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  Smith, Okun, and Chandler

  By James Annable | May 5, 2023

   

  In his masterwork, Adam Smith (1776) provides two particularly deep insights about economic activity: the spontaneous organization of self-interested market exchange (the “invisible hand”) and the nature and implications of production specialization (the “pin factory”). Smith sought to explain decentralized market cooperation by large numbers of persons who efficiently price and distribute specialized output. John Stuart Mill notably generalized Adam Smith’s division of labor to the “more fundamental” principle of worker cooperation.

  Much later, Arthur Okun (1981) fundamentally enriched Smith’s insights with his “invisible handshake”. His invisible handshake helped introduce economists to fair treatment as a critical determinant of employer-employee relations. Adam Smith anticipated that contribution. In The Theory of Moral Sentiments, Smith identifies critical motivators of behavior to be the interrelated factors of status, respect, and justice, with the latter generally equivalent to equitable treatment: “… we find ourselves to be under a stricter obligation to act according to justice than agreeably to friendship, charity or generosity; that the practice of these last-mentioned virtues seems to be left to some measure to our own choice, but that, somehow or other, we feel ourselves to be in a peculiar manner tied, bound, and obliged to the observation of justice.” The invisible handshake became the organizing metaphor for Okun’s (incomplete) analysis of optimizing exchange inside large, specialized establishments, featuring a class of wage rigidity through which nominal-demand disturbances induce same-direction movement in production, employment, and income.

  Okun, like Smith, was onto something important. Rational nonmarket price-mediated exchange is necessary if rigorous economic theory is to accommodate the mutation of pin factories into the large, specialized corporations ubiquitously organized in the aftermath of the Second Industrial Revolution. Bureaucratic workplaces, producing goods or services, are needed to motivate employee cooperation in circumstances of costly, asymmetric intra-firm information and routinized jobs.

  The third part of our story introduces the vastly underappreciated Alfred Chandler’s (1997)  “new corporate forms”. His modeling of rational personnel practices in the context of workplace information asymmetries...

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