Download MODULE 1: APPROACHES TO CANADIAN ECONOMIC HISTORY

MODULE #1
APPROACHES TO CANADIAN ECONOMIC HISTORY
- We will look at section 1.2 to examine the early staples economies in MODULE 2
- look at section 1.3 before studying MODULE 3 and section 1.4 to 1.9
before examining MODULE 5
1.1
Approaches to studying the relationship between economic
theory, institutions and history.
Text: Intro. pp IX-XII
First Generation of Canadian Economic Historians (1888 to 1920).
- used economic history as a means to comprehend the economic development
of Canada as a new nation
- prominent academics included:
I. Adam Shortt at Queens (appointed in 1888)
II. O.D. Skeleton – a younger colleague
III. James Mayor at U. of T. (appointed in 1893)
IV. Stephen Leacock at McGill (appointed in 1903)
- a multi-volume series Canada and It’s Provinces was published in 1914
Second Generation of Canadian Economic Historians (1920 – 1963).
- identified with the staples thesis
- staples are commodities that have a high natural resource content produced
for export and they completely dominate other activities
- school of economic thought was established by:
I.
Harold Innis (U. of T.)
1
- influenced first text books
II. W.A. Mackintosh* (Queens)
III. Easterbrook and Aitken (Textbook 1956)
* Inspired by G. Callender and the frontier thesis
Third Generation of Canadian Economic Historians (1963 – Present)
- often referred to as the ‘new’ (or neoclassical) economic history
- they believe that the principal theme or ‘story’ of Canadian economic
development must be guided by economic theory
- textbooks include:
I. Marr and Patterson (1980)
II. Pomfret (1981)
III. Our textbook
- we will examine this approach in more detail after we look at MODULE 2.
2
1.2 Innis Staple Thesis of Pervasive and Persistent Influences
Classic Studies
I. The Fur Trade in Canada
II. The Cod Fisheries: The History of an International Economy
General Features
- focuses on the creation of distinctive social, economic and political
institutions that take root in natural resources ‘abundant’ regions of European
‘settlement’.
- Innis stressed that the ‘character’ of each staple created a ‘bias’ in the pattern
of growth and development and the establishment of ‘distinct societies’.
Assumption in Classic Studies
- Innis appears to assume certain conditions were prevalent in early staples
economies and were persistent for a very long period of time
 Abundant natural resources endowments
 Shortage of local labour
 Static technology
 Small ‘domestic’ markets versus large international markets centred in
‘metropolitan’ Europe
- Innis observed that technological change was relatively insignificant so
growth was dependent on demand
- The sparse population in the ‘hinterland’ provided little opportunity for the
growth of local markets for input and output markets
- Innis was strongly influenced by the ‘old’ institutional school of thought in
the U.S.
- Habits and rules are essential to understand human action and both are
essential in the analysis of new institutions in staple producing economies
3
Importance of Spread Effects
I.
II.
Transportation and Communication
Location – specific activities (non-tradables)
Interpretation of the Staples Thesis by the Authors of our Textbook
(Introduction in earlier edition)
Strength of the Staples Thesis
1) Consistent framework applied to different historical phenomena over very
long periods of time (ie the longue duree of the Annales School).*
2) Comprehensive approach that draws on all areas of the social sciences
* Amerindian societies on the Canadian Shield, fisheries off Newfoundland
Limitations of the Staples Thesis
1) Rarely uses data and never uses a well defined or rigorous theory to test
empirically
2) Decreasing relevance as the natural resource sector declines in relative size of
economy
3) Important sectors are ignored and even whole regions are ignored or
disappear from history
4) Breadth of analysis results in situations where
I. Relationships between cause and effect are not clearly established
II. Correlation is often used to imply causation
III. Qualitative conclusions are made when quantitative ones would be more
insightful
5) Focus on staple export sector overlooks the internal, domestic economy
4
1.3 MacKintosh Staples Theory of Emerging Internal Dynamics
- influenced by American economic historians G.S. Callender and Gras
- pioneered the staples approach with his 1923 article ‘Economic Factors in
Canadian History’.
- most enduring work was his ‘Economic Background to Dominion –
Provincial Relations’ – part of a Royal Commission reporting in 1940
- also made a contribution to historical geography with his ‘Prairie Settlement:
The Geographical Setting’ (1934).
5
1.4 Neoclassical Interpretation of the Staples Approach
For Regions of European Settlement
I) Staples theory of progressive development
II) Neoclassical theory of export-led growth in newly settled regions
1.41 Watkins Staple Theory of Progressive Development
- seminal article in the CJEPS (1963) makes an attempt to interpret the original
‘paradigm’ into a neoclassical framework
- draws on earlier studies by R. Baldwin and D.C. North
- makes a distinction between economic growth and development
- also stresses the existence of the unique ‘character’ of the aggregate
production function in early staple economies
Definition of a Staple
- those products (which are a bundle of goods and services) that have a ‘high’
natural resources content and large demand in external markets
- they do not require any elaborate processing at the initial stages of production
in the staple producing region
- the value added content for primary manufacturing is relatively low
- labour skills are often indigenous to the staple producing region
- external prices in metropolitan markets must be high enough to bear
transportation charges to international markets
- factor proportions have a high natural resource (R) to labour-capital ratio
Unique Factors That Establish New Staples
1)
Discovery – Purposeful or accidental
6
2)
Demand – strong demand in the metropolitan areas to induce producers
to shift productive resources to the hinterland or to new areas of
settlement
3)
Technology – state of current technology must have the capacity to
adapt to new economic environment and be innovative
4)
Socio-Cultural Setting – entrepreneurs willing to undertake unknown
risks and operate in an environment of greater uncertainty
Growth in Early Staples Economies
- staple exports are the leading sector and set the pace for extensive growth
that is not accompanied by any technological or structural changes
Modern Growth and Progressive Development
- sustained increases in per capita output occur because of technical change,
spillover effects and improvements in social and business organizations
- technical change is driven by advances in science and technology
- a transformation of social and business relationships stimulates
entrepreneurship, innovation and productivity advances
- spillover effects from a dynamic staple sector lead to:
I. a process of diversification around the export base
II. agglomeration economies that lower input costs via external economies
Direct Impact of the Staples Sector
- measured with the sectors own production function and transfer function
which emerge within the context of historically specific institutional forms
Resource Specific Production Function of the Staples sector
Q = f (A, K, L, I, R)
7
Q = f (A, E, R)
Q = (gross) output at producer prices of staples
A = technology or productivity index
E = Effort (bundle of K,L,I)
R = Land inputs for Resource Sector only
Staples Transfer Function in the Sphere of Physical Distribution and Exchange
- the production function defines the creation of form utility for resource
intensive commodities
- the staples sector is the sphere of production while this defines the
Sphere of Physical Distribution
-
transportation and storage
-
communications
-
utilities (no electrical generation)
Sphere of Exchange
-
wholesale trade
-
retail trade
-
commercial banking (circulating capital)
Character of Staples Aggregate Production and Transfer Functions
- define the overall direct impact of staples activities which include:
1.
Techniques of production, physical distribution and exchange which
determine the factor proportion of inputs
2.
Demand for factor inputs that add value in the staples sector
a. Land – natural resources (or natural capital)
b. Labour – workforce
8
c. (Real) Capital – investment in the replacement of older
reproducible and additional new (net) investment
d. Entrepreneurship
3.
Distribution of income between factors employed directly in the
staples sector
4.
Demand for intermediate inputs
5.
Possibilities for further processing
Indirect Impact of the Staples Sector
- the spread effects of staple activities are best illustrated using the concept of
staple activities are best illustrated using the concept of demand – and supply –
oriented inducements for growth outside the staples sector
I. Demand Induced Expansion in Non-Staple Activities
- growth of new sectors that are related to the success of the leading export
sectors and result in diversification
- best illustrated with the concept of linkages
A.
Backward Linkage Activities
-
sectors producing intermediate inputs of goods and services
used by the staples sector
-
gross (i.e. replacement and net) investment of domestically
produced capital goods
-
the transfer function of these sectors
B. Forward Linkage Activities
-
those industries use staples as an intermediate input in
‘downstream’ activities
9
-
they are induced, processing activities that add value to the
staple and are partly dependent on technological considerations
C.
Final Demand Linkages
-
domestically produced consumer goods and services that are
purchased by the owners of factor inputs in the staple sector
-
it is influenced by:
 absolute size of the workforce
 residence of the owners of capital and land
 distribution of income
D. Fiscal Linkages
-
expenditures on physical and social infrastructure
 roads, schools, hospitals
 justice system
-
depends on public revenues from resource rents and the and the
direct and indirect taxes flowing from the staples sector
E. Lateral Linkages
-
non-staple activities that are not location-specific but grow
because of the ‘prosperity’ generated by staples sector or the
infrastructure of the transfer functions
-
‘footloose’ activities that develop because of the indivisible
nature of infrastructure for staples sector
II. Supply Side Inducements in Non-Staple Activities
A.
Entrepreneurship
10
- depends on the opportunity of the staples sector and its ability
to promote enterprise throughout the economy via:
 The development of new organizational designs and structures
 Foster the creation of new products and market opportunities
 The introduction of appropriate new technologies
B. Workforce
-
the size and quality of the workforce is influenced by
 Demographic transitions
o
Fertility rate
o
Mortality rate
 Education and training
 Immigration
C. Public policy
Growth Path of a Staples Economy
I. Factor Input Markets and Favourable Factor Properties
- the pre-existence of an abundance of natural resources lays the
foundations for a regions comparative advantage in both the domestic and
international economy
- expansion is initially the demand-led growth for staple exports followed
by spread effects via linkages
- the resulting increase in demand for factor-inputs leads to ‘surplus’
income in the form of

high labour income

economic profits from real capital

economic rents from natural resources
11
II. Capacity to Transform
- Watkins draws on Kindleberger
- Sustained growth requires an ability to shift resources as markets evolve
- Requires an absence of inhibiting traditions that foster an ‘export
mentality’ and eventually a ‘staple trap’
- Institutions and values must be formed anew based on the distinct
conditions of newly settled regions
Simple Model of Staples Economy
Sectors include:
Resources (original staples sector)
Transformation
Transportation, Communication and Trade
– sphere of physical distribution and exchange
Other Private Sector Services
Public Sector Services
Tableau of Product Flows 4B
See the TABLEAU OF PRODUCT OUTPUT AND FACTOR INPUT FLOWS
APPENDIX TO MODULE 1.42
Simple Ricardian “Corn” Model
(1) Stage of Economic Development
12
- mature, agrarian economy
- primitive accumulation
- state of autarky
- no technological change
- ong-run equilibrium
(2) Institutional Setting
- there are three (3) distinct classes that contribute “factors of production”:
(I) Free labour
-provide work effort and receive subsistence income
(II) Capitalists
- provide working capital* inputs at the beginning of each
season
- a “dose” of inputs is made up of 20 tonnes of wheat and
20 sheep
(III) Landlords
- exclusive owners of land that has various fertility on their estates
* Equivalent to free or circulating capital that depreciates after one year and/or
intermediate inputs
(3) Technology
- fixed factors and diminishing returns
- a “dose” of labour and working capital is applied to 10 hectares until land
rents fall to zero
See graphs
Agriculture
& Household Mfg.
Consumption
Investment
Labour Capitalist Landlord
Agriculture &
Household Mfg
Wages 500
Gross Profit
300
Rent
200
Value Added 1,000
(GDP)
500
100*
Total Output
(Corn Seed)
200
200
*Net Profit
13
1,000
Real Factor Inputs
Labour: 10 person-years
Working Capital: 20 units * 10 = 200
where 20 units = 20 c\nt corn seed
20 sheep
Land: 1,000 hectares
Simple Ricardian “Corn” Model with Technological Change
-upward shift in TP, MP and AP curves now creates a new “surplus” over
traditional subsistence and creates an opportunity to
I) develop an industrial and service sector
II) trade with other economies that are willing to export industrial products in
exchange for agricultural products
See graphs and charts
1.42 McCallum Staple Theory of Progressive Development
- works within the Watkins framework but adds a perspective from economic
geography and the new institutional economics
- staple activities that exploit new endowments of natural resources create both
linkage and wealth benefits
14
- the groups and owners of factor inputs who capture linkage effects depend on
a complex interaction between the rules and laws that govern trade,
government policies and institutions
- study compares the contrasting patterns of growth and development
stemming from the wheat economy in Ontario and the Prairies
- linkage appropriation and wealth benefits derived from staple activities will
flow to those regions that have a higher endowment of
 accumulation of population
 productive capacity
 financial capacity
 entrepreneurial class
 technology and know-how
 political power
1.5 Critics of the Staples Approach
- does not place enough emphasis on domestic supply side factors that help
explain the growth and development of economics such as Ontario
- Buckley believed that the staples approach was no longer relevant past the
1820’s due to the growing complexity of the emerging industrial and urban
economy
15
- Institutionalists such as Easterbrook would see this approach as too analytical
and does not place enough emphasis on distinctive socio-cultural developments
and the role of state enterprise
- Business historians would view the role at entrepreneurship as superficial to the
analysis instead of the key factor in the Schumpeter tradition
- Neoclassical growth theorists would have the same view with regard to the role
of technological change as highlighted by Chambers and Gordon
- The authors of the 3rd edition of our textbook contend that the effects of exportled growth are temporary and geographically limited as ‘Canada’s growth has
been episodic and regional in nature’ (pp XVIII)
- A single minded staples approach is inappropriate to defining Canada’s overall
growth and development
- This view is highlighted in their interpretation of the political evolution of the
country and the formation of public policy initiatives
1.7 Neo-Classical Growth
- the growth accounting frame-work developed by Solow is illustrated by an
aggregate production function and exogenous technological change
Q = f (A, K, L, R, T)
Q = GDP at factor cost
A = technology or productivity index (not ‘T’ as before)
16
K = (reproducible) capital inputs
L = workforce
R = natural resource inputs or land
t = 1, 2, 3, ……in periods of time
Note: the model is for a closed economy and does not include intermediate inputs
(I)
- the Cobb Douglas form is
Qt = At Kta Ltb Rtc
Where
a = capitals share at GDP (=MPK)
b = labour share at GDP (=MPL)
c = lands share at GDP (= MPR)
- the growth accounting equation is derived as follows
1.8 Institutional School of Economics
“Old” Institutionalism
- offers a radically different perspective on the nature of human agency based on the
concept of habit
- habits and rules are seen as essential for human action; and both are crucial for the
analysis of institutions.
17
Basis of Microeconomic Price Theory
(I) Neoclassical – emphasis on rational economic man.
- relies on the universal concepts of supply, demand
and marginal utility
(II) Institutionalists
- prices are social conventions that are reinforced by habits and embedded in
specific institutions
- such conventions are varied and reflect the different types of commodity
institution, mode of calculation and pricing process
- have no general theory of price but a set of guidelines approaches to specific
problem that lead to historically and institutionally specific studies
Macroeconomic Analysis
(I) Contemporary
– focus on equilibrium conditions of interdependent markets
(II) Institutionalists
– examine the structure of the macroeconomic system
see below
- focus on the patterns and regularities of human behaviour
that contains a great deal of imitation; inertia and cumulative
causation
Other Features of “Old” Institutionalism
Hodgson page 173-74
(1) stress the real causal linkages involved rather than more correlation between
variables.
General Features of an Institution & Organizations
- based on the way of thought or action of some prevalence and permanence which
is imbedded in the habits of a group or the reactions of a people
18
- refers to the complex of socially learned and shared values, norms, beliefs,
meanings, symbols, customs and standards that delineate the rate of expected and
accepted behaviours in a particular context.
- institutional structure and behavioural habit are mutually intertwined and mutually
reinforcing.
- an organization may be defined as a special subset of institutions, involving
deliberate coordination and recognized principles of sovereignty and control
Common Characteristics of Institutions and Organizations
Hodgson page 179-80
Critique of other Institutional Approaches
1) Cultural Determinists (?)
-place too much emphasis on the molding of individuals by
institutions.
2) Neoclassical Institutionalism
-see Williamson figure on page 597
-seeks to explain the emergence of institution by reference to a model of
rational individual behaviour, tracing out the
unintended consequences in
terms o human interactions
- it assumes an initial institution free state of nature and the
explanatory movement is from individuals to institutions, taking individuals
as given
Hodgson Figure 1, page 176
Douglas North has proposed that institutions are “the rules of the game” that
determine how and why markets and individuals behave as they do
- what is required is a theory of process, evolution and learning rather than a theory
that proceeds from an original, institution free “state of nature”
19
- a detailed analysis of the evolution of specific habits and rules – including the
pecuniary rationality of “economic man” in a market economy – should be
installed at the core of economics and social theory
- at its foundation; institutional economics has grater generality and encompasses
neoclassical economics as a special case.
First, there is a degree of emphasis on institutional and cultural factors that is not found
in mainstream economic theory. Second, the analysis is openly inter-disciplinary, in
recognizing insights from politics, sociology, psychology, and other sciences. Third,
there is no recourse to the model of the rational, utility-maximizing agent. Inasmuch as
a conception of the individual agent is involved, it is one which emphasizes both the
prevalence of habit and the possibility of capricious novelty. Fourth, mathematical and
statistical techniques are recognized as the servants of, rather than the essence of,
economic theory. Fifth, the analysis does not start by building mathematical models:
it starts from stylized facts and theoretical conjectures concerning causal mechanisms.
Sixth, extensive use is made of historical and comparative empirical material
concerning socio-economic institutions.
In several of these respects, institutional
economics is at variance with much of modern mainstream economic theory.
Common characteristics:
 All institutions involve the interaction of agents, with crucial information
feedbacks.
 All institutions have a number of characteristic and common conceptions and
routines
 Institutions sustain, and are sustained by, shared conceptions and
expectations.
 Although they are neither immutable nor immortal, institutions have
relatively durable, self-reinforcing, and persistent qualities
 Institutions incorporate values, and processes of normative evaluation. In
particular, institutions reinforce their own moral legitimation: that which
endures is often-rightly or wrongly-seen as morally just.
New Institutional Economics
20
- neoclassical growth theory has not succeeded as a complete explanation for
growth processes
- it predicts that if products and inputs are mobile between countries then per
capita GDP should converge
- explanations for dramatic and persistent differences in per capita GDP
across countries are:
1)
LDC’s have fewer key economic resources - especially modern
technology
2)
Political boundaries define the spatial borders of public policies and
institutions of nation states
- initial ‘endowments must include the institutional structures that societies
inherit or adopt
- the capacity of institutions to improve and adapt are also important
Canada’s Rank in Real GDP Per Person
1870
1913
1950
1973
12
5
6
3
Source: Textbook (3rd edition) ppXXVI
Approaches to Micro Price Theory
I. Neoclassical
- emphasis on rational decision making that takes utility functions as given
- relies on universal concepts of supply, demand and marginal utility
II. New Institutionalists
- prices represent social conventions that are rein forced by habits and
embodied in specific institutions
21
- such conventions are varied and reflect the different types of institutions,
commodities, modes of calculations and pricing processes
Approaches to Macro Analysis
I. Contemporary
- focus on equilibrium of interdependent markets
II. New Institutionalists
- examine the structure of an economic system and stress the real caused
linkages rather than the correlation between variables
- focus on the system of socially learned and shared values, norms. beliefs,
meaning, symbols, customs and standards that define the range of expected
and accepted behavior in a particular context
- an organization may be defined as a special subset of institutions (i.e.
Chandler approach in business history)
1.8 Synthesis of Approaches
22
Staples Approach of Second Generation of Economic Historians
- narratives of how the stages of colonial development depended on a
succession of staples whose characteristics set the pattern for the economic,
social, culture and political evolution of newly settled regions
Neoclassical Economic History (1960’s to Present)
- called the ‘new’ economic history in the 1960’s and 1970’s
- it stresses model building, quantification and hypothesis testing
- the role of simplification and abstraction is required to examine economic
events and activities
- concepts such as the production possibility frontier require an understanding
of opportunity cost, economic efficiency and potential comparative
advantage
- the new empirical emphasis permits one to draw powerful inferences from
very little data using economic theory
- general equilibrium models permit one to go beyond simple assertion and
define a complete set of behavioral and technological relationships
- traditional and new endogenous growth models stress the role of
technological change in accounting for increases in per capita income
- permit us to identify long-term shifts in the structure and performance of the
economy and the ‘real’ forces that influence this transformation over time
Strengths of Neoclassical Economic History
1)
Rigorous
2)
Models described economic relationships precisely
3)
Causality is explicit
4) Quantitative analysis provides an accurate measure of absolute and relative
importance
23
5) Counterfactual tests permit one to measure true economic costs and benefits
of alternative decisions, policies etc.
Weaknesses of Neoclassical Economic History
1) Rigour comes at the expense of over simplification and narrowness of
analysis
2) Topics are examined because of the existence, estimation or generation of
‘relevant’ data and not because of their historical importance
Norrie Synthesis of Approaches
- this is best articulated in the first edition of our textbook where he states
that the frame work adapted
is sufficiently formal to structure the presentation of the historical material, yet
sufficiently general not to distort the presentation of events. We present, first,
an accounting framework, designed to capture the various interdependencies of
the economy and to relate them to economy-wide aggregates such as gross
national product. Here, we do nothing more than make more of the formal
links and interdependencies that are very much the stuff of traditional
economic history. The second addition is a set of simple behavioural
relationships for economic agents, customized to represent a small open
economy. Put simply, we introduce the general notion that economic decisions
represent the outcome of conscious maximizing calculations by consumers,
firms, exporters, migrants, and international investors, subject to all the
political, social, and economic constraints they face. This approach represents
the spirit, if not the specific techniques, of the new economic history.
Ever since the Nobel Prize-winning work of the American economist W.
Leontief, it has been standard practice to represent an economy by means of a
simple input-output framework such as that depicted in Figure 1.1 below. The
figure is best understood by looking first at the individual blocks numbered 1
through 4 and then at the figure as a whole.’
Source: Textbook (1st edition), pp 7
24
- Figure 1.1 has four (4) blocks
Block 1
- the interindustry matrix which represents transactions between producers
(i.e. business to business sales)
- across a row, the entries record the value of outputs that are used as
intermediate inputs in other sectors
- down a column, the entries record the value of output that is purchased by a
single sector from other sectors
Block 2
- expenditure on goods and services in final form
- represents the total final demand or aggregate demand (AD) for each sectors
output
Block 3
- records the contribution of primary factor inputs in the production process
Block 4
Gross
Domestic
Product
=
Gross
National
Expenditure
Other Features of an I/O Table
The behaviour of economic agents and the determination of various outcomes of
their general equilibrium approach are also stated
25
Overall, an idealized economy of this type is really a collection of numerous
separate but interconnected markets. Individuals make purchases in one market
with an eye to what might be obtained elsewhere, and firms hire an input only after
considering what substitutes are available. Sellers of goods or of factors of
production look at conditions in their current markets, considering all the while
whether it might be profitable to shift production or labour services or investment
elsewhere. Changes in demand or in supply on one market spill over into others,
and these induced effects, in turn, flow back into the first one. Nor are the
interdependencies limited to product markets. Output decisions in product markets
depend on the remuneration that primary factors expect, yet these very rates depend
on the demand for the factors, which depends on conditions in the product markets.
Much effort has been expended by theorists to show, first, that, if certain technical
conditions are met, there is, for this idealized economy, a set of prices at which all
markets are simultaneously in equilibrium; and second, that the economy will move
toward this set of values, if it is not at them already. Essentially the adjustment
relies on the assertions that prices will change to remove excess demands or excess
supplies in individual markets; that adjustments in one sector feed into all others,
and that these adjustments, in turn, feed back on the original sector; and that this
sequence of adjustments is stable.’
Source: Textbook (1st edition), pp 13
Modification of an I/O Framework to Canada
- Canada has always been closely integrated into other larger economies and
‘This historical fact means we have to modify the general model to make it
represent the structure of a small open economy. For product markets, this
requirement can be met by asserting that, for all intents and purposes, Canada can
take the international economic environment as given…..
The main implication of these features of a small open economy is that the
adjustment process is constrained to operate in a particular fashion. Changes in
prices account for less of an adjustment in markets for traded goods and services;
changes in quantities, for more. Likewise, excess demands or supplies for capital
are more likely to be resolved by changes in the quantity of transfers from abroad,
and less likely, by a response in domestic savings rates. The internal adjustment
that does result is centred more obviously in the nontraded sectors, meaning that
swings in prices and incomes in these activities are more pronounced. Vague as
26
these observations may be at this point, they will figure prominently in much of the
political-economy discussion below.’
Source: Textbook (1st edition), pp 14-15
I/O Table and the Staples Model
‘It is interesting to note just how this approach compares to that traditionally
employed in Canadian economic history – the venerable staples theory. It is easily
seen that the staples theory is really only a special case of the more general
framework outlined above. Staples are export products of one particular type – one
row in the figure, so to speak. The backward, forward, and the final-demand
linkages associated with staples are, again, one particular set if interdependencies.
The impulses to aggregate growth coming from staples trade are but one type of
shock that can set the general adjustment process into motion.’
Source: Textbook (1st edition), pp 16
Module 1.10 : Business History
Alfred Chandler – Founder of the Organizational School of American Historians
1) Strategy and Structure: Chapters in the History of the American Industrial
Enterprise
- examined the hierarchial, organizational structures of industrial firms:
(I) Du Pont
(II) General Motors
(III) Standard Oil
(IV) Sears Roebuck
2) The Visible Hand: The Managerial Revolution in American Business
- the main determinants of organizational innovation were not found in social or
political settings but in the technological imperatives of mass production and
distribution made possible by the utilization of new sources of energy and the
increasing application of scientific knowledge to industrial technology
- it was little affected by public policy, capital markets or entrepreneurial talents
27
- the central dynamic that created new organizational capabilities was the
investment in production, distribution and management technologies
Three Stage Model of Industrial Development
1790-1840
- no new economic institutions or revolutions in business methods occurred
- the central theme was the increasing functional specialization made possible by
market expansion as described by Adam Smith
1840-88
- triad of epochal advances in railroads, telegraphs and anthracite coal created
managerial revolution in transportation and distribution system before spreading
to industrial firm
1880 – 1910
- rise of modern industrial firm
- the key to business success was the three pronged investment in production;
distribution and management technologies
3) Scale and Scope: The Dynamics of Industrial Capitalism
Core Concepts
-extensive industry-by-industry series of emerging industrial giants
- the strategic and organizational choices made by managers shape, if not
determine, markets (i.e. their structure, behaviour and performance).
- technological advances were capital and scale dependent and required
organizational innovations to exploit them
- industrial success required
I) Investment in large-scale production facilities to achieve the cost advantages
scale and scope
28
II) Investment in product-specific marketing, distribution and purchasing
networks
III) Recruit and develop unique professional management skills to supervise and
coordinate function activities and allocate resources
29