Thorstein Veblen and the Theory of Business Enterprise



The Sabotage of Society by the Business Class: Thorstein Veblen and the Theory of Business Enterprise

Eddie J. Girdner

Thorstein Veblen (1857-1929) sought to burst the big pretentious bubble built up over the nineteenth century by professional economists. Veblen was an influential American economist and sociologist. He is best known for his book The Theory of the Leisure Class (1899). This is a book which pokes fun at the lifestyle and habits of the rich and the business class. For Veblen, religious denominations that set up churches were “chain stores.”

Veblen was the leader of the Institutional Economics Movement and used anthropological analysis to understand “economic man.” He was a student of the famous economist, John Bates Clark, at Carleton College in Minnesota, USA.

Veblen challenged the central truths of classical and neoclassical economic theories. Capitalism was a form of modern barbarism, according to Veblen, and savage in nature. He laid out these views in his first and most famous book, The Theory of the Leisure Class (1899), which was a satire on the aristocratic class. 

Veblen seemed to be observing society as if he had just arrived from outer space and saw that people were engaged in strange but interesting behavior. It has been said that Veblen was alienated from society. He did not feel a part with his fellow man and was cynical about their motives. This was the perfect perspective for analyzing society the way an anthropologist observes primitive tribal behavior.

The American economy did not fit the theories coming from European economic thinkers which had laid the basis for neoclassical economics. Unlike the assumptions of neoclassical economics, humans did not exhibit rational behavior when they engaged in conspicuous consumption. Businesses often used brutality and violence to crush their competition. Economic behavior was socially determined, according to Veblen, and not based upon individual rational action. More important were the human instincts of emulation, predation, workmanship, parental bent, and idle curiosity.

Veblen thought that there was a fundamental split in society between those who make their livelihood through exploitation and those who make their way through industry. In early barbarism, the difference is seen between the hunter and the gatherer. Later the division is between the landed gentry and the indentured servant. The enterprise of the leisure class is to exploit.

Veblen defines the leisure class as those who lack productive economic activity and who are committed to demonstrate their idleness. This conspicuous leisure gives way to conspicuous consumption. The demonstration of wealth is the basis for social status. The way one can gain status is through wasteful consumption. If it is not wasteful, it is not reputable.

In Veblen, emulation and predation play major roles. People try to impress others, whether rich or poor. Engaging in conspicuous leisure and conspicuous consumption are useful ways to gain social status. This also produces conspicuous waste, which also has an important economic function. Imagine, if everyone used their purchases to their full utility, what the effect upon the economy would be. Economic health depends upon increasing consumption and vast waste. 

The economic behavior of the leisure class must be predatory. That is, the members of this class must obtain their wealth by force or cunning, rather than in actual labor in production. Society would then see them as strong and able when they used force and violence. Gaining wealth by force was honorable and dignified, but human productive work was just the opposite. Leisure class occupations include government office, the military, sports, religious office, and engaging in business for profit.

Environmentally, it was typical that the elite laid waste to nature, with hunting and killing things in the wild.    

 Society was still barbarian in nature and human nature was savage human nature. While force was no longer used to seize women, it could be used to seize money. The motives behind human behavior are not rational, as the mainstream economists thought, but irrational and come from deep within human nature.

In emulation, the poor and working class try to appear as the rich. This is a sort of different type of class struggle. The lower classes admire the savage values of the upper classes. Marx thought that struggle between the classes would lead to revolution, but Veblen believed that the revolution did not happen because the lower classes have a common attitude and values with the leisure class. They actually admire their conservative and brutal behavior. So they emulate the rich. Veblen believed that this leads to social stability.

Mark Twain understood this too, when he wrote about the poor putting on shows and pretending to be dukes and kings from some European country in his novel Huckleberry Finn. In this way, they got all the farmers and hicks around the country to come to their entertainment.

Veblen gives many examples of how one may show that they spend their time in idleness. One way is to demonstrate much useless knowledge, like knowing the names of all the fancy breeds of dogs and their characteristics. There is no economic utility to such knowledge, and because of that, it is impressive and admirable. Another example is sports trivia, such as knowing the names of players on many teams and how many games they have won over the years.

Veblen published The Theory of Business Enterprise (1904).  In this book, he turned economic theory upside down. For Veblen, the businessman, as the central figure, was actually out to sabotage the economic system. With the rise of machine production, Veblen saw economic progress as mechanical. Society could be seen as a big machine, like a clock, produced by the rational machine.

However, while those technicians and engineers who ran the machines were interested in production, the businessman only wanted to make money. He did not care about production. In fact, profits could best be made by working against the machine. If the businessman could cause breakdowns in the system, values would fluctuate and in this confusion, open up avenues for making a profit. Economic crises present the greatest opportunities to make a killing in the market. Capitalist enterprises which survive emerge stronger than before.

One way to profit was to build a financial superstructure on the real economy. This involved loans, phony capitalizations, credit and today, derivatives. This is the financial sector, versus the real economy. This opened up great opportunities for profit. This profit seeking was disrupting society and not infrequently leading to financial crises. Financial crises were the big apples which opened up unprecedented opportunities for accumulation, if one was lucky. Veblen surely had great foresight, as the financial sector has virtually taken over the American economy in terms of where profits are made today. It has extended its tentacles across the globe.

So for Veblen, the businessman works against production. He is interested in making money, not in producing commodities. The financial bubble becomes much bigger than the real economy. Businessmen were predators, for Veblen. They were engaged in “watchful waiting,” for opportunities to make a killing in the market. For Veblen, they were like a fat toad waiting for flies and bugs to come along so that they could snatch them.

In the end, Veblen thought that the machine would do away with the businessman. The engineers who ran the machinery would take over production. It was a case of the machine verses the businessman and the businessman was fully dispensable. The machine was driving social change. Engineers would take over the business system and end the chaos caused by the businessmen. This was necessary if there was to be progress.

Veblen thought that if this revolution did not happen, then society would turn into a brutal struggle and lead to fascism. Veblen contributed the perspective that the machine was the leading cause of change in the twentieth century. It was the triumph of science and technology. Society was not the peaceful equilibrium suggested by economists such as Leon Walras, Alfred Marshall, the Austrians, and so on. And it was also not the class conflict as thought by Marx. It was more like a primitive jungle raised to a slightly higher plane. Veblen tried to discover why people behave as they do. And this was not the way predicted by the mainstream economists through the previous ages.

The machine was rational. Man was human, not rational. Human nature must give way to the dictatorship of the machine, the dictatorship of technology in modern times. We have now reached the point where the computer tells us what we can do and cannot do and there is nothing we can do about it.

Veblen was sympathetic to state ownership of industry. His views are often compatible with Marxism, socialism or anarchism. He attacked production for profit. Veblen thought that society would reach socialism through the technological developments of engineering. In this way, his views are similar to Saint Simon.

Taking a closer look at Veblen’s arguments, there are two major classes in the modern system of barbarianism, called capitalism. One is the class of industrial engineers. They are simply interested in making production efficient. The modern machine system could not run without them. The second class is the business class that provides business management. Not only are they not the solution, they are a genuine nuisance who work against the engineers to prevent the economic system from working efficiently. Veblen believed that the advance of human society depends upon the annihilation of the business class. They are parasites who suck the blood of society for a profit to the detriment of the people. They are always anxious to disrupt the system of production and distribution if a profit can be made out of it.

Veblen begins by noting that the modern society is mechanical. Modern society itself is a machine. To function efficiently and rationally in modern society is to function as a machine. This, however, is contradictory to human nature, as in Charlie Chaplain’s Modern Times. The architects of the system, as in Visvakarma, the Celestial Carpenter, are the engineers. They provide the cornucopia of wealth, but this is out of keeping with traditional life. Businessmen, on the other hand, have no interest in production and consumption, that is, the needs of society. Their interest lies only in pecuniary gain. They frequently sabotage the system for the purpose of making a profit.

This is a very accurate description of the economic system today, more than a hundred years after Veblen wrote the theory. The 2008 financial crises in the United States was brought about by totally irrational actions of the bankers. This then spread to Europe. The bankers made bad loans, spun the market, invented new financial products called derivitives, and sank the system while making great profits. Businessmen do not always have an interest in the smooth operation of the economic system. Disturbances open up great opportunities to make a killing in the case of an economic crisis. These facts, however, go against the typical way businessmen are viewed in society.

In the machine age, everything becomes standardized. Not just inanimate objects, but people too become standardized. For example, political science professors. They specialize in some narrow field and must demonstrate that they have been accurately produced and honed to standardization before inserted as a cog wheel into the educational machine. They then turn on their hub in some department of a university for their productive years. They are not just human scholars with a brain, but functionaries. While their human brain might tell them that “national security” did not mean a new generation of nuclear weapons, they will readily accept more nukes as the standard solution as the machine is in control. They will recite the orthodoxy of the textbooks in a mechanical way in their lectures, papers, conferences, and go right on turning out the same nonsensical phrases, platitudes, and journal articles.  In fact, they generally have to do this in order to keep their job. Anyone who questions their knowledge will be seen as a defective product and useless.

In modern society, there is a subject-object reversal as seen in Karl Marx. The machine or dead matter has come to control human consciousness.

In business management, the more sophisticated the management, the more damage that is being done. Mergers and acquisitions, for example, disrupt and slow down the system. Efficient inventions are hidden or destroyed as they may damage profits. A real example is the destruction of the fleet of electric cars produced in the United States some years ago, because they threatened some big auto companies. Veblen states that: “It is a casting out of businessmen by the chief of businessmen.” Advertising is largely “unproductive work.” It is only a slight service to the community and largely a “disruption.” But just because it is “unproductive” does not mean that it is not useful for pecuniary profit.

Creating an image is also important for business in the quest for profits, no matter how misleading. There are the concerns of “reputation,” the image of honest dealings, trademarks, privileges, and copyrights. The “earning capacity” of the firm must be established to build its value in the stock market, normally through “misinformation” and “partial information.”

It is no longer a matter of supplying the needs of society. Now business principles have come to dominate life. It is largely a question of price in the market. But today, “hard times” happen just as frequently as in the past and they are generally brought on by the operations of businessmen themselves. Depressions and expansions become the normal situation.

In business “dull times” is the norm and expansion is an exception. This is an earlier version of the views of Paul Sweezy and Harry Magdoff at Monthly Review Journal in New York, after the l950s. Businessmen generally cling to the old-fashioned view that there is a natural cycle of boom and bust, but not true. When a crises does occur, it is merely a pecuniary shrinkage, not a material shrinkage. It is merely that reflected in price.

Here, Veblen sets out a theory of crisis, similar to the theory that would be forwarded by Hyman Minsky in the l960s. This movement starts with new investment in a certain area. An initial disturbance in prices opens up opportunities. More is produced as demand increases. (For example in the housing sector.) This is buoyed up by speculation and future contracts. This tends to become reckless, what Alan Greenspan liked to call “irrational exuberance.” Property values increase and the inflated property is used as collateral for new loans. This cycle continues till prices start to fall. Meanwhile, wages have advanced very slowly during this prosperity.

Eventually, the differential advantage is lost and capital will not sustain the loans. Earnings fall off. When this happens, credit dries up and liquidation of the operations begins. The creditors have the most to gain and the debtors will generally lose. But Veblen says that the creditors do not push as hard as they could because they do not have the foresight or the intelligence. They are also afraid that they might collapse the whole business system and then the money value of goods would collapse. Veblen accuses businessmen of being shortsighted and “lacking intelligence.”

Of course, in an expansion, the big businessmen gain the most. Workers only gain steady work while the expansion is going on. But any gains they make are eaten up by higher prices. The increased profits are only made at the expense of the worker as there is little increase in wages. If wages did rise, it would cut away the differential advantage which is the basis of profits.

Veblen brilliantly saw the virtue of waste in capitalist enterprise. This is also why war is so important to capitalism as it is a vast source of waste. Karl Marx once observed that war was the equivalent of dumping a significant portion if the national wealth into the ocean. War, however, has the function of being able to prevent an economic crisis. When the war stops, and thus the waste, this frequently brings on a crisis. “Useful waste” includes such things as war, armaments, diplomatic establishments, public projects, and edifices. Rulers like to build themselves palaces and buy Mercedes automobiles that cost half a million US dollars. A simpler man, like Pope Francis who wants to ride in a modest car just does not understand the value of high consumption and waste in the modern economy.

Nevertheless, even all this above is seldom enough waste to fit the bill. The government is forced to pursue ever more vast sources of waste. War is surely the greatest, especially if something non-existent can be invented to fight against, so that the war will go on forever and only get bigger and worse. Today the so-called war on terror fits that bill nicely. Of course not a little is spent on torturing some poor helpless souls grabbed up in the far corners of the earth and waterboarded until they croak. A couple of trillion US dollars wasted in Iraq. Another trillion in Afghanistan. More billions on drones. More wasted on weapons. Whether they are ever deployed is irrelevant.

Only monopoly can set aside the grinding effect of a crisis. To keep up prices, it need not be a complete monopoly, but the more the better from the business perspective.

There are two factors that lead to a depression. First the increasing effectiveness of the machine. Not everything can be sold. However, Veblen does not use the term “overproduction.” There is always a need no matter how much is produced. Secondly is the interdependence of different lines of business since they affect each other. This leads to the formation of a trust. A contradiction exists between competitive business and the machine process. The need for efficiency leads the system toward mergers. It seems that Veblen is saying that businessmen are just in the way and the sooner they go away and let the engineers run the system, the better.

The government best attuned to business sabotage will naturally be a liberal government. “A constitutional government is a business government.” And “Representative government means, chiefly, representation of business interests.” Governments have to modernize to fit this bill. Veblen wrote: “The degree to which a government fails to adapt its policy to these business exigencies is the measure of its senility.” Business comes to control the government. Veblen says that “the ring of business interests which secures the broadest approval from popular sentiment is, under constitutional methods, put in charge of the government.” This is certainly true today in the age of neoliberalism.

Business men are regarded as meritorious and productive and it is believed that they serve the public good. But Veblen argues that this is not true.  

Veblen also notes that there is a handsome profit margin to be made dealing with other countries, which he refers to as “pecuniary unregenerative populations.” But again, frequently force is required and this entails armaments. The need for “warlike demonstrations” arises. The nation in control has to show the flag. If there is actual war and the war burden becomes very large, so much the better for the businessman. It opens up opportunities for more profit. Much livelihood will be destroyed, but this is of no concern to the businessman who is just out for the profit.

In modern enterprise, the machine changes the culture and produces a certain kind of worker. First, the intellect of the worker must be “standardized.” He must learn to function in the mechanical process and the machine provides discipline. Veblen does not think that the intelligence of the worker needs to be lowered, as Marx argued, but merely become standardized and disciplined as far as intelligence goes. His standard thought will provide “quantitative precision.” This seems like Taylorism in the workplace. Any other intelligence on the part of the worker is useless, indeed, “worse than useless.” This is because it would blur the worker’s “quantitative thinking.” It will be necessary to keep the philosophers away from the assembly line. They could only screw things up like Charlie Chaplain’s little bum.

Thought that is required in work is not anthropomorphic. It is not a human type of thought. It is impersonal. It is to think like an engineer, and more accurately, to think like a machine. We have all come across these inorganic types of individuals.  

The culture of the engineers and the culture of the businessmen are totally different and they cannot understand each other. The thought of the business class is old fashioned. Businessmen think in terms of natural rights in property and are conventional. They can never question property rights. Moreover they are conservative and reactionary. This is a mark of the “higher barbarian culture.”  

Others who think in barbarian terms are soldiers, politicians and the clergy. However, these are more disciplined than the business class. This culture persists in the Western world despite the universal presence of the machine.  They lack thrift and need to engage in conspicuous waste in their life style. To keep up their reputation, they have to consume beyond any need and squander the wealth of society.

After machine production has been established for some time, trade unionism arises. It is a “concomitant of the machine age.” Veblen says that trade unionism denies the natural rights dogma. It denies individual freedom of contract to the worker. It denies the businessman the freedom to carry on the business on his own terms. It hampers individual liberty and free trade and logically leads to socialism. The institutions of the past are unfit for the work of the future, which may be under socialism. In fact, it is machine technology and the mechanical process which has given rise to socialism.

“The machine is a leveler, a vulgarizer, whose end seems to be the extirpation of all that is respectable, noble, and dignified in human intercourse and ideals.” There is some protest from some quarters, such as “Christiandom,” but the machine discipline spreads to ever wider circles.

For Veblen, this means that business enterprise is falling into decay. There is a great struggle between the machine which marches on and the culture of the businessman steeped in archaic ideals. Which will win out ultimately? This is the crucial question that Veblen addresses in the last part of the book.

Is it possible to slow down the decay of the ancient barbarian values of the business class? One possibility might be through the use of charity. Another possibility is the strengthening of military barbarity, the promotion of a warlike culture. A third possibility might be the strengthening of Christianity.

The problem is that things may have gone too far already. Natural liberty based upon petty craft industry and trade was unstable. This peaceful industry has now been replaced with a warlike industry under a coercive government. The vulgarization of modern times is far advanced. This has only increased with computerization.

Could this cultural heritage be saved by charity organizations, clubs, and societies to help the indigent? Veblen believes these are irrelevant as they are not part of the business culture. The solution must be found within the business culture itself.

One problem, however, is that business requires insincerity. It must cater to a low average level of intelligence and follow the tastes of “middle class affluent snobs.” Business pretends to promote the bourgeois values of thrift and solvency, rather than aristocratic manners. So people see business principles as good. They come to permeate the educational system and are seen to be practical. But it actually corrupts the workers and promotes conspicuous consumption.

A second way to save the system might be through warlike values. The problem with democracy is that people will no longer take orders. On the other hand, the military promotes patriotism and subordination. The barbarian values of subordination might be strengthened to counteract the vulgarization of modern life by the machine. As Veblen notes, the military is “an effective school in the barbarian methods of thought.” This could bring back the ancient virtues of allegiance, piety, servility, and prescriptive authority. In addition, war is a business proposition, It is profitable. This might guide the nation back into the archaic conventional ways and restore dignity and stability,

A third possibility is Christianity. This would give a sacramental serenity to the outlook of citizens but probably not get rid of materialistic greed. But the problem is that it would lead to a decline in business itself.   

Veblen says that it is a “blind guess” which of these cultural tendencies will prevail. But he concludes that in any event, business enterprise is bound to lose in the end. This reminds one of Joseph Schumpeter who believed that the entrepreneurial spirit could not survive into the future. Presumably, the business culture must end primarily because it is simply too disruptive of society and the economy. The logical thing is to let the engineers and industrial managers run society. This seems to suggest that Veblen saw the future society as possibly socialist. It is not clear, however, that Veblen was completely happy with this. While it might be efficient in providing the livelihood of society, it would, nevertheless, have dragged society down to an exceedingly vulgar level.  

Eddie J. Girdner is author is author of Confessions of a Renegade: Peace Corps Years. New Delhi: Gyan Publishing House, 2014.

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