Udayan RoyECO 54 History of Economic Thought
The Theory of the Leisure Class(1899)Theory of the Business Enterprise(1904)The Engineers and the Price System(1921)Seehttp://www.hetwebsite.org/het/profiles/veblen.htmfor a full list of Veblen’s publications
Veblen wasthe founder of theAmerican InstitutionalistSchoolHewas a major critic of capitalism and of the analysis of capitalism in neoclassical economics
Veblen’s criticism of capitalism may be seen as a response tothe rough, violent, predatory, lawless, and monopolistic nature of American capitalism between the end of the Civil War and the beginning of World War I, and also tothe inability of neoclassical (or,marginalist) economics to reflect the realities of contemporarycapitalismVeblen coined the term ‘neoclassical economics’ to refer to the economics of Alfred Marshall and likeminded economists
Neoclassicaleconomists saw consumer behavior asrationalbehavior by people withstabletastesVebleninstead sawnon-rationalor instinctual behavior of people under the sway of instincts thatevolveaccording to Darwinianrules
Neoclassicaleconomists saw firms engaged in a clear-sighted but honest and by-the-book pursuit of profitmaximizationVebleninstead saw deep conflicts within firms betweenbusinessmen, who wanted profits by hook or by crook, andengineersand other technical people who were mainly interested in making a good product.
Veblen’sanalysis of consumer behavior went along the following lines:Weinstinctively seek high social status.Weachieve high social status when our peers admire us, when they regard us as winners and not losers.Tobe considered a winner we need to show that we have stronger predatory abilities than others.
To show our predatory abilities,we need to amass more wealth than our peers.Moreover, that wealth must be acquired by force or by cunning andnotby hardworkbecausethe acquisition of wealth by hard work does not show any evidence of one’s predatoryabilitieshardwork is for wimps and losers.
Consequently, capitalist societies tend to generate aleisure classthat rises to the top of the food chain by making money withouthaving worked for the money.
Not only must we acquire wealth without doing any labor, we must make sure everybody knows how wealthy we are.Thisleads toconspicuousconsumption,conspicuouswaste,andconspicuousleisure.
Anact of consumption creates more utility when that consumption is observed by one’s peers than when it is done in private: what’s the point of drinking an expensive wine if no one sees you doing so?Toa neoclassical economist who swears by rational consumer behavior, this way of thinking would be considered perverse.Butto Veblen, this way of thinking about consumer behavior is a lot more realistic.
Ostentatiouswaste—as in arranging a lavish wedding for one’s pet cats—would also help convince people that a lot of unearned wealth lies at the source of all the waste.Similarly, a visibly leisurely lifestyle would also serve the same purpose.
Women’s clothing needs to be highly elaborate and obviously unsuitable for work in order to be regarded as fashionable
Businessmensee the bizarre behavior of the leisure class and realize that the way to make money is by taking advantage of the whims of the leisure class and ripping them off.Moreover, the general social admiration of predatory behavior leadsbusinessmento unscrupulous behavior.Forexample, they sabotage their rival producers so that reduced overall output would create an artificial scarcity that would lead to high prices.
Onthe other hand, the engineers who do the technical work in the manufacturing industries are interested only in the quality of their products.Theirjob satisfaction derives from simply doing a good job and producing products that serve some genuine need.
Veblenspeculated thattheseconflicts between the corrupt ideas of the businessmen and the sense of excellence of the engineers may be irreconcilabletheonly hope for capitalism lay in the engineers taking over.
Veblen’sview of labor unions wasn’t very positive either.Heargued that unions would be quite happy to procure gains for their members even if those gains come at the expense of non-union workers.Thisidea was later formalized as the so-calledinsider-outsider theoryof labor unions.
Darwin and Veblen
Accordingto Veblen, our instincts—such as the instinct to admire predatory people—may have evolved according to Darwinian laws during a primitive phase of human society when might actually made right.Theproblem, however, is that our instincts, once they are embedded in us, are hard to get rid of even after the conditions that once made them helpful give way to a new set of conditions under which they are a hindrance.
Marx and Veblen
Veblen’s viewof the evolution of our instincts is somewhat similar toKarl Marx’sconception of the inertial tendencies of the ideological superstructure.Veblen’sviews on the business cycle were also very similar to those of Marx.However, Veblen did not believe in any deadly conflict, such as that envisioned by Marx, between the leisure class and the working class.Infact, Veblen’s working class peopleadmirethe predatory prowess of the leisure class and hope to one day become members of the leisure class themselves.
A rising demand curve!
In1950, HarveyLeibensteinintroduced Veblen’s ideas on conspicuous consumption into formal demand theory and showed the possibility of arisingdemand curve.Theleisure class does not want to be seen consuming cheap stuff.Therefore, as the price of a productrises, it might becomemorepopular with such people!
Veblen is a pioneer of the relatively new discipline of behavioral economicsSeehttp://myweb.liu.edu/~uroy/web/behav-econ/index.htmlfor a taste of this subject
NewIdeas from Dead Economistsby Todd Buchholz, Chapter VIII, pages 175-185The Worldly Philosophersby RobertHeilbroner, Chapter VIIIThe Ordinary Business of Lifeby Roger Backhouse, Chapter 9, pages 195-198http://www.econlib.org/library/Enc/bios/Veblen.htmlhttp://en.wikipedia.org/wiki/Thorstein_Veblen