The Vanishing Hand theory is a concept first conceived of by economist
Richard Normand Langlois
Richard Normand Langlois (born January 20, 1952 in Putnam, Connecticut) is an American economist and currently professor at the University of Connecticut. He studied physics and English literature at Williams College, he received a Master's in ast ...
.
The term is an intentional play on both
Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
's
invisible hand
The invisible hand is a metaphor used by the British moral philosopher Adam Smith that describes the unintended greater social benefits and public good brought about by individuals acting in their own self-interests. Smith originally mention ...
and
Alfred Chandler's
Visible Hand.
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Background
In Smith's work, his invisible hand describes the self-regulating behavior of the market. In essence, this theory states that individual personal motivations lead to the most efficient allocation of resources and greatest overall benefit, even if those motivations were not in any way benevolent. This is exemplified by relatively small firms operating with no market control. Competition between buyers and sellers channels the profit motive
In economics, the profit motive is the motivation of firms that operate so as to maximize their profits. Mainstream microeconomic theory posits that the ultimate goal of a business is "to make money" - not in the sense of increasing the firm's s ...
causing competition to lead to socially desirable outcomes. During Smith's time and much after, this was a justification for a laissez-faire
''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system in which transactions between private groups of people are free from any form of economic interventionism (such as subsidies) deriving from special interest groups. ...
economy. However, in Smith's day there were not several market forces that currently exist, such as large-scale industry, finance, and advertising.[
The Visible hand, however, was believed by Chandler to have replaced the Invisible hand with middle management in the mid 19th century, which became “the most powerful institution in the American economy”. In short, he states that the multi-unit business structure arose because administrative coordination could yield greater profits than market coordination, giving rise to managerial hierarchy and led to furthered growth and profit. The rise of this new system yielded major sectors of the economy being dominated and altered the structure of markets, steering away from a competitive state and to an economy controlled by corporate managers. In other words, the large scale industries arising began to provide larger social benefits due to managerial presence and long-term scope rather than perfectly competitive markets.][
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Vanishing Hand theory
Langlois intended to show that Chandler's theory was partially correct but needed some reevaluation.
The Vanishing Hand theory, as argued by Dick Langlois:
In other words, the Vanishing hand theory states that initially the Visible hand is present as industries require managerial cooperation and vertical integration for long term growth, but eventually fades away to a more Invisible hand in which specialization allows for market forces to coordinate more effectively leading to a quasi-Smithian division of labor.[ Temporary clusters of firms arose acting under Chandler's Visible hand process that would eventually be replaced by Smith's division of labor and thus Invisible hand.] Many of the large, vertically-integrated corporations of the past have broken up in recent years into more specialized firms due to the removal of barriers to trade, such as outsourcing. Specifically it has once more become economically optimal to seek a division of labor, or seek vertical disintegration, rather than integrate.[
As minimum efficient scale falls firms size should fall as well. When firm size is viewed as firm activity undertaken, this holds true.][ It is likely, therefore, that as integration becomes costlier in comparison to alternatives, large firms are more likely disintegrate to varying degrees and have a loosened managerial presence, although complete return to a Smithian market is unlikely.][
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References
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Economic theories