The Theory of Business Enterprise Part 1: Introduction

Thorstein Veblen

Thorstein Veblen

Thorstein Veblen wrote The Theory of Business Enterprise in 1904. He is best know for The Theory of the Leisure Class, with its famous phrase, conspicuous consumption. Here’s his Wikipedia entry. There are two things that recommend him to me. First, he studied with Charles Sanders Peirce, one of the central figures of American Pragmatism, and eventually worked with John Dewey, another central figure in the only genuinely American philosophy. Second, he studied with John Bates Clark, one of the earliest neoclassical economists, and rejected his views. In general, he saw the economy as embedded in social institutions, not as an entity on its own. Mark Thoma presents the views of Veblen and Clark on the state of the worker in a capitalist system; the two short pieces will help set the context for this series.

Much of what I have written here is directed at showing that neoliberal economic theory is almost useless as a guide to policy that works for the 99%. The series on Thomas Kuhn’s The Structure of Scientific Revolutions showed that in the hard sciences, successful ideas are been verified and formalized and organized into textbooks to speed up learning. In economics, the academics took the same route. That’s how we got economics textbooks like Samuelson and Nordhaus and Mankiw, both of which are I have addressed in a number of posts. The difference is that practicing economists don’t believe that Econ 101 textbooks are the best understanding of the way the economy works. Those ideas can be quite dangerous. For example, academic economists used models that don’t predict crashes to advise policymakers that deregulating the financial sector would be just fine. That led to the Great Crash. There is no penalty for being wrong. The same old failures just maunder on until death knocks them out of the expert hierarchy. As far as I can tell, they have never managed to excise a single one piece of the arrant nonsense they spout to an ignorant reporter or a politician looking for validation of a crackpot idea. They can’t even kill off the gold standard which is out there today thanks to the supposedly-educated Ted Cruz.

Why is that so? Marion Fourcade and her colleagues have some answers. What I want to do is to examine older books by the dissenters, people who didn’t buy into the silly ideas like this one from The Theory of Political Economy, 1871, by William Stanley Jevons:

I wish to say a few words, in this place, upon the relation of Economics to Moral Science. The theory which follows is entirely based on a calculus of pleasure and pain; and the object of Economics is to maximise happiness by purchasing pleasure, as it were, at the lowest cost of pain.

By “moral science” Jevons means the utilitarian philosophy of Jeremy Bentham. It was Jevons’ intent to translate those ideas into calculus. The discussion was not meant to be humorous. Keynes said that if people knew the principles underlying economics, they’d consider them preposterous, but sadly he was wrong. Nowadays, those ideas are taught to everyone as gospel. Keynes in his time, and I in mine, doubt that academic economists ever read Jevons or Pareto or any of their other intellectual ancestors, let alone the dissenters, including Veblen.

It’s my hope that by reading older books at the boundary of economics and sociology and other disciplines, we can unearth a different tradition and different solutions. And here’s a story.

I went to a sort of book club moderated by a very old man who had long since retired from the University of Chicago where he taught English literature. One of the books he selected was De Rerum Natura, by the Roman writer Lucretius, a fascinating work from about 50 BCE. It’s usually described as an early version of atomic theory. He started by telling us a story. He said that when he was in college he read a lot by the ancient Greeks, plays, philosophy, and even a bit of Euclid. It made him wonder why such smart people would take Greek Mythology seriously, when it was obviously just a bunch of fanciful stories. There were the Sophists who rejected the philosophy of Plato and Aristotle [cf. Zen and the Art of Motorcycle Maintenance by Robert Pirsig], but as we know from Plato, Socrates was condemned to die in part because he did not believe in the gods of Athens. It wasn’t until this session of his book club and his reading of Lucretius that he realized that there were Greeks who flatly rejected the mythology and attempted to conjure up from their limited knowledge a completely material description of the world.

In just the same way, there have always been dissenting economists who offered completely different views of the way a capitalist economy works. The dominant version has concealed the dissenters, not least from themselves, but we are more likely to get a good ideas from the dissenters than from people trying to tweak the dominant structure.

Notre Dame undergrad (math); JD, Indiana University at Bloomington; 1st Lieutenant, US Army.; private practice in corporate and securities law; Assistant AG in Tennessee for consumer protection and securities; Blue Sky Securities Commissioner, Tennessee; private practice, bankruptcy and corporate law.

I have had a lifelong interest in economics. For most of my career, that interest was practical, focused on the problems in front of me. Lately I have been more interested in economics as a theory, especially its impact on the lives of people like those I met in my bankruptcy practice, and on the politics of money in the US. I also enjoy reading philosophers, starting in college and steadily expanding my reading ever since. I wrote at FireDogLake for a number of years.

Generally, I think the problem facing the US is the dominance of neoliberal discourse. I think it clouds the vision, and limits the kinds of problems that can be identified and solved. For example, the existence and danger of climate change can easily be identified in a scientific discussion. However, the problem does not fit the neoliberal discourse because science insists that the pursuit of individual and corporate self-interest will lead to devastation. In neoliberal discourse, the pursuit of self-interest always leads to Eden.

The neoliberal project has two prongs. One is the police function of crushing dissent and alternative views. The police function is provided by government agencies and private and institutional actors. The counterpart is the economic system , which is operated by government and by private and institutional actors. Some of these actors operate in both spheres. I focus on the second prong.

18 replies
  1. martin says:

    quote”In just the same way, there have always been dissenting economists who offered completely different views of the way a capitalist economy works. The dominant version has concealed the dissenters, not least from themselves, but we are more likely to get a good ideas from the dissenters than from people trying to tweak the dominant structure.”unquote

    I have a suggestion. Go to the local unemployment office. Ask 10 people in line what their view is of the way a capitalist economy “works”.

    • bevin says:

      I’m not sure what your definition of ‘real’ is but it strikes me that Paul Krugman is desperately searching for a job, starting next January.

    • Alan says:

      Real job? If you mean outside an academic department then lots of them have real jobs. They work for big financial corporations, regulators and government. It’s one big revolving door. That’s why they are so successful. They aren’t in the business of understanding social relationships so much as legitimizing them.

  2. Denis says:

    Ed: “we are more likely to get a good ideas from the dissenters than
    from people trying to tweak the dominant structure.”
    If one begins with the assertion that the dominant structure is a foul mess,
    then this statement is a bit tautological. If something is a bad idea, then the
    dissenters who oppose it are almost necessarily more likely to have better
    ideas than those who support it. But in the case of complex issues having
    multiple facets, the assessment of what ideas are “bad” and what ideas are
    “good” can almost always be done only retroactively, which means that
    the ideas that initially become the “dominant structure” are tested against
    reality, while the dissenters’ ideas remain theoretical and untested and,
    so, the flaws remain hidden. IOW dissenting ideas will almost always look
    better for lack of experience with them.
    A legal analogy: Justice Taney and 6 other Supreme Court justices “tweaked”
    the dominant structure of slavery in their 1857 Dred Scott decision. The court
    “clarified” the dominant structure by holding that slaves were property and
    even if freed could never be citizens with rights to the courts. But the 2
    dissenters on the Court, like John Brown and other abolitionist dissenters in
    the society, obviously had it right — where “obviously” and “right” are both
    determined by today’s dominant moral perspective and 150 years experience
    with and evolution of the new dominant structure that replaced slavery.
    But in 1860 at the end of the Civil War it wasn’t really obvious whose ideas
    were right. For thousands of blacks who were tortured and lynched
    during the century after the war, and millions who were subjected to
    unimaginable economic, personal, and constitutional deprivations, it may
    not have been entirely clear that the new dominant structure — which had
    been the pre-war dissent — was any better.

  3. Alan says:

    Include in the dissenters nearly all those who study economics in other disciplines e.g. sociology, anthropology, history, etc. , practically all of which would treat “the economy as embedded in social institutions”. The more fundamental dispute concerns the nature of social reality and what it is to be a social being. Many social scientists would argue that the modern discipline of Economics is fundamentally anti-social and masquerading as a social science.

  4. earlofhuntingdon says:

    I very much like your idea of reviewing older writings on economics. I think those sources hold to the more accurate view that economics cannot be usefully isolated from politics or sociology. Economics is a social science. (The Oxford degree is still labeled Politics, Philosophy and Economics.) Economic choices are inherently political. History and sociology are fundamental to understanding why we think the way we do about economics, to understanding the agency behind our choices, and to understanding how different choices might be made.

    As Philip Mirowski often points out, Americans have locked the sociology of economic thinking in the cupboard. Neoliberals exorcised it from textbooks, hoping to control the cultural landscape in a political war against dreaded state control. They hoped to conceal a) that their choices were choices, b) that those choices created winners and losers, c) that those choices came about owing to sustained, concerted, well-financed efforts, and d) that there were legitimate alternatives to those choices, which would create different winners and losers.

    Most of all, neoliberals wanted to hide their agency, to deprive others of a road map for how to compete with them and how to impose a different carving up of the economic pie. So neoliberals, as did Social Darwinists 50 years earlier, described their preferred ends as inevitable, occurring not because of their own efforts, but because they were the mandates of heaven, or of natural or mathematical law. Deviation from them, say, by Rooseveltian intervention, would be heresy, an existential threat to good order. It would also be bad science.

    The more diverse economics-as-science crowd threw out the sociology of economics and the politics of economic choice because they were intent on demonstrating that economics was a rigorous science, akin to physics and mathematics, and deserving of the same stature and regard. Physics envy.

    Reading these earlier authors might help us to revive debate about choice, about agency, about how to create the different path needed to better the lives of Main Street Americans. Or we could accept the neoliberals’ catechism, intoned with the Celtic grumble of the occupied, “You can’t get there from here”.

  5. Evangelista says:

    In regard to how ancient Greek “smart people would take Greek Mythology seriously, when it was obviously just a bunch of fanciful stories”, they did not. The Greeks of Plato’s, Euclid’s, etc.’s time, if they were aware of aspects of what we know as “Greek Mythology”, such as may have existed then, would have known them as heretical fictions, deprecatory, and pornographic, travesties slandered onto the then credited religious myths of the then extent culture turning aspects of them on their heads, sort of like writings making Jesus a whoremaster pimping Mary and Martha and burly Peter and a simpering John, doing a “Hey, baby, let me show you a real way of life!” recruiting routine on the Woman at the Well, and so on.

    As far as oppositions to fundamental religious crediting of the then culturally accredited religious myths of the culture of the time, Plato’s ‘cave-of-shadows’ analogy is just that, a definition of the people of the time’s defining of their morals and values by reflecting on reflections of the Gods’ in mythical stories demonstrated morals and values, as ‘removed from reality’ compared to reflecting on observable real events. Also, Socrates, to a Greek of the time, would have been recognized from his physical description a reflection of one of the then current Gods (one who had not been reflective, or wise, in the myths, and suffered for it, who, in the Socratic context, had become, not wise, but questioning, in a fool-like way, and so teaching reflection). All of that nuance has been lost for us with Roman (note that Ovid was banished by Augustus for his writing ‘Greek’ Deities into pornographic situations) of and Judeo-Christian Era attack and deprecation substitutions for the ‘ Pagan’ religion myths theirs displaced.

    Rewriting and redefining to ‘ borrow’ elements of concepts, to then redirect is common and with us humans always. Note the ‘Three C’s’, ” Catholic”, “Communism” and “Capitalism” for examples. None of them mean, fundamentally, what they are recognized to reference in our current usages of them (especially capitalized). ” Capitalism, for example, has been altered to reference 1. money only and 2. casino-gaming exchange play in currency, not actual capitalization (providing means to accomplish something, which investing money [or anything else that facilitates production] in someone’ s venture actually is). The result is Capitalism existing apart from production and in fact interfering with production (the reason companies are buying back to get off exchanges, or decrease their exposures to the gamblers’ manipulations), and having developed an evil connotation (and all but lost its original meaning).

    This impacts in dissent when ‘dissenters’ dissent against developed connotations instead of the essential construction that a reference references. For example, when dissent against “Capitalism” is against the exchange chart-value manipulating that economically roller-coasters companies the manipulators manipulate the values of to long and short and hype and deprecate and algo-manipulate to nip profits from the number changes. With the change of meaning for “Capitalism” that results, real capitalism, the capitalization of productive activities for constructive purpose, is damaged for becoming deprecated and associated with wrong-doing and damaging.

  6. Bay State Librul says:

    Good arguments

    Are you trying to put a dent in the economic world?
    Here is how I would kick start capitalism

    Raise the Minimum wage to $15, and then add a % for cost of living adjustment where you live.

    Tinker with the tax rate

    Provide billions for infra-structure
    Measure the analytics — see Bill James

    Don’t agree that we should go back in time (regressive). The new economy has 10-15%
    earners inside the digital economy. The middle class has 30-40% who provide services to the digital economy. Not sure what to do with bottom class.

    • bevin says:

      While auto firms are making record profits wages are plummeting.
      “…Ford workers have informed the WSWS Autoworker Newsletter that all positions on the new hot metal machinery will be filled exclusively by new hires, that is, a third tier, who will start at $9 per hour—fifty cents more than the state’s minimum wage of $8.50. These workers will top out at $12 after years of service.

      “In the 2015 contract the UAW imposed a “competitive wage rate structure” on workers at the factory, as well as two other Michigan plants: Sterling Axle (2,100 workers) and the powertrain plant in Rawsonville (740 workers). The lower wages were necessary, the union claimed, to save the plants from closing and compete with non-union suppliers…..”

  7. bevin says:

    “By “moral science” Jevons means the utilitarian philosophy of Jeremy Bentham. It was Jevons’ intent to translate those ideas into calculus. The discussion was not meant to be humorous…”

    This is a very important point. What we call classical economics was, from its origins, connected with Utilitarian nonsense philosophy. Malthus was deeply influenced by Utilitarianism. Ricardo developed his theories at the urging-and with the assistance of-James Mill, Bentham’s sidekick by the 1820s. John Stuart Mill bridges the two schools (albeit in a weird way).

    The ‘libertarian impulses’ of the free traders were always at odds with the authoritarianism and racism of the Utilitarians, who regarded despotism (‘enlightened’ of course by their ideas) as the most desirable form of government. Of course those Mancunian ‘libertarian impulses’ were also contradicted by the political habits of their raw material suppliers in the South.
    Racism comes in very useful to liberals trying to square circles.

    • Alan says:

      The transformation from the moral economy of Smith in the 1770s through to the marginal revolution of the 1870s is covered in After Adam Smith: A Century of Transformation in Politics and Political Economy (not the easiest read in my opinion).

      Where once stood Smith’s rich description of morally regulated, prudent behaviour to describe self-interested action–derived from a model of a socially-constructed self–now stood a rational calculator of exclusively private costs and benefits.

    • bevin says:

      Thank you. I recently read a book on the subject (free on the net) but I don’t think it was the one that you recommend. And the name temporarily escapes me.

  8. bevin says:

    Thanks for the link but it does not work for Canada. The link includes a range of secondhand and new copies from $3.60 upwards. to which I contribute hundreds of dollars per month- has a couple of copies available, starting at $44.00
    I’m off to abebooks. Free trade they call it, too.

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