Culture Magazine

Thorstein Veblen's Economics of Wealth and Leisure

By Realizingresonance @RealizResonance

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Photo courtesy of iStockphoto.

It has been more than a century since Thorstein Veblen’s The Theory of the Leisure Class shook the foundation of America’s elite culture and upended the assumptions behind the virtues of wealth. His economic and social commentary on the decadence and profligate excesses of the Gilded Age may be as relevant in 2014 as it was 1899, considering that America is just now climbing out of its worst economic catastrophe since President Hoover resided in the White House, a dire situation for most, but one in which the wealthy did just fine. Even more relevant is how Veblen’s critique on the values of extreme wealth pertains to the recent emergence of wealth and income inequality to the economic and political dialog. The short-lived Occupy Wall Street movement did succeed in making economic inequality a continuing focus of debate, with talk about the 1% versus the 99% inspiring powerful people, such as President Obama and Pope Francis, to speak of a return to Nobles Oblige. Thorstein Veblen presents an earlier American incarnation of these concerns.

Before propelling into Veblen’s economic contributions, it is helpful to reveal his peculiar biography. So peculiar in fact, that some have considered Veblen’s unusual background an explanation for his odd economic ideas as the neurosis of an “interned immigrant”, and suggested that if he had been still living by the 1950s, “his friends would…urge him to contact a psychoanalyst” (Diggins 220). He was born in 1857 Wisconsin to Norwegian immigrants, the fourth son of six children. He grew up in a foreign enclave in rural Minnesota and, disconnected from the typical American upbringing, he learned English only as a second language and spent his time avoiding household responsibilities in order to read incessantly. His family lived a rustic lifestyle in which they wore handmade clothes to work in the field. It was from just such work that a seventeen year old Thorstein was sent off to the religious Carlton College by his father without any forewarning, and with the hope that he would enter the Lutheran ministry.

Veblen was not one destined for the ministry. His interests were directed toward anthropology, sociology and economics. It was in the last subject that he studied under the marginalist economist John Bates Clark, who put forward a theory that wealth distribution was based on the law of diminishing returns to one’s productivity (Brue 265). It was also here that Thorstein met his wife Ellen Rolfe, the niece of the school’s President (Heilbroner 223). Veblen’s penchant for riling feathers began early when he caused a stir by giving controversial addresses with titles like, “Plea for Cannibalism” and “Apology for a Toper” (Diggins 34). After Carlton he spent some time at John Hopkins before obtaining his doctorate in philosophy from Yale. It was not until 1892 that Veblen landed his first job at the University of Chicago, in the year that it opened. In the middle of his 14 years at the school he published his seminal work, The Theory of the Leisure Class, which turned him into something of an academic celebrity.

Despite Professor Veblen’s notorious intellect, his teaching skills were horrendous. He lectured in a quiet and mumbling voice. All his students received a grade of C regardless of their performance, and he once explained to an exasperated student, “My grades are like lightning, they are liable to strike anywhere.” (Diggins 167) Throughout his teaching career his fame attracted prospective pupils, but his dreary methods drove most of them away before they could complete the semester. However, he did make an impression on some of his students like Wesley Clair Mitchell, who went on to further the ideas of the new school of institutional economics that Veblen initiated (Diggins 168). The most unfortunate aspect of Veblen’s behavior in academia was not his teaching habits, but his infidelity. His disreputable philandering would cause him to eventually divorce his wife, but not before he lost his job at the University of Chicago (Heilbroner 241). More schools and more controversies such as these would be the story of his life, so to speak. But other chapters, such as volunteering for government service during World War I, and his last days as a hermit in the hills of Palo Alto who allowed the rats and skunks free reign of his cabin, add color to this most intriguing man’s story.

Thorstein Veblen contributed several novel ideas to economic thought, often including elements of psychology, anthropology, and sociology. His colorful and elucidating term, “conspicuous consumption” is still in the popular lexicon today. In The Theory of the Leisure Class, he incriminates most of society by satirically accusing them of unproductive and wasteful behavior to one extent or another. In his The Theory of the Business Enterprise, he illustrates the modern capitalists’ pattern of interference with industry, relating this behavior back to primitive mannerisms of a predatory nature. In Engineers and the Price System, he addresses the problems caused by the owners of capital being disconnected from the managers who put it to use. Each of these works has some relevance to the global economic drama that has been unfolding during the Great Recession.

In The Theory of the Leisure Class, Veblen sets the tone by first illustrating the pre-historical succession from savage to barbarian culture, and then determining that the latter stage’s characteristics were still reflected in the men of modern capitalist society. Barbarian civilizations, whether ancient or modern, set them apart from the earlier peaceful communes of savage society, by their propensities to warring and predation, resulting in the appearance of a dominant leisure class. The transition to this new social order is made possible, and perhaps inevitable, by the innovations that allow a community to produce beyond the minimum subsistence level. Once this happens, an exclusive clique of men develops. This elite cadre practices cunning and deceit in order to redistribute the fruits of other people’s productive labor into their own hands, while simultaneously creating such envy in the middle and lower classes that these lesser groups aspire to the same un-industrious lifestyle. The institution of ownership springs from the same forces that allow the leisure class to form.

The modern barbarian society is a property oriented culture, thus the accumulation of possessions is priority number one for the leisure class. Since this privileged group, by virtue of their envious position, sets the agenda, the working class tends to parrot them. “Pecuniary emulation” is Veblen’s term for this behavior. He indicates that a major source of this conduct is due to the pressures of “invidious comparison”, a “process of valuation of persons in respect of worth.” The instinctual pride of workmanship is therefore suppressed in the environment of private property because it can no longer garner the esteem of others the way that building wealth can. So as soon as societies emerge from a subsistence regime, the surplus produce generated has the effect of causing individuals to compete for the highest share of it due to the respect and admiration it brings from others. It is this reverence from peers that we ultimately desire.

In order for invidious comparisons to be made individuals must find ways to demonstrate their wealth. Veblen cited two major methods to this end, “conspicuous leisure” and “conspicuous consumption”. The leisure class appears because it is a sign of richness to abstain from laborious work. Employment diverges into two broad categories in Veblen’s analysis; productive work is the ideal occupation of humans, but it is now reserved for those of lowly status, while the honorable employments of the upper echelon are those of a predatory nature. Politicians, soldiers, business men, and even clergy fit the latter category, according to Veblen. Conspicuous consumption expresses pecuniary emulation even more so than leisure, because the working classes engage in “wasteful” expenditures in an attempt to appear wealthy, even when their employments are not of the leisurely persuasion. Extravagant dress, gluttonous banquets, grand mansions, and hand-crafted silver utensils are all examples of conspicuous consumption. Any item that is without a productive function, or that has a price well above what is indicated by its practical utility alone, constitutes a good that is valued predominantly for the social capital that it brings.

Veblen contends that the institution of ownership began when predatory men began claiming women as possessions, then slaves of both sexes. The fruits of servant labor were reposed by these men, and this is the most primitive form of capital formation. The vestiges of chattel remained in the trophy wives and household servants of the wealthy men of the Gilded Age, and Veblen is an early advocate of women’s rights. He suggests that the barbarian institution of subjugation is alive and well when it came to women in his time, and this treatment was not limited to the rich. The historical reason for this behavior is simply that men were much more aggressive and better at fighting, and took advantage of this fact. Besides the obvious lack of suffrage, Veblen reduces various aspects of female culture to “vicarious consumption” and “vicarious leisure”. From fashion and jewelry to being excused from gainful employment, the women at the end of the 19th century made excellent props for displaying a man’s pecuniary success.

Thorstein Veblen’s criticism of America’s most sacred institutions does not stop with wealth and consumption. In 1904, he published The Theory of the Business Enterprise, which among other things addresses the accusation in his first book that business men are predatory rather than productive. The accumulation of money is the sole purpose of the capitalist. However, business in Adam Smith’s era was truly industrious and capital actually did consist of actual goods and equipment. Capital, by the early 20th century, has become the intangible goods of credit and goodwill, which are lost in a morass of absentee ownership. According to Veblen, there is a disconnection between the industrial “machine process”, which is productive and good for the community, and the actions of the business men who have found that the best way to make money is to game the system by exploiting the volatility in markets and industry that they themselves are in a position to create. He writes:

“The economic welfare of the community at large is best served by a facile and uninterrupted interplay of the various processes which make up the industrial system at large; but the pecuniary interests of the business men in whose hands lies the discretion in the matter are not necessarily best served by an unbroken maintenance of the industrial balance…To the business man who aims at a differential gain arising out of interstitial adjustments or disturbances of the industrial system, it is not a material question whether his operations have an immediate furthering or hindering effect upon the system at large. The end is pecuniary gain, the means is disturbance of the industrial system, - except so far as the gain is sought by the old-fashioned method of permanent investment in some one industrial or commercial plant[.]” (Veblen 1904)

The widespread use of credit to finance business, including loans, stocks and deferred payments, is what drives business cycles, Veblen argues. Credit necessarily becomes ubiquitous because it provides an advantage over competitors by financing expansion. In fact it is a potentially ruinous move to forgo the use of credit in business. The more financial capital that is made available for loans the quicker the increase in investment, followed by the inevitable speculation as a product of greedy anticipation. However, economic growth of this fashion is short lived because inevitably the extenders of credit, who only want a return on investment, will lend so much that the capital produced will outpace the earnings expectations on it. Once investors realize that they risk losses due to overextension in the market, they will liquidate their positions causing a chain reaction of deflation, inventory reductions, fire sales, credit freezes, defaults and consolidations. Veblen determines that the natural course of the economy is declining profits, but strangely enough he makes the case that wasteful consumption and monopolistic limitations on production could stave this off.

The ultimate solution to the vicious business man and the plague of capitalism would not be a Marxian working class revolution, although Veblen was eager for the success of the Bolsheviks in Russia. His theories suggest that Marx was wrong in his belief that the lower classes could maintain a proletariat government because a leisure class, or bourgeoisie equivalent, would remain in place regardless. Only the particular individuals on the top would change, because men could not resist pecuniary emulation as long as there were possessions to be had. His answer was a “soviet of technicians”, and he made this case in his 1921 work, The Engineers and the Price System. Engineers are the best hope for humanity, because they are devoted to workmanship and the smooth operation of the machine process, rather than self interest.

Veblen also trampled all over such Neoclassical School assumptions as the laws of demand and marginal utility. In his 1909 essay, “The Limitations of Marginal Utility”, he derides his former teacher John Bates Clark’s theory of distribution, based on diminishing marginal utility, as a static model that could not explain the growth and change that takes place in the real economy. The assumption that economic behavior is just rational hedonism frustrates Veblen and he argues that this misses the important role of intangible cultural institutions on consumers, which cause them to modify their behavior in relation to each other. Veblen’s legacy in this regard may not be considered very substantial considering the fact that the Neoclassical approach to economics is part of mainstream thinking today, while typical university classes on the subject are resoundingly silent on the implications of invidious comparison and pecuniary emulation. However, his theories inspired a few well known predecessors, like John Kenneth Galbraith, who served in the Kennedy administration and shared Veblen’s concerns about absentee ownership (Brue, Grant 388), and Wesley Clair Mitchell, an acolyte of Veblen who advocated empirical research for testing theories. (Brue, Grant 384) Veblen’s Institutional School still exists today, even if it has been relegated to a heterodox classification, like the Austrian School and Marxism.

The Theory of the Leisure Class, as well as his subsequent works, propelled Veblen to the status of superstar iconoclast, so it’s no surprise that not everyone was on board with his unconventional notions of wealth, consumption, and the status of women. Henry Louis Mencken was Thorstein Veblen’s most critical contemporary, when the latter’s ideas were still in vogue. Mencken complained in 1918 that, “everybody who was anybody began gabbling about him” and that he “dominated the American scene.” (Diggins 212) He contends that Veblen’s description of ownership is a “wraith of balderdash” (Diggins 161), and specifically targets what he considers to be the Achilles heel of the leisure class argument. The idea that men posses their women in modern society is preposterous, according to Mencken, because the examples of this provided by Veblen, like a husband forbidding his wife to drink alcohol, were due to a man’s sentimental desire to protect his wife from actions that would debase her. Looking back on this debate from a modern perspective we can see that Mencken’s argument from paternalism is no longer viable. Veblen’s characterization of the barbaric ownership of women may no longer be as popular either, due to the gains in equality that women have achieved in the last 100 years, but it would surely get more sympathy in comparison to Mencken’s defense of the historical status quo.

Even though mainstream economic thought may not pay considerable attention to Veblen’s contributions, I think that he offers some deep insights if one can get past his somewhat neurotic hyperbole. Attempts to incorporate his arguments into the Neoclassical School have been made, like Harvey Leibenstien’s (Brue, Grant 376) 1950 article that attempted to depict a marginal analysis of demand for “Veblen goods”, products that serve the single purpose of conspicuous consumption. Leibenstien illustrates the demand curve for these items as upward sloping, implying that as the price of a Veblen good increases the demand for it actually grows as well. This is contrary to the law of demand, which proposes the inverse, and is a primary assumption of economic theory today for good reason. There is little evidence that goods actually have upward sloping demand curves, though there are some cases where this occurs, yet the evidence for the traditional assumptions about the law of demand are abundant.

I think Veblen would have been aghast at the attempt to model his ideas with oversimplified static graphs. The essence of what he proposed is missing from this model, because he described a dynamic social environment that continually effects, and it is affected by, the participants. Dramatic examples of wasteful behaviors and the persistence of barbaric institutions aside, Veblen’s lasting insights are really about the powerful influence of social institutions on aggregate behavior. The whole is more than the sum of the parts, and has its own downward causality. His vision of America as a monetary culture in which individuals compare themselves to each other based on their degree of wealth has empirical evidence in modern society. Erzo Luttner conducted a statistical analysis in 2005 that establishes an inverse relationship between the well-being of a person and the monetary success of neighbors and peers. When a neighbors living standards rise relative to oneself, happiness is reduced even more than when one’s own income is reduced according to the findings.

Economic conditions, when I originally wrote this essay in the summer of 2009, were improving tentatively and the emphasis in the media was on the debates over fiscal stimulus and extending tax cuts. Now, looking back on our recent economic woes with Veblen’s theories in mind, one finds a reasonable explanation for the business cycle there. The Great Recession began after the supply of credit had increased until it became apparent that the expected future returns on this lending would not pan out, causing a less than orderly removal of credit from the markets. This is what happened to the innovative credit markets for mortgage backed securities, collaterized debt obligations (CDO), and credit default swaps (CDS) in the last four months in 2008. This panic spread to the whole credit system and led to a feedback cycle of production cuts and reductions in demand and a stall in business activity.

I disagree with Veblen’s characterization of the business man as essentially predatory, mainly because I know of many business men, both personally and by reputation, who don’t fit this mold. With that being said, his accusation that absentee owners would benefit by manipulating stock prices and then take advantage of these artificially induced changes has a modern analog. On May 6, 2010 there was a “flash crash”, in which prices suddenly plummeted and then jumped again across a wide range of asset classes due to large scale computerized trading. The Securities and Exchange Commission (SEC) announced a probe into whether or not traders encouraged volatility in the stock market by such innovative techniques as “spoofing”, in which a traders places fake bids without any intention of buying. Hyper-fast trades are executed on such a huge scale in the modern computer age that it took five months to investigate the transactions that took place over a span of a few minutes (Younglai, Spicer). Given the role that computer engineer’s play in this activity, Veblen’s last hope for humanities economic future in the form of technicians dedicated to the machine process seems misplaced.

Veblen’s ideas about conspicuous consumption and pecuniary emulation may be emerging as more relevant than ever, in our ages of hyper-consumerism and hyper-inequality. These two things together have the potential to be very ruinous to a robust middle class American society, as the encouragement and desire for the consumer to increase spending on goods and services is coupled with a declining means by which to do so. Thorstein Veblen’s Economic Philosophy was famous at the beginning of the 20th century, but is now largely forgotten in the beginning 21st century. I think it is the right time to bring these eccentric ideas of an American iconoclast back into the modern economic dialog.

Jared Roy Endicott

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Works Cited

Brue, Samuel L., and Randy R. Grant. The Evolution of Economic Thought. Seventh Edition. Mason, OH: Thomsom South-Western, 2007. Pirnt.

Diggins, John Patrick. Thorstein Veblen: Theorist of The Leisure Class. Princeton, New Jersey: Princeton University Press, 1999. Print.

Heilbroner, Robert L.. The Wordly Philosophers. New York: Touchstone, 1953. Print.

Luttmer, Erzo F. P. . “Neighbors and Negatives: Relative Earnings and Well Being.” Quarterly Journal of Economics, Aug. 2005. Web. 7 Aug. 2009.

Younglai, Rachelle, and Jonathan Spicer. “U.S. Probes Trading Practices in Fragmented Markets.” Reuters. 8 Dec. 2010. Web. 11 Dec. 2010.

Veblen, Thorstein. The Theory of the Leisure Class. New York: Oxford University Press, 1899.

Veblen, Thorstein. The Theory of the Business Enterprise. 1904. 5 August 2009. Print.

Veblen, Thorstein. The Engineers and Price System. 1921. 6 August 2009. Print.

Veblen, Thorstein. “The Limitations of Marginal Utility.” Journal of Political Economy, Volume 17. 1904. Web. 7 Aug. 2009.


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