Reviewed by Mary McKinney Schweitzer
Regional Economic History Research Center
Eleutherian Mills-Hagley Foundation Inc.
In The Visible Hand, Alfred Chandler analyzes the emergence of the modern corporation between 1840 and 1917, in a continuation of his history of industrial enterprise begun in 1962 with the publi-cation of Strategy and Structure. According to Chandler, during this period, as businesses and markets grew, the visible hand of management replaced the invisible hand of the market in all transactions except the ultimate one to the consumer. Chandler finds business organization and methods in 1840 essentially unchanged from those of medieval Venice.
Slow transportation and small markets left businessmen with little need for cost accounting—each venture was viewed separately based on immediate market conditions. The coming of the railroads brought the first use of middle management as well as the growth of new financial markets to serve the needs of these early corporate giants. Function limited the railroads’ growth (along with that of the communications industry) and the industry had no need for top management or modern accounting procedures. Similarly, the mass retailing firms which grew as a response to the opening up of markets by the railroad failed to produce significant managerial innovations. In the late 1800s, technological changes in manufacturing industries resulted in remarkable increases in the speed with which products could pass through the factory, and thus the volume that a single firm could produce. It was in these industries that the first modern managerial methods emerged.
According to Chandler, “high volume industries soon became capital-intensive, energy-intensive, and manager-intensive.” In these mass production industries, “technological and organizational innovation created a high rate of throughput and therefore permitted a small working force to produce a massive output” (p. 241). It was thus economies of speed not of scale, which transformed these industries. However, innovations in accounting methods were not yet necessary to the mass production firm; first, the successful firm underwent vertical integration, taking over both supply of raw goods and distribution of the finished product. Merger provided the second and better known route to the modern business enterprise. Chandler finds that by 191 7, however, only those mergers remained that involved industries able to add supply and distribution networks, as had the mass production industries. It was the firms that grew by merger that developed modern top management structures and moved beyond family control.
By 1917, General Electric, DuPont, and General Motors, three firms that had grown both by merger and vertical integration, had developed the methods of accounting, budgeting, and forecasting that were to become normal operating procedures in the 1920s. Managerial innovation thus followed changes in the structure of firms, and “markets and technology . . . had a far greater influence in determining size and concentration in American industry than did the quality of entrepreneurship, the availability of capital, or public policy” (p. 373).
