American Institutionalism

Thorstein VEBLEN, a founder of institutional economics, was an early critic of the "marginalism" at the heart of traditional theory: Standard economics emphasizes choice, which seems grounded in a philosophic concept of free will. But mathematical models of choice appear inconsistent with any meaningful freedom to choose. Most institutionalists join some other critics of conventional economic theory by doubting that people are unfailingly rational and calculating.

Veblen, a first generation Norwegian-American and world-class oddball, was born on his parents’ farm in Wisconsin shortly before the Civil War. A child prodigy, he read book after book in a dark attic, leaving all chores to his siblings. Thorstein’s lifelong knack for bluffing helped him invent mazes of plausible facts while detailing answers to all sorts of questions from his brothers and sisters. Recognizing his intellect, Thorstein’s parents shipped him off to Carleton College, where he wrote on such topics as "A Plea for Cannibalism" and "An Apology for a Toper." The faculty soon classified him a brilliant misfit," an apt one-line summary for his entire life.

After earning a doctorate in philosophy at Carleton, Veblen unsuccessfully set out to be an academic. After he finally secured a position at Monoma Academy, it shut down permanently the next year. He proceeded to study at Yale, receiving his Ph.D. in economics in 1884, but then malaria forced him to return home to recuperate. For seven years he did little but read books and loaf. His brother later wrote, "Thorstein was the only loafer in a highly respectable community. He read and loafed, and the next day he loafed and read." Even Veblen’s relationship with his wife, Ellen Rolfe, reflected psychological isolation from the rest of the world. Mood swings (for Thorstein) and frustration (for Ellen) followed their eventual marriage in 1888.

At 34, Veblen had never held a job for more than a few months, despite two doctoral degrees. His family, dismayed, pushed him to reenter academia. He chose Cornell. Arriving in a coonskin cap in 1891, he entered the office of the prominent economist J. Laurence Laughlin and announced "I am Thorstein Veblen." Laughlin, an apparent masochist, made Veblen his protégé and, together, they joined the faculty of the newly-opened University of Chicago the following year. Veblen, whose lectures were a mix of ramble and mumble, deserved his bizarre reputation. All students, regardless of attendance or performance, received "C" grades, but when one fellow protested that anything below an "A" would kill his eligibility for a Rhodes Scholarship, Veblen acquiesced without much fuss. His focus was elsewhere.

Thorstein Veblen scrutinized economic behavior, not through the lenses of classical economists, but through a unique perspective on human nature itself. He saw some societies having a superstructure of the idle rich, whose lives revolved around consumption. He called them the leisure class. But some pre-industrial societies seemed to lack a leisure class.

Veblen asked a classic question: "Why?" He summarized his answers in The Theory of the Leisure Class (1899), his most famous work. Just as Veblen’s views on social and economic behavior were, to understate the point, unique, his writings were curious blends of eccentricity and erudition. Consider a passage critiquing then standard economic theories of consumer demand:

The hedonistic conception of man is that of a lightning calculator of pleasures and pains, who oscillates like a homogeneous globule of desire ... under the impulse of stimuli that shift him about the area but leave him intact ... He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another ... When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before.

Veblen coined the phrase "conspicuous consumption" to describe the hallmark of the endeavors of the leisure class, their competition for social status through material goods.

Unlike those who see satisfaction from hard work well done as inherent in human nature, Veblen emphasized a darker side of the human animal; the predator. In a later book, The Theory of Business Enterprise, he argued that a fundamental conflict exists between productive people who use machines, whom he categorized as engineers, and people who make, not goods, but only money – businessmen. While engineers strive for efficiency and product quality, business people seek short-term profits, often times at the expense of progress or other people.

Veblen lacked tact, seldom bathed, and was extraordinarily homely. He claimed to have invented an automatic dishwasher when he dumped his dirty dishes in a rain barrel and sprayed them with a garden hose every week or so. Nevertheless, some women apparently found his charms irresistible. An affair with Laughlin’s wife left Veblen without a sponsor, and he left the University of Chicago for a series of short stints at several other schools. These appointments were marred by bitter fights with many of his colleagues and sordid affairs with their spouses. He died broke at 72, filling a slot as a visiting assistant professor at the University of Missouri.

Many critics of capitalism still find Veblen’s ideas attractive. In this view, just as the Rockefellers, Morgans, and Harrimans once seemed to rule the business world and manipulate it accordingly, corporate America still celebrates the predator spirit. As examples, these critics cite such facts as tobacco companies arguing that nicotine is neither addictive nor harmful. Or stock brokers being paid, not based on earnings to their investors, but instead, on how many trades they make per day. Or oil companies, accused of ravaging the environment and consumers’ pocketbooks while buying and burying patents for efficient solar energy. And the list goes on and on.