Thorstein Veblen - Expensivity

Veblen’s Early Life

Thorstein Veblen (1857–1929) was born in the small town of Cato, just west of Manitowoc, Wisconsin. His parents had immigrated from Norway ten years before his birth.

Veblen’s parents arrived in Milwaukee with no English and little money. However, the family soon prospered due to his father’s talent as a carpenter and his mother’s grit and determination.

Although Norwegian was spoken in Thorstein’s home, the boy soon learned English from neighbors, playmates, and at school, which he began attending at the age of five.

In 1864, the Veblens moved to Rice County, Minnesota, south of the Twin Cities, where they established a family farm. The farm prospered, enabling all the younger generation of Veblens to a receive higher education.

Veblen’s older brother Andrew went on to become a professor of physics, while Andrew’s son—Thorstein’s nephew—Oswald, became a distinguished mathematician.

Veblen’s Education

In 1874, at the age of 17, Veblen matriculated at Carleton College in nearby Northfield, Minnesota, where he studied economics under John Bates Clark before he became well known. Today, Clark is best remembered for the John Bates Clark medal, named for him in 1947 by the American Economic Association. The medal is awarded every other year to the most promising American economist under the age of forty.

After graduating from Carleton College, in 1880 Veblen traveled east to attend Johns Hopkins University in Baltimore, Maryland. There he studied philosophy briefly with Charles Sanders Peirce—the founder of pragmatism and considered by many the greatest philosopher America has produced.

Failing to obtain financial support from Johns Hopkins, Veblen transferred to Yale University in New Haven, Connecticut. There he obtained his PhD in philosophy, with a minor in social studies, in 1884. While at Yale, Veblen studied with the noted sociologist William Graham Sumner.

Veblen’s Career

Upon receiving his PhD from Yale, Veblen was unable to find academic employment. The reason is not known with certainty, but it is most likely that his avowed agnosticism was held against him, as was perhaps his second-generation immigrant status and farming background. At this time, American Academia was still heavily dominated by its Christian heritage and also prided itself on upholding traditional standards of gentility and bourgeois respectability.

Whatever the reason, Veblen remained outside of academia for nearly eight years. During this time, he bruited it about for the sake of his reputation that he had retreated to his family’s farm to recover from a serious case of malaria. In fact, he spent his time reading widely.

In 1891 Veblen went to Cornell University on what we would now term a “post-doc,” to carry out additional study and research. The following year, in 1892, he was hired as a paid “fellow” by the Economics Department at the University of Chicago. In addition to teaching lower-level classes, one of his main duties was to edit the Journal of Political Economy.

Veblen used his editorship of this journal as a springboard for the publication of his own first professional economics articles. Soon, he was placing articles in other journals, as well, including the American Journal of Sociology.

In 1899 Veblen published his first book, The Theory of the Leisure Class.It would always be his best-known work, and remains so to this day. In 1904, he followed up on the success of his first book with the publication of a sociological analysis of the business firm as such, The Theory of Business Enterprise.

On the strength of these well-received publications, Veblen began to receive serious offers of employment from top-flight American academic institutions. In 1906, he accepted an offer from Stanford, pulled up stakes, and moved to California.

Unfortunately, in time Veblen’s position at Stanford became untenable due to a combination of factors. For one thing, he was not a gifted lecturer and was not popular with his students. More importantly, he indulged in an extramarital love affair that became public knowledge, shocking the conservative Stanford administration.

Veblen left Stanford more or less in disgrace. Luckily, he was able to find a position in 1911 at the University of Missouri through the good offices of his friend, Herbert J. Davenport.

While at Missouri, in 1914, Veblen published his third book, The Instinct of Workmanship and the State of the Industrial Arts. The following year—in the wake of the eruption of World War I—he published his third book, Imperial Germany and the Industrial Revolution.

In 1917 Veblen left Missouri for Washington, D.C., in order to join a commission that had been set up by President Woodrow Wilson to analyze possibilities for establishing lasting global peace in the wake of the first world war. That same year, as a result of this experience, Veblen published a book entitled, An Inquiry Into the Nature of Peace and the Terms of Its Perpetuation.

After the war, Veblen occupies a couple of short-term positions in government and in magazine editing. In the meantime, he had become friendly with the distinguished progressive philosopher John Dewey and others who founded the New School for Social Research in New York City in 1919. The New School became Veblen’s academic home until 1926.

That same year, 1919, Veblen published an important book on the power that “vested interests” exert over government in modern industrial democracies. The book was entitled The Vested Interests and the Common Man: The Modern Point of View and the New Order.

Also in 1919, Veblen published an important collection of his essays on economic, cultural, and political topics, The Place of Science in Modern Civilization and Other Essays.

Veblen’s final book, The Engineers and the Price System, was originally published in serial form in 1919 in a new, modernist magazine called The Dial, and then released in book form in 1921.

Veblen’s Ideas

Veblen was a critic of laissez-faire capitalism who explored the manifold ways in which the way the free market functions in practical reality departs from the theoretical ideal.

More specifically, Veblen identified both psychological and sociological factors as the main causal contributors to this distortion. As such, he may be regarded as the founding father of both behavioral economics and institutional economics (as will be explained below).

Thus, it is fair to say that Veblen is more important for the seminal ideas he had than for any fully developed theory of his own. Certainly, the contribution to economics most closely associated with his name, both in his own day and in ours, is the concept of “conspicuous consumption.”

This idea—which lies at the heart of Veblen’s first and most-famous book, The Theory of the Leisure Class—refers to the commonly observed practice by the wealthy of spending their money on high-priced luxury goods, when cheaper goods that fulfill the same function just as well are available.

Luxury spending of this sort poses a problem for classical economic theory because it seems to be “irrational” from the point of view of the standard assumption of the consumer as a “rational agent” seeking to maximize its “utility” (as measured by money, in this case).

In a nutshell, Veblen showed that luxury consumption is not irrational, because it provides a profound psychological satisfaction to the wealthy who engage in it. And it provides this satisfaction for the very reason that it is conspicuous.

How so? By demonstrating to the world that the buyer is able to make such a purchase, thus demonstrating his or her wealth and concomitant high social status.

In this way, we can see that luxury consumption makes economic sense after all, because the wealthy buyer of the luxury good in question is not just obtaining a good that fulfills some practical function, but is also—or even primarily—flaunting his or her social status, which is intensely pleasurable.

Veblen was thus the first to systematically demonstrate that the classical economic idea that human beings are best understood as rational agents must be qualified, by taking account of other sorts of psychological motivations besides utilitarian ones. In this respect, he was a forerunner of the founder of behavioral economics, the psychologist and Nobel Prize–winning economist, Daniel Kahneman, and his legions of followers.

Several of Veblen’s other books explore, not individual psychology, but social institutions and the way that they interact with the economy. In this respect, he may be seen as a forerunner of the great, Nobel Prizewinning institutional economist, James M. Buchanan.