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MGT301

Syllabus

History of Management

Pre-Industrial Management

Renaissance and Reformation

Industrial Revolution

Adam Smith

Capitalism in America

Rise of Professionals

Frederick Taylor

 

Henry Fayol

 

Hawthorne Experiments

Mary Follett

McGregor

Management Science

Systems Theory

Adam Smith: The Economics of Capitalism

"Factories", as an organized and localized production activity,  before the Industrial Revolution were used  only for limited products, mostly armaments and pottery. The "putting out" system continued to dominant production. The first "modern" textile factory appears in 1769. The Scotsman Richard Arkwright built a textile plant that combined the new technology of the spinning jenny for weaving fabric. Steam power did not supplant water power in textile manufacturing until 1785. Textile manufacturing dominated the earliest period of the Industrial Revolution. But, in the period 1770 to 1860, an ever expanding array of manufactured goods displaced traditional crafts and cottage based industry to transform markets. The Industrial Revolution made possible new products at low costs for wider markets accessed by the new technology of rail and steam ship transportation.

So, Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, comes at the earliest beginnings of the Industrial Revolution. Adam Smith constructs the theory of modern laissez faire capitalism before the use of interchangeable parts in the production of manufactured goods, a technology introduced by Eli Whitney in 1780, permitting standardization and mass manufacturing. At this dawn of the Industrial Revolution, Adam Smith's work provided a framework by which the emergent modern economy is understood. His explanation is rooted in a basic understanding of man's behavior, found in his rational, persistent pursuit of self-interest: "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

The word "capitalism" was not used by Adam Smith-- it was Karl Marx who later coined the term. "Laissez faire" economics, as the theory is still identified meant, as the French term suggests, that government should leave the economy alone. This was a direct attack on mercantilism of the period. The essential tenants of capitalism, as developed by Smith, included:

(1) The means of production, land and capital, are privately owned. "Capital", here, means the plant and equipment used to produce goods and services.

(2) The economy is organized and coordinated through the interaction of buyers and sellers (or producers) in markets.

(3) Suppliers, the owners of land and capital as well as laborers, pursue their own self-interests in seeking maximum gain and profits from the use of their resources. Buyers of goods and services similarly spend their money to yield the greatest satisfaction.

(4) With suppliers and buyers pursuing self-interest the market is constructed in which the value (or price) of goods and services is determined through the "haggling" of seller and buyer.

(5) With a competitive market of buyers and sellers following self-interest, the economy is self-regulating and there is little role for government. The sovereign is necessary mainly to protect society from foreign attack, uphold the rights of private property, guarantee contracts, and assist, where necessary, in the building of "infrastructure", to include roads, canals, and similar "public" goods.

What makes this view engaging is: what links people together is economy - producing and buying. The British philosopher Thomas Hobbes had argued in the Leviathan that the social glue was the the sovereign who by virtue of his absolute power holds society together against the chaos of individuals pursuing self-interest. The British philosopher John Locke and and the French philosopher Jean Rousseau imagined that the social glue that held people together in community was the "social contract" whereby individuals, from whom legitimate authority rested, collectively consented to unity through government. In Adam Smith's formulation, though, we have a social contract theory by which the economy binds society through every man acting in his own self interest, acting out of a natural "propensity to truck, barter, and exchange", and finding harmony in the interaction of supplying and demanding. The individual is organized into community by virtue of economic markets based on individual needs and production.

The Wealth of Nations is an "inquiry" into the nature and causes of national economic development. Smith places at the center of his treatise that greater productivity is derived from manufacturing. In his visit to a pin factory he observed that the traditional craftsman might manufacture one pin a day. The pin factory, however, using ten men created 48,000 pins a day. This leap of productivity, Smith attributed to organization and technology: the division of labor in which one man draws out the wire, another straightens it, a third cuts it, a forth points it, a fifth grinds the head, and so on through about 18 different operations; and, to the ability to utilize time saving machinery by which one laborer can do the work of many.

Smith's pin factory, however, is not the modern business firm. Absent in The Wealth of Nations and, indeed, in most of the literature on industry prior to the beginning of the 20th century is the modern concept of management as a distinct and noteworthy business activity. The notion of a business firm was a factory, shop, retailer, bank, or other economic agent owned by a single person, or by a few owners, operating at a single location, producing a single product or service, under the supervision of a proprietor-manager. In these types of ventures, ownership is indistinguishable from management. This will remain the dominant form of enterprise until near the twentieth century.