THORSTEIN VEBLEN

I. INTRODUCTION What do we mean by old and new institutionalists? A. OLD INSTITUTIONALISTS emerged in the beginning of the 20th century 1. criticized Marshalls followers who refused to observe the realities of the world and chose to deal with mathematical curves and models instead 2. believed that Marshalls abstract theory ignored too much 3. believed that while Marshallians ignored reality, institutions were evolving and economic theory was growing obsolete B. NEW INSTITUTIONALISTS 1. like the oldies, they observe societys institutions 2. BUT used the very tools of Marshall that the oldies criticized II. VEBLEN AND OLD INSTITUTIONALISM A. vehemently criticized the pillars of neoclassical economics: 1. Marshalls law of demand 2. the assumption that laborers work only because they are paid and do not work for works sake 3. attacked the marginalists for assuming a smooth, gradual path to a point of equilibrium a. equilibria do not exist the economy always changes and equilibrium is a daydream of economists who do not live in the real world B. was a better critique than a constructive theorist was not so sure how to RECONSTRUCT economics, but he was very sure that Marshall and his followers made a mess III. VEBLENS ATTACKS MARSHALLS LAW OF DEMAND A. Neoclassical economics assumed that each consumer independently weighed the costs and benefits of purchasing an item
The hedonistic conception of man 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.

1. according to Veblen, an individual is not an independent globule

2. believed that each globule looks at other globules before deciding where to go except for a few trendsetters and non-conformists, most people want to keep up with the rest OR at least look over and see that the others are doing 3. on other words, an individuals valuation of utility depends partly on what her neighbors will think of a purchase B. attempted to further prove his belief through anthropological proof and found that: 1. man has what Veblen labels as an emulatory instinct evolved after the primal instinct of self-preservation was already honed. a. referred to how man began judging their social status by property ownership he who plundered gained social esteem as well as wealth. b. eventually, HOW one acquired property became important if a person gathered property through toil and sweat, he was not admired 2. the family that gained property passively, without a drop of perspiration, earned admiration and incited emulation in the community thus, the leisure class was born 3. the leisure class work hard to maintain their nonworking status they would rather maintain good form than do anything for themselves Veblens term for this behavior is conspicuous leisure 4. paired with conspicuous leisure is conspicuous consumption ex. labels on clothing is free advertising for the designer and paid advertising for the consumer B. Admittedly, Veblens criticisms sound more at home in sociology rather than in economics 1. BUT in 1950, a certain Professor Harvey Leibenstein published an article entitled, Bandwagon, Snob and Veblen Effects in the Theory of Consumer Demand that applied Veblens theory to economics 2. According to the above article, usually, Marshalls law of demand reigns but for some goods ( referred to in the article as Veblen goods), a consumers demand is determined by the use of the good and the price that the consumer thinks other people will think she paid i.e., the expected conspicuous price IV. THE CREATIVE URGE OF ENGINEERS A. According to Veblen producers know that envy and peer pressure force consumers to act and therefore, businessmen spend more time enhancing a products expected conspicuous price than improving its usefulness the institutionalists argue that this is a shame and a waste of time and talent as it results in more superficial advertisements for relatively inferior products. B. Veblen believed in the creative urge 1. Like Marx, he believed in the instinct of workmanship the leisure class is a perversion of this natural drive a. as conspicuous leisure and conspicuous consumption pervade, the creative desire suffers

2. UNLIKE Marx, the enemies are not the capitalists, and the heroes are not laborers a. instead, the enemies are the businessmen (regardless whether they owned the companies or not) and the good guys are the engineers in the modern world, only the engineers accept the challenge to create, improve and produce while businessmen strangle creativity 3. Veblen thought that the rise of scientific engineers in the 20th century would bring the downfall of the philosophies behind capitalism. 4. Veblen predicted that the struggle between engineers and managers will also wear down the economy as captains of industry strive for high profits which was achieved in two ways: restricting output like in a monopoly and lowering production costs businessmen will always neglect efficiency a. short-term goals of financial gain sabotage long-term economic growth 5. Veblen viewed labor unions in the same light as businessmen and the government unions block efficiency and sabotage the economy V. THE GOVERNMENT AND THE ROBBER BARON BUSINESSMAN A. Despite his critique of neoclassical economics, Veblen sometimes echoed Adam Smith, especially on trade restrictions 1. the businessmen have very strong influences in government leading to a state where, representative government, means, chiefly, representation of business interests. VI. ENGINEERS AND THE PRICE SYSTEM A. Veblen speculated that engineers might growth so disgusted with waste and sabotage that they would overthrow their bosses and take charge of the factory floor and the boardroom. 1. Veblen assumed that engineers who take power will not surrender to self-interest