The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Veblen, Thorstein Bunde (1857–1929)

  • Geoffrey M. Hodgson
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1855

Abstract

This article outlines the work of the American institutional economist Thorstein Veblen (1857–1929), stressing his critique of neoclassical economics and his development of an alternative, evolutionary approach to the analysis of social, economic and technological change. Veblen’s analytical approach to both technology and institutions is discussed, as well as his explicit application of the evolutionary ideas from Darwinian biology to economics.

Keywords

Ayres, C. E. Clark, J. M. Commons, J. R. Conspicuous consumption Consumer sovereignty Customs Darwin, C. Economic man Evolutionary economics Explanation Habit Hedonism Innovation Institutional economics James, W. Mark, K. H. McDougall, W. Mitchell, W. C. Natural selection Neoclassical economics Old institutionalism Peirce, C. S. Pragmatism Preferences Spencer, H. Sumner, W. G. Technical change Utililitarianism Veblen, T. B. 

Thorstein Veblen was one of the most influential economists of the early twentieth century and one of the founders of the American school of institutional economics.

Veblen was the fourth son and sixth child of Norwegian immigrants who settled in eastern Minnesota in United States. Educated at Carleton College, Johns Hopkins University, Yale University and Cornell University, he took various university posts at Chicago, Stanford, Missouri and New York. At Johns Hopkins he came in contact with the pragmatist philosopher Charles Sanders Peirce, and at Yale he was influenced by William Graham Sumner. Veblen read widely in biology, psychology and philosophy, as well as the social sciences. The works of Immanuel Kant, Charles Darwin, William James, Karl Marx, William McDougall and Herbert Spencer also made an enduring mark. Despite the popularity of his ideas, Veblen’s career was marred by scandal and he never held a senior academic post (Jorgensen and Jorgensen 1999). He died in meagre circumstances in California.

Several of his most important theoretical works date from the 1890s, when he was at the University of Chicago. In 1898 he published his classic article ‘Why is Economics Not an Evolutionary Science?’ in the Quarterly Journal of Economics. The following year saw the appearance of his first book The Theory of the Leisure Class. Although this is an original and sophisticated theoretical work, its mockery of the wasteful rich turned it into a bestseller. Other academic articles followed in the Quarterly Journal of Economics, the Journal of Political Economy and elsewhere, the most important of which have been collected in The Place of Science in Modern Civilization and Other Essays (1919). These articles provided a critique of ‘neoclassical’ economics (a term he coined to refer to equilibrium-oriented approaches involving individual utility maximization) and suggestions of a new approach to economics on ‘evolutionary’ and ‘Darwinian’ lines.

He is remembered today as the founder of the school of ‘institutional economics’ that prospered in the United States between the first and second world wars. This school involved leading American economists such as John Maurice Clark, John Rogers Commons and Veblen’s student, Wesley Clair Mitchell.

However, Veblen and his followers did not construct an integrated system of economic theory. This is partly because the original foundations of Veblenian institutionalism were challenged. Pragmatist philosophy, instinct-habit psychology and evolutionary ideas had been foundational for Veblen’s thought. However, by the 1920s they had lost much of their former popularity. Thus, at the high point of its influence, American institutionalism faced fundamental philosophical and theoretical difficulties. After 1940, the ‘old’ institutional economics lost ground to the rising generation of formal and mathematically inclined theorists. By the 1960s the American institutional school was confined to a small minority of adherents. However, in economics in recent years there has been a revival of interest in both evolutionary ideas and the legacy of the ‘old’ institutional school.

Veblen (1919, p. 73) argued that neoclassical economics adopted a faulty and ‘hedonistic’ psychology, involving ‘a passive and substantially inert and immutably given human nature’. He criticized the idea of the individual as a given ‘globule of desire’, lambasting the neoclassical picture of the optimizing and omniscient economic agent as ‘a lightning calculator of pleasures and pains’. He saw this ‘economic man’ as having ‘neither antecedent nor consequent’, lacking an account of how human wants are formed and portraying humans as utility-maximizing automata. Veblen (1914) proposed an alternative theory of human agency, in which ‘instincts’ such as ‘workmanship’, ‘emulation’, ‘predatoriness’ and ‘idle curiosity’ play a major role. Habit and instinct replaced the utilitarian pleasure-pain principle.

Following the pragmatist philosophy of Peirce and James, Veblen rejected the Cartesian notion of the supremely rational and calculating individual, instead seeing agents as propelled in the main by habits and customs. Habits of thought provide the point of view from which facts and events are interpreted. When they are shared and reinforced within a society or group, individual habits assume the form of socioeconomic institutions. In turn, institutions create and reinforce habits of action and thought: ‘The situation of today shapes the institutions of tomorrow through a selective, coercive process, by acting upon men’s habitual view of things, and so altering or fortifying a point of view or a mental attitude handed down from the past’ (Veblen 1899, pp. 190–1).

In The Theory of the Leisure Class and elsewhere, he argued that consumption is a ‘conspicuous’ and social process. Through consumption, humans signal status and social position, and thereby stimulate the desires of others. Accordingly, individual tastes are malleable and the idea of unalloyed ‘consumer sovereignty’ is a myth.

Veblen saw conventions, customs and institutions as repositories of social knowledge. Institutional adaptations and behavioural norms were stored in individual habits and could be passed on by education or imitation to succeeding generations. His explanations of economic growth privileged knowledge and institutions, rather than the accumulation of physical assets.

Veblen addressed the ‘evolutionary’ processes of innovation and transformation in a modern economy. Neoclassical theory is defective in this respect because it indicated ‘the conditions of survival to which any innovation is subject, supposing the innovation to have taken place, not the conditions of variational growth’ (Veblen 1919, pp. 176–7). He saw it as important to consider why innovations take place, and not merely to dwell over equilibrium conditions with given technological possibilities. The question for him was not how things stabilize themselves in a ‘static state’, but how they endlessly grow and change.

Veblen saw Darwinian evolutionary principles as crucial to the understanding of the processes of institutional and technological development in a capitalist economy. He was the first economist to argue at length that Darwinian evolutionary principles should be applied to economics. He upheld that economics should become an ‘evolutionary’ and ‘post-Darwinian’ science. There is a current revival in ‘evolutionary’ approaches in economics but the Veblenian precedent for this type of approach is not always acknowledged.

Darwinian evolution involves three essential features. First, there must be sustained variation among the members of a species or population. Variations may be random or purposive in their origin, but without them, as Darwin insisted, natural selection cannot operate. Second, there must be some principle of heredity or continuity involving some mechanism through which individual characteristics are passed on to succeeding generations. Third, natural selection operates because better-adapted organisms leave increased numbers of offspring, or because the variations that are preserved bestow advantage in the struggle for survival.

Veblen applied the same three Darwinian principles to economic evolution. He recognized the role of creativity and novelty with his concept of ‘idle curiosity’. Habits and institutions were regarded as relatively durable heritable traits. Concerning selection, Veblen (1899, p. 188) wrote: ‘The life of man in society, just as the life of other species, is a struggle for existence, and therefore it is a process of selective adaptation. The evolution of social structure has been a process of natural selection of institutions.’ This did not mean that social phenomena were to be explained wholly or largely in biological terms, but that Darwinian principles could be applied to social and economic units and processes.

Veblen saw Darwinian evolutionary processes as open-ended and suboptimal. Unlike advocates of laissez faire, he did not use Darwinian principles to justify market competition. He was critical of apologetic tendencies in social science which regard existing institutions as necessarily efficient or optimal. He described particularly regressive or disserviceable institutions as ‘archaic’, ‘ceremonial’ or even ‘imbecile’. Furthermore, he used Darwinian ideas to rebut of Marx’s teleological suggestions that history was leading inevitably to a communist future.

Like Darwin, Veblen emphasized the importance of processual, causal explanation. Although he did not use the word, he had an appreciation of Darwinian evolution as an ‘algorithmic’ process. Veblen used phrases such as ‘cumulative causation’, ‘theory of a process, of an unfolding sequence’ and ‘impersonal sequence of cause and effect’ to connote the same idea. This focus on algorithmic processes is revolutionary and modern; it directs attention to ongoing processes rather than static equilibria alone.

Consequently, rather than taking individual reasons or preferences as themselves sufficient to understand motivations, Veblen pointed to the need for causal explanations of reasons or preferences themselves. He did not underestimate the importance of human intentionality – but it had to be explained rather than assumed. Such explanations involved the evolution of social institutions and their interplay with biological and psychological characteristics. He thus acknowledged processes of dual inheritance or coevolution (again to use modern terms) where there was evolution and transmission at both the instinctive and the cultural levels.

Along with the assumption of fixed preference functions, Veblen also criticized the widespread assumption in economic theory of a fixed set of technological possibilities. Technological change can challenge established institutions and vested interests. In The Theory of Business Enterprise and elsewhere Veblen distinguished between industry (making goods) and business (making money). This dichotomy parallels the earlier suggestion in The Theory of the Leisure Class that there is a distinction between serviceable consumption to satisfy human need and conspicuous consumption for status and display. Subsequently, institutionalists such as Clarence E. Ayres elevated the different conflict between technology and institutions into a universal principle, and dubbed it the ‘Veblenian dichotomy’. This is misleading, because Veblen never saw such a conflict as universal, and he saw institutions as the indispensable fabric of economic life (Hodgson 2004).

In the last two decades of the twentieth century, evolutionary and institutional ideas again become prominent in economics. Pragmatism has again become fashionable in philosophy and the concept of habit has returned to psychology. Many of Veblen’s ideas, including those on institutional evolution and the role of knowledge in economic growth, now seem strikingly modern. The conditions exist for a deeper appreciation of his contribution to economics and social science.

See Also

Selected Works

  • 1898. Why is economics not an evolutionary science? Quarterly Journal of Economics 12: 373–397. Reprinted in Veblen (1919).

  • 1899. The theory of the leisure class: An economic study of institutions. New York: Macmillan.

  • 1904. The theory of business enterprise. New York: Charles Scribners.

  • 1914. The instinct of workmanship, and the state of the industrial arts. New York: Macmillan.

  • 1915. Imperial Germany and the industrial revolution. New York: Macmillan.

  • 1918. The higher learning in America: A memorandum on the conduct of universities by business men. New York: Huebsch.

  • 1919. The place of science in modern civilization and other essays. New York: Huebsch.

  • 1921. The engineers and the price system. New York: Harcourt Brace and World.

  • 1923. Absentee ownership and business enterprise in recent times. New York: Huebsch.

  • 1934. Essays on our changing order. New York: Viking Press.

Bibliography

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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Geoffrey M. Hodgson
    • 1
  1. 1.