The following points highlight the top eight economic ideas of Thorstein Bunde Veblen. The economic ideas are: 1. Criticism of Earlier Schools of Thought 2. Significance of Institutions 3. The Theory of Business Enterprise 4. Corporations 5. The Theory of the Leisure Class 6. Trade Cycles 7. Class Conflict 8. Value.
Economic Idea # 1. Criticism of Earlier Schools of Thought:
Veblen was an inspired critic. Veblen was not satisfied with the methods, doctrines, and theories of the classical school and marginalist school. His economic views are contained in his articles, published in the Quarterly Journal of Economics and Journal of Political Economy in which he has been critical of the marginal utility economics, the Historical School and socialism. It is only through his criticisms of the existing economic theories, he has contributed to the development of economic thought.
He criticized the existing ecoenomics as it was not an evolutionary science. Similarly he holds that the laws of classical economics are based on a wrong conception that there is a natural order in which maladjustments are automatically corrected.
The classical economics was therefore unreal and unsound and the conclusions drawn were not universal. He attacked the classical economic theories based on hedonism and rejected the concept of economic man, as always balancing pleasure and pain.
He also criticized the Austrian economists on the ground that they could not make any advance in the direction of reconstructing economic science. Truly speaking he was greatly influenced by the development that took place in the field of social psychology. Social psychology recognised the importance of instincts. Veblen wanted to make economics an evolutionary science based on human instincts and institutions.
Calling his own method the evolutionary method of economic analysis, he believed that economists—both past and present had completely failed to grasp the significance of the evolutionary approach. They evaluated the industrial process in terms of money. His main ideas in this regard are contained in his book “The Instinct of workmanship”.
Economic Idea # 2. Significance of Institutions:
Veblen considered the entire civilisation as “a scheme of institutions”. He believed that the human behaviour ultimately developed into an institution. Hence he tried to prove that the present institutions were the product of a continuous process of cultural development which had been in operation for many centuries.
The growth of institutions was conditioned by two factors—material environment and propensities of human nature. The changing industrial technology considerably affected the changes in the economic institutions.
According to Veblen, industry and business were the two important institutions of capitalism. Around these two institutions, several small institutions like competition, private property, banks, money etc., have developed. He further believed that these institutions have developed because of the process of evolution.
These institutions would go on changing in accordance with the changes in the social habits of the people. The development of social institutions is also influenced by such factors as population, physical environment, climatic changes etc. In fact his theory of institutions is not based on any rigid principles.
He has divided the society into two classes—productive and leisure. The former comprise those who work and produce, while the latter depend on acquisition. Veblen believed that the existing institutions have helped in creating class struggle.
Thus Veblen’s institutionalism rests on two stones, namely economic conflict and change. Further, even though Veblen has traced the evolution of institutions, he was not sure about their future. Life for him was an endless process which would continue for all times and in which old changes will give place to new changes.
Economic Idea # 3. The Theory of Business Enterprise:
Veblen’s book, “The Theory of Business Enterprise” presents a theoretical analysis of the working of the large scale business enterprises and other institutions of American capitalism.
According to Veblen, it is the machine that provides the scope and method to modern industry. Machine had standardised the human life, goods, processes and consumer taste. It had improved the efficiency of work and decreased the unit cost. But these advantages of machinery are not fully obtained.
Tire industrialists in their desire to get more profit, try to control a large part of the industrial machine and adopt speculative activities. Since every businessman is not alike so far as efficiency, finance, organisational ability etc., often they merge with each other, leading to greater profit at the cost of industrial efficiency.
Veblen, therefore, concludes that it is through the establishment of monopolies and monopolistic activities that the captains of industry meddle with the economic and industrial mechanism and the results are wastes, depression and unemployment.
In short, the community is deprived of the goods and services to which it is entitled. According to Veblen, large business enterprises are mere parasites on the community, and their activities only add to the instability of the capitalistic system.
Economic Idea # 4. Corporations:
According to Veblen, technological basis of industry has given rise to a new form of business enterprise, namely corporation. Corporations depend mainly on corporate credit system. They have greater earning capacity and use it only for their benefits and not for the benefits of consumers in the form of lowering prices. Further, these corporations have changed the nature and functions of private property. They have introduced collective action and given stimulus to class conflict.
Further, Veblen feels that the era of corporate enterprise is totally different from full competition. In corporate enterprise era, “there is a division not between those who have something and those who have nothing, but between those who own wealth enough and those who do not”.
Economic Idea # 5. The Theory of the Leisure Class:
Veblen pointed out that leisure class was an ancient institution. In almost every society upper class men are exempted from industrial occupations which expressed their “superior rank”. This class, based on the ownership of property was aggressive. It never helped in providing the necessaries of life. It was always interested in getting money.
Veblen regards the activities of this class as waste because they do not serve human well-being. The culture of this class was somewhat savage like because of its dress, ways of living, expenditure etc. This class spent much time, money and energy on unproductive things.
On the other hand in the society, there has developed a class which does not have enough money, but which is faithful to the rich and is always subservient to it. This class much larger in size, supports the leisure class and is unable to fulfill its own basic needs for subsistence. Veblen’s analysis of the leisure class appears to be more or less similar to that of Marx.
Economic Idea # 6. Trade Cycles:
Veblen s analysis of the causes of financial crisis and unemployment is quite interesting. Veblen noticed that in the society there are two classes of people—one was busy in supplying the requirements of human society and the other was engaged in speculation and profit making. He regarded the cyclical occurrences as the result of the finance capitalism.
During the days of prosperity or high profits and rising prices, the captains of industry borrowed large amounts of money to expand their business and earn high profits. During prosperity the banks increase their rate of interest and hence the capitalized value of prospective income declines.
At the later stages of boom, profits decrease and a limit is reached when prices do not increase any further due to increased cost of labour and materials. Bank loans become costlier. Due to the pressure by the creditors for the return of loans, the businessmen get nervous. This leads to the failure of best established firms in the market. Ultimately a crisis occurs.
Veblen thought that the market glut was created by producers themselves because they produced without anticipating demand. They put restraint on the productive efficiency of engineers and technicians. It may be mentioned that Veblen considered “the captains of industry” as mere parasites knowing nothing about the industrial processes. They were interested only in making money and interfered with the industrial techniques.
Had this not been so, the modern industrial techniques could have increased the industrial production and raised the welfare of the society. The efforts made by the entrepreneurs towards the adjustment of supply and demand have been termed by Veblen as “Capitalistic sabotage”. He also remarked that whereas in the olden days, producers thoroughly understood the technique of production, in his day, they entirely depended upon engineers and technicians.
According to Veblen, competition is at the root of all cyclical depressions. He therefore suggested that Government expenditure in efficient and low cost public works or preparations for war can ease the pressure of competition and reduce the power of monopolists. In any case, he was not in favour of overthrowing private capitalism. He was only opposed to those producers who were money makers, that is who under-valued productivity, efficiency and gave importance to profit making.
Economic Idea # 7. Class Conflict:
According to Veblen, under the existing system of production, the society was divided into two classes—productive class and leisure class. While dealing with the concept of class organisation he introduced another concept, that of cultural lag. To Veblen, the technological change was the most important factor that changed the economic institutions and through them, the human behaviour. He emphasised the fact that class conflict arose out of cultural lag.
Economic Idea # 8. Value:
Veblen differentiated between economic value and pecuniary value. The end products produced by the industrial system possessed economic value. In the Veblenian sense, a commodity has economic value, which satisfies both the individual and social needs.
As against economic value, pecuniary value, or exchange value is the final product of an industry. It is psychological and rests on uncertain foundations of vendibility—that is the capacity of an article to bring the pecuniary gain to its owner.
Critical Estimate of Veblen’s Economic Ideas:
Veblen was the founder of institutional economics. He gave a new look to the subject economics. Veblen’s works show that he had varied interests and the topics that he wrote covered a wide range of knowledge. It is difficult to put him in any class. In fact, he was a sharp critic and he looked upon things with a critical eye.
Veblen who was against the captains of industry, financial pro-motors etc.., regarded Marxism as an offshoot of classicism. Though he disagreed with many theories of Karl Marx, he looked upon him as a great teacher and original thinker. P.C. New Man says, “Both Marx and Veblen were institutionalists to the extent that they were interested in studying private property and other economic phenomena in their changing forms”.
Veblen criticised the additive method of the classical economists. But he could not satisfactorily discuss his own method of study, namely, evolutionary method. Veblen described the evolution of economic institutions, but was not definite about their future trend. The evolutionary theory checked him from making a forecast. Though Veblen’s influence has waned, his economic thought inspired several writers.
To conclude in the words of Eric Roll, “His evolutionary economics presents a body of economic theories which are more relevant to the problem of issues of twentieth century than are the economic theories of the equilibrium economists. This greater relevance of Veblen’s institutional economics is derived from its central theories of economic conflict and change. Besides, closing the gap between theory and practice, Veblen’s evolutionary economics gives a futuristic slant to economic thought”.