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

In 1977, when Alfred D. Chandler's pathbreaking 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 that the managerial enterprise had replaced.¹

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.² One could deny that the large corporation is less successful and superior today than it was in the past.³ 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 retaining 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 article called "The Vanishing Hand." Rather than rehash my own attempt to reframe Chandler, I propose to 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 articles; I choose to see the essential differences that remain as complementary rather than contradictory. Armed with this general comparison, I then examine how the two interpretations 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 changed monotonically. Instead, as LRT have noted, it has followed a pronounced hump-shaped pattern over time, moving from highly decentralized, to integrated, and back to decentralized again.⁴ The question of why this has happened is crucial to how we assimilate Chandler into a new framework.

A "New Synthesis"

Both LRT and "The Vanishing Hand" are fundamentally Chandlerian in orientation. They are homages to Chandler far more than critiques. But, as LRT observe, Chandler's achievement was largely descriptive, and it lacked an underlying theory of organizational change.⁵ The fundamental aim of both articles is to supply this missing theory.

The first place LRT look for this theory is in the work of Oliver E. Williamson. The "lack of an underlying theory of organizational change made it difficult for [Chandler] to explain the erosion that occurred in the position of these giant firms by the late twentieth century," they write. "Fortunately, other scholars, most notably Oliver Williamson, had already recognized the need to fit Chandler's narrative into a broader theory of the firm."⁶ A dominant figure in the present-day economics of organization, Williamson had self-consciously attempted to explain the rise of the Chandlerian firm as the "product of a series of organizational innovations that have had the purpose and effect of economizing on transaction costs."⁷ In Williamson's account, vertical integration in the Chandlerian firm arose in response to incentive problems—especially in the face of asset specificity and asymmetric information—that disinclined potential market partners...