Good weekend reading on Veblen’s theories, via Michael Hudson.
Simon Patten recalled in 1912 that his generation of American economists – most of whom studied in Germany in the 1870s – were taught that John Stuart Mill’s 1848 Principles of Political Economy was the high-water mark of classical thought. However, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms. Mill was “a thinker becoming a socialist without seeing what the change really meant,” Patten concluded. “The Nineteenth Century epoch ends not with the theories of Mill but with the more logical systems of Karl Marx and Henry George. But the classical approach to political economy continued to evolve, above all through Thorstein Veblen.
Like Marx and George, Veblen’s ideas threatened what he called the “vested interests.” What made his analysis so disturbing was what he retained from the past. Classical political economy had used the labor theory of value to isolate the elements of price that had no counterpart in necessary costs of production. Economic rent – the excess of price over this “real cost” – is unearned income. It is an overhead charge for access to land, minerals or other natural resources, bank credit or other basic needs that are monopolized.
This concept of unearned income as an unnecessary element of price led Veblen to focus on what now is called financial engineering, speculation and debt leveraging. The perception that a rising proportion of income and wealth is an unearned “free lunch” formed the take-off point for Veblen to put real estate and financial scheming at the center of his analysis, at a time when mainstream economists were dropping these areas of concern.