Thorstein Veblen

1. Thorstein Veblen (1857-1929)

2. Institutionalism • Father of American heterodoxy called institutionalism • a)       Greatly influenced development of heterodox theory in U.S. • b)       Student of J.B. Clark (marginal analysis seminal thinker) at Carlton College • c)       Yale Ph.D., Cornell post-doctoral fellowship at age 35 • d)       Univ. of Chicago economics instructor & editor of Journal of Political Economy • e)       Never became a full professor and moved from school to school • f)        Refused presidency of American Economics Association in 1920s

3. Quotes • conspicuous consumption - purchasing patterns of emerging affluent society kept classes - upper class underlying population - working class • captains of erudition - university presidents • to practice sabotage - the chief service of businessmen • inordinately productive - description of industry • a conscientious withdrawal of efficiency - requirement of profit making • the fabrication of imponderables in the nth dimension - religion • chain stores - main ecclesiastical organizations • retail outlets - individual churches • an accredited vent for the erudition of effete matter from the cultural organism - description of the church

4. Veblen’s Criticism of Orthodox Theory • Asserted that the basic assumptions of orthodox, historical and Marxian economics were unscientific. Wanted to tear down entire theoretical structure and build a unified social science from economics, anthropology, sociology, psychology and history • Criticisms of orthodox theory: • Orthodox theory based on assumption of harmony in the system and that the natural laws could be discovered, and implies that equilibrium is good and socially beneficial w/o proof.

5. Veblen’s Criticism of Orthodox Theory • Teleological orientation of movement towards LR equilibrium that was not attained empirically but given before analysis (pre-Darwinian since there is no purpose or design in evolution) • Focused on static aspects of the economy rather than evolution and change (taxonomic - pertaining to the science of classification). • Taxonomic b/c it classifies the economy w/o explanation or conception of it as a set of evolving, changing institutions.

6. Veblen’s Criticism of Orthodox Theory • Assumption of the invisible hand never proven (i.e., the self-interest of businessmen seeking profits will produce goods consumers want at the lowest possible cost). • May have been a correspondence of making goods serviceable to society and making profits in Adam Smith’s time, but this changed as the economy developed.

7. Veblen’s Criticism of Orthodox Theory • Veblen maintains the pursuit of profits results in the reduction of output (monopoly power), international competition and war, depression and mass unemployment (rejected the concept of perfectly competitive markets). • Assumptions of human behavior as driven by hedonistic psychology is incorrect. • Failed to reconcile the orthodox theory of the economy with the facts of the economy.

8. Veblen’s Analysis of Capitalism • 1.        Orthodox economics theory concerned with how society allocates scarce resources among alternative uses. • 2.        Veblen thought economics should be study of evolving institutional structure.

9. ECONOMICS • a)       institutions - habits of thought that are accepted at any particular time • b)       Like Marx in this respect explaining the forces that shape society and the economy. Orthodox economic theory accepted institutions of a culture as given. • c)       Must study the evolution of institutions b/c a culture can only be understood by its antecedents (responses to what went before become habituated). • d)       Must understand the interrelationships of human traits and the culture. • Legacy of past interactions between individuals and the institutions of a culture

10. ECONOMICS • 1)       Instincts - relatively fixed underlying traits of human behavior • Most important in shaping economic behavior: • *parental instinct -concern for family, tribe class, nation, and humankind • *workmanship -desire to produce goods of high quality,to be proud of and to admire workmanship, and to be concerned with efficiency and economy in our work • *idle curiosity -leads us to ask questions and seek explanations for the world around us (desire for scientific knowledge) *acquisitiveness - leads the individual to regard his or her own welfare rather than that of others (opposite of parental)

11. The Ceremonial-Industrial Dichotomy • 1.        There is a basic tension and antagonism in human nature between the acquisitive instinct and the parental, workmanship and idle curiosity instincts. • 2.        Cultures can be analyzed by observing these 2 aspects of human behavior: • a)       Industrial (or technological) employments - promote of economic life process (parental, workmanship and idle curiosity instincts) • b)       Inhibition of full development of productive powers of the society and has negative effects on the welfare of humankind (acquisitive)

12. The Ceremonial-Industrial Dichotomy • a)       Industrial (or technological) employments • ·Ceremonial behavior - noninstrumental, nontechnological, prescientific manner of seeking cause and effect relationships for the unknown • ·         Supernatural explanations manifested in totem and taboo, appeal to authority or emotion; has undesirable effect on the welfare of humankind (static and past-binding) • ·         Industrial (or technological) employments are dynamic so tools, technology and problem-solving capacity increase the more we use scientific investigation for problem solving. (Technology is not rooted in the past.) • ·Pecuniary (or business) employments - manifestation of ceremonial behavior in the modern culture in the handicraft period

13. The Ceremonial-Industrial Dichotomy • B)       Inhibition of full development of productive powers of the society and has negative effects on the welfare of humankind • Development of the economy in the industrial period: • 1. Worker no longer owns tools and materials of production • 2. Owner of firm more interested in making money than goods • 3. Moneylending developed • 4. Absentee ownership became more common • 5. Individuals now had “prescriptive rights to get something for nothing.”

14. The Ceremonial-Industrial Dichotomy • 6. Captains of industry emerged • 7. Period of intense competition • 8. Recognition that competition was undesirable • *         Formation of monopolies, holding companies, trusts and interlocking directorates by investment bankers. • *         Practiced “advised idleness” in order to make larger profits. Reduction in output leads to “capitalization of inefficiency.” • *         “Industry is carried on for the sake of business, and not conversely.” • *         Misdirected activity into marketing and advertising instead of producing goods of service to humanity.

15. The Ceremonial-Industrial Dichotomy • 8. “One Big Union” of vested interests and absentee owners formed • 9. Different habits of thought emerged for workers, engineers, captains of industry and absentee owners • *         Workers and engineers - cause and effect thinking expresses workmanship and parental instincts. • *         Captains of industry and absentee owners - concerned with profits (conflicts with making goods).

16. The Ceremonial-Industrial Dichotomy ·Veblen’s conclusion: An economy directed by the businessmen will not promote social good. Businessman is the saboteur of society, not its benefactor.

17. The Leisure Class • The Theory of the Leisure Class (1899) - Veblen’s best known book • a)Used basic dichotomy to discuss: • ·conspicuous consumption - displays predatory abilities • ·conspicuous leisure - avoidance of work, number of servants • ·conspicuous waste • ·pecuniary emulation - work should be in absentee ownership, high management, finance, banking, or law ·dress as an expression of pecuniary culture

18. The Leisure Class • b)       Desire for honorific status in the culture. • ·         Predatory powers of men of primitive cultures used in industrial culture to amass money; recognition of this achievement supplied by cultural mechanisms. • ·         Emulation of wealth-displaying activities spreads throughout society. • ·   Businessmen reap the benefits of technological society in unearned income

19. The Stability and Long-Run Tendencies of Capitalism • 1.        Veblen’s business cycle theory • a)       Prosperity phase • ·         Expansion of credit • ·         Higher values on the intangible ability of corporations to earn profits • ·         Increased value of capital is collateral for additional credit • ·         Quantity of credit and value of capital goods expand in tandem with increased prices of capital goods for a while • ·         When gap between earning power of capital goods and values manifested in security prices, period of liquidation and retrenchment begins.

20. The Stability and Long-Run Tendencies of Capitalism • b)       Depression phase • ·         Falling prices • ·         Falling output • ·         Unemployment • ·         Reduced credit • ·         Recapitalization on more realistic basis • ·         Weaker firms forced out or acquired by larger, stronger firms ·  Concentration of ownership and control

21. The Stability and Long-Run Tendencies of Capitalism • c)       Recovery phase • ·         Self-correction by decline of real wages and increased profit margins • ·         Excess credit is removed · More reasonable evaluation of industrial output ensues

22. Veblen’s speculations on the tendencies of capitalism in the very long run. • 2.       Veblen’s speculations on the tendencies of capitalism in the very long run. • a)       Discussed in The Theory of the Leisure Class (1899), The Theory of BusinessEnterprise (1904, and essay “Some Neglected Points in the Theory of Socialism”

23. Veblen’s speculations on the tendencies of capitalism in the very long run. • ·         Critical of Marxian analysis as of orthodox theory • *         Revolution will not occur because of the increasing misery of the proletariat b/c the lot of the average of the masses is better, not worse as Marx claimed • *         Revolution that leads to the abolition of private property might occur, however, b/c the working classes will feel relatively poorer and the system grows. • ·         Emulation, adulation, and comparison of consumption will lead to an economy devoted to conspicuous consumption, conspicuous waste, and increased advertising and marketing costs. • ·         We can expect an increased flow of goods that impede the progress of mankind.

24. Veblen’s speculations on the tendencies of capitalism in the very long run. • b)       If working population and engineers gain control the industrial economy might fulfill its promise through their daily association with the matter-of-fact, cause and effect relationships of industrial employment. • c)       Veblen refused to commit himself completely to the future except for the inevitability of change.

25. Veblen’s Contribution • 1.        Little direct effect on modern orthodox economic theory. • a)       Some consider Veblen a sociologist rather than an economist. • b)       Not interested in the same set of problems as orthodox theorists. • ·         Wanted to understand the development o the institutional structures formed by the habits of thought that guide our economic activity. • ·         From this perspective his contribution could be regarded as complementary to orthodox theory. • 2.        Instinct psychology Veblen substituted for hedonism of orthodox theory has been rejected by psychology.

26. Veblen’s Contribution • 3.        The growth of empirical analysis may be attributed as an intellectual response to Veblen’s criticism of orthodox economics, though he did not employ hypothesis testing either. • 4. Normative contribution by his ethical dissent and recognition of illfare caused by the pecuniary culture.