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 / Fourth Quarter 2001 / Issue 25(originally published by Booz & Company)


Best Business Books: Economic History

Insights from Hindsight: What the Past Teaches about the Future

My grandmother’s brother Abraham Lowenhaupt — Uncle Abe, we called him — got his education when human capital really flourished in America. Raised in a rural Indiana town, he migrated to St. Louis as a young man and read about law as an apprentice at a law firm. He had a knack for math, and when the 16th Amendment to the Constitution authorized the income tax in 1913, Uncle Abe, putting math and law together, soon became the city’s most successful, most erudite corporate tax lawyer. The firm he established survives to this day, taken over in turn by his son and grandson. Neither achieved Uncle Abe’s prominence, despite their Ivy League schooling.

Alfred D. Chandler, Jr., an economic historian, would have loved my Uncle Abe. He would have been a wonderful example for Chandler’s classic history The Visible Hand: The Managerial Revolution in American Business (1977). The book is filled with achievers, most of whom, without the benefit of higher education, responded resourcefully to the circumstances of their time. The modern corporation is essentially the invention of tens of thousands of Uncle Abes who exploited the business opportunities that materialized in America between 1880 and 1925, railroads and the telegraph having finally tied the nation together, creating the world’s first mass market.

The new companies that arose — DuPont, GE, and Sears Roebuck, to cite several examples — were true pioneers. They invented mass production, mass distribution, and mass marketing. How could they resist? How could Anheuser-Busch, a local brewer in Uncle Abe’s hometown, refrain from multiplying production many times over when the railroad and refrigerator car allowed the brewer to ship its beer to distant markets?

A unique hierarchy of managers, distributors, and outside experts, like my Uncle Abe, developed to operate these increasingly complicated companies. It was expensive to hire all these managers, but the economies of scale that came out of mass production and mass marketing generated more than enough in revenues and profits.

They still do. The paradigm has not changed. Despite all the alternatives that the New Economy seems to offer, today’s most successful companies thrive by achieving economies of scale. Chandler continues the story of the modern corporation in Inventing the Electronic Century: The Epic Story of the Consumer Electronics and Computer Industries (2001), a sequel to The Visible Hand. “Talk about economies of scale,” Chandler told me in a telephone interview. “IBM’s first PC had 200 clones. But everyone [who bought a PC] had to purchase an Intel chip and a Microsoft operating system. That is real scale.”

How can a corporate manager protect himself or herself from the beguiling idea that the New Economy or any marvelous new technology represents a radical departure from the past?

Well, start by throwing out the countless books published in recent years heralding the everything-is-different-and-better nature of the Information Age, then take a look at the past. History is rarely on the curriculum at the graduate business schools that prepare executives for their futures, and in this do-it-yourself exercise, Chandler’s two books are a good starting point for the otherwise well-schooled corporate manager. Two more books round out your crash course in history: Robert L. Heilbroner’s The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers (1953) and Jared Diamond’s Pulitzer Prize–winning Guns, Germs, and Steel: The Fates of Human Societies (1997). They will illuminate your slot in history and sharpen your intuition and skepticism as a top executive.

Reading the Terrain
If only The Visible Hand had been available in the 1960s to David Sarnoff and his son Robert, RCA might still be the king of consumer electronics, replicating its great successes in radio and color television. Instead, the Sarnoffs, particularly Robert, converted RCA into a different paradigm — a paradigm out of sync with its time, Chandler argues in Inventing the Electronic Century. RCA became a conglomerate, wasting resources to acquire the car rental company Hertz and other alien operations.

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