Michael Hudson on Veblen


One of the persistent disappointments in my life has been the inability to interest more folks in the writings of Thorstein Veblen. Goodness knows I have tried—speeches, websites, multimedia CDs, letters, and boring everyone I could buttonhole.  I discovered TBV while searching for a believable explanation for what happened to trigger the global depression of 1981-82.  I didn't actually know what I was looking for and had the resources of the St. Paul library system so I did a bunch of reading—history, business magazines, trade journals, the heavy hitters on political economy from Marx to Hayek to Keynes, even philosophy.  Nothing seemed to be relevant to my search.

The death of my uncle in April 1984 got my mother talking about the insanely difficult struggle that faced the family as they tried to survive the 1920s and 30s in rural Minnesota (yes, they call them the Roaring 20s but for small farmers, it was catastrophic.)  Mom gave me enough clues so that with the skilled help of my favorite librarians, I was able to partially reconstruct my grandfather's reading list. Through the magic of inter-library loans, I began to read magazines like the 1920s Appeal to Reason / American Freeman that provided serious analysis of why farmers were starving in the age of the flappers.  What was so amazing was how economically similar the 1920s and the 1980s were—at least down on the farm.  It was stunning how politically sophisticated my grandfather's generation was in so many ways.

In the middle of this reading jag, I discovered The Theory of the Leisure Class (TOLC) by Thorstein Veblen.  My newfound exposure to the political writings of the 1920s was extremely helpful in making it through that very challenging tome. Because reading was the only method of communicating ideas in those days, people just read more and more difficult books (TOLC became a popular best-seller.) Here I was a university graduate and it took several years of reading the 1920s musings to become comfortable with the style and vocabulary of Veblen.  Even so, I believe that reading the first three pages of TOLC shed more light on how the world actually works than the approximately 250 books and 1000 magazine articles I had read up until that point.  It was breath-taking.

If you count Veblen's translation of the Lexdaela Saga, he wrote 10 books.  By now I have read all 10 at least twice.  In 1993, to celebrate the rebuilding of the Veblen farmhouse in Minnesota, I read all of them in the order in which they were published.  I highly recommend the experience.  However, I also know that for most, this would be impossible because of the heavy commitment of time and effort.  Therefore, it is always good when someone who really understands Veblen takes the time to explain what the fuss is all about in an easily digestible essay.  As the world's leading Institutionalist, Michael Hudson is superbly placed to explain Veblen and this weekend, he hit one out of the park (see below.)

What is so insightful is that he manages to include the highlights of Veblen's thinking (at least according to me) while explaining why Veblen is still relevant.  These include:
  1. “Veblen put forth a basic distinction between the productiveness of ‘industry’ run by skilled engineers, which manufactures real goods of utility, and the parasitism of ‘business,’ which exists only to make profits for a leisure class which engages in ‘conspicuous consumption’.
  2. Economic rent – the excess of price over this “real cost” – is unearned income.
  3. “Real estate is an enterprise in ‘futures,’ designed to get something for nothing from the unwary, of whom it is believed by experienced persons that ‘there is one born every minute.’”
  4. Veblen criticized academic economists for having fallen subject to “trained incapacity” as a result of being turned into factotums to defend rentier interests.
  5. His Theory of Business Enterprise (1904) emphasized the divergence between productive capacity, the book value of business assets and their stock-market price (what today is called the Q ratio of market price to book value). He saw the rising financial overhead as leading toward corporate bankruptcy and liquidation. Industry was becoming financialized, putting financial gains ahead of production.
Last Friday I went out to the Veblen farm to soak up some atmosphere to enhance the joy of reading Hudson's brilliant essay. The harvest is largely done. The trees have mostly lost their leaves.  We haven't had a hard freeze yet but that is certainly coming soon.



The Veblen farm sits on one of the highest points in the county.  This means it is often very windy as is readily apparent from the tree next to the old granary.



This has been one of those gorgeous autumns where even the oaks turn a wonderful russet color. These trees are near where the Veblens had a woodlot.  The farm was mostly grassland so they had to have a source of fuel.  Burr oaks make an especially welcoming fire and are not so good for construction.  The Veblen woodlot also had red and white oaks.  Much of the barn was framed with white oak.





The Return of the Repressed Critique of Rentiers: Veblen in the 21st century Rentier Capitalism

by MICHAEL HUDSON, OCTOBER 21, 2016

In 2012 a conference was held on Thorstein Veblen in Istanbul. It was sponsored by a socialist labor union, the Chamber of Electrical Engineers. We were asked why not focus on Marx? My answer was that Marx had died a generation earlier, and the major critique of finance capitalism had passed to Veblen. This book, Absentee Ownership and its Discontents: Critical Essays on the legacy of Thorstein Veblen, (from which my following remarks are excerpted) is a series of essays, including by myself and another NC friend, Michael Perelman.–MH

Simon Patten recalled in 1912 that his generation of American economists – most of whom studied in Germany in the 1870s – were taught that John Stuart Mill’s 1848 Principles of Political Economy was the high-water mark of classical thought, and nationalizing monopolies or regulating their prices to reflect actual production costs. However, Patten added, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms, above all either nationalizing land or fully taxing it, and either nationalizing monopolies or at least regulating their prices to bring them in line with actual production costs. Mill was “a thinker becoming a socialist without seeing what the change really meant,” Patten concluded. “The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George.” But George was only a muckraking journalist and anti-academic, so the classical approach to political economy evolved above all through Thorstein Veblen.

Like Marx and the rising socialist agitation, Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized. This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for him to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern. Veblen’s exclusion from today’s curriculum is part of the reaction against classical political economy’s program of social reform. By the time he began to publish in the 1890s, academic economics was in the throes of a counter-revolution sponsored by large landholders, bankers and monopolists denying that there was any such thing as unearned income. The new post-classical mainstream accepted existing property rights and privileges as a “given.” In contrast to Veblen’s argument that the economy was all about organizing predatory schemes, this approach culminated in Milton Friedman’s Chicago School defense the pro-rentier argument: “There is no such thing as a free lunch.” This blunt denial rejected the preceding three centuries of classical value and price theory, along with its policy conclusions promoting taxation of land and other natural endowments, and financial reform.

Dropped from view was rentier overhead in the form of predatory and unproductive forms of wealth seeking. The post-classical mainstream treats all income as “earned,” including that of rentiers. Lacking the classical concepts of unproductive labor, credit or investment, today’s textbooks describe income as a reward for one’s contribution to production, and wealth is being “saved up” as a result of someone’s productive investment effort, not as an unearned or predatory free lunch. This shift in theory has shaped the seemingly empirical National Income and Product Accounts to indulge in a circular reasoning that treats recipients of rent and interest as providing a service, an economic contribution equal to whatever rentiers receive as “earnings.” There are no categories for unearned income or speculative asset-price gains.

Veblen described the largest sectors of the economy where quick fortunes were made as being all about organizing rent-seeking opportunities to obtain income without real cost. He viewed psychological utility as social in character. In contrast to food or other satiable bodily needs characterized by diminishing marginal utility – e.g., from eating food and becoming satiated – his concept of conspicuous consumption emphasized the insatiable drives to raise one’s social status. The desire for consumer goods was characterized by fads for the most pricey goods as trophies of one’s wealth. The result was the mercenary vulgarity of wealthy Babbitts turning culture into an arena for shifting fashion, all to impress others with similar shallow sensitivities. The largest factor defining status was the neighborhood where one’s home was located. Housing was not simply a basic living space as “use value.” It established one’s position in society, duly enhanced by civic boosterism, public subsidy and infrastructure spending.

“The Great American Game”: Real Estate

Describing real estate as being “the great American game,” Veblen focused on how future prices were enhanced over present values by advertising and promotion. “Real estate is an enterprise in ‘futures,’ designed to get something for nothing from the unwary, of whom it is believed by experienced persons that ‘there is one born every minute.’” Farmers and other rural families from the surrounding lands look “forward to the time when the community’s advancing needs will enable them to realise on the inflated values of their real estate,” that is, find a sucker “to take them at their word and become their debtors in the amount which they say their real estate is worth.” The entire operation, from individual properties to the town as a whole, is “an enterprise in salesmanship,” with collusion being the rule.

Retailers in small towns collude to exploit farmers, a practice broken by the spread of mail order catalogues. But monopoly power is achieved most rigorously in local banking. Most loans are for mortgages to inflate land prices. “And the banker is under the necessity –‘inner necessity,’ as the Hegelians say – of getting all he can and securing himself against all risk, at the cost of any whom it may concern, by such charges and stipulations as will insure his net gain in any event.”

Land prices were rising in larger cities as a result of overall prosperity and the easier availability of mortgage financing, while public spending on roads, subway and bus systems, parks, museums and other prestigious activities were organized to enhance neighborhood values. Such practices prompted Veblen to criticize Clark and also Marshall for ignoring the “pecuniary” financial dimension of life. This was a glaring error of omission in the new mainstream, along with monopolies and large real estate frauds started in colonial times, highlighted by the Yahoo land fraud early in the Republic, and capped by the railroad land grants. As Henry Liu describes how Veblen emphasized the predatory role of high finance: “Veblen put forth a basic distinction between the productiveness of ‘industry’ run by skilled engineers, which manufactures real goods of utility, and the parasitism of ‘business,’ which exists only to make profits for a leisure class which engages in ‘conspicuous consumption’. The only economic contribution by the leisure class is ‘economic waste’, activities that contribute negatively to productivity. By implication, Veblen saw the US economy as being made inefficient and corrupt by men of ‘business’ who deviously put themselves in an indispensable position in society.”

Veblen against academia turned business

Veblen criticized academic economists for having fallen subject to “trained incapacity” as a result of being turned into factotums to defend rentier interests. Business schools were painting an unrealistic happy-face picture of the economy, teaching financial techniques but leaving out of account the need to reform the economy’s practices and institutions. In a conclusion recalling Veblen’s Higher Education in America, Herman Kahn describes how peer pressure leads experts to accept explanations that deviate from accepted concepts: Educated incapacity often refers to an acquired or learned inability to understand or even perceive a problem, much less a solution. The original phrase, “trained incapacity,” comes from the economist Thorstein Veblen, who used it to refer, among other things, to the inability of those with engineering or sociology training to understand certain issues which they would have been able to understand if they had not had this training.

Kahn adds that this phenomenon occurs especially “at leading universities in the United States – particularly in the departments of psychology, sociology, and history, and to a degree in the humanities generally. Individuals raised in this milieu often have difficulty with relatively simple degrees of reality testing.” The problem is greatest in economics, of course.

From Marx to Veblen

Early (and most non-Marxist) socialism aimed to achieve greater equality mainly by taxing away unearned rentier income and keeping natural resources and monopolies in the public domain. The Marxist focus on class conflict between industrial employers and workers relegated criticism of rentiers to a secondary position, leaving that fight to more bourgeois reformers. Financial savings were treated as an accumulation of industrial profits, not as the autonomous phenomenon that Marx himself emphasized in Volume 3 of Capital. Headed by Lenin, Marx’s followers discussed finance capital mainly in reference to the drives of imperialism. The ruin of Persia and Egypt was notorious, and creditors installed collectors in the customs houses in Europe’s former Latin American colonies. The major problem anticipated was war spurred by commercial rivalries as the world was being carved up. It was left to Veblen to deal with the rentiers’ increasingly dominant yet corrosive role, extracting their wealth by imposing overhead charges on the rest of society. The campaign for land taxation and even financial reform faded from popular discussion as socialists and other reformers became increasingly Marxist and focused on the industrial exploitation of labor. Veblen described how the rentier classes were on the ascendant rather than being reformed, taxed out of existence or socialized. His Theory of Business Enterprise (1904) emphasized the divergence between productive capacity, the book value of business assets and their stock-market price (what today is called the Q ratio of market price to book value). He saw the rising financial overhead as leading toward corporate bankruptcy and liquidation. Industry was becoming financialized, putting financial gains ahead of production. Today’s financial managers use profits not to invest but to buy up their company’s stock (thus raising the value of their stock options) and pay out as dividends, and even borrow to pay themselves. Hedge funds have become notorious for stripping assets and loading companies down with debt, leaving bankrupt shells in their wake in what George Ackerlof and Paul Romer have characterized as looting. In emphasizing how financial “predation” was hijacking the economy’s technological potential, Veblen’s vision was as materialist and culturally broad as that of Marxists, and as rejecting of the status quo. Technological innovation was reducing costs but breeding monopolies as the Finance, Insurance and Real Estate (FIRE) sectors joined forces to create a financial symbiosis cemented by political insider dealings – and a trivialization of economic theory as it seeks to avoid dealing with society’s failure to achieve its technological potential. The fruits of rising productivity were used to finance robber barons who had no better use of their wealth than to reduce great artworks to the status of ownership trophies and achieve leisure class status by funding business schools and colleges to promote a self-congratulatory but deceptive portrayal of their wealth-grabbing behavior.

Significance of Veblen for Today

As the heirs to classical political economy and the German historical school, the American institutionalists retained rent theory and its corollary idea of unearned income. More than any other institutionalist, Veblen emphasized the dynamics of banks financing real estate speculation and Wall Street maneuvering to organize monopolies and trusts. Yet despite the popularity of his writings with the reading public, his contribution has remained isolated from the academic mainstream, and he did not leave a “school.” The rentier strategy has been to make rent extraction invisible, not the center of attention it occupied in classical political economy. One barely sees today a quantification of the degree to which overhead charges for rent, insurance and interest are rising above the cost of production, even as this prices financialized economies out of world markets.

The narrowing of Chicago-style monetarism and neoliberalism has left the economics discipline in much the state that Max Planck applied to physics from Maxwell to Einstein: Progress occurs one funeral at a time. The old conservatives die off, freeing the way for more progressive successors to take the steering wheel. But what makes today’s economics different is that it actually would help to look backward, to the epoch before the financial sector and its allied rentier interests hijacked the discipline. The most systematic analysis of this process was that of Veblen nearly a century ago. It remains sufficiently relevant that Marxists and more heterodox critics have incorporated his theorizing into their worldview. more