I had wanted to reply to comments in the thread of Economics as Cultural Warfare: The Case of Adam Smith, over at Ian Welsh's blog, where bruce wilder makes an important correction to my view of Smith: "Smith’s central argument rather famously is that the division of labor is the primary source of wealth!" Which of course is perfectly true, given that one of Smith's most famous passages is that describing the impressive productivity of the machines Smith found in a pin making factory.
But my design is to utter annihilate any respect for Adam Smith by showing he is little more than an apologist for the imperial looting, immiseration, and devastation the British empire exacted on its colonial subject populations. In my world view, there is nothing about any apologist for the British empire that is worth salvaging. Was it possible that here was an anomaly for which I would have to bend my rules?
As I pondered this over the past week, I realized that tossing Smith's division of labor argument into the trash bin of history is more easily accomplished by referencing the arguments made by Thorstein Veblen regarding the differences between business and industry. I was not very surprised to find that I could find nothing on the internet about Veblen's argument that was worth linking to. Veblen has always been persona non grata in the mainstream economics profession -- which means that he probably has gored one or more of the profession's sacred cows. Which of course makes Veblen all the more attractive in our day, when the intellectual rot among economic academicians has reached an overpowering level of stench. Modern Monetary Theory may have some weaknesses and faults, but I would rather have it blowing through the academy to dispel as much of the bad air as it can, than leaving the brain dead body to continue rotting and fouling the air.
Researching my attack on Smith, I had taken off my bookshelf Joseph Dorfman's The Economic Mind in American Civilization. I now opened Dorfman's book again to see what he had written about Veblen. I was surprised but delighted to find the best summary I had yet read of Veblen's ideas. In case readers don't know it, Dorfman wrote a book in 1935 entitled Thorstein Veblen and His America. And what readers certainly do not know is that the descendants of Veblen loathed the book, and spent years trying to persuade, then force, Dorfman to change the book, mostly the parts in which he described Veblen's personal traits and peccadilloes, including the controversies Veblen stirred up at every university that ever hired him. Veblen’s descendants were unsuccessful. The source for this is Jon Larson, who worked with Veblen’s descendants in the restoration of the Veblen farm.
Despite this sad history, Dorfman's explanation of Veblen's ideas on the differences between business and industry are extremely useful today. I hope to see in comments someone expressing their "eureka" moment -- yes, let us bury Adam Smith once and for all, and never hear of him again.
Dorfman's The Economic Mind in American Civilization
Veblen is not an easy man to comprehend, standing as he does halfway out of society. Observing that technology and capitalism had become intertwined, he rejected the latter as predatory and wasteful yet accepted the former as fruitful and productive. But here also at certain points he was not completely at home with the whole Western emphasis on material development. He was thus armed with a double weapon for a critique of both his particular age and civilization as a whole. He was the man from Mars and at the same time a man at home in the factory; indeed, sometimes he seems a typical American gadgeteer. Such was his philosophical bias, and the tool he employed to elaborate it was a wide and deep-ranging distinction between "business" and "industry" and a broad view of the nature of "institutions."
Veblen discerned that the high command of the "institution" of modern capitalism was vested in the most powerful of financiers, who by controlling the flow of credit to important industries were able to manipulate them for their own ends. In the process the ordinary and sometimes even the larger investor was a passive figure, and the industrial operator or distributor was more directly concerned with the material contribution of society. In this high command was reflected most clearly and extremely the spirit of pure gain (monetary) or pecuniary profit, entirely abstracted from material efficiency or service.
On the other hand, the all-important "institution" making material progress was "technology," the state of the industrial arts.
The industrial arts, in Veblen's sense, were not only the arts proper but the habits, skills, transmission of skills, and the opportunity to develop and advance them. It was not physical capital or labor, let alone funds, which were to Veblen the great productive factor, but the cumulative growth of the technological habits of thought that comprised the machine process; without this intangible element physical instruments and labor would be of little use. Productivity was therefore an indivisible social phenomenon, not an individual one, a function of the given technology. Such was Veblen's "institution" of the "industrial arts."
Henry George had made physical land the source of the great "unearned increment," yielded to landowners through the growth of society and population; Karl Marx had found the capitalists' return in the exploitation of labor through the ownership of the capital goods; Veblen went further. He held that the source of "unearned gain" was in the ability of the large businessman to engross the community's technological knowledge, through the control of the funds essential to acquire the capital goods by means of which the all-important technological knowledge could achieve its end. Veblen thereby neatly presented the business classes as making no contribution to material progress but living off the industrious.
The machine technology under the regime of private property seemed to Veblen to have given rise to the dominance of corporation finance, which obeyed a logic of its own. The aim of finance was to increase funded money values, pecuniary gain, he said; while the aim of technology reduced prices disrupted the only values that business knew. Since corporation finance was master, industry obeyed business; and the community suffered the convulsions of crises and depressions, of restricted output, unemployment, and imperialistic ventures. Thus the acquisition of money did not register man's success against nature, or the individual's reward in the great contest, but a complex of pecuniary "institutions" which made profit not the means of life but its end. Pecuniary values, Thomas Carlyle's "cash nexus," therefore repressed material values, and business conflicted with industry.
To Veblen the money economy was "institutional," and not a natural requirement of humanity. He used "institution" in a broad and new sense, as a method of action arrived at by habituation and convention and generally agreed upon. Most "orthodox" economists would have agreed with this, but they presumed that "institutions," in the ordinary sense of the term, arose in response to men's needs and represented the state to which man had progressed in his struggle with nature. Veblen criticized this view as ignoring what the institution had become, an end rather than a means. To him "institutions" of price, property, and contract were active forces rather than passive embodiments of nature to which man adjusted himself by pleasure and pain. "Institutions" were themselves the embodiments and channels of the activity of man. Habits of thought were created by habits of action. Money, therefore, could not be viewed as a medium of exchange, and the successful large businessman ceased to be merely an intermediary in the efficient organization of industrial forces to satisfy men's wants. With money and securities made ends in themselves, or, more accurately, with the complex of "institutions" comprising modern business given an active or creative role, corporation finance became the main character in the drama. On its side, the machine technology, which comprised the industrial "institutions," could not be viewed merely as an element of production, different only in degree from artisan labor, but as a comprehensive and delicate process with a distinctive life of its own. Now the objective of the pecuniary experts was neither the supplying of goods to the consumer nor the efficiency of industry, but the accumulation of funded wealth, the making of money. Every step in the never-ceasing integration of industry, however, provided them with greater opportunities to achieve their ends, and these in their turn disturbed the arrangements of industry.
These untoward results came, according to Veblen, from the inevitable transformation of responsible ownership into the corporate organization, with its dissociation of nominal property rights and actual control, and consequent creation of competing feudal dynasties. The captains were not tied permanently to any industrial unit but constantly shifted their interests and thus gained by corporate losses as well as successes.
Veblen therefore turned from the conventional inquiry to a study of business or profits as an "institution" in itself. His was an inquiry into the economics of enterprise, with enterprise conceived in terms of the only realities it recognized, pecuniary realities, money profits, and with the modern enterpriser, who wields discretionary power in the economic order, occupying the seat of Kant's ultimate responsibility. In place of the successful functioning of industry through a competitive struggle to serve the public, Veblen's investigation found industry disorganized as a consequence of the struggle of competing captains to overreach one another in a purely imperialistic pursuit.
Capital in modern business enterprise, Veblen said, was funded wealth, the values of the stock market, with no definite relation to hard material values. Capital items were items of control of industry, and their value was determined not by material cost of production, nor by capitalization of "psychic incomes," nor even of actual earnings, but by the capitalization of their putative earning capacity; that is, their earnings, in the larger businessman's strategy. They were consequently an ever-varying, rather intangible magnitude. Thus the most valuable assets were the intangible assets of a monopolistic or quasi-monopolistic character. They signified the differential or monopolistic gains of the greater enterprisers at the cost, proximately of other businessmen, ultimately at the expense of the community, because business men were not bearers of the technological knowledge of the community.
The whole imbecile procedure of pursuing essentially imaginary values was not recognized as such, continued Veblen, for it proceeded on the preconception or "institutional" fact of the stability of the money unit, the notion that money measured productive contribution, that the success of business enterprise measured industrial advance, that the acquisition of funded pecuniary values represented an increase of material assets. To him this growth of capitalization in symbols acted as a dead hand on the country's material fortunes; for with the continued technological advance and integration of industry and its depressing effect on price, business was constrained to restrict output in order to maintain its nominal capital values.
The result was recurrent crises and depressions. The inflationary periods were always stimulated by extraneous, essentially wasteful forces, such as war or land booms. Thus Veblen introduced a study of recurring periods of prosperity, crises, and depressions, not as abnormal phenomena, but as integral if not dominant factors of the economic order.
Here Veblen's theory became a theory of business cycles, or, rather, a theory of the nature of corporation finance. It was a theory of modern credit, the credit of the capital markets, not the credit of the corner grocery story or the refined system of barter. Prosperity and depression were first of all prosperity and depression in pecuniary values, and only secondarily in industrial values. To illustrate this, Veblen pointed out that when business was sanguine, the competition for credit raised the apparent value of the assets of the community without so much as touching their real value. Then we were ready for still more credit. Many financial people took a lot more money without anyone's making or consuming anything more. Since this could not go on forever, eventually the real or actual profit was spread thin over the huge desert of securities; eventually wages and other costs caught up with the inflated prices produced by inflated credit. For Veblen, the discrepancy between nominal and effective capitalization arose because returns on the ever-increasing nominal capitalization could be met only by increased funds in the hands of consumers of consumption goods, and this could not be achieved because it would mean eliminating the gains of the inflation to the corporate financiers. In liquidation, Veblen continued, a redistribution of ownership occurred in which the issuers of credit, the corporate financiers, acquired the greater share of the assets and the real owners suffered.
Having profited from prosperity, they now profited from depression. But to Veblen chronic depression was the rule rather than the exception in modern business, because the increasing efficiency in technology and the competition of reorganized concerns kept prices too low to meet the fixed charges of nominal capital. His analysis found the notion that one must make more and more money so ingrained that even when the value of money rose in terms of goods, and therefore less money might mean greater real wealth, the larger business community nevertheless insisted on maintaining its high nominal capitalizations.
In Veblen's theory the future was not bright. According to it, schemes for maintaining "reasonable prices" would threaten business enterprise in the end. Thus an increase in the ever-growing monopoly of industry might prevent the cutthroat competition now caused by partial monopoly, but to be effective it must embrace all industry, and thus would eventuate in a bitter conflict between organized labor and organized capital. On the other hand, the inordinate productivity of industry, which reduced capital values, might be satisfied if the business community would waste more than it did now; but it could never waste enough, for the habit of saving was ingrained. War, colonies, foreign investments, could only temporarily help to waste the surplus.
Of course, Veblen granted that neither businessmen nor most economists considered business fundamentally a pecuniary "institution." But then he insisted that observation of the actual day-to-day operations as distinguished from official pronouncements or claims would confirm his views. Such an observation would involve not only looking at ledgers, business correspondence, profit and loss statements, and the stock market, but also, for the sake of a broader perspective, a study of other cultures and folklore, history, anthropology, psychology, ethics, aesthetics, and the like. This principle of study led him to direct his students to study actual business operations on the one hand, and to read widely on the other hand in the above-mentioned fields.
In Veblen's imaginative mind the argument became allegory and symbol. The contrast between business and industry, between pecuniary and industrial "institutions," became a contrast between different "disciplinary" systems, between the spirit of industrial and pecuniary employments. The pecuniary employments resting on the natural right of property were concerned with bargaining; they disciplined its adepts, the businessmen, in the personal self-seeking animistic logic of acquisition by seizure.
With a twinkle in his eye, Veblen here, as in many other places, gave a humorous and playful expression to a serious analysis. The process of valuation, he said, ran in terms of salesmanship and all the traits of character that depended for their success on taking advantage of people's weaknesses. It gave rise to a pragmatic point of view, with "pragmatic" meaning the agent's preferential advantage at the expense of others. But industrial employment also "disciplined" its adepts, the industrial population in general and engineers in particular, in the impersonal logic or cause and effect of the machine process, which was a more sober method. Its process of valuation ran in terms of the use of the inanimate forces of nature, not in the use of man by man in a cannibalistic struggle.
In Veblen's clash of industry and finance the respective employments lost touch with each other, since individuals worked either in one or in the other, and the differences in employment created fundamental differences in outlook that in effect represented different cultures. Men in the contrasted occupations thought differently because they acted differently. In the pecuniary occupations the faith in the punctilios of modern private property, in funded wealth, became more dogmatic and unswerving, while in the industrial occupations the faith in property tended to wane. Since the "institution" of private property, moreover, could not be stated in terms of cause and effect, it was threatened by a decay in "devout observances." The only effective cure for such unconventional conduct, which might work out in strikes and revolutions, was a counter "discipline" which would undercut the mechanistic logic. This might be supplied by recourse to warlike raids and imperialistic ventures, for training in warfare was antithetical to the training of peaceable industry. But the recourse to the counter "discipline" would bring a full flowering of the military genius; business enterprise would become merely an instrument of warlike power; and the economic order would turn into a feudal order.
To Veblen, the "natural decay" of business enterprise was certain; but the time element was important. Modern business enterprise was a transient phenomenon in the manner of a biological "sport," and must give way either to an industrial republic in conformity with the machine process, or freeze into a feudalistic dynastic regime. Modern property rights could be saved only by scrapping the machine process.
This "occupational" approach was not Veblen's only device to bring out or to dress up the meaning of the conflicting dictates of "business" and "industry." James' and McDougall's work on instincts had created a furor; everybody was talking of instincts.Veblen promptly contributed an instinct of his own, the instinct of workmanship. The unsophisticated instinct of workmanship characterized industry, he said, and the "institution" of property perverted it into the instinct of sportsmanship. Veblen even utilized conventional economic theory to bring out the distinction. The people of traditional economics who said that economics was evolutionary, meant, he said, that techniques and processes of business and competition were natural and useful; or, in other words, they constantly adapted themselves to the need of society. This to Veblen was begging the real question, which was whether traditional economics was adapted to modern requirements; or more particularly, whether modern business enterprise was adapted to the technological and material needs of the community.
The grimmest and most elaborate analysis and portrayal of his mighty theme was contained in his celebrated The Theory of the Leisure Class (1899). The book appeared in a highly expansive period of business development and prosperity. It was Veblen's first book, but its roots went back to his first writing, "Some Neglected Points in the Theory of Socialism," which dates from his re-entry into academic halls at Cornell in 1891. He gave it great care and attention, taking at least five years to complete it. The title was peculiarly apt, for leaders in the social sciences constantly bemoaned the country's lack of an aristocratic or leisure class corresponding to the English to check the inherent greed and commercialization of life. They hoped that the captains of industry who were largely responsible for the nation's progress would form a substantial element of such a select group.
The book contains one of the most withering dissections of contemporary capitalism yet penned. The nature of the control of the captains of finance over the material welfare of the community was worked out in terms of the canons and activities of the gentleman of leisure and his apparent prototype, the barbarian chieftain (read "modern businessman"). The system of free contract became the system of status; the system conforming to the machine process became the industrial republic. The commercialization of life with its poisoning of the springs of survival and advance was traced, not to men's concern with material production, but to its antithesis, pecuniary exploitation.
Veblen's "anthropological" discussions were in fact contemporary delvings into the nature of the modern money economy under the guise of anthropology. His description of the barbarian's standard of success in terms of skulls led up to his description of the modern man's standard in terms of money. And modern ownership, as in effect an ownership and enslavement of persons by pecuniary masters, he analyzed most sharply under the guise of a discussion of the barbarian status of woman as a chattel of the ferocious warrior.
The contrast between "business" and "industry" was worked out in the strangest guises -- dress versus clothing; the higher learning versus the lower learning; pecuniary beauty versus economic beauty; pecuniary canons of taste versus aesthetic canons of taste; predatory dogs versus peaceful cats; medicine men versus modern scientists; athletic combats versus physical education; criminals versus the industrious; the patriarchal family versus the household of the unattached woman; and, most sharply of all, the ferocious barbarian age versus that "earlier" stage, the presumptively primitive age of peaceable and free savages.
The free savage suddenly seemed superior; Veblen, on top of all else, was something of an anarchist. At least intermittently he showed a lack of sympathy for the "animated slide rule" or "finikin skeptic" of modern science, and for the impersonalization of large scale industrial and social organization. An occasional pessimism regarding progress crept through; and he waxed eloquent on man's inherited human nature was being restrained to meet the requirements of modern technology. He had an undercurrent of sympathy for that golden age when man, if he was not completely rational, was at least not predatory. "As seen from the point of view of life under modern civilized conditions in an enlightened community of the Western culture, the primitive, ante-predatory savage . . . was not a great success. Even for the purposes of that hypothetical culture to which his type of human nature owes what stability it has . . . this primitive man has quite as many and as conspicuous economic failings as he has economic virtues as should be plain to anyone whose sense of the case is not biased by leniency born of a fellow-feeling. At his best he is 'a clever, good-for-nothing fellow.' The shortcomings of this presumptively primitive type of character are weakness, inefficiency, lack of initiative and ingenuity, and a yielding and indolent amiability, together with a lively but inconsequential animistic sense. Along with these traits go certain others which have some value for the collective life process, in the sense that they further the facility of life in the group. These traits are truthfulness, peaceableness, good-will, and a non-emulative, non-invidious interest in men and things."
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