Invention, Markets, and the Scope of the Firm: The Nineteenth Century U.S. Shoe Machinery Industry

Consider two opposing expectations about the connection of the scope of the firm to the evolution of an industry. According to George Stigler, as an industry's market grows a scale is achieved at which specialized firms can emerge; economic growth thus results in vertical disintegration, ew industries, and growing decentralization fthe economy. According to Alfred Chandler, the growth of the firm-and of the market-is limited by the structure of firms. Innovations that extend the scope of the firm's activities overcome this limit and therefore account for both firm and market growth [2, 16]. 1 These opposing expectations are tied to differing treatments of the sources of change. For Stigler, market growth is given to the firm, and vertical disintegration isa response. For Chandler, the firm does more; its internal restructuring leads both to its own growth and to the expansion of the market. The difference can be put another way. Stigler interprets Smith's dictum that the division of labor is limited by the extent of the market to mean that firms decrease in scope as markets grow, so that the invisible hand of market interaction expands as a way of organizing economic activity. Chandler highlights the efficacy of the firm's innovation in determining market growth, and the visible hand of organization within the firm increases as an economic organizing force. Clearly, the issue extends beyond the expected trend of firm scope to the process and role of innovation in a capitalist