ECON 364 – Topic Eleven

Institutionalism and Thorston Veblen (1857-1929)

More modern names:  John Kenneth Galbraith and Robert Heilbroner

The only American economic school of thought, founder was Yale economist Thorstein Veblen, (1857-1929) best known for his 1899 book, The Theory of the Leisure Class.

Disagree with Mainstream Economics - Have A Lot in Common with Austrians - with major differences in some fundamentals

Institutionalists argue that individual economic behavior is largely explained by the society they belong to, and in particular the institutions they belong to. These include business firms, churches, families, governments, charities -- any institution that prescribes behavior, tradition or knowledge.

   In The Theory of the Leisure Class Veblen focuses on the leisure class and the inferior class as institutions that in fact channel human choices in particular ways. The underlying view is that human beings are not motivated by economic rationality. Rather, humans are motivated by status and saving face. Rational economic man characterized as a lightning calculator of pleasure and pain is not something inherent in human beings, but a product of the capitalist culture and associated institutions. 

Thorstein Veblen

Process of change in society/economy: pragmatic adaptation drives institutional change forward, ceremonial ways and vested
interests hold it back.

Production:

    Progressive factors:

    Restricting factors:

Leisure Class and the Inferior Class:

In The Theory of the Leisure Class Veblen focuses on the leisure class and the inferior class as institutions that in fact channel human choices in particular ways.

Say No To The "Economic Man" -

Consumption:
Desire/need for self-respect (instinct/propensity?)
Leads to (institutions) : leisure class + conspicuous consumption (conspicuous waste and leisure) + emulation of  money
So - motive for consumption is not need but emulation
And - pattern of consumption is based on that of leisure class

    Conspicuous Consumption:  He presented as a scientific analysis of upper-class mores and behaviors. It portrayed the life of the well-bred individual as a quest for status in a money loving culture—that is, a culture in which status was based upon wealth.

The book reached an audience far beyond the economics profession. (Most readers believed it to be as much satire as scholarship.)

Private Property and the Businessman:  Veblen argued that the goal of a businessman is not to produce goods according to the best interests of society, but to make a profit, which Veblen said was quite often harmful. 

A general theme in Veblen's writings was that the system of private property was no longer compatible with the technological basis of modern industry. The institution was out-dated, so-to-speak.

Industrial vs. Business Occupations: 

Associated with these types of occupations were two antagonistic worldviews. Veblen thought that a social upheaval was imminent, as those in industrial occupations were coming to question the social value of business activity and the system of private property upon which it was based.  But he was not a Marxist or a socialist (although both camps tried to claim him).  He really didn't want much to do with politics -- simply wanted to discuss and research ideas. 

American institutionalism can be associated with a stress on:

1. The importance of institutions (social norms, legal norms, and conventions or widespread "habits of thought") on economic behavior and organizations,

2.  The changing or evolutionary nature of such institutions.

Individuals can create new institutions or change the traditions within existing ones, but historically institutions have been resistant to change - they are behind the times, so-to-speak.

How can institutions change?  Only in modern times has the pace of change accelerated.

Veblen believed the economic theory of his day to be built on faulty assumptions about the nature of people and society. He argued that economics would not be a modern science until economists adopted an "evolutionary" viewpoint, recognizing and seeking to explain past and ongoing changes in customary patterns of economic and social interaction. Veblen's own theories focused on the role of technology in shaping a society's value system, which in turn influenced all other aspects of social organization. Social change occurred as technological innovations originally introduced to further ends consistent with one value system led to the formation of an alternative value system.

3.  The need to study the actual operation of economic institutions and rely less on highly abstract theorizing.

 Institutionalism was partly a reaction to the equilibrium economics of Alfred Marshall. His mathematical models described an economy in static equilibrium, which simply did not describe reality. The real world is constantly in flux.

4. The basis of many economic problems and failures in the existing institutional structure, and

5. The need for institutional reform - and the idea that government could accomplish this reform. 

Institutionalists favor government regulation of the market since they reject the idea that individuals are motivated purely by profit or self-interest, but are endowed with a measure of genuine altruism. 

Therefore, those in government can be altruistic and do the right thing for society in general. 

These ideas placed Institutionalists in opposition to much of standard neoclassical methodology and theory, and to its more pro-market policy implications.

Veblen, for example, 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, --- so what the heck is he sayin?  Maybe he was just trying to make people think.

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