Chandler in a Larger Frame: Markets, Transaction Costs, and Organizational Form in History

Abstract:     
In 1977, when Alfred Chandler's path-breaking book The Visible Hand appeared, the large vertically integrated "Chandlerian" corporation had dominated the organizational landscape for nearly a century. In some interpretations, possibly including Chandler's own, The Visible Hand and subsequent works constitute a triumphalist account of the rise of that organizational form: the large vertically integrated firm arose and prospered because of its inherent superiority, in all times and places, to more-decentralized market-oriented production arrangements. A quarter century later, however, the Chandlerian firm no longer dominates the landscape. It is under siege from a panoply of decentralized and market-like forms that often resemble some of the "inferior" nineteenth-century structures the managerial enterprise had replaced.

What to do with a triumphalist history of something no longer triumphant? The menu of intellectual alternatives is short. One could reject Chandler's account as having been wrong from the start. One could deny that the large corporation is less successful and superior today than it was in the past. Or, most interestingly, one could attempt to reinterpret Chandler in a way that preserves the essence of his contribution while placing that contribution in a frame large enough to accommodate both the rise and the (relative) fall of the large managerial enterprise. This last alternative - if done right - has the great advantage of preserving the essence of Chandler's remarkable and profound insights while at the same time extending our understanding of the economic theory of organization.

In April, 2003, there appeared in print two long essays attempting this third approach. One is the work of the formidable trio of Naomi R. Lamoreaux, Daniel M. G. Raff, and Peter Temin (henceforth LRT); the other is my own paper called "The Vanishing Hand." I devote the first part of this essay to comparing my account with that of LRT. There is much common purpose and a good deal of overlapping explanation in the two papers; and I will choose to see the essential differences that remain as complementary rather than contradictory. Armed with this general comparison, I then examine how the two papers address what is perhaps the fundamental post-Chandlerian puzzle. Although transportation and communication costs appear to have been declining in secular fashion since antebellum times, organizational structure has not change monotonically. Instead, as LTR have noted, it has followed a pronounced hump-shape pattern over time, moving from highly decentralized to integrated back to decentralized again. The question of why this has happened is crucial to how we assimilate Chandler into a new framework.

Keywords: Chandler, vertical integration, corporation, transaction costs, new economy, business history

JEL Classifications: D23, L14, N01, P12

Working Paper Series