The New Colossus
Hierarchical companies were once viewed as the key to America's economic success, but they now seem a relic of the past.
“Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History” by Naomi R. Lamoreaux, Daniel M.G. Raff, and Peter Temin, in American Historical Review (Apr. 2003), 914 Atwater, Bloomington, Ind. 47401.
In The Visible Hand (1977) and other influential works, Alfred D. Chandler, Jr., established what has been for a quarter-century the dominant approach to American business history. Chandler argued that America’s economic success in the 20th century was due to the rise of huge, vertically integrated, hierarchically managed enterprises in steel, automaking, and other important industries. Instead of relying on the market to obtain raw materials and to sell their products, the Ford Motor Company and other large firms took on the supply and marketing functions themselves—and management’s “visible hand” proved more efficient than the market’s invisible one.
Chandler’s view prevailed even as the behemoth firms he celebrated were running into grave difficulties in the late 20th century. Now, Lamoreaux, Raff, and Temin, economic historians affiliated with the National Bureau of Economic Research, offer an updated view of business history.
Chandler “provided a compelling alternative to the [then-common] robber-baron view of big business,” say the authors. But by the 1980s, “classic Chandlerian firms frequently were being outperformed, even in their core businesses, by more specialized, vertically disintegrated rivals,” such as Toyota. Detroit automakers found it hard to adapt, but firms in other U.S. manufacturing industries, particularly new ones such as computers, were at home in the new environment. Refusing to limit themselves, à la Chandler, to a simple choice between hierarchy and the market, these firms opted for an intermediate form of “coordination mechanism”: close, long-term relationships with independent parties. In the changed circumstances, this proved more effective than an approach that was either pure market or pure hierarchy.
The spread of railroads and the telegraph during the second half of the 19th century encouraged firms to take advantage of economies of scale and rely on hierarchical management to control their far-flung operations. The firms’ mass production of standardized goods at low cost put those goods within the reach of most consumers. By the late 20th century, however, affluence was encouraging consumers to demand a better quality of goods and more choice. Specialized firms, relying on “long-term relationships” with suppliers and distributors, had the flexibility to satisfy consumers’ new wants; the hierarchical behemoths did not.
That recent development doesn’t signal the end of business history, the authors caution, for the “coordination mechanisms” that work well in one period “may not operate as effectively when economic conditions or institutional environments change.”