Veblen’s Economics A Brief Assessment

Veblen's Economics: A Brief Assessment

Veblen's prognostication that society was about to explode certainly appeared to come true in 1929. Although the causes of the onset and the severity of the great de­pression are in debate, there is no debate concerning the extent of the financial col­lapse and the human and material unemployment that followed in its wake. Was this the "critical pass" Veblen spoke of in referring to the probable collapse of the capi­talist system? In order to answer the question, Veblen's analysis of the capitalist sys­tem must be viewed from both the theoretical and the practical side.

First, consider Veblen's theoretical scenario. The stock market crash of 1929 and the depression that followed did not bring on an "age of engineers" or an end to the price system of resource allocation and distribution. Veblen failed to perceive that self-interested behavior would have extended to any group of individuals in control of the productive process. Engineers and the "common man" were not "philosopher kings" any more than businessmen, financiers, and organized labor were. The as­cendance of the engineers would simply have created new "vested interests" in money-making. Institutional changes occurred in American capitalism after the de­pression but they were not the result of the development of a new engineering power elite.
Further, in Veblen's analysis, engineers, or some central group, would emerge to maximize production without regard to prices in a type of socialist system. But, em­pirically, no communistic or socialistic state has survived in the twentieth century without some recourse to a price system. Prices (or shadow prices) have often been found to be necessary payments in socialist systems in order to obtain efficient al­locations of resources. Profits, rents, and other factor payments may not be necessary receipts, however, and may be taxed away by socialistic central planners. Ve­blen and Marx were both naive in their understanding of markets. To date nothing has proved superior to prices as providers of economic information in the market­place.

From a more practical point of view, Veblen underestimated the ability of the sys­tem to adjust. His profound hatred of businessmen led him to the erroneous belief that virtually all output markets were characterized by monopoly or oligopoly. Ve­blen never appreciated the fact that real competition constrains the attempted "with­drawal of efficiency" by businessmen in most instances. In addition, Veblen ne­glected the role of government and the legal system in addressing problems of social costs and externalities. For good or evil, the government instituted numerous inter­ventions to alter income distribution in the post-1930s era, interventions that have sometimes acted as a political filter between "vested interests" and the "common man."

The economic critique of Thorstein Veblen cannot itself be criticized or dis­missed as easily as his speculations concerning the future of capitalism. Veblen's critique of orthodox economic method and his theory of institutions must command the serious attention of economists. While parts of Veblen's theory of instincts and of propensity formation are of questionable merit, it is clear that he was (unlike Marx) attempting to build a theory of human behavior outside the utilitarian mold. Further, he was attempting the development of a theory of property rights and other concerns of contemporary economists, especially in the area of economic development.

Much of Veblen's writing is of a sociological and quasi-philosophical nature, but his ideas are especially relevant to economics. While the Veblenian paradigm has never substituted for the usefulness of neoclassical economic analysis (as perhaps Veblen thought it should), it is not necessary to choose one or the other. The long-run institutional studies of Veblen may be employed as a useful supplement to short-run price theoretical analysis. Surely there is room for discussion within the eco­nomics profession along the lines of Veblen's "grand vision." If for no other reason, Veblen may be read for the gainful reminder that economics is a social science, not a mere branch of mathematical inquiry. (On the possible intersections between in­stitutional economics and neoclassical economics, see the box, The Force of Ideas: Evolutionary Economics, Then and Now.)