History of Management

Students "manage" their course work; parents "manage" a family; and, emperors "manage" their empires. Unlike these familiar uses of this word "management" this course is about a specific idea and way of thinking about about wealth creation. Management textbooks at least since 1953 have tended to obscure the "wealth creation" aspect of management by focusing narrowly on what managers do: planning, organizing, directing, coordination, and controlling (George R, Terry, Principles of Management, 1953), or emphasizing its social character: "the function of getting things done through others" (Harold Koontz and Cyril O'Donnell, Principles of Management: An Analysis of Managerial Functions, 1955). What these definitions fail to capture, however, is that the concept of "management" develops with the modern business enterprise and that it is a is a unique and specific idea based on capitalism. As the historian and management guru Peter Drucker observed, management is an economic activity: 
....management has failed if it fails to produce economic results. It has failed if it does not supply goods and services desired by the consumer at a price the consumer is willing to pay. It has failed if it does not improve or at least maintain the wealth producing capacity of the economic resources entrusted to it. (Peter F. Drucker, The Practice of Management, 1954)
To understand what business management is, it will be helpful to distinguish management from economics, because these two disciplines offer unique and contrasting views of business. Economics tends to be oblivious to a role for management -- to verify this, look up the word "management" in your economics textbook! The focus of the economist is on the "market". This market view is like looking at the auction of products without asking how the products came to be made. The issue is "What is the value (price) of the product?". The value of a product depends on its scarcity and demand. Products are simply produced when they are demanded. The economist's market allocates goods by fixing an economic value (price) on goods. When we say that markets "allocate goods", we mean:
1. If goods are scarce, but highly demanded, the market assigns a price to these goods higher than the costs required to make the product. The market allocates the few goods available only to those buyers who highly desire it and who are willing (and able) to pay the higher price. Similarly, when there is a surplus of products (too many for the number of buyers), the market fixes a low price (near the cost of making the product) to help "clear" the market, that is a lower price helps sell off the surplus. Thus, lower prices allocate goods to most buyers desiring the product and willing to pay the lower price.
2. When there is a scarcity of something, the market price for this product is higher than costs of making it and producers make higher than "normal" profits. Because there are profits to made by producing these goods, others will enter the market to produce and sell the higher priced goods -- soon there is no scarcity because others are making more of the product. The market is again performing an allocation function by helping to create producers of scarce goods. Similarly, when there is a surplus of goods, prices are close to the costs of making the product and profits are low. No one wants to make low profits, so the market is helping allocate economic resources by discouraging producers to make more goods already in surplus and by encouraging producers to make goods that are scarce.
In this view there really is no "management". The only decision making involved includes: What do I produce? Can I produce it at costs lower than everyone else? But the answers are provided by the market: You produce what is most profitable, but you cannot gain an advantage because the costs of making a product should be the same for everyone. No one should have advantageous costs because the market sets the costs of inputs the same way it sets the price of finished goods.
The market model tells us what should be produced at what price and helps to ensure that products that are demanded are made. But, the economist's market does not help explain how wealth is created. Indeed, competitive markets limit profit taking and wealth creation by driving prices near costs. The making of high profits (wealth) indicates that the market is not working efficiently. Certainly, making profits over a long period of time should not occur when the market is working. Our challenge  is that: (1) We need to explain how wealth is created, by relating it to the prospects of making profits on the long term; and (2) we need to explain that businesses do exist, and people enter business with a persistent belief that you can "beat the market" -- make money!
The economist's "market" is a view of a business activity from afar. When we look at a market up close, what we see are businesses producing and buying from one another, as well as individual entrepreneurs, workers and consumers. While the aloof view by an economist of the "market" reveals that many buyers compete with each other, that many suppliers compete with each other, and that buyers and supplies "haggle" over price, an "up close" view of businesses -- buying and supplying firms -- reveals that goods are being produced and bought through a collaborative effort of people working together. This collaboration of people to produce goods necessitates "management".
Management, then, is concerned with how profits or wealth is created through the collaboration of people and machines.
Management is different from economics also in the mechanisms of how business works. In the economics model, producers are simply motivated by profit potential. This is useful to explain how managers behave only when the manager is also the owner. An owner-manager is motivated to run the business in a way that simply makes more money. As we will see, managers are not necessarily the "owner" of the business, so they may not benefit directly from the wealth that they help create. Managers and workers, then, are not assumed to respond to the market rewards or profit that is created by a business, so their "motivation" is more complex than simple reaction to price variations. A central issue of management is, in the absence of market motives, how are people motivated to work and produce?
While the economist's market is interested in maintaining "free and fair competition" and in selecting "winners and losers" solely on the basis of their efficiencies. Managers seem to believe that it is possible to "beat the market": that decisions, strategies, product differences, workers, policies and practices, values, the way work is organized, even the personality and experience of managers matter in making profits.  An important management issue, then, is not how to maintain competitive markets (an economics issue), but rather how can a business gain advantages over rivals-- specifically, how do we win?
Management does not deny the impact that the economy, competition, and markets have on business. Managers attempt to take these external forces into consideration, but economic forces are issues mainly beyond management's control. Moreover, economic issues are not the only external forces that affect profits. Population shifts, changes in people's values, and political changes also constitute part of the larger external environment in which managers operate.
Management is a formal business discipline, meaning that it is a scholarly and professional activity. It is taught and researched, and there is a large body of literature identified as "management". While some may comment that "management" is "common sense" and maybe even "cannot be taught", as will be seen, the first business school parallels the emergence of the professional manager and actually pre-dates management literature. The linkage between a formal university business education and the practice of management is derived from the fact that management is a profession. Like other professions of law and medicine, managers are professionals because entry generally requires a formal education. Indeed, today at the higher levels of management the MBA has become the accepted professional degree and is one of the most demanded graduate majors.
Management is not the only business profession, but it is the preferred specialization among business students and practitioners. Marketing and finance are also business disciplines, evolving parallel with management. Accounting is a profession independent of business because the accounting profession predates the rise of the management profession, as does economics. As Peter Drucker has observed, management is universally popular as a discipline to study. Management as a profession has expanded its impact beyond business into non-profit, government, and even the "Third World" economies for one reason: management simply has been successful. It has been responsible for developing new businesses and for building global firms. Management has been the instrument for wealth creation of great nations. 

Pre-Industrial "Management"-
In its broadest possible usage the idea of "management" is as old as human society, certainly "governance" or "rule" of people in ancient tribes, kingdoms, and empires engages the notion of "managing". In ancient Egypt the rise of the state and its bureaucracy to create pyramids and canals rested on a state monopoly of wealth and power administered through delegated authorities. State planning that included predictions in the rise of the Nile waters, forecasts of crops, and forecasts of state income tax revenues illustrate what are modern management techniques. Similarly, in China the emergence of the state governed by a large civil service administering uniform and formal policies over remote territories established "managerial" practices characteristic of today's global companies. The later rise of the Roman Empire and the rule of Roman order and law backed by a state hierarchy established principles for the management of modern constitutional governments. Nicollo Machiavelli's The Prince written near the turn of the 16th century as a treatise on governance of Italian principalities by the Medici family is today a recommended reading for every student of management, as it vividly portrays a managerial style in which the "ends justifies the means."
 

Moreover, warfare and the role of the general in the management and strategies of troops and armies convey many of the concepts adapted to modern use in the management of a corporation. Students of management strategy today often study the Art of War by Sun Tsu, the 13th century Chinese military genus, or On War by Carl Von Clausewitz, the Prussian general and military strategist of the ninetieth century.
 

However insightful pre-industrial history and literature is about "management", we do not trace the founding of modern management to these sources. Modern management is business management, and pre-industrial state craft and war strategy simply provide a narrow view of the management function as something worthy of kings, princes, and emperors or, in the case of war, generals. This viewpoint is in part due to the low value that pre-industrial society placed on commerce and business. There were, of course, trading establishments, merchants, and even bankers before the Industrial Revolution - these, however, were not significant aspects of societies to merit much attention and, in the main, represented distrusted elements of society. Perhaps this distrust was rooted in the notion that even early business competed with the wealth and power of the state; more likely, early civilizations simply valued aristocratic wealth based on land and inheritance.
The early Greeks disdained trade and commerce. Manual workers and merchants were excluded from citizenship and were often foreigners or slaves. This attitude towards commerce was adopted by the Romans who developed small factories to produce armaments and pottery, but as in Greece these trades were dominated by foreigners, Greeks and Oriental freedmen. The Romans did establish state joint stock companies ( state corporations ) to raise money for state projects by selling stocks, but expressed prohibited joint stock companies for private enterprise. The early Church also prohibited usury, or interest on borrowed money. So, as the Roman Empire gave way to the domination of the Roman Church in the West, the avenues for raising capital, either through selling stocks or through borrowing, were simply not available to create large private or public companies. For most of our history, across all continents, mankind has lived in societies more dependent upon agricultural production than upon manufactured goods. As land has been owned by an aristocratic and chieftain class who governed in traditional fashion the notion of "business" management simply did not emerge as an important concept.

The Renaissance and Reformation-Rise of Nation-State and Mercantilism
The Middle Ages in Europe were marked by continuance of an anti-commerce attitude and a preoccupation with local markets.  As vile as they were, the Crusades of the 11th, 12th, and 13th centuries brought important changes in Western society. The Crusades brought feudal Europe into contact with the East: contact led to a rediscovery of the classics that had been preserved by Islamic writers, influencing the arts, literature, science, and philosophy, and contact opened new markets. Trade with Arabic cultures also influenced European economic thinking and introduced the earliest form of capitalism, mercantilism. Mercantilism is the distribution of goods in order to realize a profit -- simply, buy low from one place and sell high at another place. While this form of enterprise had developed previously and characterized much of the commerce in the Roman Empire, throughout most of Europe the Middle Ages de-emphasized trade relations. Located on, and dependent upon, the trade routes between the empires of Egypt, Persia, and later Byzantium, Arabic cultures enjoyed a long and sustained history of mercantilism, spreading the trade system with Islam across Northern Africa, Spain, the Middle East and Asia. European contact with Islam introduced the rewards of global trade, illustrated by the infusion of Arabic economic words, such as "tariff", and introducing "arabic" numbers, a counting system with the unique number "zero" which had been adopted by Arabs from India as a secret code for maintaining trade accounts.
Marco Polo's travels near the end of the 13th century reflected mercantile ambitions and the early rise of Italian city-states in the East-West trade routes which would later be challenged in the 15th century by Portuguese and Spanish sea captains -- notably, after the defeat of the Arab Empire in Europe-- and even later by France, England, and the rest of Europe. The Renaissance or "rebirth" began with this trade in Italy and created the first method of industrial organization: the "putting out" (or domestic production) system in which a merchant would obtain raw materials - such as silk from the East - and farm these out to individual workers or families who, using their own equipment, would complete the product and then deliver it to the employers for a wage. From this the need for commercial accounting developed. Luca Paciolo, a Venetian mathematician, in 1494 wrote the first book to popularize double entry bookkeeping. 

Also in Italy, the Peruzzi and Medici families began banking to loan funds and provide a clearinghouse for the transfers of funds against accounts. But, laws favoring businesses were not pervasive. In Germany Guttenberg, who had brought together for the first time all the ingredients for printing, was one of the notable business failures. Undercapitalized and sued by his backer for a loan, Guttenberg did not own the Bible he printed when it was sold. By the end of the 14th century laws against interest on loans began to be repealed or were un-enforced by the Church.
Mercantilism was capitalism for the state, not for the individual. As mercantilism developed into a formal economic theory, such as in the work of Jean Baptiste Colbert, chief minister of the French king from 1661 to 1683, it took on the the following characteristics:
(1) Bullionism - The economic well-being of a nation is measured by possession of precious metals, especially gold or silver. The rise of a money economy, the stimulation produced by the influx of bullion from America, the fact that taxes were collected in money, all seemed to support the view that hard money was the source of prosperity, prestige, and strength.

(2) Favorable balance of trade - For a nation to have more bullion, it must export more than it imports. Imports are an outflow of wealth. Exports are an inflow of wealth. 

(3) Economic self-sufficiency - To reduce the outflow of wealth, the state should encourage domestic industrial development and discourage imports. 

(4) Agriculture is the basis of national wealth. Because most consumption is food, domestic agriculture should be encouraged. This limits dependence of foreigners and increases the local tax base. 

(5) Tariffs - To reduce dependence of foreign materials, tariffs should be high on imported manufactured goods, but low on imported raw materials.

(6) National Power - Great nations are Sea powers with colonies. Colonies provide captive markets for manufactured goods and sources of raw material. For many European nations, colonies are the direct source of gold and silver, national wealth. 

(7) Economic development is a government function: to enforce economic and trade policies, protect and accrue national wealth.
Large scale enterprise in the form of state monopolies was an instrument of state economy. In the East and in the Americas, joint stock companies were developed by the state to finance adventures, such as colonial enterprises. Under the aegis of the state, private investors would finance expeditions with each expedition managed as a separate speculation. When the ship or ships returned with their cargo, the profits would be spilt with the investors. This corporation was not an "on-going venture". However, in 1600 the East India Company was formed to exploit commerce and colonial adventures in the Asia subcontinent. Unlike previous ventures, this undertaking was prolonged. By 1613 stocks were being subscribed for four year periods, providing continuity, permanence, and transferability of capital invested in a state enterprise - and providing a model for future capitalizing of business enterprises.
The evolution of state capitalism of mercantilism into the individual capitalism of laissez faire economics requires a fundamental redirection of values in which governments can understand that national wealth is, in fact, not the wealth of the sovereign, but the wealth of people. Max Weber, the German sociologist, in his The Protestant Ethic and the Spirit of Capitalism (1905) theorized that this change in values was a result of the Reformation and these religious developments were pivotal in the emergence of modern capitalism.  
When Martin Luther, an Augustinian monk, in 1517 posted his ninety-five theses protesting Papal authority, he launched direct confrontation of nationalistic tendencies in Germany against Rome. Lutheranism also quickly became a doctrine supporting peasant uprisings against traditional civil authorities throughout Germany, although Luther personally believed that rebellious peasants should be killed. Other religious reformists, Zeingli and John Calvin in Switzerland incited nationalist fervor with religious zeal, rejecting the intermediaries of the Roman Church for personal salvation - a fervor that would spread across the rest of Europe But it was King Henry VIII who, almost by accident, severed the traditional Roman authority by declaring himself Head of the Church in England. Throughout Europe there followed a period of civil warfare framed around religion and a period of terrible European conflict, the Thirty Years War. In England, the monarch would survive with a Parliament and Protestantism in place. In France the reliance of the Calvinist Huguenots on the monarchy would result in their exile, entrenchment of the monarchy, and eventual revolution and the establishment of successive republics. In Spain, steadfast Catholic during the Reformation, the monarchy would remain absolute, but squandered much of its colonial booty on war with Protestant Europe. Mainly, the Reformation set into motion a new social order. It undermined traditional authority of the Church on Rome with national governments; it undermined traditional authority of the Church on individuals; and, it unleashed a new set of values focused on the individual as authority.  
Weber's Protestant Ethic is both an attitude towards personal wealth and a work ethic. Unlike traditional Catholicism that emphasized the authority of the Church and the obligation of believers to fulfill religious duties, Protestantism placed emphasis on the individual (not the Church), promulgated moral asceticism (emphasizing work), and,  especially, Calvinism emphasized that good works could not guarantee salvation. Later Calvinists and, especially, the Puritans (Church of England Calvinists) would infer that legally accumulated wealth might be evidence of being a member of the elite who are saved.  In Weber's interpretation of the Protestant theologies, the Protestant proved his faith in self-discipline and his salvation through wealth. This was not wealth for the sake of wealth, it was rather the need for each person to engage in a life of continuous physical and mental labor, in which the individual would be self-directed and self-controlled. For the Protestant, each man has a "calling" which required him to do his best. By not seeking luxury, each person created a surplus or profit from his labors. This wealth should not be consumed beyond one's basic needs, but it is to be reinvested. This duty to work, use wealth wisely, depend upon one's own internal moral compass, and live a self-denying life is the "Protestant Ethic". These are values necessary for the emergence of capitalism.
 

Industrial Revolution: Why Great Britain?
The period roughly beginning in 1750 and ending in 1870 is the Industrial Revolution: machine power replaces man and animal power, industrial organization becomes large scale, and productive work becomes highly specialized. Technological innovations that characterize the Industrial Revolution began earlier in other places, but only in Great Britain in this period is there such an early great leap in national economic productivity accompanied by widespread social transformation of an agrarian society into an industrialized one. The Industrial Revolution's dramatic impact on Great Britain lay possibly in the social, political, and legal conditions which were particularly favorable to change there. Private property was protected by British law and less subject to arbitrary seizure by the monarchy; taxation was not any more onerous than in other Western states; intellectual property rights were protected by established patent law; and, a combination of limited monarchy with an undercurrent of popular democratic sentiments, favored entrepreneurial risk-taking and private wealth creation more-so than anywhere else in Europe. Consistent with Max Weber's thesis: Protestantism had rooted firmly in Great Britain with the king as head of the Church of England.
While most of Europe still followed mercantilism, Great Britain's government pursued a relatively hands-off economic policy in matters of commerce. The Bank of England, established in 1694, also promoted economic development. The Bank was a private stock company (until nationalized in 1946) and in return for securing national debts had authority to issue currency -- promoting the circulation of money for business exchanges and a national monetary system. Colonialism favored the development of the corporation, permitting capitalization through the sale of stocks. Early exchanges had been organized throughout Europe but traded mostly in commodities and currencies. Although Amsterdam's Bourse was the first to formally begin trading in securities in 1785, soon the London Stock Market was organized to trade in commercial stocks. In 1856 Parliament enacted the the English Joint Stock Companies Act, granting limited liability to investors and providing for public accounting of invested funds and earnings.
Natural resources also played a determinative role in Great Britain's Industrial Revolution. The country had ample coal and iron deposits to create an early iron industry. Thomas Newcomen in 1705, improving upon an earlier patent by John Calley, successfully built a steam engine that pumped water from coal mines. In 1760 John Smeaton applied the steam engine to fan the furnaces used in manufacturing iron. Iron production rose from 12 tons per furnace to 40 tons per furnace. This increased productivity made available a large supply of iron at low cost, and led to new uses for iron: bridges, ships, and other machines.
If iron was the key metal of the Industrial Revolution, at the center of the Industrial Revolution was replacement of human and animal labor with that of the machine, the steam engine. A mechanical engineer James Watt improved the Newcome engine to create a truly workable and reliable source of power. In 1775, Watt went into business with the British manufacturer Matthew Boulton, owner of the Soho Engineering Works at Birmingham, to manufacture steam engines that could be used in a variety of industrial settings, not just in mining. This partnership became one of the most important businesses of the Industrial Revolution. Boulton & Watt served as a kind of creative technical center for much of the British economy. They solved technical problems and spread the solutions to other companies. Similar firms did the same thing in other industries and were especially important in the machine tool industry. This type of interaction between companies was important because it reduced the amount of research time and expense that each business had to spend working with its own resources. The technological advances of the Industrial Revolution happened more quickly because firms often shared information, which they then could use to create new techniques or products. One of the consequences of the introduction of steam power was that now mills and manufacturing that had run successfully with water power, could be located anywhere, not just close to water.

 

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. "Liassez 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.

Capitalism in America
America for the mercantilist Europeans began as an economic enterprise for the benefit of the home country. The Spanish attempted colonization in Florida and the Carolinas, but firmly established itself early in areas to the West of the Mississippi and south through South America. The Dutch West India Company pursued fur trade along the Hudson River, now New York. The Swedes set up companies to similarly exploit fur trade in Delaware. While the English Virginia Company, and its subsidiaries the London (James River, Virginia) and Plymouth (New England) companies, espoused religious purposes, the strongest motivation was economic in the Virginias.  As the early English colonies were not financially successful, the Virginia Company held on by granting settlers stock and land.  In 1624 Virginia colony’s charter was revoked and in 1627 the colony at Plymouth bought out the English investors, leaving the colonies pretty much to their own designs.  The Massachusetts Bay Company, however, continued to function as a business concern, with the governor acting as the executive, and freedman, as the stockholders until the growing number of new settlers made this authoritarian type of government unworkable. 
The early colonial enterprise rested largely on the triangular trade routes:  rum to Africa from New York and Philadelphia, people from Africa to Cuba, and molasses and coin from Cuba to New York/Philadelphia; and, sugar and molasses to England from Cuba, manufactured goods from England to New York/Philadelphia, and grains and meat from New York/Philadelphia to Cuba. It was England’s management of this trade through taxation on exports and imports that would lead to rebellion in the colonies. Taxes and other mercantilist policies by England that intruded on American economic interests are the most cited reasons for rebellion in the Declaration of Independence.
The Constitution of the United States (ratified in 1790) established a limited national government more amenable to laissez faire economy then mercantilism, although the early government continued to follow protectionist trade policies. Domestically the central government established a common market by the power of regulating interstate commerce, ensured the private property of patents and copyrights, prohibited states from interfering with contractual obligations, and had the power to make a uniform bankruptcy law, control national defense, and tax.  The Fifth Amendment’s “takings clause“ explicitly protected private property and precluded the national government from seizing property without “due process”.  What all this meant for national business development, however, would be worked out in subsequent, often sectional clashes to the present. This conflict was presaged in early contrasting views of Jefferson and Hamilton. Hamilton argued for a strong national government and a national bank at the center of economic policy. As Secretary of the Treasury Hamilton’s “Report on Manufactures” to Congress laid out a plan for land, labor, and the use of foreign capital to advance industrialization – a view seen as favoring Northern interests. Jefferson, on the other hand, philosophically envisioned America as a farmer’s republic and would have preferred to "let our work-shops remain in Europe," a view favoring Southern plantation society as well as frontier farmers. However, as first administrator of the American Patent System, Thomas Jefferson personally examined all applications and before his death commented "The issue of patents for new discoveries has given a spring to invention beyond my conception."
Although England prohibited the export of its industrial technology and the immigration of skilled labor, Samuel Slater, an engineer at Arkwright’s water frame factory, illegally stole to America and established the first factory in 1790 at Pawtucket, Rhode Island. The “Rhode Island system” adopted the English practice of employing whole families, and thus depended upon child labor. In 1791 Alexander Hamilton employed waterpower for textile factories at Patterson, New Jersey.  Eli Whitney’s invention of the cotton gin in 1794 made Southern production of cotton more profitable and gave impetus to the systematic development of textile manufacturing in the North. Francis Cabot Lowell and Paul Moody brought together the machines needed for spinning and for weaving into one factory at Waltham, Massachusetts in 1814. The “Waltham system” established the practice of employee young women laborers, who were boarded and educated in the moral advantages of factory work. Textiles established America’s entry into the Industrial Revolution.
 

 

The Rise of the Professional Manager in America
Management emerges uniquely in the United States because of the combined effect of the Industrial Revolution, a vast geographic expanse and national market, and the unique complexities of the American railroad industry.
Historians label the the on-going developments of the the Industrial Revolution up to the 20th century as the Second Industrial Revolution. If the first period of industrialization was characterized by application of steam technologies, the second period of extended industrialization is characterized by improvements in methods, chemicals and metals manufacturing, and the power of electricity. In the United States the legacy of the Civil War provided for a national market. The Fourteenth Amendment, intended to secure the civil rights of African-Americans extended the protection of private property guaranteed by the Fifth Amendment to state governments. It may not be obvious in the 20th century, but while the Fourteenth Amendment was worthless for much of the post-Civil War history in protecting civil rights, it became the foundation for expanding the protection of property rights and the institutionalization of laissez faire capitalism.
The post Civil War period transformation of the United States to an industrial state is evidenced by: growth of industrial wage earners from 957,000 in 1849 to 4,252,0000 in 1889; the value of factory made goods jumped from fourth internationally in 1860 to first place in 1894; and, urbanization increased from 8.5 percent of American living in 44 cities in 1840 to over 32 percent living in 547 cities in 1890.
America was not alone in this kind of industrialization, which was also transforming Great Britain and Germany. Unique to the American experience was the development of the railroad industry. The Industrial Revolution, of course, introduced the rail to Europe. George Stephenson in Great Britain had pioneered the rail in 1830. But in Europe the railroad industry either developed as a state enterprise or, as in England, became a highly competitive industry spread over many rivals. In 1844 England had 104 railway companies. In the United States the railroad became "big business", the modern corporation. By 1840 there was about 3000 miles of railroad tracks in the United States – almost the same mileage as the canals. By the Civil War about $1.2B (1909 $$) had been invested in the railroads of which about 25 to 30 percent was government funded. By 1849 rail freight receipts exceeded passenger receipts. In 1855 before the Pennsylvania acquired the PFW&C, it cost about $2M to run the railroad. In comparison, the largest comparable non-railroad businesses were the huge New England textile mill complexes, and the largest only cost about $.3M to run. By the late 1880s the Pennsylvania RR employed over 50,000 men.
Size of the railway business was one aspect, but this was not a sufficient condition to create the modern business enterprise. Although the corporate form of organization with stock ownership was well established before the railroads, the rail industry required substantial capital which it acquired mainly from the sale of stocks. In 1835 only three Railroads were traded on Wall Street, by 1850 thirty-eight were traded, and by 1855 rail shares accounted for half the negotiable securities traded in the U.S. By the end of the Civil War the financial markets of Wall Street and Philadelphia were well established based largely on the transactions of rail stocks. The importance of stock ownership is that it transfers business ownership from the founder-proprietor to a large number of owners or investors. Stock owners, unlike owner-managers or partnerships, have a single interest in the enterprise -- a return on investment. Investors may have limited knowledge of the business; moreover, coordination and decision-making for the business becomes unwieldy as the number of investors increases. Ownership is divorced from management as investors now seek a professional who is knowledgeable of the business and who can manage the enterprise. This gives rise to something that did not exist before -- the professional manager.
The size of the American market created additional complexities. While a railroad traversing Great Britain from north to south spans a distance of a little over 500 miles, a transcontinental rail in the U.S. covers nearly 5,000 miles. A transcontinental railroad was charted by Congress in 1862 in anticipation of trade with the Orient and in support of the Western migration spawned by the gold rush, but the Civil War made its construction a matter of national priority. The Union Pacific, working from the east, and the Central Pacific, working from the west, completed the transcontinental railroad in 1869, meeting at Promontory Point, Utah. The enormous fixed capital investment of railroads required elaborate long-term planning to insure that tracks linked important markets. Coordinating over large distances imposes the need for multiple intermediate managers, the role of the professional manger. Also, new to capitalist enterprise was the concept of "middle management", an idea that was developed from the model of station managers or agents who oversaw rail operations for a prescribed length of track and a specific locality or "market".
There are also unique operational complexities associated with running a railroad: trains had to be scheduled; prices had to be established for different passenger fares and freight; logistics of handling passengers and freight had to be planned and executed; equipment and tracks had to be maintained; and, local operations had to be harmonized with corporate policies. This introduced a high level of specialization of skills and diversity of skills that were required.

One of the early professional managers was Daniel C. McCallum, Superintendent of the Erie line for the New York and Erie Railroad Company. In his annual reports to the corporation's Board of Directors, McCallum laid out the principles and organization of the first "modern" corporation in the mid-1850's. His organization chart, which became widely adopted, laid out the fundamental structural difference between the ubiquitous "functional" organization and the emerging corporate or "multi-divisional" structure. As illustrated in Figure 1 the "functional" form of organization, heretofore the dominant business form of organization, is based on the concept of specialization of labor by function or task. The structure is ideal for smaller businesses, operating in a single market, making a single product. The typical hierarchical deign was headed by the owner-manger, although the structure was adapted by corporations for management by the key or designated owner-manager.
McCallum observed that for short-haul railroads a superintendent can directly know and manage operations. But, with a rail stretching over 500 miles this is not feasible. He proposed and implemented an organization that broke the rail line into geographical divisions of a manageable size, each headed by a divisional supervisor. Divisional supervisors reported to headquarters. His Multi-divisional form of organization enabled a large business to operate as efficiently as a small one. J. Edgar Thompson at the Pennsylvania railroad quickly adopted McCallum's idea and developed staff functions at corporate headquarters for planning and financial controls and , and to implement general business policies. As more American enterprises expanded into markets and with new products the multi-divisional form of organization denoted by multiple business units attending to specific markets and reporting to a central headquarters become the model corporate structure.

The modern business enterprise (Figure 2), as it was developing the U.S. through the railways differed from the traditional firm in two fundamental respects:
(1) It was not fixed at one location. The modern business was an organization of multiple operating units, each in different locations and carrying out diverse economic activities. This is the horizontally integrated firm.
(2) It was characterized by multiple levels or a hierarchy of managers - top and middle management tiers - who coordinated and controlled operations, making decisions ostensibly not on the basis of individual self-interest but on the basis of collective interests of the firm.
The modern enterprise with its hierarchical controls and multi-divisional structure depended upon an increased number of professional managers. In 1881 local industrialist and philanthropist Joseph Wharton funded an experiment to meet this need - the establishment of a collegiate business school at the University of Pennsylvania. The Wharton school was an experiment because there were no "business" professors and there was no management literature, aside from "how to" manuals and trade publications.
 

Frederick Winslow Taylor: Father of Modern Management
Modern management is the collaboration of people and machines to create value. In the early days of industrialization the innovators of machines and the innovators of organization and management were engineers. Engineers, after all, were the ones closest to the machines, and this fact placed them at the interaction of workers and machines. This certainly helps explain Frederick Taylor and his invention of "Scientific Management".
Taylor began his career as the first management theorist, consultant, and "guru" as an apprentice foreman and common laborer, positions from which he quickly advanced to chief engineer. Taylor's early resume, however, belies the fact that he was born into an affluent Philadelphia family. His direct observations of men at work led him to develop what we would call "motivation" theory, although this is a psychology term that would not be imported into the management vocabulary until later. Taylor's own point of view, although benign towards workers, saw human labor very much analogous to machine work--- something to be "engineered" to achieve efficiency. His theories on management would be promoted worldwide (and maybe took stronger root in Japan than in the U.S. or Europe) and would be controversial at home. If greater economic development through efficient and productive work was Taylor's own view of his work, the growing Labor Movement would see "Taylorism" as exploitive. Organized labor's antagonism to the American popularity of Taylor's work would eventually lead to Congressional hearings and, pretty much, the demise of "Scientific Management".
Taylor developed his management theories in his book Shop Management published in 1903, making it arguably the first scholarly work on management. Although there were books and published pieces on what could be termed "management" these were more of a "guide to" or trade publication on best practices. Shop Management approached the role of manager as a general role with specific functions with respect to collaborative work. The problem, as Taylor saw it, was that workers were inefficient because: (1) Workers tended to ration their work load or work less than they could, because working faster and harder would mean that there would be less or no work to do in the future. (2) Management failed to structure work effectively and to provide appropriate incentives. It should be pointed out that Taylor is writing before the establishment of a "minimum wage" (the minimum wage became federal law in 1938), so the notion of what is "a fair day's work for a fair day's pay" was arbitrary. A day-rate or hourly-rate was a common practice at the turn of the century. Taylor viewed these wage practices as rewarding for attendance, not performance. While another common practice was the "piece-rate" system that paid workers on the basis of output, this generally failed because standards were poorly set, employers cut rates when workers earned "too much", and workers would conceal their real capacity for production to keep standards low.
The solution, to Taylor, lay in discovering the appropriate work standard and fitting wages to the standard. Management should establish specific work targets, pay workers for the tasks and goals met, and provide regular feedback. The main elements of his theory were:
1. Management is a true science. The solution to the problem of determining fair work standards and practices could be discovered by experimentation and observation. From this, it follows, that there is "one right way" for work to be performed.
2. The selection of workers is a science. Taylor's "first class worker" was someone suitable for the job. It was management's role to determine the kind of work for which an employee was most suited, and to hire and assign workers accordingly.
3. Workers are to be developed and trained. It is management's task to not only engineer a job that can be performed efficiently, but management is responsible for training the worker as to how the work is to be performed and for updating practices as better ones are developed. This standardizes how the work is performed in the best way.
4. Scientific management is a collaboration of workers and managers. Managers are not responsible for execution of work, but they are responsible for how the work is done. Planning, scheduling, methods, and training are functions of the manager.
The "scientific" approach towards work led Taylor to investigate work through "task allocation" which meant that a job would be studied by sub-dividing it into discrete tasks, each element of the job would be investigated to discern the optimal efficiency by which it could be accomplished. The elements of the job, properly designed, then, would be reconstructed as an efficient job. The criticism of this approach is that it omits the worker's own contribution to the design of work and, thereby, alienates the worker from the job. Still, what Taylor does is link national wealth and company profits to how effectively work is performed, and he defines a cooperative role between labor and management in wealth creation.
Taylor's system was widely adopted in the United States and the world until its demise in the 1930's as organized labor pushed for a minimum wage based on hourly pay, as opposed to Taylor's contention that pay ought to be based on performance. In practice "Taylorism" too often fell short of a collaboration between labor and management and, frequently, was a mask for business exploitation of workers. The enduring and unquestionable contribution of Frederick Taylor is that management is firmly established as something done by trained, professional practitioners and is elevated as the subject of legitimate scholarship.
 

The Hawthorne Experiments: Management Takes A New Direction
General  Electric, the major manufacturer of light bulbs, had preliminary evidence that better lighting of the work place improved worker productivity, but wanted to validate these findings to sell more light bulbs, especially to businesses. GE funded the National Research Council (NRC) of the National Academy of Sciences to conduct an impartial study. AT&T's Western Electric Hawthorne plant located in Cicero, Illinois, was chosen as the laboratory. Beginning with this early test, the “Hawthorne Experiments” were a series of studies into worker productivity performed at the Cicero plant beginning in 1924 and ceasing in 1932.
Illumination Studies, 1924 -1927
The earliest experiment (1924) was conducted by the NRC with engineers from MIT. The study would end in 1927 with the NRC abandoning the project. The group examined the relationship between light intensity and worker efficiency. The hypothesis was that greater illumination would yield higher productivity.  Two work groups of female employees were selected for  “control” and “experimental” groups. By comparing the changes on worker productivity by manipulating lighting in the experimental group with the production of the control group, the researchers could validate and measure the impact of lighting.  The study, however, failed to find any simple relationship as poor lighting and improved lighting seemed in increase productivity. Indeed, in the final stage, when the group pretended to increase lighting the worker group reported higher satisfaction.
The preliminary findings were that behavior is not merely physiological but also psychological. This was a break with the Scientific Management school that saw work productivity as “mechanical”, and led to the decision to learn more about worker behavior. George Pennock, Western Electric’s superintendent of inspection suggested that the reason for increased worker productivity was simply that the researchers interacted with the female employees; and, this was first time any one had shown an interest in the workers. Basically, the workers were trying to please the researchers by continuing to increase their output and report satisfaction in the study, no matter what the intervention was. Later, the phenomenon of a researcher corrupting an experiment simply by his presence would be termed the “Hawthorne effect”. 

Relay Assembly Test Room Experiments, 1927-1929
The NRC started an experiment to probe the unexpected findings of the Illumination study but would depart in 1927, at which time Western Electric continued the project drawing on support from Harvard researchers. An experimental group was established of five young women from the Relay Assembly room of the plant. The experiments involved the manipulation of a number of factors, to include pay incentives, length of workday and workweek, and use of rest periods, to measure impact on productivity and fatigue. Again, the relationship between pay, incentives, rest, and working hours seemed to have little effect on productivity, even when the original, more demanding conditions were re-implemented. 
Mica-Splitting Test group, 1928 – 1930
Disturbed by the inconclusive evidence that rewards and incentives improved worker performance, a second experiment was conducted to look only at this relationship using workers in the Mica-Splitting Room. In his experiment the workers’ piece wages were held constant while work conditions were varied.  Productivity increased by about 15%. The researchers concluded that productivity was affected by non-pay considerations. Members of the research team began to develop the theory that social dynamics were the basis of worker performance.
Plant-wide Interview program, 1928-1931
As early findings indicated that concern for workers and willingness to listen impacted productivity, Western Electric implemented a plant-wide survey of employees to record their concerns and grievances. From 1928 to 1930, 21,000 employees were interviewed. This data would support the research of the Harvard team for years and lead them to conclude that work improved when supervisors began to pay attention to employees, that work takes place in a social context in which work and non-work considerations are important, norms and groups matter to workers.
Bank Wiring Observation group, 1931-1932
The final Hawthorne experiment was conducted studying 14 male workers assigned to the Bank Wiring factory. The objective was to study the dynamics of the group when incentive pay was introduced. The finding was that nothing happened! The work group had established a work “norm” – a shared expectation about how much work should be performed in a day and stuck to it, regardless of pay.  The conclusion: informal groups operate in the work environment to manage behavior.
Importance of the Hawthorne Plant Studies
Despite modern criticism that the research was flawed and that incentives played a larger role in improving worker productivity than the Hawthorne plant researchers concluded. These studies changed the landscape of management from Taylor’s engineering approach to a social sciences approach. Worker productivity would, henceforth, be interpreted predominately in the United States in terms of social group dynamics, motivation, leadership, and “human relations”.  The practice of management could not be the aloof technician of Taylor’s Scientific Management, designing the job, selecting and training the “right” worker, and rewarding for performance. The manager was an immediate part of the social system in which work is performed, responsible for leading, motivating, communicating, and designing the social milieu in which work takes place.
The studies also developed the scholars that would continue to influence the American way of thinking about management at Harvard Business School and elsewhere. Included among these researchers were:
Elton Mayo came to Harvard from Wharton where as a psychologist he had researched the impact of social and home life on worker performance. At the Harvard University School of Business his reputation led him to consult with the FBI and the movie industry. Mayo’s reporting of the Hawthorne experiments became the most influential in that he laid out a programmatic interpretation, which would be called the “Human Relations” approach that dominated management thinking until the 1950’s. Mayo’s views lead to the construction of manager as a leader supported by knowledge and skills to build social cooperation. 
Fritz Roethlisberger and W.J. Dickson were the first to publish comprehensive findings of the Hawthorne experiments in 1937 and authored Management and the Worker in 1939, a comprehensive statement of the research and findings.  Roethlisberger, educated as an engineer, started the Harvard Industrial Research Department, was a lead researcher in the Hawthorne project and a leader in the Human Relations movement. Dickson was Chief of Employee Relations Research Department at the Hawthorne plant and an instrumental contributor to the project. 
W. Lloyd Warner, an anthropologist who designed the group experiments, pioneered the field of social anthropology at Chicago and Michigan.  His work includes classics in the American class system and race.
L.J. Henderson a chemist and physiologist in charge of the Fatigue Laboratory at the Harvard Business School provided a theoretical foundation to the research. He would contribute to the development of “systems theory”, influencing management theorists Chester Barnard and George Homans. He became the first president of the History of Science Society.
This group of scholars permanently influenced the study of management and the development of Organizational Behavior as a discipline. 

APPLYING MATH TO MANAGEMENT: MANAGEMENT SCIENCE
Mathematics historically has been the tool of science. Mathematical statistics emerges before the turn of the 20th century in Europe with the pioneering work of Karl Pearson, Francis Galton, and Edgeworth. In the United States statistics were sufficiently a tool of research to be central to the Hawthorne Experiments in which T. North Whitehead performed the detailed statistical analysis. Also, at Western Electric was W.A. Shewhart, educated as a physicist, serving as an engineer at Western Electric and later as researcher at Bell Laboratories. Shewhart’s Applications of Statistics in Maintaining Quality of a Manufacturing Product in 1926 is the pioneering work in statistical quality control. Shewhart directly influenced the work of quality management guru’s Deming and Juran.

Still, statistical techniques and mathematics were seen primarily as tools of the trade until World War II when exigencies of the war brought together scientists, mathematicians, and business to win the war. Using mathematics to solve problems from logistics to precision bombing, “operations research” was born. The British get credit for establishing the first Operations Research group in the mid-1930's to study and implement the use of radar, but the Americans, lead by scientists like Philip M. Morse, soon saw the utility in this kind of teaming of expertise. Each branch of the services formed an operations research group. After the war, business had learned the practicality of OR and by 1953 operations research was an established area taught in American universities and publishing  its own journal. The journal Management Science was dedicated “to identify, extend, and unify scientific knowledge that contributes to the understanding of the practice of management.”
If Taylor’s “scientific management” was about finding the “one best way”, management science is about find the “optimal” way.  Like Taylorism, management science is about the application of science to management. The names associated with the early days are not always found in introductory business texts: Russel Ackoff, C. West Churchman, Edward Bowman, Robert Fetter, Elwood Buffa, and Jay Forrester. The language of this approach is statistics and math to solve problems such as: how much inventory to carry? How many lines are needed to expedite customer checkout? What is the best transportation route? Game theory, mathematic modeling of decision-making, has expanded the field into management strategy to create complex models that simulate business conditions, as in war games. By the 1970’s with American competitiveness seemingly challenged by Japanese industry, the work of Deming and Juran on statistical quality control refocused management to a discipline Americans pioneered in the 1930’s.
Out of Operations Research also came the introduction of systems thinking. In the 1950’s and 1960’s through the work of Norbert Wiener, Kenneth Boulding, and Churchman, systems theory attempted to form an integrative framework of management. Systems theory envisions that all things exist as part of a larger complex of things. An impact on one element has an impact on all elements, perhaps a minor effect on some parts, but nevertheless all things are interdependent and linked to one another. While the effort to reduce all knowledge to a General Systems Theory failed, systems theory remains part of our business vocabulary to explain relationships and effects and has taken a new direction influenced by the social scientists in the concept of the “Learning Organization”.
By the 1970's the use of computers for mathematic computation and modeling presented new opportunities for growth in Operations Research. The field of operations research today is integrated into many disciplines, including the military, government policy, medicine, transportation, computer sciences, and business. It's defining characteristics are the applications of mathematics, physics, and systems thinking to problem-solving.
For more on Operations Research, see:
J.R. Beasley's OR Notes
Philip M. Morse and the Beginnings (pdf)

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