Industrialization is usually describes as a technological and material revolution. It also changed organizations to handle the massive increase in material production and distribution. Urbanization was one obvious result.

A more subtle one was the rise of technical specialists, hierarchical management, and administrative coordination. The corporate models replaced the partnership model in many businesses.

The partnership model was the traditional means of running a business. Each owner of the business was also the general manager. He hired employees and made contracts with business partners. Partners networked freely. Some were merely short-term contracts. Many of these were family businesses. The partnership model still works for some business specialties – particularly in medicine and law, which operate on the small scale.

By 1800, the partnership model became increasingly specialized. Merchants specialized in a single product (grain, cotton, textiles). In Europe, the merchant guild system began breaking down. The old guilds had a general monopoly over all goods in and out of the cities. Increasing specialization caused greater fragmentation businesses and practices.

Specialist businesses contracted each other based on needs. When multiple partners needed to pool capital to launch major ventures, they incorporated into joint-stock companies. When they wanted to ship goods overseas, they contracted a ship captain to carry the cargo. They spread out risk through insurance.

This worked well for pre-industrial economies. The primary issue was cooperation. Prices signaled supply and demand, so specialized businesses could respond to each other’s needs.

Industrialism and mass production introduced a coordination problem. New industrial models – like factories, railroads, etc – required extreme specialization and technical knowledge and this resulted in coordination and scheduling problems. Every worker specialized in building a single part and they needed to coordinate to combine the parts into a single unit and make a sufficient number of units to meet production schedules. Contract-based cooperation was too inefficient to handle the sheer mass of production.

Distribution of goods also required coordination. Train lines could carry 50 times as much cargo as canals at a far faster pace. Multiple trains ran on the same line, so there were scheduling issues. Railroad companies had to ship the cargo on time to meet business demands while preventing railroad accidents, congestion, and collisions. This required a central administration to coordinate the movement of trains across the entire country. Rival companies even standardized their administration practices for better management and safety. Railroads were the cheapest, safest, and fastest means of cross country travel in its era.

The Corporate model grew organically and was not planned. Administrative managers internalized the process needed to quickly and efficiently solve multiparty coordination problems.

A hypothetical business owner once managed all his finances personally. As his business grew in size and he had to manage an ever growing number of contracts and financial arrangements, he hired a professional accountant. This accountant was as specialist and perhaps knew much more about accounting than the business owner, but he too would be overwhelmed by the sheer quantity of data, so he hired two junior accountants. Soon, the business had an entire accounting department just to oversee finances. This was more than just a organizational change, as new departments developed new methods of doing business, like abandoning simple cash accounting and switching to accrual accounting. Businesses developed departments to handle transportation, production, personnel hiring, finances, marketing, and so on.

This eventually formed multiple specialist departments, each with its own hierarchy of Upper, Middle, and Lower Managers.

This is not a new development, except insofar as it was much more pervasive in society. Governments and militaries faced the same issue long before industrialization. This is because militaries and governments dealt with the same problems of sheer mass and coordination. The Chinese Mandarin class is a great example of managerial systems in government. Militaries needed to manage 100,000 men and logistical systems to support them in the field. Military units needed to coordinate with one another or they would turn into a mob, so officers direct and resolve these coordination issues.

Military logistics provided the model for private corporations. During the Napoleonic Wars and the US Civil War, Quartermasters became a more important position. Since armies no longer foraged for food, and new styles of warfare required far more resources, Quartermasters developed complicated measures to acquire and distribute resources on schedules. In the US, many industrialists were former Union officers who continued using the same methods and techniques. A professional manager class is functionally equivalent to the professional military officer class.

This form of administrative coordination handles sheer mass far better than networks. Networks are good at small-scale operations. Individuals or small groups signal each others’ needs are able to cooperate through contracts. These networks lack filters and priorities so they get overwhelmed by masses of information and material. Corporations with management hierarchies are less efficient on individual transactions, but are far more efficient at large-scale operations.

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