THORSTEIN VEBLEN (1857 TO 1929) Father of American Institutional Thought

 Background: Attended Carleton where he studied with J. B. Clark Received a Ph.D. in philosophy from Yale Taught at the University of Chicago, was editor of the Journal of Political

Economy Was dismissed by Chicago for sexual indiscretions Went on to teach at Stanford, Missouri, and the New School of Social

Research

Never was a full professor, similar to Marx in the lack of acceptance of his ideas.

Also he was not a very accessible instructor and had numerous personal affairs

In 1924 was offered the presidency of the American Economic Association. Veblen declined, noting that it had not come at the time when he needed it!

INSTITUTIONAL THOUGHT DEFINEDFROM AFIT Inquiry is addressed to the institutional process of providing the material means of life and to significant problems of institutional malfunction.

Economics is a policy science; economic inquiry is significant only to the extent that it is relevant to problem solving through institutional reform.

The method of inquiry is evolutionary; the object of inquiry is the social process; the search is for factual explanations and causal understandings.

Social value judgments are a part of inquiry and must themselves be objects of analysis; the normative-positive dichotomy is rejected.

All political economies evolve and are embedded in social and cultural processes; individuals are both products and creators of these processes.

Institutions correlate and coordinate economic behavior in progressive and regressive ways; problems are resolved with progressive changes in structure.

The growth of warranted knowledge and its application as technology are prime movers in social change; they are both sources and means of resolving problems through institutional adjustment.

The biotic and social communities are co-evolutionary and interdependent; sustainability of either is dependent on the other.

Any political economy is a system of power; the locus, use, and democratic accountability of achieved power remain priorities in analysis and policy.

http://www.associationforinstitutionalthought.org/division.php?page=about

MORE ON INSTITUTIONALISTS from Ron Stanfield (at Colorado State)….

Veblen directly inspires the institutional approach to economics, which came to dominate economics in the United States in the 1920s and 1930s

Wesley Mitchell - student of Veblen, founder of the National Bureau for Economic Research.

The New Deal under FDR was influenced by such writers as John R. Commons (Wisconsin) and Clarence Ayers (Texas), both institutionalists.

After World War II, this perspective loses strength in economics.1.The Cold War produces a political climate hostile to any suggestion

capitalism is not correct.2.Keynesian economics rescues neoclassical thought, much in the same

fashion Millian thought (from John Stuart Mill) rescued classical thought in the 19th century.

3.Samuelson’s efforts to fully introduce mathematics into economics cast a shadow on institutional thought.

Veblen Biographyhttp://projects.vassar.edu/itva/biography.html

Veblen was born in rural Wisconsin in 1857, just as the great national crisis of slavery was reaching its height, just around the same time when the forces of industrial capitalism were about to hasten the transformation of America into an urban capitalist empire. He was reared in partly Scandinavian Lutheran communities in the upper Midwest, mainly in central Minnesota, until he left for graduate school at Johns Hopkins. Thorstein was the fourth son of upwardly mobile Norwegian immigrant farmers who sent their children to Carleton College; indeed, they chose their farm site in part because it was only a few miles from the college. Veblen’s sister, Emily, in fact, was the first woman to graduate from a Minnesota college. Among Veblen’s teachers at Carleton was the brilliant young economist John Bates Clark, the first of a series of conservative professors from whom Veblen would receive notable encouragement. After obtaining his bachelor’s degree, Veblen taught for a year, but then enrolled at Johns Hopkins for graduate study, where he was a student of the philosopher Charles S. Peirce and economist Richard Ely. After a short and not especially fruitful stay, he transferred to Yale, where he obtained a Ph.D. in philosophy and economics in 1884, where his mentors included such noted conservative academicians as Noah Porter and William Graham Sumner. Degree in hand, Veblen returned to the rural Midwest, living with relatives or in-laws, spending much of his time trying to avoid the hard and dangerous work of the farm. Reading, reflection and study were his animating interests. Teaching jobs were hard to come by in this phase of his life: his agnosticism leaving him unemployable in schools with religious affiliations. Besides, he had to yet to make a name for himself as a significant voice in economics or philosophy. In any case, a Ph.D. dissertation on Kant was of little value in the great farming country of the American heartland.

Veblen Biographyhttp://projects.vassar.edu/itva/biography.html

In 1890, Veblen decided to make another run at an academic life, this time as a Ph. D. candidate in economics at Cornell. There he impressed another well-known conservative, the eminent economist J. Lawrence Laughlin. Laughlin was so taken by Veblen that when the senior man moved to the University of Chicago in 1892, he invited the young scholar to join him. Shortly thereafter Laughlin appointed Veblen managing editor of the Journal of Political Economy; Veblen now began his career as a publishing scholar. Seven years later, in 1899, Veblen delivered The Theory of the Leisure Class to the American reading public and immediately won the notoriety that goes with a widely read and controversial new book. The good times did not last. Veblen’s failing marriage created bitter private tensions, whose ramifications were felt all the way into the University president’s office. Aggravating those problems, Veblen’s radicalism and his failure to “advertise” the university properly, further offended the administration. He was forced to move along to a new position at Stanford. A similar bundle of difficulties followed him there, along with his embittered ex-wife, whose charges of “womanizing” once again helped to undo Veblen’s position. (Jorgensen and Jorgensen, 1999, 65- 131) This defeat led him to Missouri in 1909, and then on to Washington and New York City, where, for a time, he served as one of the editors of the Dial, a radical journal of literary and political opinion, as well as on the formative staff of The New School. In the late ‘20s, Veblen returned to California, where he died quietly, in August 1929, just a few months shy of the economic crisis whose onset he anticipated in Absentee Ownership.

Blaug on Veblen Thorstein Veblen is to economics what Jonathan Swift is to English literature: a master of the art of satire. Is is

essential to effective satire that its message be ambiguous: the reader should never be sure whether the author is absolutely serious or just pulling his or her leg That quality is certainly present in Swift's Gulliver's Travels and it is also present in Veblen's Theory of the Leisure Class (1899), The Instinct of Workmanship (1914), Imperial Germany and the Industrial Revolution (1915), TheHigherLearninginAmerica (1918),Absentee Ownership (1923), and his many essays. In fact, it is there in everyt}ung he wrote except The Theory of Business Enterprise (1904), WhiCh iS as near as he ever came to writing a conventional academic book.No matter which of these books we open, we find the idea that life in a modern industrial community is the result of a polar conflict between 'pecuniary employments' and 'industrial employments', between 'business enterprise' and 'the machine process', between 'vendibility' and 'serviceability'-in short, between making money and making goods. There is a class struggle under capitalism, not between the bourgeoisie and the proletariat, but between businessmen and engineers. Pecuniary habits of thought unite bankers, brokers, lawyers and managers in a defence of private acquisition; in contrast, the discipline of the machine unites workers in industry and more especially the technicians and engineers who supervise them.

It is in these terms that Veblen describes modern industrial civilisation. As we read him, we have the feeling that something is being explained. And yet in the end the ambiguity of the message remains. He appears to offer a fundamental critique of the market mechanism and a call for something like a technocratic revolution, but Veblen warns us specifically against the belief that the engineers are capable of taking over and running the system, which leaves us wondering just what he is saying. But perhaps the desire to pin him down precisely misses the point: it is, after all, satire and is designed to open your eyes, not to close your mind.

© Mark Blaug, Great Economists Before Keynes: An Introduction to the Lives and Works of One Hundread Great Economists of the Past , Brighton: Wheatsheaf, 1986. In Stauffer Library: HB76 .B62 1986t

http://qed.econ.queensu.ca/walras/bios/veblen.html

More on Veblen’s Life This website has a time line of Veblen’s life http://www.sjsu.edu/faculty/watkins/veblen.htm The following has more on Veblen’s life and work. http://canononline.org/archives/current-issue-2/letter-from-thorstein-veblen-to-sarah-mclean-hardy/

Veblen Teaching Stylehttp://www.lib.uchicago.edu/projects/centcat/centcats/fac/facch09_01.html

Perhaps deliberately, Veblen developed teaching techniques that frustrated students and administrators. Students in his courses were required not only to read French and German fluently, but to be conversant in a wide range of disciplines in order to register. After hearing him lecture in a barely audible monotone, most students quickly dropped his courses. Those who remained were generally all given C's, not a happy prospect for potential Phi Beta Kappas. When a scholarship committee asked Veblen why his was the only low grade on one applicant's transcript, Veblen replied that his grades were "like lightning, liable to strike anywhere.“

“Why is Economics not an Evolutionary Science?”

• Veblen, Thorstein (1898). “Why is Economics not an Evolutionary Science?” originally printed in Quarterly Journal of Economics, 12: 373-397.

• Veblen on scientific nature of economics:

• Veblen believed orthodox, Marxian, and the German historical school were “unscientific”.

• Before Smith: Supernatural forces governed society.

• After Smith: Natural laws governed society

• Orthodox theory implies, without proof, that equilibrium is good and that markets produce socially beneficial results. In other words, the existing mainstream is not a positive science, but a normative discipline.

•  He wanted a unified social science rather than separate departments of psychology, history, anthropology, sociology, and economics.

• To some extent, this is what we have in Behavioral Economics

“Why is Economics not an Evolutionary Science?”

• Veblen, Thorstein (1898). “Why is Economics not an Evolutionary Science?” originally printed in Quarterly Journal of Economics, 12: 373-397.

• Veblen and industrial organization:

• Orthodox theory investigates the world of perfect competition, where people’s self-interest produces a greater social good. Veblen lived in world of increasing monopoly power, and frequently demonstrated that the self-interest of the monopolist is inconsistent with that of society.

• Veblen and human behavior:

• Veblen also pointed out that Orthodox theory makes assumptions about human behavior that are inconsistent with the research of other disciplines.

•  “... In all the received formulations of economic theory... the human material with which the inquiry is concerned in conceived in hedonistic terms.... 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 lightening calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent or consequent. He is an isolated, definitive human datum, in stable equilibrium expect for the buffets of the impinging forces that displace him in one direction or another....

•  i.e. the conception of economic man is inconsistent with the observations of other social science. Rational man is not consistent with observed man.

“Why is Economics not an Evolutionary Science?”

• Veblen, Thorstein (1898). “Why is Economics not an Evolutionary Science?” originally printed in Quarterly Journal of Economics, 12: 373-397.

• Veblen and empirical research:

• Finally, Veblen points to the inconsistency between theory and facts, so he is calling for more empirical work and more inductive research.

•  Inductive vs. Deductive

• Deductive: Moving from the general to the specific.

• Inductive: Moving from the specific to the general.

The Theory of the Leisure ClassFirst Published in 1899

Hypothesis: Large incomes are of little value if society does not recognize a person’s wealth.

Hence, the “leisure class” can be characterized by conspicuous consumption and pecuniary emulation.

The Theory of the Leisure ClassFirst Published in 1899

1. Veblen compares the displays of wealth to the display of tribes people of substantial predatory power. The wealthy display their status in much the same fashion.

2. For Marx, the proletariat will rise up and overthrow the capitalist. Why does this not happen immediately? For Veblen, workers do not seek to displace their managers, they wish to emulate the capitalist. The objective is to rise in the ranks of society, not overthrow societies rankings.

The Theory of the Leisure ClassFirst Published in 1899

3. Veblen finds it curious that industrialized societies glorify leisure and denigrate work, while pre-industrialized societies do the opposite.

4. Veblen’s critique of occupations:

a. Pecuniary employments: absentee ownership (preferred), high management, finance, banking (ceremonially acceptable)

b. Lawyers: exclusively occupied with the details of predatory fraud.

c. Higher education: makes a person unfit for honest work.

“The Higher Learning of America”: Veblen critiques the involvement of businessmen in the management of universities. Scholarly and scientific training makes an individual unsuited for business and that business experience is incompatible with the pursuit of knowledge.

Veblen also criticized university presidents [captains of erudition (i.e. profound learning)].

Sporting activities are promoted by the leisure class as a demonstration of physical well-being or manly qualities.

Theory of the Business Enterprise (1904)

1. Classical and Neoclassical Economics: Hero of the play is the capitalist.

2. Veblen: The capitalist is the saboteur of the system.

3. Veblen glorified the machine, the engineer, the technician. What is the role of the businessman, who is not concerned with production, but with profit?

4. The capitalist sabotages the economy so that in confusion can come his profit. REVIEW MONOPOLY THEORY

5. For Veblen, society was divided between engineer and businessman. Between production and finance.

http://www.dilbert.com/

http://www.dilbert.com/

http://www.dilbert.com/

Dilbert illustrates the story Veblen tells

The engineers understand what should be happening

The manager, though, does not and constantly frustrates his engineers with poorly constructed plans and silly sayings.

Theory of the Business EnterpriseAnalysis of Capitalism from this book

1. Orthodox theory: Allocating scarce resources among alternative uses. Individual’s are independent of their environment.

2. Veblen: Study of evolving institutional structure and how that impacts individual behavior.

3. Institutions: Habits of thought that are accepted at any particular time.

4. Veblen’s approach is similar to Marx: Society dictates individual action. Orthodox theory emphasized the power of the individual.

Theory of the Business Enterprise Analysis of Capitalism from this book

5. Instincts: Relatively fixed underlying traits of human behavior. Parental, workmanship, idle curiosity, acquisitiveness. This idea has been rejected by psychology today.

6. The first three lead to positive activities, or what Veblen called industrial employments. These are activities involve matter-of-fact or cause and effect relationships.

7. These activities lie in opposition to ceremonial behavior, which is static or past-binding.

8. Making goods vs. making profits. The first three instincts lead one to make goods, the last leads one to make profits.

Theory of the Business Enterprise Analysis of Capitalism from this book

9. Capitalism separates the worker from the means of production (Marx also said this). Owner of the firm is less interested in making goods, and more interested in profits. An impediment to profit is competition. The captains of industry then conspired to eliminate competition through trusts, etc.

10. In essence, monopoly power leads to “illfare”.

11. Monopoly’s practice“advised idleness” in order to increase profits. Furthermore, production is not offered for the benefit of society, rather society is convinced that existing production is a benefit via advertising.

Future of Capitalism

Marx believed in the “increasing misery of the proletariat”.

Veblen disagreed with this perspective, but did note the possibility for increasing relative differences. (i.e. individuals want more than others, not just more)

 The Battle is between “imbecile institutions” and “matter-of-fact technology”. Which will win is unknown, the only certainty is change.

Veblen’s Contribution

I. Economists have moved away from hedonistic philosophy, to some extent.

II. Economists still assume perfect competition in standard microeconomics, although there is a field of industrial organization.

III. Keynesian economics has led to the de-labeling of equilibrium as “good”.

IV. The work of Galbraith and the field of industrial organization has carried forth his critique of imperfect competition, especially advertising.

V. Veblen’s work has inspired many who believe government action can have a positive impact on economic outcomes.

VI. Although he did not practice empirical analysis, his student Wesley Mitchell, is one of the pioneers of empirical work.

VII. And Behavioral Economics is a movement designed to integrate psychology and economics

Wesley Claire Mitchell

• Mitchell on the history of economic thought: Mitchell was a relativist, in that he believed that economic theory was developed in response to the economic problems of the time.

•  Mitchell on orthodox thought: “Economic theory of the speculative kind is as cheap and easy to produce as higher mathematics or poetry, provided one has the gift”

• Mitchell also objected to hedonistic psychology, but rejected Veblen’s theory of instincts.

Mitchell’s Contribution

• Business cycles are a result of business reactions to changing rates of profit. Both depression and prosperity contain the seeds of the opposite.

• Mitchell saw business cycles as part of the economic system. In other words, business cycles were generated by the system, but also changed the system. So a general theory of business cycles was not possible.

• Mitchell offered little theory with his empirical investigation, causing his work to be labeled “measurement without theory”.

• Mitchell founded the National Bureau of Economic Research and also played a role in the development of econometrics.

John Kenneth Galbraith Bio

http://www.johnkennethgalbraith.com/

John Kenneth Galbraith was America's most famous economist for good reason. A witty commentator on America's political follies and a versatile author of bestselling books that warn prophetically of the dangers of deregulated markets, corporate greed, and inattention to the costs of our military power (among them The Great Crash: 1929, The Affluent Society,and The New Industrial State), Galbraith always made economics relevant to the crises of the day. This first full-length biography is, in Richard Parker's hands, an important reinterpretation both of public policy and of how economics is practiced.

Born in 1908 and raised on a small Canadian farm, Galbraith began to teach at Harvard in his twenties. In 1938 he left to work in New Deal Washington, eventually rising to become FDR's "price czar" during the war. Following his years as a writer at Fortune, where he did much to introduce the work of John Maynard Keynes to a wide audience, he returned to Harvard in 1949 and began writing the books that would make him famous.

Here is more on Galbraith: http://www.theguardian.com/education/2002/apr/06/socialsciences.highereducation

Countervailing Power Is competition the norm in society?

◦ No, monopoly and oligopoly are the most prevalent forms of market structure.

Why are resources not allocated inefficiently?

The reason is “countervailing power”. ◦ When excess power accumulates in one sector of the economy, an opposing

power develops to mitigate the influence of the instigator.◦ Example: Unions and Big Government arise to offset Big Business

Conventional Wisdom [A] vested interest in understanding is more preciously guarded than any other treasure. It is why men react, not infrequently with something akin to religious passion, to the defense of what they have so laboriously learned.

Familiarity may breed contempt in some areas of human behavior, but in the field of social ideas it is the touchstone of acceptability. Because familiarity is such an important test of acceptability, the acceptable ideas have great stability. They are highly predictable. It will be convenient to have a name for the ideas which are esteemed at any time for their acceptability, and it should be a term that emphasizes this predictability. I shall refer to these ideas henceforth as the conventional wisdom. (Galbraith, 1958, pp. 6–7, italics added)

More on Conventional Wisdom

Conventional wisdom and the dependence effect

Conventional wisdom (orthodox theory) focuses on scarcity and posits the idea of consumer sovereignty. These concepts lie at the heart of demand theory.

Galbraith posits that the issue of scarcity has been solved. He laments the obsession society places on growth and ever expanding output. Business now busies itself convincing people to buy goods that are sold as necessities to this generation, yet were luxuries or non-existent to past generations.

“One cannot defend production as satisfying wants if that production creates wants”

Because public goods are not advertised, these goods are under produced at the determinant of society.

Does orthodox theory accept this critique? In general, no.

Galbraith Response: “It is a far, far better thing to have a firm anchor in nonsense than to put out on the troubled sea of thought”

The Technostructure “The accepted sequence” vs. “The revised sequence”

Orthodox theory: Consumer sovereignty dictates the actions of firms.

Galbraith:◦ Technology creates the need for large scale firms◦ Ownership is separated from management of these firms◦ The purpose of management: Survival◦ Survival implies the elimination of threats◦ Economic instability is solved by government◦ Labor problems are solved via unions◦ Consumer preference must be managed

More Quotes from John Kenneth GalbraithFaced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.

The only function of economic forecasting is to make astrology look respectable.

Economics is extremely useful as a form of employment for economists.

Under capitalism, man exploits man. Under communism, it's just the opposite.

Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.

Nothing is so admirable in politics as a short memory.