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 DEFINED
FROM 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 Biography
http://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 Biography
http://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-issue2/letter-from-thorstein-veblen-to-sarah-mcleanhardy/
Veblen Teaching Style
http://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
Class
First 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
Class
First 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
Class
First 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.
2.
3.
4.
5.
Classical and Neoclassical Economics: Hero of the
play is the capitalist.
Veblen:
The capitalist is the saboteur of the
system.
Veblen glorified the machine, the engineer, the
technician. What is the role of the businessman,
who is not concerned with production, but with
profit?
The capitalist sabotages the economy so that in
confusion can come his profit. REVIEW MONOPOLY
THEORY
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 Enterprise
Analysis 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.highereducatio
n
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 Galbraith
Faced 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.