Veblen Competition – Supply and Demand

Thorstein Veblen, Competition, Supply and Demand, Price

The assumptions of free competition and the control of market forces emphasized by the classical economists came under attack from yet another source. Thorstein Veblen (1857-1929), father of institutional economics, believed that the fallacies of previous economists lay not in their logic but in their premises, for even the critics of classical economics accepted generally the basic assumptions of the school founded by Smith, Ricardo, and Mill. According to Veblen these basic assumptions were: first, that man inevitably sought pleasure and avoided pain; second, that each man through the pursuit of self interest (i.e. pecuniary gain, subject only to control by competition) contributed to the the well being of the community; and third, that because of self interest and competition, society inexorably ascended to greater heights of wealth and happiness. The facts of living, as found among primitive peoples and in historical civilizations, denied these assumptions, said Veblen. His principal works were de­voted primarily to the accumulation of data to prove his con­tention. He believed that man is endowed with certain instinctive tendencies which condition his behavior, but that in every age the established customs and traditions of a society determine the specific direction such instinctive tendencies will take. In order to understand the economic activity in any age, therefore, one must study the interaction between man's instinctive tendencies and the institutional form in which they find expression. Since all economists up to the time of Veblen took human nature and so­cial customs for granted and paid little attention to them, Veblen's method of analysis was a thoroughgoing innovation.

The most important of human instincts, in Veblen's treatment of the subject, is the instinct of workmanship. This innate force causes men to use care in the development of those material ob­jects, especially tools, which enable men to exploit nature more completely and1 adapt it to their own needs. The institution of private property, however, which began in either fraud or force in the predatory stages of social evolution, subordinated the in­stinct of workmanship to the accumulation of property. With the outset of modern industrialism two new aspects of social or­ganization became apparent. The first aspect called attention to a division of society into two classes: those who lived in ease and luxury off the accumulation of property and those who labored at routine tasks for a bare existence. The second aspect recog­nized the existence of envy and jealousy among members of society especially in matters of money and property,. Veblen saw modern society as a seething mass of individuals, each one striving to outdo the individuals just above him in the accumulation and the display of wealth. It was to him a society organized on the principle of "keeping up with the Joneses." Veblen coined unique terms to designate this characteristic of contemporary life. Pecuniary emulation (imitation in the accumulation and use of money and property) and invidious comparison (the envious comparison of one man's social position with that of his neighbor) are becoming familiar words in economic literature.

Thus with Veblen as well as with later members of the institu­tional school of economic thought, competition was a prominent feature of economic behavior. It was competition for property, place, and power, however, and not merely competition in the buying and selling of goods. Competition as Veblen understood it has far more serious implications for society than the compe­tition of the market place. To demonstrate his superiority over his competitors, the modern business man does not confine his ef­forts to producing better articles more efficiently to sell at cheaper price; indeed, the pursuit of wealth and power leads the entre­preneur to undermine the competitive conditions of the market by perfecting his control over all the factors of production and distribution. He strives to obtain a monopoly of raw materials; he seeks to restrict the use of the peculiar types of machinery necessary for production; he limits production in the interest of higher prices; he tries to make wage-earners dependent upon him alone for employment at wages he is willing to pay; he reaches out to control the wholesale and retail agencies respon­sible for the sale of his product; and through the use of trade marks, brand names, and advertising, he seeks to determine the choices of the consumer.

It is obvious that Veblen would seek some other explanation of price than the operation of supply and demand in a competi­tive market. When the rate of expansion of markets began to decline about the middle of the 19th century, price competition in the market declined with it. Competition and collusion were introduced as a means of insuring profits by restricting produc­tion. Whereas the classical economists believed competition to be the' natural or normal state of the market from which monopolistic practices were but occasional and temporary devia­tions, Veblen held that free competition was impossible in an industrial society. Every successful business, he believed, was marked by monopolistic practices to some degree. Indeed, he held that the only source of profit in modern industry was the interference on the part of the business man with the natural efficiency of business enterprise, that is, a "conscientious with­drawal of efficiency" from economic activity. Thus the setting of prices, in Veblen's view, was not a matter of the free play of market forces, but the result of innumerable controls exercised over the factors of production and distribution.

Looking back over the development of economic ideas as they apply to competition, supply and demand, and price, one fact stands out clearly. The conceptions of the economists on these subjects reflect the times in which they lived. If for some reason the ideas expressed were in advance of their times, the author remained for years in obscurity, only to be brought forth and honored for his pioneer work. From Adam Smith to John Stuart Mill English experience proclaimed the value of free competi­tion' Writers in countries not so economically favored as England were critical of any policy which left the destiny of the business or the nation to non-human forces. When freedom of economic action finally produced an increasing number of monopolistic situations, the old doctrines were revived albeit somewhat slowly. In the present circumstances, where change and uncertainty are characteristic of economic life, the ideas of even the leading" con­temporary economists remain unsettled.