The Social Economics of Thorstein Veblen

By Michael Hudson
(Cross posted from eh.net)

David Reisman, The Social Economics of Thorstein Veblen. Cheltenham, UK: Edward Elgar, 2012. vii + 338 pp. $150 (hardcover), ISBN: 978-0-85793-218-1.

Reviewed for EH.Net by Michael Hudson, Department of Economics, University of Missouri – Kansas City.

Those who wish to understand the many and deep contributions of Thorstein Veblen to economics will find that this offering falls short of the mark. The title promises to treat the social policy content of Veblen’s economic thought. Describing the ways in which markets were being distorted by predatory finance and other special interests, Veblen was read by every socialist leader and most progressives in early and mid-twentieth century America. Written in a popular sarcastic style, his books showed how the behavior of wealth and high finance was having perverse effects after World War I. Instead of funding economic growth, Wall Street was becoming the protector of privilege and engaging in artful deception, distorting economies away from passing on the fruits of technology to populations in the form of rising living standards and falling costs of living. Mainstream economics was ripe with hypocrisy in saying (and even trying to demonstrate mathematically) that all this was for the best and depicting all wealth and income as being fairly earned.

This new mainstream emerged largely to counter the application of classical political economy by Progressive Era reformers advocating regulation, property taxation and other threats to the vested interests. The ideas of Simon Patten, John Commons and other institutionalists prompted a counter-reaction denying the classical concept of unearned income and wealth. Economics was decoupled from the reform process to justify the status quo – just the opposite policy of socialist regulation and progressive taxation. Given the force of this new mainstream, Veblen was obliged to fight largely a rear-guard battle showing its tunnel vision. It would take the New Deal to renew Progressive Era reforms – and even this was done more on a purely pragmatic basis than in conjunction with economic theory.

Veblen’s basic theme remains relevant today – even more so, perhaps, because high finance and real estate have become more drags on the economy than benefactors. Unfortunately, Reisman (not to be confused with David Riesman of the University of Chicago and Harvard, who wrote Thorstein Veblen: A Critical Interpretation in 1953) has written his book not to praise Veblen but to bury his ideas. He treats the institutionalists not so much as economists but as philosophers about evolution, race and civilization – about anything except what was the core of their efforts during the Reform Era in the United States. Describing Veblen’s ideas mainly to belittle and denounce them, he buries them by distracting attention away from what most disturbed rentier interests and the new economic mainstream.

There is no recognition here that the institutionalists were the major school retaining the classical concept of economic rent as “unearned income” so as to tax it away and keep natural monopolies in the public domain or at least to regulate the prices they charged so as to keep them in line with cost-value. This was the aim of classical economics from the Schoolmen in the thirteenth century discussing Just Price through the Physiocrats, Adam Smith, John Stuart Mill, Karl Marx and Henry George. But there is no mention of this over-arching aim in this book, or for that matter in its companion volumes in Edward Elgar’s New Institutionalism series. Reisman therefore rejects what was most important to Veblen and his Reform Era contemporaries. He endorses D. A. Walker’s judgment that Veblen’s “distinction between business and industry, between pecuniary and technological criteria, is false” (p. 304). Also false, concludes Reisman, is Veblen’s definition of optimality as “a maximum output at low cost.” Yet this was the basic logic of classical economics. The concept of economic rent as “unearned income” served to indicate what should be taxed away or otherwise minimized, e.g., by public regulatory agencies and Veblen’s “engineers.”

The economic imperatives of international competition and national competitiveness called for minimizing costs below those of one’s rivals. This was not a socialist ethic as such. It was taught in the leading business schools, such as the Wharton School at the University of Pennsylvania under Simon Patten. Ever since the mercantilist era, using technology to maximize productivity had long been a basic strategy of national power. This was the context in which Veblen warned that the problem of high finance was its tendency to deviate from technological efficiency, to form a symbiosis with speculative activities and defend the vested interests (the term he coined for rentier real estate, finance and monopolies). Without understanding this, it is not possible to understand the post-classical economics of John Bates Clark and others against whom Veblen, Patten and their contemporaries were fighting.

One cannot understand Veblen without understanding his Reform Era’s attempt to protect society against the predatory financial system busy organizing monopolies and protecting its major customers: absentee real estate investors, oil and mining companies, and industrial monopolies. Socialists and national strategists alike during the high tide of the Industrial Revolution expected the force of industrial technology to be strong enough to rationalize hitherto corrosive financial systems and subordinate them to serve the technological imperatives of industrial competition. Germany and Central Europe took the lead along these lines during the late nineteenth century. But World War I proved to be a turning point. By the time Veblen wrote Absentee Ownership in 1923, finance was taking over industry to monopolize it instead of lowering prices in keeping with productivity. Financial management was adding to costs, making economies less competitive and denying them the fruits of technological progress.

Also being financialized was academic economics. The new economics was that of John Bates Clark and his colleagues who rejected the classical concept of economic rent as prices and income with no counterpart in socially necessary costs of production, these post-classical writers (whom Veblen coined the term “neoclassical” to describe) insisted that everyone deserved whatever revenue or wealth they managed to obtain. By definition, this payment was for providing an economic service equal in value to their income and rise in wealth. “That is why some market socialists have contended that a Central Planning Board can do no better than to mimic market-clearing responses,” concludes Reisman (p. 305).

Veblen and his fellow institutionalists understood that “the market” was distorted by special “free lunch” privileges to extract income without really contributing to production. Inherited privilege, monopoly power and land ownership rights were rewarded more than labor. While classical economics focused on labor time as forming the ultimate basis for cost-value, isolating land rent, natural resource rent, monopoly rent and financial privilege as prices without value – in order to minimize the gap. The largest asset in every economy was still real estate – mainly the raw land, as well as oil and gas, mines and forests and other resources supplied by nature, not human labor. In the United States, Henry George’s Progress and Poverty (1879) and The Irish Land Question (1882) had helped inspire a reform era to tax away the “free lunch” of land sites and natural resources being privatized.

Reisman deters readers from understanding this institutionalist focus on how best to shape markets, tax systems and regulatory agencies to bring market prices in line with socially necessary costs of production. To set the stage for his misrepresentation of what Veblen was all about, he makes the incredible misreading (p. 202) that “Henry George in Progress and Poverty had stated that depression would be permanent so long as land remained private.” The reality, of course, was just the reverse: George opposed the Marxian socialists and their advocacy of nationalizing land and other means of production. George explained that land could indeed be left in private hands if the government would simply collect the land rent – long taken by landed aristocracies as a privatization of tribute imposed on conquered populations, as in Britain’s heirs to the Norman invasion and those of similar colonizers abroad.

The key to understand Veblen, and indeed the Reform Era, is to analyze land rent, and how urban real estate speculation was becoming not only the fastest way to get rich, but also the major customer of banking and high finance. While followers of Henry George denounced Ireland’s absentee landlords living off hereditary rents without having to work or provide productive services, Veblen became justly famous for describing small towns (and by logical extension, big cities) as real estate promotion projects, trying to get the proverbial “something for nothing.” He described America’s rapid urbanization as a great real estate game – what today is called a zero-sum game in which one party’s winnings are another’s loss.

This idea was denied by the new school of pro-rentier, pro-financial economists whom Veblen termed “neoclassical.” It was society that created the value of land, not landlords or speculators – whose job was more one of marketing than productive activity. The problem was absentee ownership, not only of real estate but of corporate industry, under management that sought pecuniary (“market”) gains rather than optimizing society’s output and living standards.

The ethic of classical economics remained one of Just Price and the labor theory of value. This meant isolating what was unfair – above all, inherited privilege. It meant taxing income that was unearned (“economic rent”), and protecting society by keeping natural monopolies in the public domain. Veblen and his classical forerunners understood that economies could not successfully compete if they allowed private tollbooths for infrastructure, overcharged for resources and utilities, and enabled banks and high finance to siphon off the surplus for themselves.

Veblen saw that the greatest threat was no longer the vestigial post-feudal landlord class, but finance. Wall Street had become the predator consuming the economic surplus as the mother of trusts and protector of privilege. This was central about Veblen’s analysis of urban real estate, which was becoming the economy’s largest asset. There’s not a trace of any of that in this book – or in other books in this Elgar series seeking to divert attention away from its topic of Institutional Economics.

Veblen’s writings bedeviled the new academic economics mainstream after World War I, prompting the equilibrium theorists at whom he poked fun to pigeonhole him as a sociologist or social philosopher rather than an economist as such. To the extent that he is recognized as remaining within the economics field, it is an “institutionalist” buried in the sub-basement of academic prestige. Indeed, over the past decade the American institutionalist school itself has been paved over by its antithesis, a neoliberal New Institutionalism centered in Britain.

It is from this perspective that Reisman’s book is written, as part of an Edward Elgar series on the New Institutionalism that rewrites intellectual history to represent Veblen’s generation as armchair speculators about evolution, civilization, methodology in economic analysis, without much mention of the concrete policy logic they developed.

Unfortunately, Reisman’s approach is deeply flawed because he focuses on Veblen’s more superficial early work, and on methodology without recognizing what its policy aim was. Veblen’s contribution to preserving the classical logic of economic rents as “unearned income” that either should be taxed or owned by the public receives short shrift. Reisman is not alone, of course, in ignoring or misrepresenting the great reformers of the past. His book should be viewed in keeping with the other books in the Elgar series on what calls itself the New Institutionalist School. This series and its organizer, Geoffrey M. Hodgson, set for themselves the neoliberal task of rejecting the main policy thrust of classical economics, of which the American institutionalist school of Simon Patten, Veblen et al. were offshoots. When Reisman and the other authors of this series write about Veblen, it is like having a devout follower of Ayn Rand summarize the economics of Marx and Lenin. One does not expect a fair treatment of their contribution or ideas.

The Elgar series mislabels economic reformers as armchair Darwinian philosophers because they side with those under attack – the 1%. The very thought of this is anathema to the New Institutionalist School and the Elgar series depicting the institutionalists as armchair Darwinian philosophers rather than economic reformers. It is an antiseptic, Darwinian perspective without recognizing that Veblen had only sarcasm to resist the flood of rationalization that the financialization of industry of his day was all for the best, not an about-face from what the classical economists and Progressive Era had hoped to see. There is little hint in any of these books that what was “institutional” was what varied from country to country rather than being universal technology, or individualistic – namely, the mode of property ownership, tax policy and other government policy. But to today’s “free market” theorists, anything not universal is deemed not scientific. To Veblen and his contemporaries, what was scientific was the most efficient public tax and regulatory policy, whether land and other means of production were left in private hands (as George urged) or nationalized as the Marxists and other socialists urged, or made part of a mixed public/private economy as actually was evolving in the United States, Britain and other countries.

Reisman concludes by trying to drive a stake through Veblen’s intellectual corpus. Criticizing Veblen for failing to found a school of his own – that is, for not winning the fight to defend the classical economic methodology that was being buried under the force of pro-rentier academic economics (which Veblen did so much to poke fun at). He attributes this failure not to the massive subsidy and lobbying pressure by the banks, monopolists and landlord class, but to Veblen’s personality. This is the same diversion away from actual content that Joseph Dorfman followed in his biography of Veblen. Reisman quotes biographers who have noted Veblen’s cynical and sarcastic writing style – which played a major role in popularizing his ideas, after all. One wonders really what more could have been done in fighting the new economic mainstream whose aim was to censor the basic classical economic concept of unearned income (economic rent) and the distinctions between productive and unproductive labor, investment and credit.

Reisman joins other critics in blaming Veblen for not founding a school of followers. But how could he have done so after World War I transformed the political scene, traumatized by the Russian Revolution and excluding the earlier trend of hoping for state regulation and indeed, socialism emerging out of industrial capitalism? Even as he looked forward to warn how the world was going awry from the promise of technology bringing wealth, and the Wall Street manipulations of the 1920s, Veblen could only look backward to the time when economics sought to guide government policy, not oppose it. His post-mercantilist, proto-socialist reform approach warning about how finance capitalism was derailing industrial capitalism was excluded from the mainstream curriculum. Yet as an antecedent of Hyman Minsky, it is now indeed flowering among the Heterodox Economists centered at the University of Missouri (Kansas City).

There is still an active Thorstein Veblen society, after all, and just last summer, for instance, a post-Marxist Turkish labor union of electrical engineers sponsored a Veblen conference in Istanbul. It need hardly be added that what was discussed was not the armchair Victorian philosophizing about evolution and economic methodology on which Reisman and the rest of the New Institutionalist series focus, but on the specific progress that Veblen forged beyond the Marxist and other socialist writers of his day, about the underside of finance capitalism and its constraints blocking society from realizing its technological potential.

The first half of Reisman’s book contributes to the aversion by Hodgson et al. to dealing with the core of Veblen and his generation. Focusing on what is harmless as far as a criticism of rentiers is concerned, it deals with his early writings on anthropology, sociology, the role of race and other armchair philosophy typical of that speculative epoch a century ago. Veblen’s core message – that finance was taking over industrial capitalism and turning it into an extractive rentier system rather than maximizing social welfare and living standards – is buried right in the middle of the 16-chapter book, in Chapter 9 (“Corporation and credit”). Reisman then reverts to a discussion of generality, ending the book with a chapter on “Neoclassical economics” where he talks about Veblen’s general methodology without ever explaining what the immediate political focus was – the policy direction that inspired Veblen and his generation of reformers in the first place!

As a final note, I should mention the mind-numbing style. Too many sentences seem to be a declarative seven words or so, one following another. To top matters, the $150 price is exorbitant for a book that costs less than $10 to produce. If prices really reflect rarity, libraries can do much better than to buy this book or its companion Elgar publications in this series.

Michael Hudson ([email protected]) is Distinguished Research Professor at the University of Missouri (Kansas City). His most recent book is The Bubble and Beyond (ISLET 2012). His website is michael-hudson.com

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