nature of the market. According to him, the market consists of social systems that make up the division of labor under private ownership of production processes. According to him, the market is not a thing, place, or a collective entity. Instead, he describes a market as a process that is characterized by the interplay of actions by various entities that cooperate under the division of labor. For example, 8 entrepreneurs will come together and come up with a plan to improve the situation in the market. They, therefore, appraise, calculate, develop a plan, and then execute. These actions are examples of efforts undertaken by business enterprises in order to achieve the benefits of a workable marker. The market processes are developed by people who have a good understanding of a given economy. According to these findings, Ludwig seems to hold a believe that means of production is largely privately owned.

The market process depends entirely on the state of the business enterprises. As business enterprises work out efforts of making profits by undertaking various courses of action the market processes improve in that respect. These are actions such as price changes, product feature changes, and the introduction of products. Market processes have seen the discovery of new and better combinations of technology and inputs into improving capital. It has also seen managers developing new methods of management in order to position their business enterprise to the state of the market. All these actions are made up the market process and are the components of a market society that meets the concerns raised by Ludwig von Mises. As business strive to achieve the desired profits, they develop the market proves through their introduction of new and competitive products or services that meet the customer demands (Langlois, 2003).

Chandler also raises ideas on the profit motives, according to him the motives are developed by private owners who want to induce their business enterprises with an aim of establishing the most efficient methods of production. This makes up another factor of the invisible hand of the market. Chandler develops comprehensive supporting ideas on his theory on the invisible hand of the market. However, critics still believe Chandler’s idea of perfect competition does not fit the neoclassical economics. Many scholars have concluded that the invisible hand of the market has been brought about because of the market process. Market processes entail business enterprises setting up structures and strategies with an aim of making a profit and maintaining or attracting more customers (Chandler, 2005).

Flaws in the Theory

Besides the concerns developed by Ludwig von Mises, other scholars have also highlighted some flaws in Chandler’s theory of the Invisible Hand. The first flaw is concerning price completion between small and traditional enterprises. Scholars have found that Chandler confuses the market process and misrepresents what is ideally the invisible hand of the market. Unlike Chandler, Adam Smith in his theory or idea on the Visible Hand develops a premise that perfect competition and the invisible hand of the market is one and the same thing. The idea of the Visible Hand is that modern enterprises have some type of managerial hierarchy that consists of horizontal and vertical types of integration. The theory holds that the factors of the visible hand supersede the market process and the invisible hand of the market. Chandler ideas seem to lead to a conclusion that modern business enterprise supersedes the market process given that entrepreneurs are always on a quest to achieve the success in the market. This seems to be untrue given that in order for the entrepreneurs to supersede the invisible hand of the market they must cater to the desires of consumers hence they do not have absolute liberty to the market.

Scholars who have studied Chandler’s work have also adopted the same mistake. For example, William Lazonick describes how the establishments of organization capabilities have acted as the driving force of the capitalist development. He adamantly disregards the contribution of market mechanisms. He also describes how managerial coordination and industrial corporations managed to develop and establish a corporation between human and physical resources into enhanced production capabilities through market coordination. According to Lazonick, in order for a modern managerial enterprise to be successful, it should be able to develop productive resources and superior products or services at a competitive cost.  These will, in turn, put that organization at a position that it will be able to compete and command the market. He believes that an enterprise can only be successful it is able to meet the desires of the consumers while still upholding the most efficient measures. The flaws come about when both Lazonick and Chandler seem to share the idea that the modern managerial enterprises were not affected by the invisible hand of the market while the traditional enterprises were. The fact is that every firm is a phenomenon of the market and is therefore subject to the invisible hand of the market (Pisano, 2010).

Conclusion

Chandler’s idea on The Visible Hand is truly a depiction of the history of the managerial revolution in American business. The analysis of the reveals that the book goes on as far as that but does not effectively describe the modern managerial enterprise. Scholars have established that the idea that the market mechanisms used in the coordination of economic activities were not directly dictated by the managerial enterprises. This interpretation is not accurate as it is based on the false premise that price competition between traditional enterprises was caused by the invisible hand of the market. Through studying both the invisible and visible hand derives a common denominator. This is the fact that the invisible hand is actually the effect brought about by market processes characterized by business enterprises competing for the most efficient methods of providing for the consumers. These processes have in turn developed a different understanding of what made the modern managerial enterprise. It is, therefore, safe to say modern enterprise is not a substitute for the invisible hand of the market. Instead, the modern enterprise is a major component of the invisible hand of the market and is therefore subject to it.

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