Capitalism-and-Its-Critics-A-History-From-the

These developments fascinated Veblen. In 1894 he had published an article in Popular Science Monthly titled “The Economic Theory of Woman’s Dress.” For many high-end consumers, the piece pointed out, clothes were no longer worn merely for work and comfort; they had turned into “an index of wealth.” For clothing to be an effective signaling device, Veblen explained, it must satisfy three cardinal principles: “expensiveness,” “novelty,” and “ineptitude.” It must be perfectly clear to everybody that the wearer of the dress was “manifestly incapable of doing anything that is of any use,” and that the monies that had been expended upon it represented pure “waste,” or “conspicuously unproductive expenditures.”28

This argument didn’t mesh with the labor theory of value, which Marx and other classical economists had relied on, or with the new mathematical economic theories of the Englishman William Stanley Jevons and the Frenchman Leon Walras, which traced the value of goods to the incremental utility (or satisfaction) they yielded. Breaking with all orthodoxies was Veblen’s intention. Unlike most American economists, he took Marx seriously and sympathized with some of the goals of socialism despite his skepticism, at this stage of his life, about its practicality. In the end, though, he regarded the materialist theory of history as teleological and “unfit … for the purposes of modern science.”29 As for the orthodox theory, he regarded its foundations as fundamentally unsound. He believed it was ahistorical and psychologically unrealistic to treat people as atomistic and entirely rational decision-makers.

Veblen developed this idea in a journal article titled “Why Is Economics Not an Evolutionary Science?”30 “The hedonistic conception of man,” he wrote, “is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area but leave him intact.” But humans weren’t “simply a bundle of desires,” Veblen insisted. Their behavior emerged from “a coherent structure of propensities and habits,” each one shaped by their hereditary traits, past experience, and current material circumstances. The proper goal of economics, he argued, was to analyze these factors and the institutions that they gave rise to in a process of cumulative “cultural growth.”

Veblen intended to develop these themes in his book, but his writing was interrupted by a marital crisis, the first of many. It was prompted by his relationship with Hardy. In a February 1896 letter, he wrote to her: “I love you beyond recall.”31 Not only was Veblen still married, but Hardy was engaged to someone else. In March, Veblen confessed to his wife, Ellen, that he was in love with another woman and asked for a divorce. After Ellen refused and Hardy went ahead with her marriage, Veblen went into a decline. “Mr. Veblen’s health is entirely broken down,” Ellen wrote to Hardy in April 1897. “He says often that he will not live through the year.”32 Despite his heartache, Veblen eventually managed to finish his manuscript. In September 1898, he sent a final version to the publisher Macmillan, which had agreed to put it out on condition that he covered half of the production costs. Five months later The Theory of the Leisure Class appeared.33

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In its opening chapters, Veblen developed his evolutionary approach. Like Smith, Marx, and many other European scholars, he divided human history into separate epochs, in his case “savage,” “barbarian,” and “civilized.” In the savage epoch, when people lived as roving bands of hunters, there was “no hierarchy of economic classes”; everyone participated in the communal activity and shared the spoils.34 The rise of a leisure class that did no productive work coincided with the emergence of barbarian societies, in which a privileged upper tier lived off the economic surplus that it appropriated from the people who produced it. Veblen divided these societies into lower and higher barbarism. As examples of the latter, he cited feudal Europe and Japan. In these sorts of societies, “a struggle between men for the possession of goods” develops.35 Gradually “accumulated property  … more and more replaces trophies of predatory exploit as the conventional exponent of prepotence and success.”36

Veblen’s stadial theory of history was essentially technological. His use of the term “civilized” didn’t represent an endorsement of the modern era, which, in his view, shared some key economic attributes with the “barbarian” epoch. In his narrative, the rise of settled agriculture created societies that were productive enough to support an idle elite of chieftains and high priests. Eventually, humanity transitioned into the era of handicrafts and, finally, the age of machinery, in which the economic surplus was big enough to support a sizable leisure class, who were direct descendants of the ancient high priests and the feudal nobility. They largely lived off the work of others.

Rather than singling out the predations and excesses of the Vanderbilts and other individual members of this new elite, as other critics of the Gilded Age had done, Veblen focused on the group as a whole and identified two of its key features. Since the goal of the members of the leisure class in accumulating wealth was “to rank high in the comparison with the rest of the community in point of pecuniary strength,” there was no level of absolute wealth, however large, that could satisfy the desire for more.37 As Veblen put it: “Since the struggle is substantially a race for reputability on the basis of an invidious comparison, no approach to a definitive attainment is possible.”38 Moreover, the private possession of great riches didn’t guarantee a high social standing. Because “esteem is awarded only on evidence,” everybody must be made aware of the existence of this wealth.39

One way for the upper classes to advertise their wealth was by refraining from productive work and engaging in “conspicuous leisure.” From ancient Greece onward, Veblen noted, “the life of leisure is beautiful and ennobling in all civilized men’s eyes.”40 Reprising the argument he had made in his article on women’s dress, he identified another signaling device: making wasteful purchases and engaging in “conspicuous consumption.” Either of these tactics could be effective. “In the one case it is a waste of time and effort, in the other it is a waste of goods. Both are methods of demonstrating the possession of wealth, and the two are conventionally accepted as equivalents.”41 Veblen pointed out that many members of the leisure class adopted them simultaneously. He referenced the “quasi-peaceable gentleman of leisure” who “consumes freely and of the best, in food, drink, narcotics, shelter, services, ornaments, apparel, weapons and accoutrements, amusements, amulets, and idols or divinities.”42 Such a fellow is no longer “simply the successful, aggressive male … In order to avoid stultification he must also cultivate his tastes, for it now becomes incumbent on him to discriminate with some nicety between the noble and the ignoble in consumable goods.”43

At a time when the robber barons and their families were rifling the châteaus of Burgundy and Provence to furnish and decorate their mansions, Veblen’s barbs reached the bone. But his arguments about status seeking and conspicuous consumption weren’t restricted to the ultrarich. Although this sort of behavior was most prevalent among the elite, it had extended down the social scale, because the “leisure class stands at the head of the social structure  … and its manner of life and its standards of worth therefore afford the norm of reputability for the community.”44 Obviously, the middle and lower classes didn’t have the means to shop at Tiffany’s or import rugs from Asia, but they, too, felt obliged to keep up appearances and impress their peers. The “members of each stratum accept as their ideal of decency the scheme of life in vogue in the next higher stratum, and bend their energies to live up to that ideal,” Veblen wrote. “On pain of forfeiting their good name and their self-respect in case of failure, they must conform to the accepted code, at least in appearance.”45 Even people on the lowest social rungs weren’t immune to the urge for wasteful display: “No class of society, not even the most abjectly poor, forgoes all customary conspicuous consumption  … Very much of squalor and discomfort will be endured before the last trinket or the last pretense of pecuniary decency is put away.”46

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Of all Veblen’s contributions, the theory of conspicuous consumption is the one he is most famous for, and with good reason. As time goes by in any capitalist society and incomes rise, spending that Veblen would have classed as wasteful makes up an ever-larger proportion of overall consumer spending. But Veblen’s discussion of conspicuous consumption represented only part of the critique that he presented in The Theory of the Leisure Class. He also focused on production.

Looking at the United States of the 1890s, with its monopolistic trusts and increasingly powerful financial sector, personified in the form of the Wall Street banker J. P. Morgan, Veblen divided the economy into two different sectors: “industry” and “business.” The leaders of the first sector, the industrial class, were engaged in the task of making things and developing innovative new products and manufacturing processes. By contrast, the business class, or “pecuniary class,” was composed of absentee factory owners, passive shareholders, financiers, and other owners of capital who were engaged merely in making money, or rather, in appropriating it from the productive classes. “Their office is of a parasitic character, and their interest is to divert what substance they may to their own use, and to retain whatever is under their hand,” Veblen wrote. “The conventions of the business world have grown up under the selective surveillance of this principle of predation or parasitism. They are conventions of ownership; derivatives, more or less remote, of the ancient predatory culture.”47

The distinction between productive and nonproductive work that Veblen drew wasn’t exactly new. The French social theorist Henri de Saint-Simon, who was discussed previously, had envisioned an ideal society led by les industriels—the productive class of workers and industrialists. Veblen’s taxonomy was in the tradition of Saint-Simon, but he emphasized how the pecuniary class had arranged things so it could make as much money, with as little effort, as possible. He cited a series of reforms that benefited its members, including “changes affecting bankruptcy and receiverships, limited liability, banking and currency, coalitions of labourers or employers, trusts and pools.” The “institutional furniture of this kind is of immediate consequence only to the propertied classes, and in proportion as they are propertied,” he wrote. “But indirectly these conventions of business life are of the gravest consequence for the industrial process and for the life of the community.”48

Why so? Veblen argued that they undermined the efficiency gains on which economic and social progress ultimately rested. “The collective interests of any modern community centre in industrial efficiency,” and this efficiency was “best served by honesty, diligence, peacefulness, good-will, an absence of self-seeking.”49 But these productive traits, Veblen said, were “present in a markedly less degree in the man of the predatory type than is useful for the purposes of the modern collective life.”50 Therefore, the very existence of the pecuniary class “acts to lower the industrial efficiency of the community and retard the adaptation of human nature to the exigencies of modern industrial life.”51

Here again Veblen didn’t single out individuals by name. He did make clear that the “captains of industry”—a term that was sometimes applied to entrepreneurs like Carnegie and Rockefeller—were members of the parasitic pecuniary class because they operated at many removes from the shop floor. “The captain of industry is an astute man rather than an ingenious one, and his captaincy is a pecuniary rather than an industrial captaincy,” Veblen wrote. “Such administration of industry as he exercises is commonly of a permissive kind. The mechanically effective details of production and of industrial organisation are delegated to subordinates of a less ‘practical’ turn of mind—men who are possessed of a gift for workmanship rather than administrative ability.”52

In presenting this caustic portrait of the new plutocrats, Veblen gave no hint as to whether it was to be taken as gospel or satire or something in between. Throughout The Theory of the Leisure Class, he affected the manner of a lab-coated entomologist looking through his magnifying glass and dutifully noting down what he saw. In a chapter titled “The Conservation of Archaic Traits,” he said that the “tendency of the pecuniary life is, in a general way, to conserve the barbarian temperament, but with the substitution of fraud and prudence, or administrative ability, in place of that predilection for physical damage that characterises the early barbarian.”53 Yet even as modern society chiefly preserved “the quasipeaceable, or bourgeois variant,” of the barbarian mindset, it also preserved “in some measure of the predatory variant.”54 Veblen held that this “substitution of chicane in place of devastation takes place only in an uncertain degree.”55 But he also identified some character traits that the members of the pecuniary class shared with the ne’er-do-wells and delinquents who eked out a living on the bottom rungs of society: “The ideal pecuniary man is like the ideal delinquent in his unscrupulous conversion of goods and persons to his own ends, and in a callous disregard of the feelings and wishes of others and of the remoter effects of his actions.”56 In other words, he was a monster.

The Theory of the Leisure Class received mixed reviews. One orthodox economist said it was “vicious”; others described it as a valuable social study. The left-leaning sociologist Charles Henderson hailed its author as a closet socialist, which annoyed Veblen. The two most important reviews came from William Dean Howells, an eminent novelist and literary critic, and the Harvard economist John Cummings. Writing in the journal Literature, Howells praised Veblen’s “cold, scientific” approach and said his subject matter would make for a good novel.57 This review brought Veblen, hitherto an obscure academic, to the attention of many noneconomists. But it was Cummings’s critical article, which appeared in Veblen’s own Journal of Political Economy, that the author took most seriously. Cummings described The Theory of the Leisure Class as a “highly original” contribution “to the general theory of sociology.”58 But he also called its author “a master of sophistical dialectic,” and he took to task, on economic grounds, the book’s two most substantive contributions: the theory of conspicuous consumption and the theory of the nonproductive businessman.

Cummings didn’t deny that members of the plutocracy were making showy purchases of incredibly expensive items. How could he? But the Harvard man did question Veblen’s suggestion that these items were intrinsically worthless and their desirability resided solely in their trophy value. He pointed out that many costly goods required a great deal of labor to manufacture, which helped explain their high prices: “From the fact that things of lasting worth are commonly costly may have developed by association the notion that things costly are of lasting worth, without the entrance of the invidious element into our aesthetic judgment at all.”59 Turning to Veblen’s “captains of industry,” Cummings claimed that their high incomes reflected the value of the productive services they provided to the economy—services that benefited everybody, including their workers. “The rise in wages during the last quarter century,” he wrote, “is to a very considerable extent, if not altogether, due to the confiscation by the community in general of the increment to production and labor efficiency which has resulted from improvements, inventions, and the industrial genius of a few.” Far from providing evidence of parasitism and predation, the possession of great wealth “has become an evidence of economic efficiency and facility in apprehension and adoption of more productive exploitation of labor and environment.”60

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This defense of the pecuniary class struck at the heart of Veblen’s critiques of capitalism and economic orthodoxy. As Charles Camic emphasized in his 2020 biography, one of Veblen’s principal goals in writing The Theory of the Leisure Class was to challenge the claim that the earnings of the rich reflected their high productivity.61 In the same year that Veblen’s work appeared, John Bates Clark, his teacher from Carleton College, published a book titled The Distribution of Wealth, in which he argued that competition ensured that the level of profits and interest in the economy were equated to the “marginal productivity” of capital, just as wages were equated to the “marginal productivity” of labor. This theory amounted to a rationalization of inequality, and many American economists, including Cummings, adopted it wholesale. “Wealth is the product of industry,” he wrote, “apportioned among the agents of its production as nearly as may be in proportion to the value of services by them severally executed.” The strict line that Veblen had drawn between a productive industrial class and a nonproductive business class was “a distinction which cannot be maintained in fact.”62

Veblen felt obliged to respond to Cummings’s review. His initial salvo came in a piece published in the next issue of the Journal of Political Economy, where he defended his distinction between industrial and pecuniary employment, saying Cummings’s “failure to apprehend the distinction does not affect its reality.”63 He expanded this argument in a paper he wrote for a conference at Harvard, which he then tried to turn into a short book, provisionally titled The Captain of Industry and His Work. By the summer of 1901, he had completed a manuscript, but his publisher Macmillan turned it down. Forced to rethink the project, Veblen spent two years revising it. He also came up with a new title, The Theory of Business Enterprise, and a different publisher, C. Scribner’s Sons, which put out the book in September 1904.64

Although it lacked some of the sparkle of The Theory of the Leisure Class, The Theory of Business Enterprise was more focused, and its arguments were backed up by case studies. Veblen drew extensively from a multivolume report from the Industrial Commission, an official body that

President William McKinley had set up in 1898 to examine railroad pricing, the broader issue of monopoly, and the impact of immigration on wages. He mentioned consumption, conspicuous or otherwise, only briefly. Perhaps for this reason, The Theory of Business Enterprise received much less attention than The Theory of the Leisure Class, but it remains essential reading.

During the early stages of industrial capitalism, Veblen wrote, the individual proprietor remained close to the shop floor and “kept an immediate oversight of the mechanical processes as well as the pecuniary transactions in which his enterprise was engaged.”65 He had an instinct for “workmanship” and took pride in the quality of his products. But as time went on, businesses got larger, production processes became more complicated, and the focus of attention of the “business man” shifted “to an alert redistribution of investments from less to more gainful ventures, and to a strategic control of the conjunctures of business through shrewd investments and coalitions with other business men.”66 Veblen argued that this financialization of the economy changed the moral code under which businesses operated: making a quick score became the main goal. Although the individual businessman perhaps still retained “a sense of equity, fair dealing, and workmanlike integrity,” these values acted as “a conventional restraint upon pecuniary advantage, not in abrogation of it.” Veblen went on acidly: “The code of business ethics consists, after all, of mitigations of the maxim Caveat emptor.”67

To illustrate his point, Veblen cited the consolidation of the railroads, which he described as “a game, in which the end sought by the players is their own pecuniary gain and to which the industrial serviceability of the outcome is incidental only.”68 But he also insisted that the practices of eliminating competition, establishing monopoly power, and raising prices had extended far beyond the railroads: “It is very doubtful if there are any successful business ventures within the range of the modern industries from which the monopoly element is wholly absent,” he wrote. “There are, at any rate, few and not of great magnitude. And the endeavor of all such enterprises that look to a permanent continuance of their business is to establish as much of a monopoly as may be.”69

These comments about monopolization were timely, if not exactly pathbreaking. By 1904, the journalist Ida Tarbell’s famous multipart exposé of Standard Oil had appeared in McClure’s magazine, and Theodore

Roosevelt was in the White House. He had created a Department of Commerce, and within it a Bureau of Corporations tasked with investigating the trusts. Roosevelt’s Justice Department had filed a lawsuit to break up Northern Securities, a holding company that J. P. Morgan and several railroad barons had set up to consolidate three large railroad companies. In March 1904 the Supreme Court ruled for the Justice Department, describing the creation of Northern Securities as “an illegal combination in restraint of interstate commerce.”70

The novelty of Veblen’s treatment of monopolization was that he framed it as a natural evolution of industrial capitalism rather than an aberration. The creation of trusts and the formal elimination of competition was but one aspect of this evolution, he argued. Others included the rise of advertising and the creation of brands that enjoyed a “monopoly of custom and prestige” and were able, therefore, to command premium price.71 The money that firms spent on advertising “does not add to the serviceability of the output, except it be incidentally and unintentionally,” Veblen wrote. It is part of the sales effort, “which is useful to the seller, but has no utility to the last buyer.”72 Money spent on advertising is therefore “wasteful” spending, and advertising is a “parasitic” industry.73

Finance was another sector of the economy that Veblen regarded with a great deal of skepticism. In the days of Adam Smith, he reminded his readers, the term capital referred to the stock of machinery, equipment, and raw materials that were used in production. But in an age of far-flung partnerships, joint-stock corporations, and holding companies that owned many different businesses, members of the business class conceived of capital as financial capital issued by businesses—stocks, bonds, debentures, and so on—the value of which was determined in financial markets. Whereas the sole proprietor’s aim was to make the most productive use of his physical capital, Veblen said, the primary goal of the corporate or pecuniary capitalist was to maximize the value of his firm’s financial capital.

Events had borne out this analysis. In February 1901, when J. P. Morgan merged Andrew Carnegie’s eponymous steel company, which was based in Pittsburgh, with Elbert H. Gary’s National Steel Company, which was based in Chicago, and several other metals businesses, he created in US Steel a giant that had 168,000 employees and operations in more than a dozen states. The new combine established its headquarters on lower Broadway in Manhattan, just off Wall Street. On its founding, the company issued \$508 million in common stock, \$510 million in preferred stock, and \$391 million in bonds, giving it a total value of \$1.4 billion. The accounting value of its underlying assets—its steel mills, rolling equipment, and so on —was only about half that amount. On April 1, 1901, US Steel’s stock began trading on the New York Stock Exchange.