The visible hand refers to business management that coordinates economic activity following market mechanisms. The visible hand is produced through the administration function carried out by managers and specialized people within companies. This achieves the efficiency of production and distribution activities
In other words, the visible hand is a theory that maintains that the management of entrepreneurs is what generates the dynamism in economic activity.
The visible hand is a concept contrary to the idea of the invisible hand proposed by the classical economist Adam Smith. Adam Smith’s concept is based on the idea that the great forces of the market are what allow the coordination of economic activity.
Without a doubt, for Adam Smith the interaction of market forces such as supply and demand is what forms prices. Finally, prices are what transmit information so that economic agents make their decisions in the market. This allows coordination of all economic activity to take place.
While the visible hand is a new concept that comes to life in 1977 when Alfred Chandler publishes his work entitled “Visible Hand”. This idea presents an alternative way of carrying out the coordination of economic activity through the managerial activity of the entrepreneur. Therefore, it is presented as an alternative way to the price system to carry out the coordination of economic activities.
How the idea of the visible hand is explained
Indeed, the new idea of the visible hand gives great importance to the development of modern companies. But, especially to the role played by entrepreneurs who, with their right decisions, can lead companies to succeed.
The development of the importance of the company and the role of the entrepreneur has gone through three periods:
- From 1790 to 1840: In this period there was a predominance of the market and practically the role of the company was totally unknown.
- From 1840 to 1880: During these years there were changes in the process of communications and transportation, especially due to the emergence of the railway and the telegraph. In addition, the use of coal was greatly promoted. In this period it can be said that modern companies arise.
- From 1880 to 1920: Both the railway and the telegraph reached their maximum development, leading to the emergence of industrial companies. This gives rise to modern industrial companies.
As a consequence, the modern company, according to this concept, appears due to the changes that occurred in the forms of communication and transportation. Additionally, due to the use of coal. From that moment on, it is considered that the coordination of economic activities is carried out from within the company, through the conscious action of the employer. Therefore, the entrepreneur plays an important role in coordinating production and distribution activities.
Positions before the idea of the visible hand
The idea of the visible hand has generated different positions. The most important ones are:
1. Those who are in favor
To begin with, supporters of the visible hand idea are especially some of Alfred Chandler’s colleagues or students at Harvard Business School. For this reason, they agree that the modern company has been favored and strengthened by the new forms of business organization and the development of technology.
Also, they consider that it is not enough to manufacture a good product, but that you have to know how to market it and create demand. For that reason, the actions of the entrepreneur are essential.
2. Those who are against
On the other hand, those who are against affirm that this idea has some shortcomings because it does not consider the role of institutions and culture in the development of companies. The role of public institutions, banks, the postal system and culture in general is highlighted.
What are the most important points of the idea of the visible hand?
Among the most important points we find:
- Explain the evolution of modern companies.
- He opposes the idea of the invisible hand.
- Considers the company as a set of operating units with different hierarchical levels.
- The integration of large-scale production and distribution is achieved within the company through the actions of managers. These are salaried and have adequate training.
- Coordination and greater productivity is achieved through the action of business decisions.
- It helps to understand the functioning of modern capitalism, the rise of multinational companies and mergers.
To conclude, it can be stated that the visible hand of company directors is what Alfred Chandler considers has replaced the invisible hand of the market. Thus, it was possible for large industrial companies to efficiently coordinate both production and distribution activities. In this way, greater emphasis was placed on the development of the modern company and on the role of entrepreneurs and managers.