Veblen's Criticism of Neoclassical Theory

Veblen coined the term neoclassical to emphasize the classical ancestry of this type of economic theory. He felt that both the classical and the neoclassical approaches were unscientific. His criticisms of neoclassical theory are contained throughout his works, although a collection of his essays, The Place of Science in Modern Civilization, contains most of his explicitly methodological writings. His training in philosophy partly explains the nature of his attack on the accepted economics of his time. Veblen was not interested in making small changes in the theoretical structure—for example, in correcting minor logical flaws in the system. He struck at the heart of neoclassical theory, asserting that the basic assumptions of its doctrine were unscientific. Such an assault on the fundamental tenets of a theoretical structure leaves those trained in that structure with two choices: they may accept the criticism and build a new theory on altered premises, or they may reject the criticism. Criticism of a theoretical structure that accepts its basic premises but offers new, more logical, or more empirically correct conclusions can also be accepted or rejected, but in such a case acceptance is much less painful for those already trained in the discipline, because it demands no drastic reordering of their training and orientation. Veblen was clearly no Ricardo, Marshall, or Keynes trying to improve the theoretical structure of classical economics while accepting its premises as laid down by Smith; he wanted to tear down the entire structure and rebuild a unified social science from economics, anthropology, sociology, psychology, and history. It is interesting to note that Veblen criticized prior heterodox thinking on the same grounds as those on which he criticized orthodoxy, contending that both the historical school and Marxian economics were deficient because their basic assumptions and precon­ceptions were unscientific.

It was Veblen's view that although the terminology of orthodox economic theory had changed from the time of Smith, its basic assumptions and precon­ceptions remained the same. Before Smith much analysis of the economy and society had been based on the preconception that society was ordered by supernatural forces so as to obtain desirable results. Later the appeal to super­natural forces or God was replaced with the idea that natural laws existed in the economy and society, just as in the physical sciences, and that appropriate investigation and study would reveal the workings of these natural laws.

Veblen said that all of orthodox economic theory from Smith through Marshall was based on the same assumption: that there is harmony in the system, or what Veblen called a "meliorative trend." This appears in Smith's concept of natural price and in the workings of the invisible hand that turns private vices into public benefits. Marshallian theory reflects this belief in its notions of normal price and equilibrium and in its expectation of beneficial results from perfectly competitive markets in long-run equilibrium. J. B. Clark's conclusion that long-run competitive equilibrium produces an equitable distribution of income is a particularly striking example of the presumption of harmony in the economy. To Veblen the concept of equilibrium as used by orthodox theorists was norma­tive: they implied, without proof, that equilibrium is good and that the results produced by markets in equilibrium are socially beneficial.

Let us examine this point from a different perspective and integrate it with another of Veblen's criticisms of orthodox theory. Borrowing concepts from philosophy and biology, Veblen concluded that orthodox theory was teleological and therefore pre-Darwinian. It was teleological because it depicted the economy as moving toward an end—namely, long-run equilibrium—that was not attained empirically, but given before the analysis began. It was therefore pre-Darwinian because, as Veblen interpreted Darwin, evolution was a purely mechanical process by which living things developed over time in response to environmental circumstances. There was no purpose or design in evolution.

Classical thought was also pre-Darwinian in refusing to admit that the economy was constantly changing and evolving and in focusing instead on its static aspects. This static, pre-Darwinian economic theory, Veblen contended, should be replaced by a dynamic Darwinian analysis of the evolution of the economy and society. Veblen made this same point in biological terminology, accusing orthodox theory of being taxonomic and therefore, again, unscientifi­cally pre-Darwinian. It is taxonomic in that it classifies the economy and its parts but has no explanation or conception of them as a set of evolving, changing institutions. In its focus on price theory, orthodox economics assumes that many things are given or fixed (e.g., tastes or consumer preferences, technology, the organizational arrangements of the society and economy, and so forth). Veblen suggested that economists not only study the formation of prices and the allocation of resources but investigate the very factors they held constant. He had some kind words for Marshall's attempt to break from static analysis, but concluded that Marshall was unsuccessful in this endeavor.

One reason Veblen gave for the unscientific nature of economics was that it had never been purged of Adam Smith's concept of the invisible hand. It was founded, therefore, on an assumption that was never examined: that making money could be equated with making goods. According to orthodox theory, the businessperson in pursuit of profit will produce at the lowest possible cost those goods that consumers want. Competitive markets make the self-interest of the businessperson correspond to society's interests. Each individual businessperson following his or her own self-interest promotes the social good. Veblen main­tained that it was obvious to all but economists that producing goods and making profits were two different things, that the business community's striving for profits often has deleterious effects on the economy and society, and that each individual businessperson following his or her own self-interest will promote only his or her own self-interest. It has been suggested that this concept of the economy and society came to Veblen at an early age when he left his Lutheran family's frontier farm in Minnesota to go to Carleton College, which was attended mainly by the children of moneymakers from New England with a Congregational background.2 The growth in the size and power of large corpo­rations and the formation of trusts in the last quarter of the nineteenth century also influenced Veblen. In addition, the agrarian populist hostility toward business—the grain elevator, the railroad, the farm equipment manufacturers, and the banks—must have run deep in his family.

Veblen contended that in Adam Smith's time there was a reasonably close connection between making profits and producing goods serviceable to the society. But this changed as the economy developed. He drew a sharp distinction between those who are involved in producing goods—production managers, supervisors, and workers—and those who are involved in the management of firms. The aim of business is pecuniary gain, and Veblen delighted in pointing to examples in which the general interest is damaged by the pursuit of profit. His view was that increased profits result from a reduction of output, which is obviously detrimental to society. The purpose of the larger corporations that were being formed during Veblen's time was not to increase efficiency but to acquire monopoly power and restrict production. He pointed to the advertising activities of firms, questioning their serviceability to the community at large. Competition among firms for international markets led to conflicts and ulti­mately to wars. The pecuniary activities of the captains of industry will inevitably lead to depressions and mass unemployment. In essence, Veblen rejected the orthodox assumption of perfectly competitive markets and the idea that markets under the control of businesspeople would produce socially desirable results. Where orthodox theory found harmony under capitalism with an efficient allocation of resources and full employment, Veblen found discord, with busi­nesspeople sabotaging the system in order to make profits and, ultimately, bringing about depression. .
To Veblen, the pre-Darwinian, teleological preconceptions of orthodox theory reflected the failure of economics to keep abreast of developments in the physical and biological sciences. Orthodox economic theory was also culpable in ignoring developments in psychology, sociology, and anthropology, and in building a model based upon unscientific notions of human nature and behavior. Orthodox theory, according to Veblen, was based upon the assumption that humans are driven by the desire to maximize pleasure and minimize pain, on hedonistic psychology. Given this assumption, economists correctly deduced its logical consequences. The logic was impeccable, but the assumption was wrong. Veblen maintained that orthodox economics was the study of man, but with man abstracted out of the analysis. In some of his most biting prose, he ridiculed the accepted theory of consumer behavior:

The psychological and anthropological preconceptions of the economists have been those which were accepted by the psychological and social sciences some genera­tions ago. The hedonistic conception of man is that of a lightning calculator of pleasure and pains, who oscillates like a homogeneous globule of desire of happi­ness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated, definitive human datum in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before.

A final criticism of orthodox theory by Veblen, one less explicitly stated than the others, was its failure to reconcile the theory of the economy with the facts of the economy. Thus, Veblen's writing includes an implicit plea for more empirical work and a greater emphasis on inductive research.