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Re-reading Chandler’s Strategy and Structure

While preparing for for my practical knowledge seminar last week I saw something in Chandler that had been hiding in plain sight, which I think aligns Chandler with Frank Knight — and away from the transaction cost view of organizations advanced by two Nobel Laureates Ron Coase and Oliver Williamson. (Chandler felt strongly that Williamson had misapplied his histories).

Chandler is very explicit about “entrepreneurial” role of the top managers of large organizations. Any investment (save, perhaps, buying an index fund) involves Knightian uncertainty — an unavoidable leap of faith. But although leaps of faith are unavoidable we don’t want decision makers to jump blindly. This was the principal advantage of the organizational structures that Chandler wrote about: they allowed top executives to think about long-term choices and created a system to provide supporting information and analysis. The do-it-all themselves entrepreneurs did not have the mental bandwidth to think about exploiting economies of scale and scope.

Thus while the large corporation may have had some superficial features of a static, rule-enforcing Weberian public-sector bureaucracy it was much more a dynamic instrument. It may also have controlled transaction costs (per Coase and Williamson) but that was not and is not its main function (any more than marriages are designed to minimize the monitoring and contracting costs of specializing of household labor).

This is also implicit in Edith Penrose’s model of corporate growth and in Schumpeter’s later claim that large corporations would take over all entrepreneurial activity.

Schumpeter turned out to be wrong: corporate decision-making infrastructure and rules dont cope well with very high Knightian uncertainty (that was one of the main claims of my 1999 book). But its still the best vehicle we have for organizing low (BUT NOT zero) Knightian uncertainty projects with large capital requirements.

(Im going to work this into an article I want to write for the 100th anniversary of Knight’s classic book, Risk, Uncertainty and Profit)

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