Public Management and the Visible Hand

The application of market-like competition to the public sector has had mixed results, writes H. George Frederickson.
October 10, 2007
George Frederickson
By H. George Frederickson  |  Contributor
H. George Frederickson was a GOVERNING contributor. He is the Edwin O. Stene Distinguished Professor of Public Administration at the University of Kansas.

In a free market, Adam Smith argued, an "invisible hand" will allocate resources in a way that will strengthen effective firms and weaken ineffective firms, a kind of Darwinian survival of the fittest. But, to put it gently, the application of market-like competition to the public sector has had mixed results.

Instead of Adam Smith's theory of the "invisible hand" of the market, I recommend Alfred D. Chandler's theory of the "visible hand." Based on his detailed studies of the historical evolution of businesses, Chandler determined that it was not the invisible hand of the market that determined corporate effectiveness but the visible hand of management. His book, "The Visible Hand: The Managerial Revolution in American Business," which won both the Pulitzer and Bancroft prizes in 1978, rewrote the course of American economic history. The key findings in "The Visible Hand" are: 1. The origins of the modern enterprise trace to the recognition that administrative coordination does a better job than the market at enhancing productivity and lowering costs, particularly as enterprises grow and their production increases. 2. A managerial hierarchy is essential. 3. Once a managerial hierarchy is in place, it becomes its own source of permanence, power, and continued growth. 4. Such hierarchies tend to become increasingly technical and professional. 5. Over time, such professional structures become separate from ownership. 6. Professionals prefer long-term stability and growth to short-term gains.

Chandler found that modern enterprises needed a "new subspecies of economic man -- the salaried manager." The manager must possess the expertise of management and not necessarily the expertise of the content of what he or she is managing. And, the manager, unlike the traditional entrepreneur, need have no stake in the enterprise being managed.

Another economist, Oliver E. Williamson, at about the same time, in his book "Markets and Hierarchies," made the same argument -- that hierarchies replaced markets because they were more efficient -- but not because of managerial coordination, as Chandler claimed, but because hierarchies have lower transaction costs than markets (a debatable point).

If the work of Chandler and Williamson reads a lot like what you learned in Public Administration 101, you are right. Applied to public management, the theory of the visible hand is entirely compatible with traditional perspectives. We can start with the assertion that the visible hand of public management is just as important to effective government as the visible hand of business management is to effective enterprise. Because laws and policies do not carry themselves out, a professional, educated and technically competent public service must be organized and managed to administer laws and policies. A merit-based civil service coordinated through a managerial hierarchy is essential to guarantee order and competence. As Chandler indicated, a fully developed public sector managerial hierarchy will likely become a source of its own permanence and power. So, the public-sector visible hand can also be a heavy hand.

This point is a challenge in public management because, as Chandler pointed out, the visible hand of corporate management is separate from corporate ownership -- the stockholders. In public management we call this the policy-administration dichotomy, and we are fond of arguing that the dichotomy is neither empirically true nor especially important. In fact, following Chandler, the extent which the visible hand of management is uncoupled from ownership -- in the case of public management this means operating at arm's length from elected lawmakers and executives -- is critically important to institutional effectiveness.

It is reasonable, under such arrangements, to worry about bureaucratic accountability to elected officials and about goal displacement. But some elected officials and public managers have been so worried about bureaucratic accountability and about the costs associated with effective public agencies that they have shrunk the ranks of the public service and put layers of political appointments at the top of agencies. The separation between democratic "ownership" and the effective management of public agencies is too often politically breached. So, although there is a public visible hand of management, it is a weak hand. These days, public managers are less able to defend the longer view of policy and agencies lurch from election to election, lacking the kind of stability required for long-range effectiveness. Democratic law and policy making is essential, as is legislative and executive oversight, but too much political intervention in the day-to-day implementation of public policy is harmful to the effectiveness of democratic government.

It is time to worry less about the democratic accountability of the public service and to worry more about the competence, independence, resources and managerial leadership of the public service. The application of Alfred Chandler's theory of the visible hand to public management can help.