The Return of the Repressed Critique of Rentiers – Veblen in the 21st Century

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Edited excerpt from Michael Hudson and Ahmet Oncu, eds., Absentee Ownership and its Discontents: Critical Essays on the legacy of Thorstein Veblen (ISLET 2016, $35). [Just published.]

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, and nationalizing monopolies or regulating their prices to reflect actual production costs. However, Patten added, Mill’s reformist philosophy turned out to be “not a goal but a half-way house” toward the Progressive Era’s reforms, above all either nationalizing land or fully taxing it, and either nationalizing monopolies or at least regulating their prices to bring them in line with actual production costs. 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 George was only a muckraking journalist and anti-academic, so the classical approach to political economy evolved above all through Thorstein Veblen.

Like Marx and the rising socialist agitation, 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 him 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.

Veblen’s exclusion from today’s curriculum is part of the reaction against classical political
economy’s program of social reform. By the time he began to publish in the 1890s, academic
economics was in the throes of a counter-revolution sponsored by large landholders, bankers and monopolists denying that there was any such thing as unearned income. The new post-classical mainstream accepted existing property rights and privileges as a “given.” In contrast to Veblen’s argument that the economy was all about organizing predatory schemes, this approach culminated in Milton Friedman’s Chicago School defense the pro-rentier argument: “There is no such thing as a free lunch.”

This blunt denial rejected the preceding three centuries of classical value and price theory,
along with its policy conclusions promoting taxation of land and other natural endowments, and financial reform. Dropped from view was rentier overhead in the form of predatory and
unproductive forms of wealth seeking. The post-classical mainstream treats all income as
“earned,” including that of rentiers. Lacking the classical concepts of unproductive labor,
credit or investment, today’s textbooks describe income as a reward for one’s contribution to
production, and wealth is being “saved up” as a result of someone’s productive investment
effort, not as an unearned or predatory free lunch.

This shift in theory has shaped the seemingly empirical National Income and Product
Accounts to indulge in a circular reasoning that treats recipients of rent and interest as providing a service, an economic contribution equal to whatever rentiers receive as “earnings.” There are no categories for unearned income or speculative asset-price gains.

Veblen described the largest sectors of the economy where quick fortunes were made as
being all about organizing rent-seeking opportunities to obtain income without real cost. He
viewed psychological utility as social in character. In contrast to food or other satiable bodily needs characterized by diminishing marginal utility – e.g., from eating food and becoming satiated – his concept of conspicuous consumption emphasized the insatiable drives to raise one’s social status.

The desire for consumer goods was characterized by fads for the most pricey goods as
trophies of one’s wealth. The result was the mercenary vulgarity of wealthy Babbitts turning
culture into an arena for shifting fashion, all to impress others with similar shallow sensitivities.

The largest factor defining status was the neighborhood where one’s home was located.
Housing was not simply a basic living space as “use value.” It established one’s position in
society, duly enhanced by civic boosterism, public subsidy and infrastructure spending.

“The Great American Game”: Real Estate

Describing real estate as being “the great American game,” Veblen focused on how future
prices were enhanced over present values by advertising and promotion. “Real estate is an
enterprise in ‘futures,’ designed to get something for nothing from the unwary, of whom it is
believed by experienced persons that ‘there is one born every minute.’” Farmers and other
rural families from the surrounding lands look “forward to the time when the community’s
advancing needs will enable them to realise on the inflated values of their real estate,” that
is, find a sucker “to take them at their word and become their debtors in the amount which
they say their real estate is worth.” The entire operation, from individual properties to the
town as a whole, is “an enterprise in salesmanship,” with collusion being the rule.

Retailers in small towns collude to exploit farmers, a practice broken by the spread of
mail order catalogues. But monopoly power is achieved most rigorously in local banking.
Most loans are for mortgages to inflate land prices. “And the banker is under the necessity
–‘inner necessity,’ as the Hegelians say – of getting all he can and securing himself against
all risk, at the cost of any whom it may concern, by such charges and stipulations as will
insure his net gain in any event.”

Land prices were rising in larger cities as a result of overall prosperity and the easier
availability of mortgage financing, while public spending on roads, subway and bus systems,
parks, museums and other prestigious activities were organized to enhance neighborhood values.

Such practices prompted Veblen to criticize Clark and also Marshall for ignoring the
“pecuniary” financial dimension of life. This was a glaring error of omission in the new
mainstream, along with monopolies and large real estate frauds started in colonial times,
highlighted by the Yahoo land fraud early in the Republic, and capped by the railroad land
grants. As Henry Liu describes how Veblen emphasized the predatory role of high finance:
“Veblen put forth a basic distinction between the productiveness of ‘industry’ run by skilled engineers, which manufactures real goods of utility, and the parasitism of ‘business,’ which exists only to make profits for a leisure class which engages in ‘conspicuous consumption’. The only economic contribution by the leisure class is ‘economic waste’, activities that contribute negatively to productivity. By implication, Veblen saw the US economy as being made inefficient and corrupt by men of ‘business’ who deviously put themselves in an indispensable position in society.”

Veblen Against Academia Turned Business

Veblen criticized academic economists for having fallen subject to “trained incapacity”
as a result of being turned into factotums to defend rentier interests. Business schools were
painting an unrealistic happy-face picture of the economy, teaching financial techniques but
leaving out of account the need to reform the economy’s practices and institutions.

In a conclusion recalling Veblen’s Higher Education in America, Herman Kahn describes
how peer pressure leads experts to accept explanations that deviate from accepted concepts:
Educated incapacity often refers to an acquired or learned inability to understand or even perceive a problem, much less a solution. The original phrase, “trained incapacity,” comes from the economist Thorstein Veblen, who used it to refer, among other things, to the inability of those with engineering or sociology training to understand certain issues which they would have been able to understand if they had not had this training.

Kahn adds that this phenomenon occurs especially “at leading universities in the United
States – particularly in the departments of psychology, sociology, and history, and to a degree in the humanities generally. Individuals raised in this milieu often have difficulty with relatively simple degrees of reality testing.” The problem is greatest in economics, of course.

From Marx to Veblen

Early (and most non-Marxist) socialism aimed to achieve greater equality mainly by
taxing away unearned rentier income and keeping natural resources and monopolies in the
public domain. The Marxist focus on class conflict between industrial employers and workers
relegated criticism of rentiers to a secondary position, leaving that fight to more bourgeois
reformers. Financial savings were treated as an accumulation of industrial profits, not as the
autonomous phenomenon that Marx himself emphasized in Volume 3 of Capital.

Headed by Lenin, Marx’s followers discussed finance capital mainly in reference to the
drives of imperialism. The ruin of Persia and Egypt was notorious, and creditors installed
collectors in the customs houses in Europe’s former Latin American colonies. The major
problem anticipated was war spurred by commercial rivalries as the world was being carved up.

It was left to Veblen to deal with the rentiers’ increasingly dominant yet corrosive role,
extracting their wealth by imposing overhead charges on the rest of society. The campaign
for land taxation and even financial reform faded from popular discussion as socialists and other reformers became increasingly Marxist and focused on the industrial exploitation of labor.

Veblen described how the rentier classes were on the ascendant rather than being
reformed, taxed out of existence or socialized. His Theory of Business Enterprise (1904) emphasized the divergence between productive capacity, the book value of business assets and their stock-market price (what today is called the Q ratio of market price to book value). He saw the rising financial overhead as leading toward corporate bankruptcy and liquidation. Industry was becoming financialized, putting financial gains ahead of production. Today’s financial managers use profits not to invest but to buy up their company’s stock (thus raising the value of their stock options) and pay out as dividends, and even borrow to pay themselves. Hedge funds have become notorious for stripping assets and loading companies down with debt, leaving bankrupt shells in their wake in what George Ackerlof and Paul Romer have
characterized as looting.

In emphasizing how financial “predation” was hijacking the economy’s technological
potential, Veblen’s vision was as materialist and culturally broad as that of Marxists, and as
rejecting of the status quo. Technological innovation was reducing costs but breeding
monopolies as the Finance, Insurance and Real Estate (FIRE) sectors joined forces to create
a financial symbiosis cemented by political insider dealings – and a trivialization of economic theory as it seeks to avoid dealing with society’s failure to achieve its technological potential.

The fruits of rising productivity were used to finance robber barons who had no better use
of their wealth than to reduce great artworks to the status of ownership trophies and achieve
leisure class status by funding business schools and colleges to promote a self-congratulatory
but deceptive portrayal of their wealth-grabbing behavior.

Significance of Veblen for Today

As the heirs to classical political economy and the German historical school, the
American institutionalists retained rent theory and its corollary idea of unearned income.
More than any other institutionalist, Veblen emphasized the dynamics of banks financing
real estate speculation and Wall Street maneuvering to organize monopolies and trusts. Yet
despite the popularity of his writings with the reading public, his contribution has remained
isolated from the academic mainstream, and he did not leave a “school.” The rentier strategy
has been to make rent extraction invisible, not the center of attention it occupied in classical political economy. One barely sees today a quantification of the degree to which overhead charges for rent, insurance and interest are rising above the cost of production, even as this prices financialized economies out of world markets.

The narrowing of Chicago-style monetarism and neoliberalism has left the economics
discipline in much the state that Max Planck applied to physics from Maxwell to Einstein:
Progress occurs one funeral at a time. The old conservatives die off, freeing the way for more
progressive successors to take the steering wheel. But what makes today’s economics different
is that it actually would help to look backward, to the epoch before the financial sector
and its allied rentier interests hijacked the discipline. The most systematic analysis of this
process was that of Veblen nearly a century ago. It remains sufficiently relevant that Marxists and more heterodox critics have incorporated his theorizing into their worldview

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  1. akaPaul LaFargue

    See Guy Standing’s new book: “The Corruption of Capitalism” highlights the many aspects of Rentier Capitalism.

  2. BecauseTradition

    Speaking of rent, why must we rent most* of our money supply from the banks? Why can’t we directly** deal in our nation’s fiat as they do? Cuo bono that we can’t?

    *Federal spending is currently an exception since, in that case, deposits receive net nominal interest from the banks. However, if negative interest is eventually passed on to bank depositors then even this exception will cease.

    **Using physical fiat, aka cash, does not compare as safe, convenient dealing with fiat.

      1. BecauseTradition

        My apologies for the brain fart. Also for poor eyes.

        Speaking of the love of God: Proverbs 19:11

  3. BecauseTradition

    I do like the idea of land taxes since they inescapable, i.e. one might hide his/her income but land is a form of wealth that can’t be hidden.

      1. Bjornasson

        Some of Marx’s and Lenin’s turns of phrase are things of beauty – literally dripping with contempt. I think my favorite 19th century insult is “philistine”.

        1. Procopius

          It seems laughing at them is a good way to get a little back from them. Trump goes crazy when people laugh at him.

  4. Jeremy Grimm

    I can’t fit it into my budget this month — but maybe next month I’ll order a copy of “Absentee Ownership and its Discontents”. I stumbled onto Veblen after I finally managed to graduate from college. I always wondered why he received so little — NONE — notice in the few economics classes I took.

    Also I must agree with jsn — Veblen is wickedly funny. Adapted to the present vocabulary some of his works would fuel some biting and apropos satire for framing a window onto our present day upper classes and their methods for economic plundering.

      1. Bjornasson

        “You have owners. They own you.”

        “It’s a big club, and you ain’t in it!”

        Carlin never minced words, nor did he walk a self-aware moral tightrope that present-day comics like Louis CK do. The only person today that can truly channel his ghost is Bill Burr.

        1. Procopius

          That’s why “political correctness” never bothered him. He knew it was just a phony excuse for lacking a sense of humor, like Bill Maher. Man, I love his material. I’m grateful so much of it is available on YouTube.

  5. Tom Stone

    A tad verbose for my taste, Mencken’s takedown of “The Theory of the Leisure Class” is a classic.

      1. Katharine

        Thank you! I was just wondering how to get ahold of this, having radically overspent on books already this year. Much appreciated, as is the post which got me interested.

          1. Procopius

            Think about making a small contribution. That’s about the only non-profit I’ve actually contributed to, although there are surely some others that do almost as much good. Wish there was some way to roll back the copyright laws to what they were when I was a kid.

  6. chuck roast

    Please don’t dismiss Henry George as “…a muckraking journalist and anti-academic.”
    George’s theory of land value taxation is very important in how we organize land use in urban areas. Cities that value and tax land with a higher relative value than the structures that sit upon them exhibit greater density and high infrastructure efficiencies. Conversely, the typical American city whose tax bills reveal land valued at a lower rate than buildings demonstrate sprawling tendencies and inner cities with lots of dead space including the worst center-city blight…surface parking lots. Infrastructure deteriorates and the cost of fixing it is concomitantly higher.
    Worst of all, big urban (and suburban) government projects like roads and bridges are funded by taxpayers who receive only peripheral benefits, and most of the benefits go to developers who laugh all the way to the bank.
    In a number of Latin countries where Georgian land value taxation is the norm, beneficiaries of large public projects are required to return to the municipality a portion the value created by this public expenditure. This is a good way to capture “unearned income.”
    I feel like I’m standing on my head as I type this missive…

  7. ChrisAtRU


    … thankfully not excluded from my curriculum!

    Have covered lots of his writings for classes and subsequently term papers. I wonder what Messrs Hudson and Oncu think about Veblen’s “soviet of the technician”, and whether it still constitutes a possible post-capitalism reality. Good follow up discussion.

    Also: Check will be in the mail tomorrow! #Promise
    Thanks to Yves & staff for all the good work they do!

  8. susan the other

    the brief comment of Veblen’s disapproval of “business” for frivolous purposes just to please the filthy rich is an idea that could be fleshed out, seems like it goes hand in glove with unearned-unproductive-rent extraction.. and it looks (today) to be the thing that survives but cannot replace a real economy once the financialization of the real economy has crippled it

    1. diptherio

      His Theory of Business Enterprise does just that. In a nutshell (and pretty close to a verbatim quote): “Industry is carried on for the sake of business, and not vice versa.” Of course, it’s often more profitable for the businessman to impede the advancement of industry than to assist it (see planned obsolescence). TBE doesn’t get nearly as much notice as TLC, but it’s just as good (and relevant).

    2. Chauncey Gardiner


      Also have appreciated your many previous comments here regarding the avenue to full employment, which I believe is closely intertwined with the politics of the macroeconomic policies discussed in this post. Seems to me that historically the goal of full employment has also been opposed by those who fall into the same group that Veblen discussed.

      Courtesy of Matt Stoller, here is a link to a related essay by Michal Kalecki:

  9. LifelongLib

    Over my head, but Veblen seems more in line with the English Levellers and early American reformers like Paine rather than with Marxism (which I admit to not being well informed about but that comes across to me as being like a religion).

    1. Katharine

      But why compartmentalize? The threads of these ideas have turned up in many times in many forms. Marx and Veblen both did more extended analysis than John Ball (“When Adam delved and Eve span, who was then a gentleman?”), but yet he raised the question. Coming at it from many angles surely increases the odds, both of interesting more people in it and of developing useful extensions or applications of previous analysis.

  10. Annonymous II

    Hedge funds have become notorious for stripping assets and loading companies down with debt, leaving bankrupt shells in their wake in what George Ackerlof and Paul Romer have
    characterized as looting.

    I would like to offer an analogy from biology to describe the situation practiced by hedge funds. Lets call it parasitical capitalism; the parasites (private equity funds) invade a vulnerable host, take over the companies resources and then like a virus that invaded the organism’s cells, cause the cells to produce more virus DNA.

  11. TedHunter

    Thank you for introducing Veblen.

    “In a conclusion recalling Veblen’s Higher Education in America…”

    Should read “The Higher Learning In America” (A Memorandum On the Conduct of Universities By Business Men)

  12. clarky90

    New species of giant herbivorous dinosaur found in outback Australia

    “We realised there must have been some sort of barrier to them dispersing between South America and Australia before about 105m years ago,”

    The researchers argued the cool climate of the polar region could have been that barrier. And a period of global warming that occurred about 105m years ago could have made the polar region more suitable to the dinosaurs.

    “Whether by accident or by choice, some of them found themselves in Australia,” said Poropat.

  13. Carolinian

    Great article. Thanks for this and thanks for NC. Perhaps Veblen was the last gasp of the Age of Reason….an age that, economically, we certainly aren’t living in now.

  14. Crank3y Frank3y

    I was first introduced to the Yazoo land fraud in “Corruption in America” by Zephyr Teachout, who is running for congress in New York (and could use our support!)

  15. flora

    Great post. Thank you. A few random thoughts:

    The blunt denial [of the labor theory of value] rejected the preceding three centuries of classical value and price theory,…”
    Three centuries ago (and earlier, see Florence 1000-1300) would have been the height of the Renaissance, particularly in Italy. The Florentine Renaissance saw the rise of infant capitalism out of feudalism. When, many centuries later, the rising capitalist class replaced the old feudal aristocratic class in rentier power, (rents charged in money rather than in commendations), the most powerful capitalists began to ape the old aristrocrats.

    “The result was the mercenary vulgarity of wealthy Babbitts turning
    culture into an arena for shifting fashion, all to impress others with similar shallow sensitivities.

    An aristocrat must display his puissance.

    “Veblen criticized academic economists for having fallen subject to “trained incapacity”
    as a result of being turned into factotums to defend rentier interests. …”

    Dogma pervades the university. There is approved dogma and unapproved dogma. Those wanting tenure know exactly which is which.

    “The rentier strategy
    has been to make rent extraction invisible, not the center of attention it occupied in classical political economy.”

    You cannot fight what you cannot see.

    Capitalism, in its long struggle against feudal aristocracy, has been associated with the rise of democracy. If the richest capitalists now want to become aristocrats what’s for democracy?

    Thanks again for a most thought provoking post.

  16. casino implosion

    I’d like to see more at Naked Capitalism on the ,. now largely forgotten, New Left thinkers that followed in veblen’s footsteps like Martin Sklar, James Livingston, Gabriel Kolko, Carl Oglesby, Eugene Genovese and such like.

  17. Phil

    Read Veblen many years ago. I remember his description in “The Theory of the Leisure Class” of one reason why women who were wives or relatives of prominent men wore corsets.

    Veblen posited that wearing a corset made it physically impossible to do what was traditionally called “woman’s work”; thus, the men married to or related to said corseted women were signaling to their male peers that they could afford to hire help to do women’s work, and let their women be idle – something that was not possible for men of lesser means. Thus, the binding up of women as a means to signal status – and, at the same time, “ownership” of their women’s bodies.

  18. icancho

    the Yahoo land fraud early in the Republic

    this should read: “the Yazoo land fraud early in the Republic” (though I do like Yahoo land fraud …)

  19. arte

    Reading this, I was struck by an idea of introducing an intellectual property tax, similar to existing or old property/land taxes.

    If something (be it copyright, trademark, or patent) is valuable enough to sue over (to invoke the state’s protection), it is valuable enough to assess taxes on… and then afterwards, pay a regular tax on it. Of course, you could stop paying if the property is no longer valuable, but that would mean losing the exclusive right to use that particular property.

    I did not get any farther than visualizing a tax assessor regularly calculating the value of Mickey Mouse or an Apple logo, but it did make me snicker.

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