The Visible Hand - Literary Analysis Essay

Paper Type:  Book review
Pages:  7
Wordcount:  1839 Words
Date:  2022-05-22


The great work of Alfred Chandler, The Visible Hand: The Managerial Revolution in American Business (1993), lays out the course of the economic history of the United States of America which acts as the base for international explorations. The book sets out the task and theme through the statement of several propositions concerning the business history that made America's most powerful institution of the economy. Chandler contends in this book that American business history can be isolated into two separate stages: pre-1850 as well as post-1850. He argues that the initial stage is a representation of the market economy. According to economists, this stage is characterized by perfect competition. The second stage which continues to date represents the managerial capitalism. The transition between the two phases resulted in the American business enterprise revolution. The revolution as presented by Chandler (133) saw the transfer of operations in the railroad company owners or partners to full-time managers with salaries. The new management methodologies were devised as a result of the need for a vast system alongside complex operations in the railroad enterprise.

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Analysis of the Economic Concepts

Alfred Chandler, through his book, The Visible Hand: The Managerial Revolution in American Business, has revolutionized the history of the business. His work has led to significant advancements in the understanding of massive business enterprises that have played instrumental roles in shaping the economy of the United States of America to make it the richest country across the globe. The theme of the book is that the current business firm took over from the market mechanisms as far as the coordination of activities within the economy as well as the allocation of resources is concerned. In various sectors of the economy, the visible hand of management replaced the invisible hand of market forces that was proposed by Adam Smith. According to Chandler, businesses before 1850, which he referenced as the traditional enterprises, were characterized by small, single-unit operations producing one product for a small geographic region. The coordination and supervision of the traditional firms' activities were left to the markets and price mechanisms.

Later on, the modern business enterprise came in and took over the management given their large and multi-unit operations leading to the production of several different products that could serve many geographical areas. As opposed to the traditional enterprises, the activities and operations of the modern enterprises were under the coordination and supervision of salaried employees. Therefore, the modern business enterprise replaced the market due to the permission by the administrative coordination that allowed greater productivity, fewer costs, and increased profits which were superior to the coordination of the mechanisms of the market. Chandler posits that the market mechanism, which to him is Adam Smith's invisible hand of the market, is a scenario of price competition among the American small, traditional enterprises. In essence, the market mechanism refers to the perfect competition in the neoclassical economics. Chandler is in fact very critical of the perfect competition market model including where it has led economists. In his critique, Chandler argues that the basic economic theory still holds on to the assumption the small traditional enterprises manages the production and distribution of processes under the regulation of the invisible hand of the market.

Specifically, Chandler is convinced that the perfect market competition model does not aid in the understanding of the modern business enterprise and therefore not important in the comprehension of the business history. In a deeper economic aspect, Chandler is right in his critique since a market is considered perfectly competitive when; the buyers and sellers do not have a significant effect on the market; buyers, as well as sellers, are completely aware of the exchange opportunities in the market, and the products are not differentiated. As such, the perfect competition market seems to be at an equilibrium state where both sellers and buyers have completely exploited the knowledge as well as the exchange opportunities available to them. In this state, the firms have entirely exhausted the means of production. Consequently, the firms in perfect competition not only lack competition but also do not innovate, lack access to better inputs, technology, or ways to organize production. The firms do not offer a cut on their prices.

Given that the model of perfect competition assumes competition as well as knowledge and exploitation of exchange opportunities on the part of the sellers and buyers, it is not helpful in the comprehension of the modern business enterprise. The perfect competition exhibits lack of knowledge discovery, determination of demand for their products, the hiring of inputs, the appropriate technology to use, an organization of purchases, production, and marketing. Therefore the perfect competition market structure cannot be used in addressing matters that are valuable to business historians, for instance, how the American business development influenced the American economic development as well as the reason behind the evolution of the American business. A market with different characteristics to the framework of the perfect competition model is viewed as imperfectly competitive and thus lacks the economic efficiency. Market imperfections in that respect include; product differentiation; a few sellers; and incomplete information. An analysis conducted in that manner results in specific dubious conclusions when used in business history.

Chandler is correct in his criticism of the perfect competition model on the money. Nonetheless, equating the neoclassical economics' perfect competition model to the invisible hand of the market is a big mistake. The consequences of this mistake are vital specifically to Chandler since the idea that both perfect competition market, as well as the invisible hand of the market, are similar, is the basis upon which he has built The Visible Hand. When Chandler equates the invisible hand of the market to the price competition among small traditional enterprises, he misinterprets the market process and at the same time misreports the invisible hand of the market. The misinterpretation and the misreporting is not an issue that can easily be overlooked taking into consideration the theme of The Visible Hand which is founded on the premise of perfect competition and the invisible hand of the market is the same. Subsequently, should the premise of The Visible Hand be false, it implies that the theme is false as well. The theme in The Visible Hand asserts that modern business enterprise armed with the managerial hierarchy alongside vertical as well as horizontal integration replaces the invisible and of the market and the market processes.

The theme is false in the sense that the modern business enterprise cannot replace the market processes because the people in the market form and run the business enterprise with the aim to achieve success within the market. Also, the modern business enterprise cannot take over the invisible hand of the market because it relies on the invisible hand of the market to address customer desires to make profits. In line with that, the invisible hand of the market bears the power to the generation of goods and services that are distributed to the customers. Business historians who concur with the economics of Chandler make a similar mistake because according to history, the driving force behind the successful development of a capitalist is organizational capabilities. Further, by use of managerial coordination, industrial corporations were capable of developing combined productive capabilities consisting physical and human resources in a manner that market coordination was incapable of doing despite having the unplanned interaction of specialized producers. To realize success, the modern business enterprise must develop its productive resources to enable the production of superior commodities at either a competitive cost, be sold at a lower cost, or both.

The difference between the management and the use of the market as described by Chandler points out to his narrow view of the invisible hand of the market. In his argument, he says that the distinction between the modern business enterprise and the small traditional enterprises is that the former does the allocation of resources through management as opposed to using the market and thus takes over the market. However, the difference between management and use of the market is not a clear concept. According to Chandler, an enterprise partakes management when it assigns a section of its inputs as well as hires managers to coordinate the production. On the contrary, an enterprise uses the market when it purchases an input from it. Unfortunately, the definitions by Chandler present difficulties because management and use of the market cannot be separated from one another. The firm manages the market through various activities such as buying an input; searching through the market to identify the available inputs and the possible combinations with other inputs; negotiating contracts to using inputs; and measuring and supervising the performance of a specific input.

An enterprise replaces the market with management when it decides to produce certain inputs and employ managers to coordinate the process of production. On the part of using the market, an enterprise buys services they use in production from the market. The underlying fact is that the choice of the enterprise to produce an input or purchase it from the market cannot be clarified by making a difference between managing and using the market. Regardless of the firm's choice, it cannot avoid both managing and use input markets. Purchase of inputs entails an extensive sequence of decisions that are equivalent to managing while production of input calls for the firm to utilize the market for the managers. There is a distinction between production and purchase of an input. Nonetheless, none of the choices is separate from the market process. The firm's decision to either purchase or produce an input is not concerned with either managing or using the input markets rather a choice on the input markets to use. Generally, it is a great mistake to conclude that by hiring managers to coordinate production the modern business enterprise takes over from the market. Instead, the modern business enterprises are faced with difficulties that it cannot avoid by all means.

Competition in the input market is unavoidable for the modern business enterprise since it has no ownership of its entire inputs and the mangers. The modern business enterprises purchase services from the managers and as such faces stiff competition in acquiring the services of the managers. If the firm does vertical integration and employs managers for coordination of purchases, production, and marketing, it never replaces the input market but competes within a specific set of input markets that includes the market for the managers and not a different set of input markets. Additionally, the modern business enterprise cannot take over the capital market. Big firms depend on external capital in their operations and expansions. However, the external capital is subject to competition among firms in the capital market. In attracting the external capital, the firms must indicate that they can make profits in the future. The capital owners assess several aspects of the firm before supplying it with the capital. The assessment ranges from the choices concerning the product markets to input markets, and decisions of the organization. In ca...

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