The Visible Hand
by Alfred D. Chandler, Jr.
Central Theme: From a market economy of perfect competition to managerial capitalism
In this book, Chandler argues that American business history can be separated into two separate phases: pre-1850 and post-1850. He contends that the first phase represents the market economy—one characterized by what economists call perfect competition. The
second phase, continuing to the present, represents what he calls managerial capitalism. The transition between these two
periods constituted a revolution in American business enterprise, for it transferred operation of a company from the owner or
partners to a full-time, salaried manager. It was necessitated by the requirements of operating the first truly modern enterprise,
the railroad. With its vast system and complex operations, the railroads were compelled to devise new management methodologies.
For Chandler, the railroad was the catalyst for the managerial revolution.
prior to 1850, what Chandler terms "traditional enterprises," fell into three primary models: the Southern plantations, the
Lowell textile factories, and the Springfield Armory. The Southern plantations were the first enterprises that had to contend with
the management of people and production. They operated on a age-old system of work gangs assigned a specific task. The plantation
overseer's main duty was to manage the gangs' foremen. The plantation's accounting system was little changed from the time of the Medicis. No cost accounting was used and neither the plantation owner or the overseer appeared to be concerned with this lack. The
Lowell textile factories were a considerable step more advanced from the Southern plantations in their complexity. Managers
were much more concerned with enhancing productivity and increasing output. Lowell's managers not only had to supervise workers,
they had to have a thorough knowledge of the factory's production line and machines. They kept detailed records of past transactions,
but showed no inclination to analysis of these records to determine operating costs. The Springfield Armory, by far the closest
to a modern business of the three models, was one of the few American businesses to have an internal specialization of labor
during this period. It had three auxiliary shops that fed material into a central shop, where the guns were assembled into a final
product. Each shop had its own manager, who was responsible for only his workers and area. Records were meticulously kept
and the Armory's superintendent could review the work of each area in great detail. However, cost accounting was not introduced
and the superintendent did not use the information available to render the Armory more efficient. Chandler contends that
the Springfield Armory was significant for factory management, not multi-unit business management.
The railroad, for Chandler, is an especially significant development in American business. Not only was it the first modern enterprise, it also facilitated the development of other businesses because it provided reliable, fast transportation. Railroads were the
first organizations to have multiple, geographically-dispersed units whose operations must be coordinated. Job functions, long
nebulous in earlier industries, became solid and well-defined; organizational charts were created showing lines of authority
and communication. Multiple layers of management were introduced. By far, the most significant organizational innovation introduced
by the railroads was cost accounting. Utilizing data only hours old, railroad managers could accurately track trains, estimate
their cost per ton-mile, and determine whether rates should be changed based on this data. It was a watershed in business
management. The railroads also enabled other industries to expand, both by their pioneering efforts in organization and their reliable
transportation system. Mass production and mass retailing could not have come about without the railroads' innovative management
methods or their ability to ship goods cross-country quickly and reliably.
For Chandler, the revolution was not so much the evolving methods of management as it was the creation of management as such. Prior to the railroads, market mechanisms governed and guided the production process. After the railroads, skilled management took over that capacity.