We have left classical political economy, and its critique by Karl Marx, and we enter now the realm of Institutional economics. This is a movement of thought started at the turn of the century in the United States. Common factor among the many authors, but especially in the case of Thorstein Veblen (1857-1929), one of the most important figures together with R. Commons, Wesley C. Mitchell and, later Karl Polanyi, was the critique on a different methodological ground of the general equilibrium approach of neo-classical economics. (Today, Institutional Economics is best represented by the Journal of Economic Issue, which is in the library. If you want more information about this approach, I would suggest to browse the journal).
The revolt was essentially a revolt against the formalism of neo-classical economics.
institutional economics Vs neo-classical economics
experience Vs universally valid reason
evolutionary change Vs the search for "natural" or "normal" conditions
human beings as active agent Vs human beings as passive instrument registering the impact of pleasure and pain.
1.
Influence of Darwin. Institutionalists as pragmatists stressed the biological aspects of evolution. Task of social science = explaining human beings adaptation and survival under the ever changing conditions of social, political and economic life.
2.
unity of thought and action => experimentalism that tested ideas by applying them in practice.
3. rejection of a-priori abstract reasoning and its replacement by empirical studies
Institutionalists rejected laissez-faire and instead believed that natural selection in the struggle for people's existence would enable people to learn the art of adjustment to new conditions by deliberate public policies.
One of the major figures of institutionalist thought was
From the American Encyclopaedia
Veblen, Thorstein B.
Thorstein Bunde Veblen, b. Valders, Wis., July 30, 1857, d. Aug. 3, 1929, is best known for his book The Theory of The Leisure Class (1899), a classic of social theory that introduced the concept of "conspicuous consumption." Veblen received a Ph.D. from Yale in 1884 and taught at the University of Chicago, Stanford University, the University of Wisconsin, and the New School for Social Research.
Veblen argued that a fundamental conflict exists between the making of goods and the making of money. In The Theory of Business Enterprise (1904), he argued that the entrepreneur is a reactionary predator whose perspective is diametrically opposed to that of the engineer or industrialist. Veblen's businessperson makes profits not by providing an outlet for the forces of industrialization and social evolution but by distorting them: by engaging in monetary manipulations, by restricting output to keep prices artificially high, and by interfering with the engineers who actually produce goods and services. The founder of the socalled institutionalist school, Veblen believed that economics must not be studied as a closed system but rather as an aspect of a culture whose customs and habits constitute institutions that are rapidly changing.
Richard T. Gill
Bibliography: Blaug, H., ed., Thorstein Veblen, 18571929(1992); Davis, A. K., Thorstein Veblen's Social Theory (1980); Dowd, D. F., ed., Thorstein Veblen (1958; repr. 1977); Qualey, C. C., ed., Thorstein Veblen: The Carleton College Veblen Seminar Essays (1968); Riesman, D., Thorstein Veblen: A Critical Interpretation (1975); Seckler, D. W.,Thorstein Veblen and the Institutionalists (1975; repr. 1983); Tilman, R., Thorstein Veblen and His Critics, 18911963 (1992).
The main thesis of Veblen's Theory of the Leisure Class is the following, as described by Galbraith: "the rich are merely anthropological specimens whose behaviour the possession of money and property has made more interesting and more visibly ridiculous" (xvi).
This is the line of the argument:
human evolution has passed through the savage, barbarian, handicraft, and machine process culture.
Savages = peaceable and poor. Little division of labour and little differentiation among classes.
Barbarism = predatory habits of life - warfare, big game hunting become common, and with them there emerge ownership, first of women, then of slaves and later of inanimate things. Aggressive bravery becomes an object of admiration and emulation +> invidious comparisons made between exploits and other worthy employment on the one hand, and productive work on the other, the latter being associated with weakness and submission to a master.
Labour becomes irksome because it is considered an unworthy employment. The possession of wealth is in the nature of a trophy and confers honour.
Root of ownership and accumulation => emulation and invidious distinction, rather than the search for subsistence and physical contort.
Since the possession of wealth confers honour, the desire for it has no limits.
Wealthy people wants to put their affluence in evidence, and they do so by means of conspicuous consumption, conspicuous leisure, and conspicuous waste.
Waste was both in consumption and in production. The captains of industry, strove not for a maximum output of goods and services but for pecuniary rewards. They obtained this by financial manipulations and monopolistic restrictions of output (Veblen called these sabotage) rather than expanding output.
A parasitic and predatory culture was kept going because it was sanctioned by a set of beliefs which confined the underlying population in its low opinion of the worth of its employment and in the eagerness to emulate the exploits and wasteful consumption of the superior ranks.
You should be now in a position to understand Galbraith's remark, according to which, Veblen's thesis is that "the rich are merely anthropological specimens whose behaviour the possession of money and property has made more interesting and more visibly ridiculous" (xvi). Anthropological specimen. That is, their culture and motivation is not different from the culture and motivation of the powerful in the age of barbarism.
The only solution for Veblen is in the upheaval of the members of the technical engineering class, whose matter-of-fact working habits made their minds less susceptible to the set of beliefs taken up by the working class, and who might take the direction of production.
Last comment. Let us take Aristotle, Veblen and Marx. I invite you to notice the similarities as well as the differences in their treatment of money. Aristotle was the first who strongly emphasised the boundless character of money, and criticised the pursuit of money for its own sake (commerce and chrematistics) on a ethical ground. Marx does not take the moral stand, but stresses the social and human meaning of the absence of inherent limits in money accumulation. He points out how the boundless drive for more money meant nothing but inherent boundless work on people. He does this through his labour theory of value and surplus value. Veblen also points out the boundless character of money. He also, like Marx, wants to investigate what is behind the boundless drive for accumulation. But instead of pointing the finger on work, he explains it in terms of boundless desire for honour. Thus Veblen embraces a work ethic that made him favour the technical engineering class.