Review: The Theory of Business Enterprise , by Thorstein Veblen

Thorstein Veblen’s The Theory of Business Enterprise takes as the starting point of its analysis classical liberalism — specifically the doctrine of “natural rights” of absolute, individual property ownership (rooted in the ownership of the labor involved in making or at least appropriating that piece of property) and freedom of contract (on a one-to-one, personal basis) as the foundations of economic and social life. While he views the notion of natural rights as colored by a primitive “anthropomorphism,” he regards the premise of such rights, and the view that they conduced to the greatest good, as plausible within an eighteenth century, pre-industrial context of small-scale, owner-managed enterprise and handicraft production, as represented by the independent artisan.

However, the Industrial Revolution centering on what he called the “machine process” fundamentally changed the character of both economic life, and culture. (By “machine process” he makes clear that he does not simply mean mechanical industry, but includes also such sectors as chemicals, the fundamental point being the replacement of individual craft by scientific precision and standardization.) What it eventually produced was a worldwide, high-technology economic system, extraordinarily productive but also extraordinarily delicate and susceptible to disruption. What had also happened was an increasing differentiation between production on the one hand, and “pecuniary management” on the other — “industry” on the one side, and “business” on the other — which he found problematic.

What seemed to best serve the needs of society was the uninterrupted, efficient functioning of the industrial system, for the sake of its maximum efficiency, and highest and most “serviceable” possible output. However, that system was ultimately controlled by business, a step removed from the object of production — its interest, instead, in the maximum of profit (“what the traffic will bear”), which might or might not be served by that maximum of efficiency and output. Indeed, with the rise of the business corporation and modern high finance trafficking in “vendible corporate capital” (stock) rather than “vendible goods,” the controlling business interest was actually a second step removed from that concern with production — centering its “endeavors upon the discrepancy between the actual and the putative earning-capacity rather than upon the permanent efficiency of the concern,” and even prepared to compromise the latter for the sake of the former (again, at the expense of the social good).

Veblen makes the case that this conflicting interest, combined with business dominance, leads to much business conduct that is “useless or detrimental” to society, and in fact a constant disruption of industrial output, and “parasitism” on what occurs. Anti-competitive practices aimed at destroying competitors rather than besting them in the marketplace (like railroad rate wars), and financial operations aimed at raising and lowering the valuation of firms for the sake of “tactical maneuvering” (“A convincing appearance of decline or disaster will lower the putative earning capacity of the concern below its real earning capacity and so will afford an advantageous opportunity for buying with a view to future advance or with a view to strategic control”) are examples of such disruption. “Competitive selling” (entailing such activities as advertising) is in his view similarly parasitic, adding nothing to the stock of goods, and forcing every enterprise to engage in it simply because others are. There is also the duplication of effort and failure to realize efficiencies of scale (for example, consolidating the rail networks or Great Lakes region iron ore mining operations).

Finally there is the periodic, large-scale, systemic idling of workers and plant in the business downturns he explains as above all due to a “malady of the affections of the business men,” laying out a theory of depressions that even more than all the rest is key to his reading of the system’s long-term viability, and warrants commensurate discussion here. The affections of which he wrote were for rising financial valuations (businessmen being more concerned with nominal valuations than real valuations — “current dollars” rather than “constant dollars” because they falsely imagined currencies to be stable).1 These were increasingly based not on material capital but optimistic readings of “earning-capacity,” based on the inclusion of “intangible assets” like the involvement of star entrepreneurs, and rising demand and prices. These led to what one might, to use a more contemporary phrase, call “irrationally exuberant” recapitalizations and commensurate credit extensions (boom times!), which led to overvaluations, tightening credit, firms going out of business and the redistribution of the associated property on an eventually systemic scale (hard times), clearing the way for a return to the beginning of the cycle (which, he claimed, seemed to alternate between ten to twelve year upturns and downturns in the 1816–1873 period). However, since the 1870s the deflationary effect of increasing productivity, which more than offset the effect of demand on price, prevented those price rises and recapitalizations from happening in the old manner, resulting in what he characterized as “chronic” depression for the last three decades, in his view the new tendency of the system.2

In short, the imperatives of business were getting in the way of the optimal functioning of the industrial system that had grown up under it. This, moreover, threw into question its legitimation in the eyes of population, not just its claims to efficiency, but in others as well — like the challenge that corporate stock presented to the idea of property. (As Veblen put it, “the general body of owners are necessary reduced to the practical status of pensioners dependent on the discretion of the great holders of immaterial wealth.”) The same went for the matter of contract — the disadvantage of workers in relation to owners in such “free” contract-making compelling them to resort to collective bargaining which had no place in the old logic, interfering as it did with owner’s prerogatives in relation to their own property, and individual contract. (While less criticized, he noted that it was even the case that business itself was inverting the old natural law philosophy for its own ends, in regard to its justifications for property, which rather than being the fruit of productive labor, was increasingly argued for as a prerequisite to it.)

Most fundamental, however, was the changing ethos that went with exposure to and participation in that “machine process.” This drove a turn to a materialistic, cause-and-effect-based, “matter-of-fact,” scientific outlook, especially among skilled industrial workers and still more, scientists. Imbued with it, the old natural rights view — and along with it the older aristocratic (“barbarian”) ethos that still colored much of contemporary life and thought with an anthropomorphic “metaphysics,” and a stress on pecuniary acquisitiveness, and personal force and personal subordination — were “no longer self-evident or self-legitimating to [their] common sense.”3 In more concrete terms this meant a diminished attachment to the old patriarchal family, religion, patriotism and most at issue here, property, with a secular, cosmopolitan and ultimately socialist ethic in the ascendance, to the horror of cultural traditionalists, the power elite, and especially those who were both. That certainly included businessmen, whose “metaphysics” was of the older kind, with property and contract the unquestioned starting point and “final ground” of their thought, which ran to “explanations of phenomena in terms of human relation, discretion, authenticity, choice” rather than a coming to terms with impersonal fact, and “the interpretation of new facts in terms of accredited precedents, rather than a revision of the knowledge drawn from past experience in the matter of fact light of new phenomena,” making “facts conform to law.”

The result was that, as the dominance of business became less compatible with the development of industry, the sway of the traditional values congenial to a business culture, too, were faltering, and the conflict between the associated ideologies and social models sharpening. As business enterprise could not do without the machine process it had unleashed, but the machine process could do without business; and technological advance meant that the machine process was exerting its influence more widely and deeply; it appeared that history was on the side of industry, not business.

Still, in his closing chapter Veblen does note that the scene is somewhat more complicated than that, identifying a number of powerful, reactionary forces at work across the Western world. Mass education was tailored to the needs and values of business, and even conducted on business-like lines, while stressing “conviction over inquiry,” rather than training young minds. The popular press catered above all to that audience “in moderately easy circumstances . . . the respectable middle class . . . of various shades of conservatism, affectation and snobbery,” with content designed to be even further to the right than they, and intellectually of the lowest common denominator — all “pointlessness” and “edifying, gossipy optimism.” Meanwhile, the rising tide of nationalism, imperialism and the associated militarism and militarization were a conditioning to servility. (As he put it, military training was training in “ceremonial procedures, arbitrary command” and “unquestioning obedience,” while “martial law puts civil rights in abeyance.”) However, threatening as all these were, it was his long-range expectation that the machine process would triumph over them all.

As all of this suggests, Theory is one of Veblen’s longer works, and a fairly dense one at that, more difficult than I had expected it to be in its discussion of finance, growth, boom, bust, depression, which comprises about half the book. It strikes me that this is partly because this was less familiar territory for him, but partly because older writing on these matters, preceding the richer vocabulary we have developed and the wealth of statistical and other data we take for granted in such discussions, was unavailable to him; partly because Veblen’s discussion is so abstract and intricate at the same time, with little in the way of concrete examples to provide clarification and points of reference. (Perhaps reflective of a certain strain, Veblen’s biting humor and linguistic flair are not much on display here.) Still, if less efficient or striking than usual he was not without considerable insight here. Veblen’s theory of depression, if perhaps looking thinly sketched today, still has its interest, bound up with that analysis of what economic life means when high finance dominates non-financial industry, a matter still timely a century on — its core in the significance of inflated values and corrections for the business cycle to which he was so attentive, and the effect they have on actual production, not just of importance in understanding his time, but our own as well.

Veblen’s writing also reacquires its accustomed sharpness and vibrancy when he turns to the other aspects of his chosen subject matter, ranging from his lucid exposition of the roots of the “natural law” philosophy, to the ways in which it had become problematic in the nineteenth century. Considering his last chapter it strikes me that little is said now of the failings of our education system and the press, or the dangers of militarism, that he did not say then, if only in outline. Indeed, in the contrast between the older value system of the traditionalists, and the more skeptical outlook of those touched by the machine process, we get an adequate description of the stuff of the culture wars that rage on today in tiresome, destructive fashion — devotees of flag, cross, family values and capitalism-as-freedom clashing with socially liberal, secular progressives then as now.

To be fair, Veblen would go on to say much of this elsewhere, in more developed, sophisticated fashion. But this important, early exposition is strong enough to enrich the understanding of them (as I found when I took a second look at Absentee Ownership). Similarly I have found this book an aid to understanding not just Veblen’s body of work, but that of the numerous writers who followed in his footsteps over the twentieth century — the preoccupations and analyses of figures like C. Wright Mills, John Galbraith, Gabriel Kolko and Paul Sweezy, all of whom have considerable debts to him. In short, even after having read a good deal of Veblen previously, The Theory of Business Enterprise more than rewarded my pushing on through its less even patches.

1. Veblen took a comparatively dim view of businessmens’ intellects, observing that “short-sightedness and lack of insight beyond the conventional routine seem to be fairly universal traits of the class of men who engage in the larger business activities” — and even suggested that if the class as a whole got wise to the realities, “business traffic as now carried on might conceivably collapse through loss of its base line.”
2. Veblen acknowledged that there had been efforts to restore growth without changing the system, namely “wasteful expenditure,” as on arms; and the effort to control competition, by way of the “trusts”; but viewed both as undesirable, with trusts particularly ineffective (the latter, due to the implausibly comprehensive character they would have to attain).
3. The aristocratic, barbarian ethos was, of course, the principal subject of Veblen’s The Theory of the Leisure Class.

Originally published at https://naderelhefnawy.blogspot.com.