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

Veblen cited the formation of US Steel as an example of how businesses could be combined to raise their market capitalization well above the real economic value of their underlying assets. This excess value was known as “good will.” “On this higher level of business enterprise,” Veblen commented tartly, it “has a certain character of inexhaustibility, so that its use and capitalization in one corporation need not, and indeed does not, hinder or diminish the extent to which it may be used and capitalized in any other corporation.”74 He also highlighted another financial ruse that corporate insiders used to enrich themselves: a corporate recapitalization, in which a business issued or retired large blocks of stocks or bonds, sometimes in connection with a merger, but often just for the sake of it. This “traffic in vendible capital is the pivotal and dominant factor in the modern situation of business and industry,” Veblen wrote.75

His portrait of the new financialized, trustified US economy, and the men who ran it, could hardly have been darker. Where economists like Cummings pointed to the economies of scale and other efficiencies afforded by industrial giants and joint-stock corporations, Veblen portrayed their creators as rent seekers who extracted great wealth from the economy without making any matching contribution to productivity. Like Adam Smith before him, he highlighted how the joint-stock corporate structure created the potential for conflicts of interest and outright abuses. Since the managers of businesses knew far more about their operations than outside shareholders did, they could easily “induce a discrepancy between the putative and the actual earning-capacity” of their firms “by expedients well known and approved for the purpose,” Veblen wrote.76 “Partial information, as well as misinformation, sagaciously given out at a critical juncture, will go far toward producing a favorable temporary discrepancy of this kind, and so enabling the managers to buy or sell the securities of the concern with advantage to themselves.” Given the potential to make a quick financial killing, Veblen argued, business leaders even had an interest in creating industrial disturbances and dislocations, which they could then profit from—for instance, by picking up the assets of rival businesses on the cheap.

In 1921, when Veblen was old and famous and living in New York, he would describe the activities of the pecuniary class as “sabotage” in his book The Engineers and the Price System. In The Theory of Business Enterprise, his language was less loaded but he leveled essentially the same charge. Once capital was conceived of as financial capital, he wrote, it was “unavoidable” that “the business men in whose hands lies the conduct of affairs should play at cross-purposes and endeavor to derange industry.”77 Indeed, “this class of businessmen  … have an interest in making the disturbances of the system large and frequent, since it is in the conjunctures of change that their gain emerges.”78 Problems of this nature were inevitable, Veblen said, in a system where “the material processes of industry are under the control of men whose interest centres on an increased value of the immaterial assets.”79

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When The Theory of Business Enterprise was published, Veblen was fortysix years old and still a lowly assistant professor. The success of his first two books had brought him some public attention, but in the world of economics he remained a maverick and, in some quarters, a suspected socialist. His personal life remained complicated. In 1906 he left Chicago for Stanford, which had offered him a promotion, but his reputation as a philanderer followed him west. In Palo Alto, Veblen’s extramarital affairs continued, and in 1909 Stanford forced him to resign. (Two years later his wife, Ellen, finally divorced him.) After struggling to find another academic post, he took a job as a lecturer at the less vaunted University of Missouri, in the city of Columbia.

He stayed in Missouri for seven years and continued to write prolifically, elucidating themes new and old. There was truth to the critic H. L. Mencken’s claim that Veblen often repeated himself, but his themes were timeless. The final chapter of The Theory of Business Enterprise was devoted to “The Natural Decay of Business Enterprise,” which he linked to its expansionist and warlike tendencies. “Business interests urge an aggressive national policy and business men direct it,” he wrote.80

Since the Spanish-American War of 1898, the United States had openly fashioned itself as an imperial power with territorial ambitions in the Caribbean, Latin America, and the Pacific. The business class supported these policies on the grounds that they reflected “an enthusiasm for the commercial aggrandizement of the nation’s business men”81 and diverted popular attention to “less hazardous matters than the unequal distribution of wealth or of creature comforts,” Veblen wrote. In taking this stance, business leaders were making a Faustian pact with the forces of militarism and absolutism, he argued. Even when the “policy of warlike enterprise has been entered upon for business ends,” the initiative tends to “shift from the business interests to the warlike and dynastic interests, as witness the history of imperialism in Germany and England.” And this process “may easily be carried so far as to sacrifice the profits of the business men to the exigencies of the higher politics,”82 ultimately leading to a “decline of business enterprise itself.”83 Veblen didn’t claim that this calamitous outcome was inevitable. He remarked that there were powerful countervailing forces, and he described the final outcome as “something of a blind guess.”84 Despite these qualifications, however, the thrust of Veblen’s argument was that the triumph of pecuniary values could well herald a return to barbarism. A decade after he issued this warning, the Western capitalist countries plunged into the hellscape of World War I.

“A particularly crude form of capitalism” John Hobson’s Theory of Imperialism

During the summer and autumn of 1899, John Atkinson Hobson, a fortyyear-old English economist and writer, visited South Africa on assignment for The Manchester Guardian, a liberal newspaper that was edited by the legendary C. P. Scott. Although Hobson had written several books on economics and a biography of John Ruskin, the Victorian art critic and polymath, he was little known to the British public. In 1898, however, he had published an essay in The Contemporary Review, a highbrow journal, in which he challenged the arguments of imperialists like Joseph Chamberlain, Britain’s colonial secretary, and Cecil Rhodes, the Britishborn South African politician and mining magnate, who claimed that expanding Britain’s already-vast empire was the best way to create markets for British products and jobs for British workers.1 “The Empire, as I have always said, is a bread-and-butter question,” Rhodes had declared a few years earlier, after attending a meeting of unemployed workers in London’s East End. “If you want to avoid civil war, you must become imperialists.”2 In his article, Hobson dismissed this argument as a canard. He said that territorial conquests were unnecessary to promote trade, and he insisted that the root cause of deficient demand for British products was a domestic one: an inequitable distribution of income, which limited the purchasing power of the masses.3

Hobson’s economic critiques of imperialism came to the attention of L. T. Hobhouse, a noted liberal philosopher who was also an editorial writer at The Manchester Guardian. It was Hobhouse who urged Scott to send

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Hobson to South Africa, which appeared to be on the brink of a war between rival colonial territories: Britain’s Cape Colony, where Rhodes had served as prime minister from 1890 to 1896, and two small republics—the Orange Free State and the Transvaal—which Dutch settlers, known as Boers (or Afrikaners), had established earlier in the nineteenth century, after fleeing British rule in the Cape. For decades, there had been tensions between the British and the Dutch territories, but the root cause of the war scare was gold, which had been discovered in large quantities in the Witwatersrand region of the Transvaal. Rhodes and his fellow mining magnates and financiers, collectively known as the Randlords, were determined to gain control of the gold-mining regions. The Dutch colonists, led by Paul Kruger, president of the Transvaal, had vigorously resisted their demands.

To Hobson’s delight, Scott, the Guardian editor, agreed to Hobhouse’s idea of enlisting him as a correspondent. “Though I had no experience in newspaper work, except as an occasional reviewer, I seized the opportunity to see the working of imperialism at close quarters,” Hobson would write years later.4 When he reached Cape Town, British troops were gathering on the northern border with the Boer republics; fighting seemed imminent. Shortly after his arrival, Hobson made his way to the historic Groote Schuur estate, which the Dutch East India Company had built in the seventeenth century, when it relied on the Cape as a transshipment point on its Asia trade routes. Rhodes had leased the estate, and he used it to entertain visitors. Since arriving in South Africa in 1870 as the sickly seventeen-yearold son of a lowly Church of England minister, he had created a vast fortune for himself. After entering the diamond trade in the northern Cape, where the precious minerals were discovered in 1868, he had created, with the assistance of the Rothschild banking house, the world’s largest diamond company, De Beers. Then he had entered politics as an unabashed imperialist who had ambitions of extending British rule from Cape Town to Cairo.5

As prime minister, Rhodes introduced racist laws that drove more native Africans from their lands and excluded them from the voting franchise. In tribal territories that are now in Zimbabwe, he obtained invaluable mining concessions for his British South Africa Company. The Boers had resisted his efforts to gain control of their land. In 1895, under the guise of defending the rights of foreign workers living in the Boer republics, who were known as Uitlanders, Rhodes dispatched hundreds of armed police to the Transvaal in an effort to spark an uprising. The Jameson Raid, as it came to be known, ended in ignominious failure and cost Rhodes his premiership. But he and his fellow Randlords hadn’t given up on their ambitions to defeat the Boers and annex their territories. Moreover, they retained the enthusiastic support of senior British officials, including Sir Alfred Milner, the governor of Cape Colony, and Chamberlain, the colonial secretary.

As a visiting journalist, Hobson was able to speak with many of the major players in the Cape, including Milner, who told him that military action might be necessary to “break the dominion of Africanderdom.”6 He also spent several weeks in the Boer republics, where he found that that the threats to the Uitlanders had been “wildly exaggerated.”7 During his visit to Groote Schuur, Rhodes had expressed doubts that the outnumbered Boers would actively resist a British invasion.8 This prediction turned out to be utterly mistaken.

The war that began in October 1899 lasted two and a half years and resulted in more than fifty thousand deaths—Dutch, African, and British. After the Dutch fighters adopted the methods of guerrilla warfare, the British Army confined their families and many members of the native Black population to shoddily constructed internment camps, where tens of thousands died from disease and malnutrition. Shortly after the shooting began, Hobson returned safely to England, where he published a series of articles blaming the war on the Randlords, imperialist British officials, and a jingoistic media. “The lesson I learned from this experience was the dominant power of a particularly crude form of capitalism operating in a mixed political field,” he subsequently wrote. “It became evident that, while the politicians were hesitant and divided, the capitalists of the Rand were planning straight for war and were using the British Press of South Africa as their instrument for rousing the war-spirit in England.”9 He went on: “War came from the joint drive of capitalism in South Africa and the new imperialism in England.”10

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As the history of Groote Schuur illustrated, commercially driven European colonialism was nothing new to Africa and Asia. In a letter to Lord Rothschild, his principal financier, Rhodes himself referred to De Beers as “another East India Company.”11 What was different about late nineteenthcentury imperialism was its scale and rapidity and the unabashed racism that was used to justify it. (“I contend that we are the finest race in the world and that the more of the world we inhabit the better it is for the human race,” Rhodes wrote in 1877.)12 In 1870 roughly 10 percent of the African continent was under European occupation. Thirty years later, after the monumental land grab that historians call the “Scramble for Africa,” only about 10 percent of Africa was unoccupied. In rapid succession, the four major European powers—Britain, France, Germany, and Italy—greatly expanded their possessions on the continent, establishing territories with names like Anglo Egyptian Sudan, French West Africa, German South West Africa, Italian Somaliland, and the Belgian Congo. The surge of imperialism extended to Asia and the Americas. Exploiting the power of their battleships and the new Maxim machine gun, Britain expanded its possessions on the Malay Peninsula and in the Pacific. France colonized much of Indo-China. Germany occupied part of New Guinea and dozens of nearby islands in the Pacific. Russia and Japan made advances on parts of China. After the Spanish-American War of 1898, the United States annexed the Philippines, Guam, and Puerto Rico, and it temporarily occupied Cuba.

Of all the liberal thinkers who grappled with these developments, Hobson was arguably the most important. He was born in 1858 in Derby, an ancient market town in the English Midlands, which, since the industrial revolution, had developed into a manufacturing center for cotton textiles and other goods. His father was the churchgoing proprietor of a local newspaper who believed in peace, prosperity, and progress, and his son didn’t start out as any kind of radical. “Born and bred in the middle stratum of the middle class of a middle-sized industrial town of the Midlands, I was favorably situated for a complacent acceptance of the existing social order,” he recalled in his autobiography. “There was not stagnation anywhere, but a gradual orderly improvement in the standard of living, the working conditions, and the behaviour of most classes.”13 The high school that Hobson attended didn’t offer economics, but he took a beginner’s course through the Cambridge University Extension Movement, where the readings included Adam Smith and J. S. Mill. After leaving school, Hobson went to Lincoln College, Oxford. He did a degree in classics—the study of Greek and Latin—and occasionally attended political debates at the Oxford Union, where, in his words, “I heard nothing to disturb my complacent acceptance of the beneficent and equitable operation of laws of supply and demand in their laisser-faire environment.”14

Hobson’s thinking began to evolve after he left Oxford and became a schoolteacher in Exeter, a city in southwestern England. There, he met his future wife, an American writer named Florence Edgar. He also had a chance encounter with Alfred Mummery, a well-known mountaineer who had found a new way to scale the Matterhorn. Mummery was also a businessman interested in economics, endowed with what Hobson described as “a sublime disregard of intellectual authority.”15 One of the orthodoxies Mummery questioned was the claim that saving—or deferred consumption—was the key to prosperity. In Mummery’s view, excessive saving was at the root of the long deflation and malaise that had afflicted Britain and other Western countries since the great financial panic of 1873. It was in this same economic environment that Henry George’s Progress and Poverty had become a publishing phenomenon in England, but Hobson was unimpressed by George’s argument. In “concentrating upon a single form of unearned wealth”—land rents—“it enables its adherents to evade and arrest the wider claims of Socialism,” he wrote.16

Hobson thought a different explanation was needed for the problems that attended industrialization, including widespread unemployment and poverty, which were receiving a good deal of attention in Britain thanks to the social researcher Charles Booth and others. Mummery blamed these blights on oversaving by the rich. “For a long time I sought to counter his arguments by the use of the orthodox economic weapons,” Hobson later recalled. “But at length he convinced me and I went in with him to elaborate the over-saving argument in a book entitled The Physiology of Industry, which was published in 1889.”17

The book, which had a joint byline, argued that orthodox economists had made a mistake by focusing mainly on the productive capacity of the economy. From this perspective, the authors conceded, a high level of saving seemed essential because it provided the funds that businesses needed to invest in factories, machinery, and other forms of capital. But saving and capital, they argued, were useful only insomuch that they facilitated the production of goods that people wanted to buy and had the financial resources to buy. If these conditions weren’t satisfied, a high level of saving could “cause an accumulation of Capital in excess of that which is required for use, and this excess will exist in the form of general overproduction,”18 which in turn “throws labourers out of work, drives down wages, and spreads that gloom and prostration through the commercial world which is known as Depression in Trade; that, in short, the effective love of money is the root of all economic evil.”19

In identifying oversaving as a chronic failure of capitalism, Mummery and Hobson were effectively making the same argument that John Maynard Keynes would popularize forty years later, when he wrote, “It should be obvious that mere abstinence is not enough by itself to build cities or drain fens.”20 Now known as “the paradox of thrift,” this theory is a basic element of Keynesian economics and features in many textbooks. In 1889, though, concerns about generalized overproduction and oversaving were largely confined to Marxists and a few devotees of Sismondi, the early nineteenthcentury Swiss dissident, and his British counterpart Thomas Malthus. Most economists stoutly believed in Say’s Law, which said that an extended glut of goods was impossible because, if supply did exceed demand, prices would fall until the gap was eliminated. Thus, supply would create its own demand, and oversaving wouldn’t be a problem. Hobson and Mummery reversed this logic, writing: “In the normal state of modern industrial Communities, consumption limits production and not production consumption.”21

The Physiology of Industry didn’t attract a big readership. It did succeed in getting Hobson effectively drummed out of the economics profession. By the time it was published, he had moved to London, where he applied for a job teaching university extension courses that catered to working adults. On the recommendation of an economics professor who had read the book and, in the words of Hobson, “considered it as equivalent in rationality to an attempt to prove the flatness of the earth,” the program turned down his application.22 Although he would go on to teach classes at the Oxford University extension program, he would never be offered a regular academic post.

Not to be put off, he quickly published a second book, Problems of Poverty: An Inquiry into the Industrial Condition of the Poor, which drew on government reports and Charles Booth’s painstaking survey of workingclass life in London. It was a shortish work with a fairly narrow focus. By contrast, Hobson’s third book, The Evolution of Modern Capitalism: A Study of Machine Production, which appeared in 1894, was a grand tome in the tradition of Marx’s Capital. Like Marx, Hobson emphasized the role technical progress played in capitalist development. He also drew attention to the monotony of factory work, and he said the goal of a progressive society should be “not the abolition of machinery, but the diminution of machine-tending, which attends the growing perfection of machinery, in order that the arts may be able to absorb a larger share of human exertion.”23

By this stage, Hobson was starting to make a name for himself in London’s intellectual circles. He mixed with socialists of the Fabian, Christian, and Marxian variety but professed to be a member of none of these groups.24 When he read the first British edition of Capital, which was published in 1887, he was put off by the labor theory of value and a “Hegelian dialectic which used an empty intellectual paradox to impart an air of mysticism into quite intelligible historic processes.”25 Like many other liberal intellectuals at the time, Hobson was searching for a middle way between socialism and the old individualist doctrines. From 1896 to 1898, he was associated with The Progressive Review, a journal that published articles by writers ranging from the Liberal politician Herbert Samuel to the independent socialist (and future founder of the Labour Party) Keir Hardie. Despite his religious upbringing, Hobson was also an active member of the London Ethical Society, a British offshoot of the New York Society for Ethical Culture, which was dedicated to secular humanism and ameliorating the condition of the poor.26

Hobson regarded his primary intellectual goal as humanizing economic thinking and moving it beyond arid abstractions. Like George and Veblen, he stressed the importance of institutions and state capture. As the machinations of Rhodes and his colleagues made a war in South Africa seem inevitable, he got caught up in the political debates about imperialism that had split the Liberal Party into two warring camps, with the old Gladstonian wing on the anti-imperialist side, and Joseph Chamberlain’s Liberal Unionists on the other. In 1895 Chamberlain had joined a coalition government with Lord Salisbury’s Conservatives and obtained the post of colonial secretary, from which he promoted the idea of turning the far-flung British Empire into a formal federation and jettisoning free trade in favor of imperial protection. Aligning himself with Rhodes, Chamberlain supported the Jameson Raid; subsequently, he directed the British participation in the Boer War.