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The Vanishing Hand:
the Changing Dynamics
of Industrial Capitalism


Richard N. Langlois

The University of Connecticut

U63 Storrs, CT 06269-1063 USA

(860) 486-3472 (phone)

(860) 486-4463 (fax)




Industrial and Corporate Change 12(2): 351-385 (April 2003)








In The Visible Hand (1977) and subsequent works, Alfred Chandler focused the spotlight on the large, vertically integrated corporation.  He did this not merely to chronicle the rise of that institution but also to explain it and to give it a prominent place in American economic growth during the last century and a half.  The force and originality of Chandler’s ideas coalesce in the book’s title, a provocation in the direction of Adam Smith (1976).  Smith had predicted an increasingly fine division of labor as the response to a growing extent of the market; and, although he was actually quite vague on the organizational consequences of the division of labor, Smith was clear in his insistence on the power of the invisible hand of markets to coordinate economic activity.  Chandler’s account appears to challenge this prediction: internal organization and managerial authority became necessary to coordinate the industrial economy of the late nineteenth and early twentieth centuries.  The visible hand of managerial coordination had replaced the invisible hand of the market. 

On one reading, The Visible Hand is about the response of business institutions to the conditions of a particular historical episode, namely the dramatic increases in population and per capita income in the United States after the Civil War, coupled with the equally dramatic fall in transportation and transaction costs attendant on the railroad, the inland water network, and the telegraph.  On another reading, however, the managerial revolution represents the emergence of an institutional structure inherently superior for all times and places to that of decentralized ownership and market exchange in all its forms.  History is never kind to historicists, however; and the facts of the last quarter century have made life uncomfortable for those who would project the Chandlerian model into the present.  It has become exceedingly clear that the late twentieth (and now early twenty-first) centuries are witnessing a revolution at least as important as, but quite different from, the one Chandler described.  Strikingly, the animating principle of this new revolution is precisely an unmaking of Chandler’s revolution.  Rather than seeing the continued dominance of multi-unit firms in which managerial control spans a large number of vertical stages, we are seeing a dramatic increase in vertical specialization — a thoroughgoing “de-verticalization” that is affecting the traditional Chandlerian industries as much as the high-tech firms of the late twentieth century.  In this respect, the visible hand — understood as managerial coordination of multiple stages of production within a corporate framework — is fading into a ghostly translucence. 

We are left with the choice of abandoning Chandler or reinterpreting him.  This essay takes the latter course.  If we take the first reading of The Visible Hand – that the managerial revolution was an adaptation to particular historical circumstances – then we can explain the organizational revolution of the new economy by embedding Chandler’s story within a roomier account that admits of a range of possible historical circumstances.  As a byproduct, such a reinterpretation can hope not only to explain the new economy but also to shed light on the organizational changes of the original Chandlerian revolution. 

The basic argument — the vanishing-hand hypothesis — is as follows.  Driven by increases in population and income and by the reduction of technological and legal barriers to trade, the Smithian process of the division of labor always tends to lead to finer specialization of function and increased coordination through markets, much as Allyn Young (1928) claimed long ago.  But the components of that process — technology, organization, and institutions — change at different rates.  The managerial revolution Chandler chronicles was the result of such an imbalance, in this case between the coordination needs of high-throughput technologies and the abilities of contemporary markets and contemporary institutions to meet those needs.  It was an organizational solution appropriate to its time and place.  But with further growth in the extent of the market and the evolution of institutions to support exchange, the central management of vertically integrated production stages is increasingly succumbing to the forces of specialization.


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