Theory of the Visible Hand

The theory of the visible hand of Alfred D. Chandler determined that it was not the invisible hand of the market that determined corporate effectiveness but the visible hand of management. His book, “The Visible Hand: The Managerial Revolution in American Business,” which won both the Pulitzer and Bancroft prizes in 1978, rewrote the course of American economic history. The key findings in “The Visible Hand” are: 1. The origins of the modern enterprise trace to the recognition that administrative coordination does a better job than the market at enhancing productivity and lowering costs, particularly as enterprises grow and their production increases. 2. A managerial hierarchy is essential. 3. Once a managerial hierarchy is in place, it becomes its own source of permanence, power, and continued growth. 4. Such hierarchies tend to become increasingly technical and professional. 5. Over time, such professional structures become separate from ownership. 6. Professionals prefer long-term stability and growth to short-term gains.

Chandler found that modern enterprises needed a “new subspecies of economic man — the salaried manager.” The manager must possess the expertise of management and not necessarily the expertise of the content of what he or she is managing. And, the manager, unlike the traditional entrepreneur, need have no stake in the enterprise being managed.

If the work of Chandler and Williamson reads a lot like what you learned in Public Administration 101, you are right. Applied to public management, the theory of the visible hand is entirely compatible with traditional perspectives. We can start with the assertion that the visible hand of public management is just as important to effective government as the visible hand of business management is to effective enterprise. Because laws and policies do not carry themselves out, a professional, educated and technically competent public service must be organized and managed to administer laws and policies. A merit-based civil service coordinated through a managerial hierarchy is essential to guarantee order and competence. As Chandler indicated, a fully developed public sector managerial hierarchy will likely become a source of its own permanence and power. So, the public-sector visible hand can also be a heavy hand.