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WP 02-2

Richard N. Langlois. The Vanishing Hand: the Changing Dynamics of Industrial Capitalism.

Keywords: Industrial Organization, Markets, Managerial Hierarchies.

Abstract:

In a series of classic works, Alfred Chandler challenged the prediction (implicit perhaps in Adam Smith’s account of the division of labor and the Invisible Hand) that economic growth would always lead to finer market decentralization. In the late nineteenth and early twentieth centuries, Chandler showed, the visible hand of managerial coordination replaced the invisible hand of the market. Many would argue, however, that the late twentieth century witnessed an organizational revolution at least as important as the one Chandler described. In that epoch, Smithian forces clearly outpaced Chandlerian ones. This paper is a preliminary attempt to explain why: to provide some theoretical insight into the organizational structure of the new economy. The basic argument - the vanishing-hand hypothesis - is this. The managerial revolution Chandler chronicled was the result of an imbalance between the coordination needs of high-throughput technologies and the abilities of contemporary markets and contemporary technologies of coordination to meet those needs. With further growth in the extent of the market and improvements in the technology of coordination, the central management of vertically integrated production stages is increasingly succumbing to the forces of decentralization.

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