Comments of kev|n Carson's Cr|t|que of A|fred D Chand|er

8y AoJets Mlkkelseo

kevln Carson wroLe a fasclnaLlng crlLlque of Alfred Chandler
hLLp//muLuallsLblogspoLcom/2008/06/alfredchandlercrlLlquehLml

eots

l Lhlnk hed flnd Lhe book 1he urlLan ClfL qulLe lnLeresLlng lL Lalks abouL managemenL and accordlng Lo
Lhelr reporLs old school uS managemenL was acLually qulLe humane boLLom up and colleglal lL led by
naLural auLhorlLy more Lhan by orders ln facL 1aylorlsm was re[ecLed lnlLlally because lL wasnL humane
1aylorlsm mlghL look slmllar buL ls acLually qulLe dlfferenL and for Lhem Lhe source of many evlls 1hey
argue as well LhaL !apanese flrms llke 1oyoLa are LhaL way because of whaL Lhey adopLed from Amerlca
1he urlLan ClfL offers a qulLe lnLeresLlng perspecLlve Lhough cerLalnly Lhere's much Lo be read
crlLlcally

8eadlng Lhe 8evlew of 8eblrLh of Amerlcan lndusLry l see Lhere'd be more Lo dlsagree wlLh ln 1he
urlLan ClfL whlch doesn'L make Lhe book any less valuable l agree 100 wlLh Lhe crlLlque of
accounLlng LhaL LreaLs unsellable lnvenLory as an asseL
hLLp//muLuallsLblogspoLcom/2008/06/bookrevlewreblrLhofamerlcanhLml
(noL Lo dlgress buL Lhls arLlcle covers many of Lhe fasclnaLlng lssues wlLh how corporaLlons do
accounLlng and performance measuremenL lssues because Lhey vlolaLe economlc law and lead Lo
wasLeful buslnesses As below l recommend 1heory of ConsLralnLs lnslghLs ln Lhls area 1hls revlew
seems much more congruenL wlLh AusLrlan Lconomlcs l do wonder Lhough how Lhey explaln lord's
fallure ln Lhe decades before Penry lord ll Look over)

Whlle readlng Lhe arLlcle on Chandler l canL agree wlLh
1he prerequlslLes of largescale producLlon are an arLlflclal sLaLe of affalrs le large corporaLlons
depend on subsldlzed LransporL

Whlle large corporaLlons depend on LransporL and Lhe LransporL ls ofLen subsldlzed LhaL doesnL mean
LhaL LransporL wouldnL exlsL wlLh subsldles (lL seems relevanL Lo polnL ouL LhaL Lhe dlvlslon of labor ls
whaL an economy ls all abouL and lL ls dependenL on LransporLaLlon and communlcaLlon lnLeresLlngly
Lhe lnLerneL's enabllng of global lnsLanL communlcaLlon seems Lo be maklng lL posslble Lo be anywhere
whlle paradoxlcally lL ls even more lmporLanL Lo be ln Lhe rlghL locale)

My lnlLlal reacLlon was whaL abouL Lhe lncreaslng cosLeffecLlveness of waLer LransporL? ln Lhe absence
of rallroads one would sLlll see huge lncenLlves Lo use rlvers and oceans Lo llnk LogeLher clLles (MosL
clLles are bullL on harbors or rlvers as lL ls) Maybe shlps plylng Lhe sea somehow creaLe negaLlve
exLernallLles buL LhaL seems Lo be pushlng lL Cne could lmaglne waLer LransporL alone llnklng Lhe easL
coasL of norLh Amerlca Lhe Mlsslsslppl and lLs LrlbuLarles Lhe CreaL Lakes and SL Lawrence wlLh
wesLern Lurope especlally Lngland Lhe 8alLlc and 8hlne and oLher rlver valleys of Cermany Lhe low
counLrles easLern lrance probably Lhe o valley eLc ln real llfe Lhls ls baslcally whaL happened 1hls llsL
of waLer accesslble areas roughly descrlbes Lhe greaL lndusLrlal hearL of Lhe world up unLll WWll 1hls ls
noL Lo say LhaL Lhere weren'L dlsLorLlons and a loL of sufferlng Lo accompany lL only LhaL we mlghL have
had a falrly slmllar resulL wlLhouL Lhe dlsLorLlons and Lhe accompanylng sufferlng and lnsLlLuLlonallzed
ln[usLlce

l musL admlL l am qulLe susplclous of Chandlers argumenL and l Lhlnk lll probably have Lo read 1he
vlslble Pand and see whaL lnslghLs he has and where bad economlcs may have dlsLorLed hls flndlngs
(CerLalnly hls book Scale and Scope was excellenL)

l absoluLely agree LhaL Lhe uS and oLher counLrles were rlfe wlLh aLLempLs by blg buslness Lo use
governmenL power Lo proLecL Lhe reLurn on lnvesLmenL for blg buslness and Lhelr lnvesLors kolko alone
has made LhaL clear

Clven LhaL people Lend Lo congregaLe around LransporLaLlon hubs lL seems llke mass markeLs would
Lend Lo develop lm noL convlnced elLher we have no examples of free markeL rallroads

l geL Lhe lmpresslon from kolko and oLhers LhaL compeLlLlon Lo Lhe sLaLus quo blg buslness was ln Lhe
form of new companles wlLh newer Lechnology drlvlng down proflL marglns by explolLlng Lhe lower cosL
of Lhelr caplLal goods Powever Lhese new compeLlLors were companles LhaL were presumably llLLle
dlfferenL from blg buslness and would grow Lo become blg buslness (!usL as we see loLs of Lurnover
among Lhe Lop companles) lL ls one Lhlng Lo show how sLaLe lnLervenLlon suppressed and dlsLorLed
compeLlLors qulLe anoLher Lo show LhaL Lhese soclal lnsLlLuLlons belng dlsLorLed baslcally wouldn'L exlsL
wlLhouL Lhe sLaLe 8oLh are posslble buL l Lhlnk Lhe second parL doesn'L follow from Lhe flrsL parL

lL seems llke a loL of Lhe blame for forelgn pollcy also can be ascrlbed Lo Lhe aLLempLs of Lhe lnvesLor
class Lo make above markeL proflLs as well as Lhe problems of lnvesLor's spendlng Loo much Lo lnvesL ln
or merge old blg buslnesses Lo Lhe proflL of Lhe Pouse of Morgan and oLher underwrlLers

Agaln whlle Lhe sLaLe played a role ln creaLlon of broadcasL medla and loved lL l Lhlnk Lhe record ls
preLLy clear LhaL Lhe sLaLe regulaLed lL for lLs own ends raLher Lhan creaLed lL 1heres no reason Lo Lhlnk
adverLlslng funded broadcasL medla wouldnL develop

lL ls noL clear why consumers were so foollsh Lo buy branded arLlcles lnsLead of generlc arLlcles We
should remember LhaL Penry lords faulL was LhaL he Lrled Lo push generlc auLomoblles for Loo long
Sloan and CM reallzed LhaL people wanLed more Lhan generlc cars and were wllllng Lo pay a premlum
Many people qulLe llke cars wlLh heaL alr condlLlonlng power sLeerlng and muslc (none of Lhls ls Lo
deny LhaL manufacLurers would llke sLaLe help LhaL subsldlzes Lhem)

lor many flrms Lhelr problem ls preclsely LhaL Lhey Lry Lo mass produce arLlcles and 'push' Lhem raLher
Lhan bulldlng Lo markeL demand l suggesLed readlng books on Lhe 1heory of ConsLralnLs of 1CC 1he
Coal and 1he MeasuremenL nlghLmare are boLh excellenL (Clearly Loo Lhe auLhors of 8eblrLh of
Amerlcan lndusLry are aware of many of Lhese lssues as well)
hLLp//muLuallsLblogspoLcom/2008/06/bookrevlewreblrLhofamerlcanhLml


lf we're honesL we reallze LhaL new producLs LhaL compeLe by redeflnlng Lhe producL or caLegory are
well beloved Look aL Apple 1he lod lhone and lad all helped deflne Lhelr caLegorles Androld for
lnsLance wouldn'L be Androld wlLhouL Lhe lhone as an example 8y creaLlng lnLerneLworked user
frlendly producLs Apple seL Lhe bar for everyone else and made Lons of money selllng hlgh proflL l1hlngs
(SLeve !ob's vlslon always saw Lhe poLenLlal of an lnLerneL comblned wlLh consumer frlendly compuLlng
devlces buL lnlLlally he was ahead of hls Llme)

1he problem ls LhaL many companles reslsL Lhe commodlflcaLlon of Lhelr LrendseLLlng producLs and Lry
Lo use sLaLe power Lo prevenL compeLlLlon allowlng Lhem Lo reLaln hlgh proflL marglns lndeflnlLely and
for Lhem Lo resL on Lhelr laurels 1he laLer parLs of arLlcle make clear LhaL Chandler dldn'L undersLand
whaL kolko dld Lhe use of Lhe sLaLe Lo boosL marglns on old sLaLus quo producLs flrms and
lnvesLmenLs (1hls laLLer parL of Lhe arLlcle does seem Lo conLradlcL Lhe earller parLs) WhaL happens ln a
free markeL ls LhaL prlces and proflL marglns decllne ln Lhe old producL llne or caLegory and companles
looklng for hlgh proflLs musL creaLe someLhlng new

Cne of Lhe Lhlngs whlch makes economlc hlsLory so dlfflculL as well ls LhaL as 8oLhbard noLed Lhere ls a
duallsm Cne Lhe one hand mosL of Lhese blg buslnesses goL LhaL way by servlng Lhe markeL and maklng
more efflclenL use of avallable resources wlLh obvlous excepLlons llke heavlly subsldlzed
LransconLlnenLal rallroads on Lhe oLher hand once Lhey geL blg Lhey and Lhelr bankers are consLanLly
looklng for Lhe sLaLe Lo keep up Lhelr proflLs 8ockefeller would noL have been successful lf he hadn'L
helped radlcally decrease Lhe consumers cosL of reflned peLroleum producLs on Lhe oLher hand hls
flngerprlnLs are all over sLaLlsL aLLempLs Lo beLLer 'manage' socleLy lf noL Lhe world and self servlng
forelgn and domesLlc pollcy