New Ideas from Dead Economists – Pt. 7 (Thorstein Veblen)

This is part 7 of my review of New Ideas from Dead Economists by Todd Buchholz. Here are parts 1, 2, 3, 4, 5, and 6 if you’d like to look back. Any of the entries can stand alone, of course.

Our next economist, Thorstein Veblen, is most famous for attacking the ideas of the economist we featured in Part 6, Alfred Marshall. Veblen’s attack was most focused on two ideas specifically: (1) Marshall’s Law of demand – as the price of a good falls, people will buy more of it, and (2) People only work for the money, and not for the sake of work.

Buchholz chooses to focus most of his attention of the attack on the law of demand. The model of demand assumes that each consumer weighs costs and benefits independently when purchasing a product. Veblen found this to be ridiculous. Buchholz uses the example of caviar – the insecure guest at the dinner party might rave about how delicious the caviar is – but how many people actually like caviar better than ice cream and cookies? Veblen said that you don’t just consider costs and benefits when you make a purchase, but how your neighbors will perceive the purchase. He points out that people often make their consumption conspicuous – people buy Ralph Lauren shirts that say Ralph Lauren.

He also points out that certain goods are desireable (in demand) precisely because of their high price. Gucci bags would likely be in less demand if they were on the shelves of every department store. People want Gucci because it says, “I can afford to buy expensive things, therefore, I am awesome.” Buchholz calls goods like these, “Veblen goods.”

Veblen also wrote a book called The Theory of the Leisure Class. The theory of the leisure class, enunciated by Veblen, basically states that at the beginning of time, people were focused on survival. As soon as survival wasn’t such a big problem anymore, people started trying to impress each other with their property ownership. Eventually, it began to matter how the money was made. Money earned through sweat was less impressive than money that was older and more easily come by. Leisure had become cool. Thus, the leisure class was born.

As for Veblen’s second challenge to Marshall’s economics, Veblen points out two major groups, businessmen and engineers. He makes them wholly separate, and points out that engineers and businessmen are different creatures. An engineer wants to push innovation. A businessman, on the other hand, wants to sell the maximum amount possible with the smallest possible investment. The engineer goes to bed dreaming of building the perfectly efficient engine. The businessman goes to be dreaming that consumers will decide they want his old product. Veblen thought that once businessmen invest in old techniques, they have an incentive to hold back production and advances.

Buchholz is astute enough to point out that now, engineers aren’t the fairy tale good guys that Veblen points out. In fact, they’re almost the same people for the most part (at least now). The largest group of people in top MBA programs around the country tend to be none other than – engineers.

I think you can see a lot of Veblen style economics at work in modern economics. Veblen touted the intersection between economics, sociology, psychology and anthropology. Some of the most famous mainstream economics books have that exact characteristic – think Freakonomics and The Undercover Economist. He focused on the human side of economics and was quick to point out that you can’t use econ to predict everything precisely because of the human element. Current market conditions back up that assertion. Thanks for reading.