The annotated text
Veblen's article opens with the following words:
The limitations of the marginal-utility economics are sharp and characteristic. It is from first to last a doctrine of value, and in point of form and method it is a theory of valuation. The whole system, therefore, lies within the theoretical field of distribution, and it has but a secondary bearing on any other economic phenomena than those of distribution – the term being taken in its accepted sense of pecuniary distribution, or distribution in point of ownership. Now and again an attempt is made to extend the use of the principle of marginal utility beyond this range, so as to apply it to questions of production, but hitherto without sensible effect, and necessarily so. The most ingenious and the most promising of such attempts have been those of Mr Clark, whose work marks the extreme range of endeavor and the extreme degree of success in so seeking to turn a postulate of distribution to account for a theory of production. But the outcome has been a doctrine of the production of values, and value, in Mr Clark's as in other utility systems, is a matter of valuation; which throws the whole excursion back into the field of distribution. Similarly, as regards attempts to make use of this principle in an analysis of the phenomena of consumption, the best results arrived at are some formulation of the pecuniary distribution of consumption goods.
Within this limited range marginal utility theory is of a wholly statical character. It offers no theory of a movement of any kind, being occupied with the adjustment of values to a given situation. Of this, again, no more convincing illustration need be had than is afforded by the work of Mr Clark, which is not excelled in point of earnestness, perseverance, or insight. For all their use of the term ‘dynamic,’ neither Mr Clark nor any of his associates in this line of research have yet contributed anything at all appreciable to a theory of genesis, growth, sequence, change, process, or the like, in economic life. They have had something to say as to the bearing which given economic [620/621] changes, accepted as premises, may have on economic valuation, and so on distribution; but as to the causes of change or the unfolding sequence of the phenomena of economic life they have had nothing to say hitherto; nor can they, since their theory is not drawn in causal terms but in terms of teleology. . . .
To the modern scientist the phenomena of growth and change are the most obtrusive and most consequential facts observable in economic life. For an understanding of modern economic life the technological advance of the past two centuries – e.g., the growth of the industrial arts – is of the first importance; but marginal utility theory does not bear on this matter, nor does this matter bear on marginal utility theory. As a means of theoretically accounting for this technological movement in the past or in the present, or even as a means of formally, technically stating it as an element in the current economic situation, that doctrine and all its works are altogether idle.
Veblen's claim that marginal utility theory has a bias towards statics retains much of its force today. Veblen refers here of course to John Bates Clark, the most important pioneer of neoclassical economics in the United States. If we examine the progress of economics over the subsequent century – notwithstanding important exceptions – it has regrettably and indisputably been biased towards choice, allocation, and equilibrium outcomes, rather than towards technology, production, and the ongoing processes of change. The insistence that technological change has to be a major feature of economic analysis was to become a major feature of the original American institutionalism (Hodgson, Reference Hodgson2004). Veblen continues with his critique of the marginal utility school:
It is characteristic of the school that whatever an element of the cultural fabric, an institution or any institutional phenomenon, [621/622] is involved in the facts with which the theory is occupied, such institutional facts are taken for granted, denied, or explained away. If it is a question of price, there is offered an explanation of how exchanges may take place with such effect as to leave money and price out of the account. If it is a question of credit, the effect of credit extension on business traffic is left on one side and there is an explanation of how the borrower and lender cooperate to smooth out their respective income streams of consumable goods or sensations of consumption. The failure of the school in this respect is consistent and comprehensive. And yet these economists are lacking neither in intelligence nor in information. They are, indeed, to be credited, commonly, with a wide range of information and an exact control of materials, as well as with a very alert interest in what is going on; and apart from their theoretical pronouncements the members of the school habitually profess the sanest and most intelligent views of current practical questions, even when these questions touch matters of institutional growth and decay.
To the deficient treatment of technology in the marginal utility school, Veblen adds the criticism that it takes institutions and culture as given. Institutional and cultural change became another major theme of American institutional economics. Veblen then identifies the source of these failures:
The infirmity of this theoretical scheme lies in its postulates which confine the inquiry to generalisations of the teleological or ‘deductive’ order. These postulates, together with the point of view and logical method that follow from them, the marginal utility school shares with other economists of the classical line – for this school is but a branch or derivative of the English classical economists of the nineteenth century. The substantial difference between this school and the generality of classical economists lies mainly in the fact that in the marginal utility economics the common postulates are more consistently adhered to at the same time that they are more neatly defined and their limitations are more adequately realized.
For Veblen, the ‘marginal utility’ school is both ‘teleological’ and ‘deductive.’ But he does not define these terms carefully. By ‘deductive’ he probably refers to the axiomatic bias in the neoclassical theory. By ‘teleological’ he suggests an argument directed towards a final end or goal. Hence, neoclassical marginal utility theory is ‘teleological’ in the sense of being logically directed toward equilibrium outcomes. Elsewhere Veblen seems to invest the word with possibly a slightly different meaning, that of being directed by an intention, purpose, or aim.Footnote 3 Veblen is also cavalier towards his treatment of ‘the English classical economists of the nineteenth century’: he ignores the great methodological and theoretical rift between the largely deductive theory of David Ricardo and the critical position adopted by Thomas Robert Malthus. The same paragraph continues:
Both the classical school is general and its specialized variant, the marginal utility school, in particular, take as their common point of departure the traditional psychology of the early nineteenth century hedonists, which is accepted as a matter of course or of common notoriety and is held quite uncritically. The central and well defined tenet so held is that of the hedonistic calculus. Under the guidance of this tenet and of the other psychological conceptions associated and consonant [622/623] with it, human conduct is conceived of and interpreted as a rational response to the exigencies of the situation in which mankind is placed; as regards economic conduct it is such a rational and unprejudiced response to the stimulus of anticipated pleasure and pain – being, typically and in the main, a response to the promptings of anticipated pleasure, for the hedonists of the nineteenth century and of the marginal utility school are in the main of an optimistic temper.
By ‘hedonistic psychology’, Veblen is referring to the pleasure−pain calculus of Jeremy Bentham and others. Several critics of Veblen subsequently objected that neoclassical economics became less driven by a narrow hedonism, including motivations beyond mere pleasure, and even forms of altruism (Collard, Reference Collard1978). This modification to Veblen's critique is necessary, but it remains the case that in the following century mainstream economics remained dominated by notions of utility maximization. By focusing on the ‘hedonistic calculus’ whereby ‘human conduct is conceived of and interpreted as a rational response to the exigencies of the situation in which mankind is placed’, Veblen identifies a particularly deliberative version of utilitarianism. Elsewhere Veblen (Reference Veblen1901: 225–226; Reference Veblen1906b: 581–582; Reference Veblen1907: 308) also criticized Marxism on similar grounds. He does not envisage the ‘as if’ methodology of Milton Friedman (Reference Friedman and Friedman1953) and others, where attention is directed at behaviour rather than the reasoning that leads to it. Veblen immediately follows with these words in a rather cryptic footnote:
The conduct of mankind differs from that of the brutes in being determined by anticipated sensations of pleasure and pain, instead of actual sensations. Hereby, in so far, human conduct is taken out of the sequence of cause and effect and falls instead under the rule of sufficient reason. By virtue of this rational faculty in man the connection between stimulus and response is teleological instead of causal . . .
A major problem with these two sentences is that Veblen does not make it crystal clear whether he is reporting his own views, or those of others. It is not immediately clear whether Veblen is here referring here to the views of the ‘hedonists,’ the marginal-utility school or himself. It is only the context and later passages that show that these were not his views, but imputed to others.
What is crucial is Veblen's stance toward the concept of ‘sufficient reason’. This confusing term derives from the philosopher Gottfried Leibniz and has since carried many very different meanings (some of which contradict one another) including: (i) every event has a cause, or (ii) every event has a reasonable and justifiable explanation, or (iii) God's reason lies behind events, or (iv) human reason is sufficient to explain events, or that (v) some events are the consequences of reason.Footnote 4 Voltaire in Candide satirized the second and third meanings. From his works as a whole, the overwhelming evidence is that Veblen rejected the view that ‘human reason is sufficient to explain events’.Footnote 5 He saw ‘sufficient reason’ as viable only in the limited sense that ‘some events are consequences of reason’ but always regarding this as partial and inadequate. He rejected the idea that reason itself is a sufficient explanation of human behaviour. Veblen certainly upheld that ‘either every event has a cause’ but he never used the term ‘sufficient reason’ to describe this proposition. To confirm that Veblen is reporting the views of others rather than his own, the paragraphs that follow immediately are notably in this same mode. We may skip one paragraph and return to the following point in the text:
The external circumstances which condition conduct are variable, of course, and so they will have a varying effect upon conduct; but their variation is, in effect, construed to be of such a character only as to vary the degree of strain to which the human agent is subject by contact with these external circumstances. The cultural elements involved in the theoretical scheme, elements that are of the nature of institutions, human relations governed by use and wont in whatever kind and connection, are not subject to inquiry but are taken from granted as pre-existing [623/624] in a finished, typical form and as making up a normal and definite economic situation, under which and in terms of which human intercourse is necessarily carried on. This cultural situation comprises a few large and simple articles of institutional furniture, together with their logical implications or corollaries; but it includes nothing of the consequences or effects caused by these institutional elements. The cultural elements so tacitly postulated as immutable conditions precedent to economic life are ownership and free contract, together with such other features of the scheme of natural rights as are implied in the exercise of these. These cultural products are, for the purpose of the theory, conceived to be given a priori in unmitigated force. They are part of the nature of things; so that there is no need of accounting for them or inquiring into them, as to how they have come to be such as they are, or how and why they have changed and are changing, or what effect all this may have on the relations of men who live by or under this cultural situation.
Evidently the acceptance of these immutable premises, tacitly, because uncritically and as a matter of course, by hedonistic economics gives the science a distinctive character and places it in contrast with other sciences whose premises are of a different order. As has already been indicated, the premises in question, so far as they are peculiar to the hedonistic economics, are (a) a certain institutional situation, the substantial feature of which is the natural right of ownership, and (b) the hedonistic calculus. The distinctive character given to this system of theory by these postulates and by the point of view resulting from their acceptance may be summed up broadly and concisely in saying that the theory is confined to the ground of sufficient reason instead of proceeding on the ground of efficient cause.
Immediately after this, Veblen gives part of his own viewpoint, which he sees as consonant with ‘modern science’:
The contrary is true of modern science, generally (except mathematics), particularly of such sciences as have to do with the phenomena of life and growth. The difference may seem trivial. It is serious only in its consequences. The two methods of inference – from sufficient reason and from efficient cause – are out of touch with one another and there is no transition from one to the other; no method of converting the procedure or the results of the one into [624/625] those of the other.
This is an important philosophical criticism of an ontology with two or more modes of causation, including (a) outcomes traceable ultimately to human intentions or reasons (Aristotle's ‘final cause’) described by Veblen as ‘sufficient reason’, and (b) outcomes resulting from material forces (Aristotle's ‘efficient cause’). In the case of (b), Veblen uses Aristotle's term. Importantly, it must be noted that Aristotle's term ‘efficient’ does not here mean effective or unwasteful. It simply refers to the existence of a material cause. Veblen makes the important point that if there were multiple modes of causality, then how would one affect another. For instance, by what mechanism or linkage could ideas affect material circumstances? To deal with this problem one must assume either that material reality consists of ideas, or that ideas have a material basis in the brain. Veblen took the latter position.
Others since have echoed Veblen's argument against separate types of cause. They have rejected a dualism of matter on the one hand and mind and reason on the other. For example, Barry Hindess (Reference Hindess1989: 150) asked pertinently: ‘If human action is subject to two distinct modes of determination, what happens when they conflict, when intentionality pushes one way and causality pushes another?’ We do not and cannot know the answer, because to reach it would involve the reconciliation of irreconcilables. John Searle (Reference Searle1997: xii–xiii) similarly remarked: ‘dualism . . . seems a hopeless theory because, having made a strict distinction between the mental and the physical, it cannot make the relation of the two intelligible’. Mario Bunge (Reference Bunge1980: 20) put it in a nutshell: ‘Dualism is inconsistent with the ontology of science.’Footnote 6 Veblen continues in the same paragraph:
The immediate consequence is that the resulting economic theory is of a teleological character – ‘deductive’ or ‘a priori’ as it is often called – instead of being drawn in terms of cause and effect. The relation sought by this theory among the facts with which it is occupied is the control exercised by future (apprehended) events over present conduct. Current phenomena are dealt with as conditioned by their future consequences; and in strict marginal-utility theory they can be dealt with only in respect of their control of the present by consideration of the future. Such a (logical) relation of control or guidance between the future and the present of course involves an exercise of intelligence, a taking thought, and hence an intelligent agent through whose discriminating forethought the apprehended future may affect the current course of events; unless, indeed, one were to admit something in the way of a providential elements, the relation of sufficient reason runs by way of the interested discrimination, the forethought, of an agent who takes thought of the future and guides his present activity by regard for this future. The relation of sufficient reason runs only from the (apprehended) future into the present, and it is solely of an intellectual, subjective, personal, teleological character and force; while the relation of cause and effect runs only in the contrary direction, and it is solely of an objective, impersonal materialistic character and force. The modern scheme of knowledge, on the whole, rests for its definitive ground, on the relation of cause and effect; the relation of sufficient reason being admitted only provisionally and as a proximate factor in the analysis, always with the unambiguous reservation that the analysis must ultimately come to rest in terms of cause and effect. The merits of this scientific animus, of course, do not concern the present argument.
The point to emphasize here is that, for Veblen, intentions and beliefs are all themselves caused and all require explanation. ‘Sufficient reason’ is insufficient. This is not a trivial point, because much of social science in the twentieth century has taken intentions and beliefs as given. Here Veblen is closely aligned with the philosophical position of Charles Darwin (Reference Darwin, Barrett and Gruber1974), and against the position of Auguste Comte and others who regarded any investigation into causation as needless and as unwarranted metaphysics (Comte, Reference Comte1830–42; Hodgson, Reference Hodgson2004).Footnote 7 Veblen continues in the next paragraph:
Now, it happens that the relation of sufficient reason enters very substantially into human conduct. It is this element of discriminating forethought that distinguishes human conduct from brute behavior. And since the economist's subject of inquiry is this human conduct, that relation necessarily comes in for a large [625/626] share of his attention in any theoretical formulation of economic phenomena, whether hedonistic or otherwise. But while modern science at large has made the causal relation the sole ultimate ground of theoretical formulation; and while the other sciences that deal with human life admit the relation of sufficient reason as a proximate, supplementary, or intermediate ground, subsidiary, and subservient to the argument from cause and effect; economics has had the misfortune – as seen from the scientific point of view – to let the former supplant the latter. It is, of course, true that human conduct is distinguished from other natural phenomena by the human faculty for taking thought, and any science that has to do with human conduct must face the patent fact that the details of such conduct consequently fall into the teleological form; but it is the peculiarity of the hedonistic economics that by force of its postulated its attention is confined to this teleological bearing of conduct alone. It deals with this conduct only in so far as it may be construed in rationalistic, teleological terms of calculation and choice. But it is at the same time no less true that human conduct, economic or otherwise, is subject to the sequence of cause and effect, by force of such elements as habituation and conventional requirements. But facts of this order, which are to modern science of graver interest than the teleological details of conduct, necessarily fall outside the attention of the hedonistic economist, because they cannot be construed in terms of sufficient reason, such as his postulates demand, or be fitted into a scheme of teleological doctrines.
There is, therefore, no call to impugn these premises of the marginal-utility economics within their field. They commend themselves to all serious and uncritical persons at first glance. They are principles of action which underlie the current, business-like scheme of economic life, and as such, as practical grounds of conduct, they are not to be called in question without questioning the existing law and order. As a matter of course, men order their lives by these principles and, practically, entertain no question of their stability and finality. That is what is meant by calling them institutions; they are settled habits of thought common to the generality of men. But it would be mere absent-[626/627]mindedness in any student of civilization therefore to admit that these or any other human institutions have this stability which is currently imputed to them or that they are in this way intrinsic to the nature of things. The acceptance by the economists of these or other institutional elements as given and immutable limits their inquiry in a particular and decisive way. It shuts off the inquiry at the point where the modern scientific interest sets in. The institutions in question are no doubt good for their purpose as institutions, but they are not good as premises for a scientific inquiry into the nature, origin, growth, and effects of these institutions and of the mutations which they undergo and which they bring to pass in the community's scheme of life.
To any modern scientist interested in economic phenomena, the chain of cause and effect in which any given phase of human culture is involved, as well as the cumulative changes wrought in the fabric of human conduct itself by the habitual activity of mankind, are matters of more engrossing and more abiding interest than the method of inference by which an individual is presumed invariably to balance pleasure and pain under given conditions that are presumed to be normal and invariable. The former are questions of the life-history of the race or the community, questions of cultural growth and of the fortunes of generations; while the latter is a question of individual casuistry in the face of a given situation that may arise in the course of this cultural growth. The former bear on the continuity and mutations of that scheme of conduct whereby mankind deals with its material means of life; the latter, if it is conceived in hedonistic terms, concerns a disconnected episode in the sensuous experience of an individual member of such a community.
In so far as modern science inquires into the phenomena of life, whether inanimate, brute, or human, it is occupied about questions of genesis and cumulative change, and it converges upon a theoretical formulation in the shape of a life-history drawn in causal terms. In so far as it is a science in the current sense of the term, any science, such as economics, which has to do with human conduct, becomes a genetic inquiry into the human scheme of life; and where, as in economics, the subject of inquiry is the [627/628] conduct of man in his dealings with the material means of life, the science is necessarily an inquiry into the life-history of material civilization, on a more or less extended or restricted plan. Not that the economist's inquiry isolates material civilization from all other phases and bearings of human culture, and so studies the motions of an abstractly conceived ‘economic man’. On the contrary, no theoretical inquiry into this material civilization in its causal, that is to say, its genetic, relations to other phases and bearings of the cultural complex; without studying it as it is wrought upon by other lines of cultural growth and as working its effects in these other lines. But in so far as the inquiry is economic science, specifically, the attention will converge upon the scheme of material life and will take in other phases of civilization only in their correlation with the scheme of material civilization.
Note that Veblen twice uses the term ‘genetic’ in the above passage. ‘Genetic’ (like ‘genesis’) refers to causal origin or determination. The word ‘genetic’ had been widely used in methodological or scientific contexts in the nineteenth century. It should not be confused with the modern biological term ‘gene’, which was first introduced into biology in 1909 by the Danish botanist Wilhelm Johannsen. In another work, Veblen (Reference Veblen and Ward’1903: 655) described the ‘genetic’ method as one that ‘deals with the forces and sequence of development and seeks to understand the outcome by finding how and why it has come about. The aim is to organize social phenomena into a theoretical structure in causal terms.’ Although Veblen kept up to date with many developments in biology, it is clear that he was not referring to genes. Instead, he was arguing that a general causal explanation of individual tastes and dispositions was required, particularly to understand the causes and outcomes of institutional change. As he made clear in another essay, Veblen (Reference Veblen1909a: 300) did not uphold that this explanation would be entirely in biological terms.
Notably he also suggests that ‘the subject of inquiry’ of economics ‘is the conduct of man in his dealings with the material means of life’. This broad definition was consonant with most other mainstream economists at the time.Footnote 8 It was only later that economics was redefined as the ‘science of choice’ assuming given preferences (Robbins, Reference Robbins1932; Samuelson, Reference Samuelson1948). Veblen continues:
Like all human culture this material civilization is a scheme of institutions – institutional fabric and institutional growth. But institutions are an outgrowth of habit. The growth of culture is a cumulative sequence of habituation, and the ways and means of it are the habitual response of human nature to exigencies that vary incontinently, cumulatively, but with something of a consistent sequence in the cumulative variations that so go forward, – incontinently, because each new move creates a new situation which induces a further new variation in the habitual manner of response; cumulatively, because each new situation is a variation of what has gone before it and embodies as causal factors all that has been effected by what went before; consistently, because the underlying traits of human nature (propensities, aptitudes, and what not) by force of which the response takes place, and on the ground of which the habituation takes effect, remain substantially unchanged.
Evidently an economic inquiry which occupies itself exclusively with the movements of this consistent, elemental human nature under given, stable institutional conditions – such as is the case with the current hedonistic economics – can reach statical [628/629] results alone; since it makes abstraction from those elements that make for anything but a statical result. On the other hand an adequate theory of economic conduct, even for statical purposes, cannot be drawn in terms of the individual simply – as is the case in the marginal-utility economics – because it cannot be drawn in terms of the underlying traits of human nature simply; since the response that goes to make up human conduct takes place under institutional norms and only under stimuli that have an institutional bearing; for the situation that provokes and inhibits action in any given case is itself in great part of institutional, cultural derivation. Then, too, the phenomena of human life occur only as phenomena of the life of a group or community; only under stimuli due to contact with the group and only under the (habitual) control exercised by canons of conduct imposed by the group's scheme of life. Not only is the individual's conduct hedged about and directed by his habitual relations to his fellows in the group, but these relations, being of an institutional character, vary as the institutional scheme varies. The wants and desires, the end and aim, the ways and means, the amplitude and drift of the individual's conduct are functions of an institutional variable that is of a highly complex and wholly unstable character.
Note the emphasis in the above passage on the concept of habit and its relation to institutions. Veblen saw instincts as biologically inherited, but by contrast habits are formed by individuals acting in specific institutional and cultural contexts. His concepts of habit and instinct were most strongly influenced by the psychology of William James (Reference James1890). The above statement also emphasizes the reconstitutive power of institutions over individuals: institutional changes affect individual ‘wants and desires’. In contrast to economics post-Robbins, preferences are endogenous, rather than taken as exogenously given.
Such passages have led some commentators, whether approvingly or critically, to describe Veblen as a ‘methodological collectivist’ or ‘holist’ who emphasizes the explanation of individuals in terms of structures, institutions, or culture.Footnote 9 But Veblen did not believe that the social wholes entirely determine the individual parts. He immediately goes on to emphasize that institutions are a product of individuals in a group, and institutions cannot exist without individuals:
The growth and mutations of the institutional fabric are an outcome of the conduct of the individual members of the group, since it is out of the experience of the individuals, through the habituation of individuals, that institutions arise; and it is in this same experience that these institutions act to direct and define the aims and end of conduct. It is, of course, on individuals that the system of institutions imposes those conventional standards, ideals, and canons of conduct that make up the community's scheme of life. Scientific inquiry in this field, therefore, must deal with individual conduct and must formulate its theoretical results in terms of individual conduct.
It cannot be more clear from the above passage that, while Veblen believed that institutions affect individual ‘wants and desires’, he also insisted that social processes operate through individuals, that institutions ‘are an outcome of the conduct of the individual members of the group’ and that it is ‘out of the experience of the individuals . . . that institutions arise’. In diametrically opposed contrast to the last-mentioned commentators, others have seized up this last quoted passage to claim that Veblen was really a ‘methodological individualist’.Footnote 10
Both positions are misleading. At least if these terms are to retain strict and distinguishable meanings, Veblen was neither a methodological collectivist nor a methodological individualist (Hodgson, Reference Hodgson2007). Despite its widespread usage, there is no consensus on a clear meaning of methodological individualism (Udéhn, Reference Udéhn2001). If it means explanations in terms of individuals alone, then it is not implemented in practice (Arrow, Reference Arrow1994). If it means explanations in terms of individuals plus relations between individuals, then it is difficult to find exceptions to this practice in modern social science, and the term approaches a banality (Hodgson, Reference Hodgson2004). Serious questions remain whether this inclusive version warrants the one-sided emphasis on individuals in the term ‘methodological individualism’. Similar problems apply to methodological collectivism. If individuals are included here in the explanantia, then the meanings of methodological collectivism and individualism converge!
For Veblen, explanations of social phenomena could be reduced entirely to neither institutions, structures, culture, nor individuals. He saw both social institutions and individual agency as mutually constitutive. Both individuals and institutions were required in all explanations of social phenomena, and it was possible to dispense with neither of these terms. In the same paragraph, Veblen then returns to the implications for marginal utility theory.
But such an inquiry can serve the purposes of a genetic theory only if and in so far as this individual conduct is attended to in those respects in [629/630] which it counts toward habituation, and so toward change (or stability) of the institutional fabric, on the one hand, and in those respects in which it is prompted and guided by the received institutional conceptions and ideals on the other hand. The postulates of marginal utility, and the hedonistic preconceptions generally, fail at this point in that they confine the attention to such bearings of economic conduct as are conceived not to be conditioned by habitual standards and ideals and to have no effect in the way of habituation. They disregard or abstract from the causal sequence of propensity and habituation in economic life and exclude from theoretical inquiry all such interest in the facts of cultural growth, in order to attend to those features of the case that are conceived to be idle in this respect. All such facts of institutional force and growth are put on one side as not being germane to pure theory; they are to be taken account of, if at all, by afterthought, by a more or less vague and general allowance for inconsequential disturbances due to occasional human infirmity. Certain institutional phenomena, it is true, are comprised among the premises of the hedonists, as has been noted above; but they are included as postulates a priori. So the institution of ownership is taken into the inquiry not as a factor of growth or an element subject to change, but as one of the primordial and immutable facts of the order of nature, underlying the hedonistic calculus. Property, ownership, is presumed as the basis of hedonistic discrimination and it is conceived to be given in its finished (nineteenth-century) scope and force. There is not thought either of a conceivable growth of this definitive nineteenth-century institution out of a cruder past or of any conceivable cumulative change in the scope and force of ownership in the present or future. Nor is it conceived that the presence of this institutional element in men's economic relations in any degree affects or disguises the hedonistic calculus, or that its pecuniary conceptions and standards in any degree standardize, color, mitigate, or divert the hedonistic calculator from the direct and unhampered quest of the net sensuous gain. While the institution of property is included in this way among the postulates of the theory, and is even presumed to be ever-present in the economic situation, it is allowed to have no force in shaping economic conduct, which is conceived to run its course to its hedonistic outcome as if no such [630/631] institutional factor intervened between the impulse and its realization. The institution of property, together with all the range of pecuniary conceptions that belong under it and that cluster about it, are presumed to give rise to no habitual or conventional canons of conduct or standards of valuation, no proximate ends, ideals, or aspirations. All pecuniary notions arising from ownership are treated simply as expedients of computation which mediate between the pain-cost and the pleasure-gain of hedonistic choice, without lag, leak, or friction; they are conceived simply as the immutably correct, God-given notation of the hedonistic calculus.
In other words, by reducing explanations universally to the utilitarian calculus, marginal utility theory fails to acknowledge the historically specific features of such institutions as property. Veblen then turns to the pecuniary imperatives of modern capitalism. We rejoin his text at the following point, with a long extract:
Pecuniary institutions induce pecuniary habits of thought which affect men's discrimination outside of pecuniary matters; but the hedonistic interpretation alleges that such pecuniary habits of thought do not affect men's discrimination in pecuniary matters. Although the institutional [632/633] scheme of the price system visibly dominates the modern community's thinking in matters that lie outside the economic interest, the hedonistic economists insist, in effect, that this institutional scheme must be accounted of no effect within that range of activity to which it owes its genesis, growth, and persistence. The phenomena of business, which are peculiarly and uniformly phenomena of price, are in the scheme of the hedonistic theory reduced to non-pecuniary hedonistic terms and the theoretical formulation is carried out as if pecuniary conceptions had no force within the traffic in which such conceptions originate. . . .
It may be needless to take exception to such conversion from pecuniary into sensuous terms, for the theoretical purpose for which it is habitually make; although, if need were, it might not be excessively difficult to show that the whole hedonistic basis of such a conversion is a psychological misconception. But it is to the remoter theoretical consequences of such a conversion that exception is to be taken. In making the conversion abstraction is made from whatever elements do not lend themselves to its terms; which amounts to abstracting from precisely those elements of business that have an institutional force and that therefore would lend themselves to scientific inquiry of the modern kind – those (institutional) elements whose analysis might contribute to an understanding of modern business and of the life of the modern business community as contrasted with the assumed primordial hedonistic calculus.
The point may perhaps be made clearer. Money and the habitual resort to its use are conceived to be simply the ways and means by which consumable goods are acquired, and therefore simply a convenient method by which to procure the pleasurable sensations of consumption; these latter being in hedonistic theory the sole and overt end of all economic endeavor. Money values [633/634] have therefore no other significance than that of purchasing power over consumable goods, and money is simply an expedient of computation. Investment, credit extensions, loans of all kinds and degrees, with payment of interest and the rest, are likewise taken simply as intermediate steps between the pleasurable sensations of consumption and the efforts induced by the anticipation of these sensations, other bearings of the case being disregarded. The balance being kept in terms of the hedonistic consumption, no disturbance arises in this pecuniary traffic so long as the extreme terms of this extended hedonistic equation – pain-cost and pleasure-gain – are not altered, what lies between these extreme terms being merely algebraic notation employed for convenience of accountancy. But such is not the run of the facts in modern business. Variation of capitalization, e.g., occur without its being practicable to refer them to visibly equivalent variations either in the state of the industrial arts or in the sensations of consumption. Credit extensions tend to inflation of credit, rising prices, overstocking of markets, etc., likewise without a visible or securely traceable correlation in the state of the industrial arts or in the pleasures of consumption; that is to say, without a visible basis in those material elements to which the hedonistic theory reduces all economic phenomena. Hence the run of the facts, in so far, must be thrown out of the theoretical formulation. The hedonistically presumed final purchase of consumable goods is habitually not contemplated in the pursuit of business enterprise. Business men habitually aspire to accumulate wealth in excess of the limits of practicable consumption, and the wealth so accumulated is not intended to be converted by a final transaction of purchase into consumable goods or sensations of consumption. Such commonplace facts as these, together with the endless web of business detail of a like pecuniary character, do not in hedonistic theory raise a question as to how these conventional aims, ideals, aspirations, and standards have come into force or how they affect the scheme of life in business or outside of it; they do not raise the questions because such questions cannot be answered in the terms which the hedonistic economists are content to use, or, indeed, which their premises permit them to use. The question [634/635] which arises is how to explain the facts away; how theoretically to neutralize them so that they will not have to appear in the theory, which can then be drawn indirect and unambiguous terms of rational hedonistic calculation. They are explained away as being aberrations due to oversight or lapse of memory on the part of business men, or to some failure of logic or insight. Or they are construed and interpreted into the rationalistic terms of the hedonistic calculus by resort to an ambiguous use of the hedonistic concepts. So that the whole ‘money economy,’ with all the machinery of credit and the rest, disappears in a tissue of metaphors to reappear theoretically expurgated, sterilized, and simplified into a ‘refined system of barter,’ culminating in a net aggregate maximum of pleasurable sensations of consumption.
But since it is in just this unhedonistic, unrationalistic pecuniary traffic that the tissue of business life consists, since it is this peculiar conventionalism of aims and standards that differentiates the life of the modern business community from any conceivable earlier or cruder phase of economic life; since it is in this tissue of pecuniary intercourse and pecuniary concepts, ideals, expedients, and aspirations that the conjunctures of business life arise and run their course of felicity and devastation; since it is here that those institutional changes take place which distinguish one phase or era of the business community's life from any other; since the growth and change of these habitual, conventional elements make the growth and character of any business era or business community; any theory of business which sets these elements aside or explains them away misses the main facts which it has gone out to seek. Life and its conjunctures and institutions being of this complexion, however much that state of the case may be depreciated, a theoretical account of the phenomena of this life must be drawn in these terms in which the phenomena occur. It is not simply that the hedonistic interpretation of modern economic phenomena is inadequate or misleading; if the phenomena are subjected to the hedonistic interpretation in the theoretical analysis they disappear from the theory; and if they would bear the interpretation in fact they would disappear in fact. If, in fact, all the conventional relations and principles of [635/636] pecuniary intercourse were subject to such a perpetual rationalized, calculating revision, so that each article of usage, appreciation, or procedure must approve itself de novo on hedonistic grounds of sensuous expediency to all concerned at every move, it is not conceivable that the institutional fabric would last over night.
The central theme of these final paragraphs of Veblen's article is that by making utility the centrepiece of the analysis of human motivation, important historically specific institutional factors are neglected, particularly property, money, and modern business institutions.
In particular, Veblen argues that neoclassical analysis reduces money to ‘an expedient of computation’ and is thus unable to appreciate adequately the nature of money. This defect was not remedied, even with later developments in neoclassical theory, including general equilibrium analysis. As Frank Hahn (Reference Hahn1988: 972) put it: ‘monetary theory cannot simply be grafted on to Walrasian theory with minor modifications’. And as Stephen Horwitz (Reference Horwitz1992: 15) remarked: ‘the properties of real-world moneys throw a monkey wrench into the neoclassical theory of economic exchange’. Veblen further observes that a similar reduction of monetary phenomena – such as investment, borrowing, and credit – to the utilitarian calculus overlooks ‘the run of the facts in modern business’. The whole money economy is treated as if it were equivalent to a ‘refined system of barter’. Instead, Veblen argues, ‘a theoretical account of the phenomena of this life must be drawn in these terms in which the phenomena occur’: they must incorporate the real institutions of a money-driven economy.
The concept of marginal utility still plays a major role in mainstream economics, although it has been challenged by experimental and behavioural economists who have become influential since around 1990. Veblen's argument that marginal utility gives an inadequate causal explanation of human motivation, and masks an understanding of institutional and historical specificities, retains much of its original force (Hodgson, Reference Hodgson2001).
The Great Crash occurred 20 years after Veblen wrote this article, and subsequently John Maynard Keynes (Reference Keynes1936) urged economists to take the nature of money and its institutions more seriously. Earlier Veblen (Reference Veblen1904) saw the source of capitalist crises in the financial institutions that promoted the excessive and irrational exuberance of the speculators. He focused on the institutional basis of earnings and capitalist expectations. It has been argued by some commentators (Vining, Reference Vining1939; Raines and Leathers, Reference Raines and Leathers1996) that Veblen brilliantly foreshadowed the theory of business fluctuations and employment in the later work of Keynes.
Ironically, on the centenary of Veblen's article, the world economy has entered its deepest crisis since the Great Depression. Needless to say, the significance of Veblen's work today lies in much more than these numerical macroeconomic coincidences. If Veblen should be credited for his insights into the business system and the causes of economic crises, he also should be recognized as one of the most important philosophers of economics and an inspiration behind major streams of thought within evolutionary and institutional economics.
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Editorial introduction
One hundred years ago, Thorstein Veblen (Reference Veblen1909b) published what is one of his most important journal articles. In ‘The Limitations of Marginal Utility’, he not only developed his critique of neoclassical economics, but also expanded his own methodological outlook.
Veblen wrote the article when he was at Stanford University. Previously, from 1892, he had been at the University of Chicago. In 1904, unproven rumours erupted of an affair between Veblen and the wife of a faculty member. Provided by Veblen's wife with what might have seemed to be corroborative evidence of the affair, and enraged by Veblen's written disapproval of ties between universities and big business, the University President made it clear that he wished Veblen to leave. In 1906, Veblen secured a post at Stanford. Initially he found its atmosphere and governance much more conducive than Chicago. He was given a higher salary and allowed ‘to teach as little as he wished and devote his time to writing’ (Dorfman, Reference Dorfman1934: 269). There Veblen continued to find intellectual stimulation, with colleagues such as Allyn Young. While at Stanford, Veblen produced and published a number of highly significant articles, building on the evolutionary and institutional framework that he had earlier developed at Chicago.
‘The Limitations of Marginal Utility’ is widely available on the Web.Footnote 1 Its barbed criticisms of utilitarianism and neoclassical economics are quoted frequently. But its underlying philosophical themes are less widely discussed. Generally, the work repays careful and detailed reading. A purpose of this centenary celebration of this essay is to bring some of its hidden themes to light. As suggested below, several of its passages have been subject to misinterpretation.
Veblen was a deeply philosophical writer and some of his philosophical insights have been downplayed, even by his disciples. His emphasis on causality and other ‘metaphysical’ principles was overlooked from the 1920s, when the social sciences were seduced by forms of positivism that denied the relevance of unobservables for science. Veblen's psychological views and his emphasis on habit were also neglected in this era (Camic, Reference Camic1986). Furthermore, as social scientists were persuaded by theories of cultural determination that became popular in the interwar period, Veblen was wrongly interpreted in terms of a primary and perhaps exclusive emphasis on culture and institutions, rather than the individual (Hodgson, Reference Hodgson2004). His 1909 ‘Limitations’ essay belies such misinterpretations.
Given its widespread availability, the essay is not reprinted here as a complete whole. Instead, what is offered is a sequential annotation of most of the text. Veblen's writing suffers typically from a cryptic style and an inadequacy of clear definitions. Indeed, one has to become familiar with his works as a whole before risking an interpretation of some key phrases or terms.Footnote 2
The annotated text
Veblen's article opens with the following words:
The limitations of the marginal-utility economics are sharp and characteristic. It is from first to last a doctrine of value, and in point of form and method it is a theory of valuation. The whole system, therefore, lies within the theoretical field of distribution, and it has but a secondary bearing on any other economic phenomena than those of distribution – the term being taken in its accepted sense of pecuniary distribution, or distribution in point of ownership. Now and again an attempt is made to extend the use of the principle of marginal utility beyond this range, so as to apply it to questions of production, but hitherto without sensible effect, and necessarily so. The most ingenious and the most promising of such attempts have been those of Mr Clark, whose work marks the extreme range of endeavor and the extreme degree of success in so seeking to turn a postulate of distribution to account for a theory of production. But the outcome has been a doctrine of the production of values, and value, in Mr Clark's as in other utility systems, is a matter of valuation; which throws the whole excursion back into the field of distribution. Similarly, as regards attempts to make use of this principle in an analysis of the phenomena of consumption, the best results arrived at are some formulation of the pecuniary distribution of consumption goods.
Within this limited range marginal utility theory is of a wholly statical character. It offers no theory of a movement of any kind, being occupied with the adjustment of values to a given situation. Of this, again, no more convincing illustration need be had than is afforded by the work of Mr Clark, which is not excelled in point of earnestness, perseverance, or insight. For all their use of the term ‘dynamic,’ neither Mr Clark nor any of his associates in this line of research have yet contributed anything at all appreciable to a theory of genesis, growth, sequence, change, process, or the like, in economic life. They have had something to say as to the bearing which given economic [620/621] changes, accepted as premises, may have on economic valuation, and so on distribution; but as to the causes of change or the unfolding sequence of the phenomena of economic life they have had nothing to say hitherto; nor can they, since their theory is not drawn in causal terms but in terms of teleology. . . .
To the modern scientist the phenomena of growth and change are the most obtrusive and most consequential facts observable in economic life. For an understanding of modern economic life the technological advance of the past two centuries – e.g., the growth of the industrial arts – is of the first importance; but marginal utility theory does not bear on this matter, nor does this matter bear on marginal utility theory. As a means of theoretically accounting for this technological movement in the past or in the present, or even as a means of formally, technically stating it as an element in the current economic situation, that doctrine and all its works are altogether idle.
Veblen's claim that marginal utility theory has a bias towards statics retains much of its force today. Veblen refers here of course to John Bates Clark, the most important pioneer of neoclassical economics in the United States. If we examine the progress of economics over the subsequent century – notwithstanding important exceptions – it has regrettably and indisputably been biased towards choice, allocation, and equilibrium outcomes, rather than towards technology, production, and the ongoing processes of change. The insistence that technological change has to be a major feature of economic analysis was to become a major feature of the original American institutionalism (Hodgson, Reference Hodgson2004). Veblen continues with his critique of the marginal utility school:
It is characteristic of the school that whatever an element of the cultural fabric, an institution or any institutional phenomenon, [621/622] is involved in the facts with which the theory is occupied, such institutional facts are taken for granted, denied, or explained away. If it is a question of price, there is offered an explanation of how exchanges may take place with such effect as to leave money and price out of the account. If it is a question of credit, the effect of credit extension on business traffic is left on one side and there is an explanation of how the borrower and lender cooperate to smooth out their respective income streams of consumable goods or sensations of consumption. The failure of the school in this respect is consistent and comprehensive. And yet these economists are lacking neither in intelligence nor in information. They are, indeed, to be credited, commonly, with a wide range of information and an exact control of materials, as well as with a very alert interest in what is going on; and apart from their theoretical pronouncements the members of the school habitually profess the sanest and most intelligent views of current practical questions, even when these questions touch matters of institutional growth and decay.
To the deficient treatment of technology in the marginal utility school, Veblen adds the criticism that it takes institutions and culture as given. Institutional and cultural change became another major theme of American institutional economics. Veblen then identifies the source of these failures:
The infirmity of this theoretical scheme lies in its postulates which confine the inquiry to generalisations of the teleological or ‘deductive’ order. These postulates, together with the point of view and logical method that follow from them, the marginal utility school shares with other economists of the classical line – for this school is but a branch or derivative of the English classical economists of the nineteenth century. The substantial difference between this school and the generality of classical economists lies mainly in the fact that in the marginal utility economics the common postulates are more consistently adhered to at the same time that they are more neatly defined and their limitations are more adequately realized.
For Veblen, the ‘marginal utility’ school is both ‘teleological’ and ‘deductive.’ But he does not define these terms carefully. By ‘deductive’ he probably refers to the axiomatic bias in the neoclassical theory. By ‘teleological’ he suggests an argument directed towards a final end or goal. Hence, neoclassical marginal utility theory is ‘teleological’ in the sense of being logically directed toward equilibrium outcomes. Elsewhere Veblen seems to invest the word with possibly a slightly different meaning, that of being directed by an intention, purpose, or aim.Footnote 3 Veblen is also cavalier towards his treatment of ‘the English classical economists of the nineteenth century’: he ignores the great methodological and theoretical rift between the largely deductive theory of David Ricardo and the critical position adopted by Thomas Robert Malthus. The same paragraph continues:
Both the classical school is general and its specialized variant, the marginal utility school, in particular, take as their common point of departure the traditional psychology of the early nineteenth century hedonists, which is accepted as a matter of course or of common notoriety and is held quite uncritically. The central and well defined tenet so held is that of the hedonistic calculus. Under the guidance of this tenet and of the other psychological conceptions associated and consonant [622/623] with it, human conduct is conceived of and interpreted as a rational response to the exigencies of the situation in which mankind is placed; as regards economic conduct it is such a rational and unprejudiced response to the stimulus of anticipated pleasure and pain – being, typically and in the main, a response to the promptings of anticipated pleasure, for the hedonists of the nineteenth century and of the marginal utility school are in the main of an optimistic temper.
By ‘hedonistic psychology’, Veblen is referring to the pleasure−pain calculus of Jeremy Bentham and others. Several critics of Veblen subsequently objected that neoclassical economics became less driven by a narrow hedonism, including motivations beyond mere pleasure, and even forms of altruism (Collard, Reference Collard1978). This modification to Veblen's critique is necessary, but it remains the case that in the following century mainstream economics remained dominated by notions of utility maximization. By focusing on the ‘hedonistic calculus’ whereby ‘human conduct is conceived of and interpreted as a rational response to the exigencies of the situation in which mankind is placed’, Veblen identifies a particularly deliberative version of utilitarianism. Elsewhere Veblen (Reference Veblen1901: 225–226; Reference Veblen1906b: 581–582; Reference Veblen1907: 308) also criticized Marxism on similar grounds. He does not envisage the ‘as if’ methodology of Milton Friedman (Reference Friedman and Friedman1953) and others, where attention is directed at behaviour rather than the reasoning that leads to it. Veblen immediately follows with these words in a rather cryptic footnote:
The conduct of mankind differs from that of the brutes in being determined by anticipated sensations of pleasure and pain, instead of actual sensations. Hereby, in so far, human conduct is taken out of the sequence of cause and effect and falls instead under the rule of sufficient reason. By virtue of this rational faculty in man the connection between stimulus and response is teleological instead of causal . . .
A major problem with these two sentences is that Veblen does not make it crystal clear whether he is reporting his own views, or those of others. It is not immediately clear whether Veblen is here referring here to the views of the ‘hedonists,’ the marginal-utility school or himself. It is only the context and later passages that show that these were not his views, but imputed to others.
What is crucial is Veblen's stance toward the concept of ‘sufficient reason’. This confusing term derives from the philosopher Gottfried Leibniz and has since carried many very different meanings (some of which contradict one another) including: (i) every event has a cause, or (ii) every event has a reasonable and justifiable explanation, or (iii) God's reason lies behind events, or (iv) human reason is sufficient to explain events, or that (v) some events are the consequences of reason.Footnote 4 Voltaire in Candide satirized the second and third meanings. From his works as a whole, the overwhelming evidence is that Veblen rejected the view that ‘human reason is sufficient to explain events’.Footnote 5 He saw ‘sufficient reason’ as viable only in the limited sense that ‘some events are consequences of reason’ but always regarding this as partial and inadequate. He rejected the idea that reason itself is a sufficient explanation of human behaviour. Veblen certainly upheld that ‘either every event has a cause’ but he never used the term ‘sufficient reason’ to describe this proposition. To confirm that Veblen is reporting the views of others rather than his own, the paragraphs that follow immediately are notably in this same mode. We may skip one paragraph and return to the following point in the text:
The external circumstances which condition conduct are variable, of course, and so they will have a varying effect upon conduct; but their variation is, in effect, construed to be of such a character only as to vary the degree of strain to which the human agent is subject by contact with these external circumstances. The cultural elements involved in the theoretical scheme, elements that are of the nature of institutions, human relations governed by use and wont in whatever kind and connection, are not subject to inquiry but are taken from granted as pre-existing [623/624] in a finished, typical form and as making up a normal and definite economic situation, under which and in terms of which human intercourse is necessarily carried on. This cultural situation comprises a few large and simple articles of institutional furniture, together with their logical implications or corollaries; but it includes nothing of the consequences or effects caused by these institutional elements. The cultural elements so tacitly postulated as immutable conditions precedent to economic life are ownership and free contract, together with such other features of the scheme of natural rights as are implied in the exercise of these. These cultural products are, for the purpose of the theory, conceived to be given a priori in unmitigated force. They are part of the nature of things; so that there is no need of accounting for them or inquiring into them, as to how they have come to be such as they are, or how and why they have changed and are changing, or what effect all this may have on the relations of men who live by or under this cultural situation.
Evidently the acceptance of these immutable premises, tacitly, because uncritically and as a matter of course, by hedonistic economics gives the science a distinctive character and places it in contrast with other sciences whose premises are of a different order. As has already been indicated, the premises in question, so far as they are peculiar to the hedonistic economics, are (a) a certain institutional situation, the substantial feature of which is the natural right of ownership, and (b) the hedonistic calculus. The distinctive character given to this system of theory by these postulates and by the point of view resulting from their acceptance may be summed up broadly and concisely in saying that the theory is confined to the ground of sufficient reason instead of proceeding on the ground of efficient cause.
Immediately after this, Veblen gives part of his own viewpoint, which he sees as consonant with ‘modern science’:
The contrary is true of modern science, generally (except mathematics), particularly of such sciences as have to do with the phenomena of life and growth. The difference may seem trivial. It is serious only in its consequences. The two methods of inference – from sufficient reason and from efficient cause – are out of touch with one another and there is no transition from one to the other; no method of converting the procedure or the results of the one into [624/625] those of the other.
This is an important philosophical criticism of an ontology with two or more modes of causation, including (a) outcomes traceable ultimately to human intentions or reasons (Aristotle's ‘final cause’) described by Veblen as ‘sufficient reason’, and (b) outcomes resulting from material forces (Aristotle's ‘efficient cause’). In the case of (b), Veblen uses Aristotle's term. Importantly, it must be noted that Aristotle's term ‘efficient’ does not here mean effective or unwasteful. It simply refers to the existence of a material cause. Veblen makes the important point that if there were multiple modes of causality, then how would one affect another. For instance, by what mechanism or linkage could ideas affect material circumstances? To deal with this problem one must assume either that material reality consists of ideas, or that ideas have a material basis in the brain. Veblen took the latter position.
Others since have echoed Veblen's argument against separate types of cause. They have rejected a dualism of matter on the one hand and mind and reason on the other. For example, Barry Hindess (Reference Hindess1989: 150) asked pertinently: ‘If human action is subject to two distinct modes of determination, what happens when they conflict, when intentionality pushes one way and causality pushes another?’ We do not and cannot know the answer, because to reach it would involve the reconciliation of irreconcilables. John Searle (Reference Searle1997: xii–xiii) similarly remarked: ‘dualism . . . seems a hopeless theory because, having made a strict distinction between the mental and the physical, it cannot make the relation of the two intelligible’. Mario Bunge (Reference Bunge1980: 20) put it in a nutshell: ‘Dualism is inconsistent with the ontology of science.’Footnote 6 Veblen continues in the same paragraph:
The immediate consequence is that the resulting economic theory is of a teleological character – ‘deductive’ or ‘a priori’ as it is often called – instead of being drawn in terms of cause and effect. The relation sought by this theory among the facts with which it is occupied is the control exercised by future (apprehended) events over present conduct. Current phenomena are dealt with as conditioned by their future consequences; and in strict marginal-utility theory they can be dealt with only in respect of their control of the present by consideration of the future. Such a (logical) relation of control or guidance between the future and the present of course involves an exercise of intelligence, a taking thought, and hence an intelligent agent through whose discriminating forethought the apprehended future may affect the current course of events; unless, indeed, one were to admit something in the way of a providential elements, the relation of sufficient reason runs by way of the interested discrimination, the forethought, of an agent who takes thought of the future and guides his present activity by regard for this future. The relation of sufficient reason runs only from the (apprehended) future into the present, and it is solely of an intellectual, subjective, personal, teleological character and force; while the relation of cause and effect runs only in the contrary direction, and it is solely of an objective, impersonal materialistic character and force. The modern scheme of knowledge, on the whole, rests for its definitive ground, on the relation of cause and effect; the relation of sufficient reason being admitted only provisionally and as a proximate factor in the analysis, always with the unambiguous reservation that the analysis must ultimately come to rest in terms of cause and effect. The merits of this scientific animus, of course, do not concern the present argument.
The point to emphasize here is that, for Veblen, intentions and beliefs are all themselves caused and all require explanation. ‘Sufficient reason’ is insufficient. This is not a trivial point, because much of social science in the twentieth century has taken intentions and beliefs as given. Here Veblen is closely aligned with the philosophical position of Charles Darwin (Reference Darwin, Barrett and Gruber1974), and against the position of Auguste Comte and others who regarded any investigation into causation as needless and as unwarranted metaphysics (Comte, Reference Comte1830–42; Hodgson, Reference Hodgson2004).Footnote 7 Veblen continues in the next paragraph:
Now, it happens that the relation of sufficient reason enters very substantially into human conduct. It is this element of discriminating forethought that distinguishes human conduct from brute behavior. And since the economist's subject of inquiry is this human conduct, that relation necessarily comes in for a large [625/626] share of his attention in any theoretical formulation of economic phenomena, whether hedonistic or otherwise. But while modern science at large has made the causal relation the sole ultimate ground of theoretical formulation; and while the other sciences that deal with human life admit the relation of sufficient reason as a proximate, supplementary, or intermediate ground, subsidiary, and subservient to the argument from cause and effect; economics has had the misfortune – as seen from the scientific point of view – to let the former supplant the latter. It is, of course, true that human conduct is distinguished from other natural phenomena by the human faculty for taking thought, and any science that has to do with human conduct must face the patent fact that the details of such conduct consequently fall into the teleological form; but it is the peculiarity of the hedonistic economics that by force of its postulated its attention is confined to this teleological bearing of conduct alone. It deals with this conduct only in so far as it may be construed in rationalistic, teleological terms of calculation and choice. But it is at the same time no less true that human conduct, economic or otherwise, is subject to the sequence of cause and effect, by force of such elements as habituation and conventional requirements. But facts of this order, which are to modern science of graver interest than the teleological details of conduct, necessarily fall outside the attention of the hedonistic economist, because they cannot be construed in terms of sufficient reason, such as his postulates demand, or be fitted into a scheme of teleological doctrines.
There is, therefore, no call to impugn these premises of the marginal-utility economics within their field. They commend themselves to all serious and uncritical persons at first glance. They are principles of action which underlie the current, business-like scheme of economic life, and as such, as practical grounds of conduct, they are not to be called in question without questioning the existing law and order. As a matter of course, men order their lives by these principles and, practically, entertain no question of their stability and finality. That is what is meant by calling them institutions; they are settled habits of thought common to the generality of men. But it would be mere absent-[626/627]mindedness in any student of civilization therefore to admit that these or any other human institutions have this stability which is currently imputed to them or that they are in this way intrinsic to the nature of things. The acceptance by the economists of these or other institutional elements as given and immutable limits their inquiry in a particular and decisive way. It shuts off the inquiry at the point where the modern scientific interest sets in. The institutions in question are no doubt good for their purpose as institutions, but they are not good as premises for a scientific inquiry into the nature, origin, growth, and effects of these institutions and of the mutations which they undergo and which they bring to pass in the community's scheme of life.
To any modern scientist interested in economic phenomena, the chain of cause and effect in which any given phase of human culture is involved, as well as the cumulative changes wrought in the fabric of human conduct itself by the habitual activity of mankind, are matters of more engrossing and more abiding interest than the method of inference by which an individual is presumed invariably to balance pleasure and pain under given conditions that are presumed to be normal and invariable. The former are questions of the life-history of the race or the community, questions of cultural growth and of the fortunes of generations; while the latter is a question of individual casuistry in the face of a given situation that may arise in the course of this cultural growth. The former bear on the continuity and mutations of that scheme of conduct whereby mankind deals with its material means of life; the latter, if it is conceived in hedonistic terms, concerns a disconnected episode in the sensuous experience of an individual member of such a community.
In so far as modern science inquires into the phenomena of life, whether inanimate, brute, or human, it is occupied about questions of genesis and cumulative change, and it converges upon a theoretical formulation in the shape of a life-history drawn in causal terms. In so far as it is a science in the current sense of the term, any science, such as economics, which has to do with human conduct, becomes a genetic inquiry into the human scheme of life; and where, as in economics, the subject of inquiry is the [627/628] conduct of man in his dealings with the material means of life, the science is necessarily an inquiry into the life-history of material civilization, on a more or less extended or restricted plan. Not that the economist's inquiry isolates material civilization from all other phases and bearings of human culture, and so studies the motions of an abstractly conceived ‘economic man’. On the contrary, no theoretical inquiry into this material civilization in its causal, that is to say, its genetic, relations to other phases and bearings of the cultural complex; without studying it as it is wrought upon by other lines of cultural growth and as working its effects in these other lines. But in so far as the inquiry is economic science, specifically, the attention will converge upon the scheme of material life and will take in other phases of civilization only in their correlation with the scheme of material civilization.
Note that Veblen twice uses the term ‘genetic’ in the above passage. ‘Genetic’ (like ‘genesis’) refers to causal origin or determination. The word ‘genetic’ had been widely used in methodological or scientific contexts in the nineteenth century. It should not be confused with the modern biological term ‘gene’, which was first introduced into biology in 1909 by the Danish botanist Wilhelm Johannsen. In another work, Veblen (Reference Veblen and Ward’1903: 655) described the ‘genetic’ method as one that ‘deals with the forces and sequence of development and seeks to understand the outcome by finding how and why it has come about. The aim is to organize social phenomena into a theoretical structure in causal terms.’ Although Veblen kept up to date with many developments in biology, it is clear that he was not referring to genes. Instead, he was arguing that a general causal explanation of individual tastes and dispositions was required, particularly to understand the causes and outcomes of institutional change. As he made clear in another essay, Veblen (Reference Veblen1909a: 300) did not uphold that this explanation would be entirely in biological terms.
Notably he also suggests that ‘the subject of inquiry’ of economics ‘is the conduct of man in his dealings with the material means of life’. This broad definition was consonant with most other mainstream economists at the time.Footnote 8 It was only later that economics was redefined as the ‘science of choice’ assuming given preferences (Robbins, Reference Robbins1932; Samuelson, Reference Samuelson1948). Veblen continues:
Like all human culture this material civilization is a scheme of institutions – institutional fabric and institutional growth. But institutions are an outgrowth of habit. The growth of culture is a cumulative sequence of habituation, and the ways and means of it are the habitual response of human nature to exigencies that vary incontinently, cumulatively, but with something of a consistent sequence in the cumulative variations that so go forward, – incontinently, because each new move creates a new situation which induces a further new variation in the habitual manner of response; cumulatively, because each new situation is a variation of what has gone before it and embodies as causal factors all that has been effected by what went before; consistently, because the underlying traits of human nature (propensities, aptitudes, and what not) by force of which the response takes place, and on the ground of which the habituation takes effect, remain substantially unchanged.
Evidently an economic inquiry which occupies itself exclusively with the movements of this consistent, elemental human nature under given, stable institutional conditions – such as is the case with the current hedonistic economics – can reach statical [628/629] results alone; since it makes abstraction from those elements that make for anything but a statical result. On the other hand an adequate theory of economic conduct, even for statical purposes, cannot be drawn in terms of the individual simply – as is the case in the marginal-utility economics – because it cannot be drawn in terms of the underlying traits of human nature simply; since the response that goes to make up human conduct takes place under institutional norms and only under stimuli that have an institutional bearing; for the situation that provokes and inhibits action in any given case is itself in great part of institutional, cultural derivation. Then, too, the phenomena of human life occur only as phenomena of the life of a group or community; only under stimuli due to contact with the group and only under the (habitual) control exercised by canons of conduct imposed by the group's scheme of life. Not only is the individual's conduct hedged about and directed by his habitual relations to his fellows in the group, but these relations, being of an institutional character, vary as the institutional scheme varies. The wants and desires, the end and aim, the ways and means, the amplitude and drift of the individual's conduct are functions of an institutional variable that is of a highly complex and wholly unstable character.
Note the emphasis in the above passage on the concept of habit and its relation to institutions. Veblen saw instincts as biologically inherited, but by contrast habits are formed by individuals acting in specific institutional and cultural contexts. His concepts of habit and instinct were most strongly influenced by the psychology of William James (Reference James1890). The above statement also emphasizes the reconstitutive power of institutions over individuals: institutional changes affect individual ‘wants and desires’. In contrast to economics post-Robbins, preferences are endogenous, rather than taken as exogenously given.
Such passages have led some commentators, whether approvingly or critically, to describe Veblen as a ‘methodological collectivist’ or ‘holist’ who emphasizes the explanation of individuals in terms of structures, institutions, or culture.Footnote 9 But Veblen did not believe that the social wholes entirely determine the individual parts. He immediately goes on to emphasize that institutions are a product of individuals in a group, and institutions cannot exist without individuals:
The growth and mutations of the institutional fabric are an outcome of the conduct of the individual members of the group, since it is out of the experience of the individuals, through the habituation of individuals, that institutions arise; and it is in this same experience that these institutions act to direct and define the aims and end of conduct. It is, of course, on individuals that the system of institutions imposes those conventional standards, ideals, and canons of conduct that make up the community's scheme of life. Scientific inquiry in this field, therefore, must deal with individual conduct and must formulate its theoretical results in terms of individual conduct.
It cannot be more clear from the above passage that, while Veblen believed that institutions affect individual ‘wants and desires’, he also insisted that social processes operate through individuals, that institutions ‘are an outcome of the conduct of the individual members of the group’ and that it is ‘out of the experience of the individuals . . . that institutions arise’. In diametrically opposed contrast to the last-mentioned commentators, others have seized up this last quoted passage to claim that Veblen was really a ‘methodological individualist’.Footnote 10
Both positions are misleading. At least if these terms are to retain strict and distinguishable meanings, Veblen was neither a methodological collectivist nor a methodological individualist (Hodgson, Reference Hodgson2007). Despite its widespread usage, there is no consensus on a clear meaning of methodological individualism (Udéhn, Reference Udéhn2001). If it means explanations in terms of individuals alone, then it is not implemented in practice (Arrow, Reference Arrow1994). If it means explanations in terms of individuals plus relations between individuals, then it is difficult to find exceptions to this practice in modern social science, and the term approaches a banality (Hodgson, Reference Hodgson2004). Serious questions remain whether this inclusive version warrants the one-sided emphasis on individuals in the term ‘methodological individualism’. Similar problems apply to methodological collectivism. If individuals are included here in the explanantia, then the meanings of methodological collectivism and individualism converge!
For Veblen, explanations of social phenomena could be reduced entirely to neither institutions, structures, culture, nor individuals. He saw both social institutions and individual agency as mutually constitutive. Both individuals and institutions were required in all explanations of social phenomena, and it was possible to dispense with neither of these terms. In the same paragraph, Veblen then returns to the implications for marginal utility theory.
But such an inquiry can serve the purposes of a genetic theory only if and in so far as this individual conduct is attended to in those respects in [629/630] which it counts toward habituation, and so toward change (or stability) of the institutional fabric, on the one hand, and in those respects in which it is prompted and guided by the received institutional conceptions and ideals on the other hand. The postulates of marginal utility, and the hedonistic preconceptions generally, fail at this point in that they confine the attention to such bearings of economic conduct as are conceived not to be conditioned by habitual standards and ideals and to have no effect in the way of habituation. They disregard or abstract from the causal sequence of propensity and habituation in economic life and exclude from theoretical inquiry all such interest in the facts of cultural growth, in order to attend to those features of the case that are conceived to be idle in this respect. All such facts of institutional force and growth are put on one side as not being germane to pure theory; they are to be taken account of, if at all, by afterthought, by a more or less vague and general allowance for inconsequential disturbances due to occasional human infirmity. Certain institutional phenomena, it is true, are comprised among the premises of the hedonists, as has been noted above; but they are included as postulates a priori. So the institution of ownership is taken into the inquiry not as a factor of growth or an element subject to change, but as one of the primordial and immutable facts of the order of nature, underlying the hedonistic calculus. Property, ownership, is presumed as the basis of hedonistic discrimination and it is conceived to be given in its finished (nineteenth-century) scope and force. There is not thought either of a conceivable growth of this definitive nineteenth-century institution out of a cruder past or of any conceivable cumulative change in the scope and force of ownership in the present or future. Nor is it conceived that the presence of this institutional element in men's economic relations in any degree affects or disguises the hedonistic calculus, or that its pecuniary conceptions and standards in any degree standardize, color, mitigate, or divert the hedonistic calculator from the direct and unhampered quest of the net sensuous gain. While the institution of property is included in this way among the postulates of the theory, and is even presumed to be ever-present in the economic situation, it is allowed to have no force in shaping economic conduct, which is conceived to run its course to its hedonistic outcome as if no such [630/631] institutional factor intervened between the impulse and its realization. The institution of property, together with all the range of pecuniary conceptions that belong under it and that cluster about it, are presumed to give rise to no habitual or conventional canons of conduct or standards of valuation, no proximate ends, ideals, or aspirations. All pecuniary notions arising from ownership are treated simply as expedients of computation which mediate between the pain-cost and the pleasure-gain of hedonistic choice, without lag, leak, or friction; they are conceived simply as the immutably correct, God-given notation of the hedonistic calculus.
In other words, by reducing explanations universally to the utilitarian calculus, marginal utility theory fails to acknowledge the historically specific features of such institutions as property. Veblen then turns to the pecuniary imperatives of modern capitalism. We rejoin his text at the following point, with a long extract:
Pecuniary institutions induce pecuniary habits of thought which affect men's discrimination outside of pecuniary matters; but the hedonistic interpretation alleges that such pecuniary habits of thought do not affect men's discrimination in pecuniary matters. Although the institutional [632/633] scheme of the price system visibly dominates the modern community's thinking in matters that lie outside the economic interest, the hedonistic economists insist, in effect, that this institutional scheme must be accounted of no effect within that range of activity to which it owes its genesis, growth, and persistence. The phenomena of business, which are peculiarly and uniformly phenomena of price, are in the scheme of the hedonistic theory reduced to non-pecuniary hedonistic terms and the theoretical formulation is carried out as if pecuniary conceptions had no force within the traffic in which such conceptions originate. . . .
It may be needless to take exception to such conversion from pecuniary into sensuous terms, for the theoretical purpose for which it is habitually make; although, if need were, it might not be excessively difficult to show that the whole hedonistic basis of such a conversion is a psychological misconception. But it is to the remoter theoretical consequences of such a conversion that exception is to be taken. In making the conversion abstraction is made from whatever elements do not lend themselves to its terms; which amounts to abstracting from precisely those elements of business that have an institutional force and that therefore would lend themselves to scientific inquiry of the modern kind – those (institutional) elements whose analysis might contribute to an understanding of modern business and of the life of the modern business community as contrasted with the assumed primordial hedonistic calculus.
The point may perhaps be made clearer. Money and the habitual resort to its use are conceived to be simply the ways and means by which consumable goods are acquired, and therefore simply a convenient method by which to procure the pleasurable sensations of consumption; these latter being in hedonistic theory the sole and overt end of all economic endeavor. Money values [633/634] have therefore no other significance than that of purchasing power over consumable goods, and money is simply an expedient of computation. Investment, credit extensions, loans of all kinds and degrees, with payment of interest and the rest, are likewise taken simply as intermediate steps between the pleasurable sensations of consumption and the efforts induced by the anticipation of these sensations, other bearings of the case being disregarded. The balance being kept in terms of the hedonistic consumption, no disturbance arises in this pecuniary traffic so long as the extreme terms of this extended hedonistic equation – pain-cost and pleasure-gain – are not altered, what lies between these extreme terms being merely algebraic notation employed for convenience of accountancy. But such is not the run of the facts in modern business. Variation of capitalization, e.g., occur without its being practicable to refer them to visibly equivalent variations either in the state of the industrial arts or in the sensations of consumption. Credit extensions tend to inflation of credit, rising prices, overstocking of markets, etc., likewise without a visible or securely traceable correlation in the state of the industrial arts or in the pleasures of consumption; that is to say, without a visible basis in those material elements to which the hedonistic theory reduces all economic phenomena. Hence the run of the facts, in so far, must be thrown out of the theoretical formulation. The hedonistically presumed final purchase of consumable goods is habitually not contemplated in the pursuit of business enterprise. Business men habitually aspire to accumulate wealth in excess of the limits of practicable consumption, and the wealth so accumulated is not intended to be converted by a final transaction of purchase into consumable goods or sensations of consumption. Such commonplace facts as these, together with the endless web of business detail of a like pecuniary character, do not in hedonistic theory raise a question as to how these conventional aims, ideals, aspirations, and standards have come into force or how they affect the scheme of life in business or outside of it; they do not raise the questions because such questions cannot be answered in the terms which the hedonistic economists are content to use, or, indeed, which their premises permit them to use. The question [634/635] which arises is how to explain the facts away; how theoretically to neutralize them so that they will not have to appear in the theory, which can then be drawn indirect and unambiguous terms of rational hedonistic calculation. They are explained away as being aberrations due to oversight or lapse of memory on the part of business men, or to some failure of logic or insight. Or they are construed and interpreted into the rationalistic terms of the hedonistic calculus by resort to an ambiguous use of the hedonistic concepts. So that the whole ‘money economy,’ with all the machinery of credit and the rest, disappears in a tissue of metaphors to reappear theoretically expurgated, sterilized, and simplified into a ‘refined system of barter,’ culminating in a net aggregate maximum of pleasurable sensations of consumption.
But since it is in just this unhedonistic, unrationalistic pecuniary traffic that the tissue of business life consists, since it is this peculiar conventionalism of aims and standards that differentiates the life of the modern business community from any conceivable earlier or cruder phase of economic life; since it is in this tissue of pecuniary intercourse and pecuniary concepts, ideals, expedients, and aspirations that the conjunctures of business life arise and run their course of felicity and devastation; since it is here that those institutional changes take place which distinguish one phase or era of the business community's life from any other; since the growth and change of these habitual, conventional elements make the growth and character of any business era or business community; any theory of business which sets these elements aside or explains them away misses the main facts which it has gone out to seek. Life and its conjunctures and institutions being of this complexion, however much that state of the case may be depreciated, a theoretical account of the phenomena of this life must be drawn in these terms in which the phenomena occur. It is not simply that the hedonistic interpretation of modern economic phenomena is inadequate or misleading; if the phenomena are subjected to the hedonistic interpretation in the theoretical analysis they disappear from the theory; and if they would bear the interpretation in fact they would disappear in fact. If, in fact, all the conventional relations and principles of [635/636] pecuniary intercourse were subject to such a perpetual rationalized, calculating revision, so that each article of usage, appreciation, or procedure must approve itself de novo on hedonistic grounds of sensuous expediency to all concerned at every move, it is not conceivable that the institutional fabric would last over night.
The central theme of these final paragraphs of Veblen's article is that by making utility the centrepiece of the analysis of human motivation, important historically specific institutional factors are neglected, particularly property, money, and modern business institutions.
In particular, Veblen argues that neoclassical analysis reduces money to ‘an expedient of computation’ and is thus unable to appreciate adequately the nature of money. This defect was not remedied, even with later developments in neoclassical theory, including general equilibrium analysis. As Frank Hahn (Reference Hahn1988: 972) put it: ‘monetary theory cannot simply be grafted on to Walrasian theory with minor modifications’. And as Stephen Horwitz (Reference Horwitz1992: 15) remarked: ‘the properties of real-world moneys throw a monkey wrench into the neoclassical theory of economic exchange’. Veblen further observes that a similar reduction of monetary phenomena – such as investment, borrowing, and credit – to the utilitarian calculus overlooks ‘the run of the facts in modern business’. The whole money economy is treated as if it were equivalent to a ‘refined system of barter’. Instead, Veblen argues, ‘a theoretical account of the phenomena of this life must be drawn in these terms in which the phenomena occur’: they must incorporate the real institutions of a money-driven economy.
The concept of marginal utility still plays a major role in mainstream economics, although it has been challenged by experimental and behavioural economists who have become influential since around 1990. Veblen's argument that marginal utility gives an inadequate causal explanation of human motivation, and masks an understanding of institutional and historical specificities, retains much of its original force (Hodgson, Reference Hodgson2001).
The Great Crash occurred 20 years after Veblen wrote this article, and subsequently John Maynard Keynes (Reference Keynes1936) urged economists to take the nature of money and its institutions more seriously. Earlier Veblen (Reference Veblen1904) saw the source of capitalist crises in the financial institutions that promoted the excessive and irrational exuberance of the speculators. He focused on the institutional basis of earnings and capitalist expectations. It has been argued by some commentators (Vining, Reference Vining1939; Raines and Leathers, Reference Raines and Leathers1996) that Veblen brilliantly foreshadowed the theory of business fluctuations and employment in the later work of Keynes.
Ironically, on the centenary of Veblen's article, the world economy has entered its deepest crisis since the Great Depression. Needless to say, the significance of Veblen's work today lies in much more than these numerical macroeconomic coincidences. If Veblen should be credited for his insights into the business system and the causes of economic crises, he also should be recognized as one of the most important philosophers of economics and an inspiration behind major streams of thought within evolutionary and institutional economics.