The Dark Places of Business Enterprise

Reinstating Social Costs in Institutional Economics

Pietro Frigato, Francisco J. Santos-Arteaga

• Publisher: Routledge
• Year: 2019
• Topic: Business
• eBook ISBN:
  9781000006865
• Subtopic: Business General
• Index: Business

This book considers Thorstein Veblen's central preoccupation with the dark places of business enterprise, an integral part of the old institutional economics. Combining the contributions made by Karl William Kapp and Philip Mirowski, it proposes the systematization of an adjourned institutional theory of social costs of business enterprise useful for the analysis of contemporary crises.

The Dark Places of Business Enterprise explores the research potential of the theory of social costs for the analysis of actual business behavior in the current globalized privatization regime. It begins with a detailed outline of Veblen's critique of business enterprise and market competition before illustrating the methodical enrichment of this approach through Kapp's work. Finally, it concludes by proposing the integration of the Veblenian-Kappian approach with Mirowski's theory of markets and business doubt manufacture. The resulting theory of social costs will shed light on the ubiquitous business control of society under the now dominant computer-based technological infrastructure.

This interdisciplinary foundation of the theory of social costs, encompassing knowledge from computer science and engineering to natural sciences, provides the tools required to analyze this great transformation.

1 Veblen’s dark places of business enterprise and the theory of social costs

The current chapter provides a constructive critical analysis of Veblen’s theory of the system of business enterprise. In line with Rutherford’s highly opportune emphasis on the fact that “institutionalists found market failure to be widespread, in fact endemic to the existing system of business”, we regard it as a theory of social costs (Rutherford 2015, 78; Frigato, Santos-Arteaga 2012).

In his evolutionary analysis of the system of business enterprise, Veblen associates basic distinguishing characteristics with the era of free competition (1760–1860) and the final advent of the corporate form of business enterprise, whose securities are traded in financial markets and whose capital is a pecuniary asset. Both these historically traceable market structures differ in the allocation and behavioral patterns of the rival business operators determining their evolution. Despite the existing differences, Veblen is unequivocal regarding the pervasive influence of a cost-shifting mechanism on the actual working of business enterprise under any market configuration. Profit-oriented investment decisions inevitably occur “at the cost of any whom it may concern”, “at the cost of the underlying population (or community)”, “at the cost of the common man”, “at any cost” (Veblen 1904, 1919, 1921, 1923).

Veblen’s theory of business enterprise is genetic and evolutionary. The successive stages of institutionalized economic arrangements that take place through the eras of free competition and corporate finance must be considered cumulatively emerging changes. This means that every successive intervening and superseding scheme of economic habits of thought and organizations selectively incorporates features from the preceding ones. Thus, while entailing elements from the earlier feudal phase of economic evolution, the era of handicraft and petty trade introduces the novel figure of the masterless man working for a living together with the right of free bargaining and contract. The incentives derived from the resulting market structure would ultimately lead to absentee ownership grounded in workmanship. The subsequent era of free competition combines elements from the previous phase with the definitive instalment of the principle and practice of investment for profit at the core of the economic system. Towards its end, halfway through the nineteenth century, the full-fledged combination of absentee ownership and the machine technology inaugurates the era of corporation finance in a credit economy.

A direct, prudent, and sober rereading of Veblen’s most important books on the business system, namely, The Theory of Business Enterprise (1904), The Engineers and the Price System (1919), The Vested Interests and the Common Man (1921), Absentee Ownership (1923), attests that an institutional theory of business enterprise must be a theory of the inherently wasteful nature of private business initiative. Building on this interpretation, we illustrate the significance of Veblen’s analysis of the dark places of business enterprise as a basic theoretical underpinning for the formulation of an expounded institutional theory of social costs.

We start by clarifying the central importance occupied by Veblen’s seminal critique of business enterprise and the market mechanism for the foundation and successive development of the institutionalist method. “Remarkably consistent” themes regarding “questions of the efficiency of business and markets in the allocation and use of resources” and the subsequent distributional effects are distinctive features of the institutionalist literature (Rutherford 2015, 80). These problems are addressed in “a number of general themes” that go under the heads of consumption decisions (through aggressive sales promotion, invidious emulation, and the exploitation of the asymmetric information existing between producers and consumers), and the intrinsically wasteful nature of the pecuniary institutions of capitalism (business enterprise and market competition), stemming from the cost-shifting incentives inherent to business logic and practice (Rutherford 2015, 79–80).

The resulting social costs are reflected in substantial and widespread social losses of various types, including the untimely depletion of natural resources, pollution in life and work environments, “chronic depression” (since about the seventies of the nineteenth century) and the built-in instability of the financial sector with the resulting cyclical waves of speculative prosperity, crisis and mass unemployment (Rutherford 2015, 79–80). In Veblen and Kapp, in particular, “the waste associated with the business control of industry is presented as a systemic issue that stems from conducting business for profit, and profit-seeking by individual firms may not be consistent with efficient production or overall coordination” (Rutherford 2015, 84).

After demonstrating the central importance of Veblen’s theory of social costs of business enterprise in the development of the institutionalist movement, we reconstruct Veblen’s view according to which both political and business institutions are inherently incapable of warranting or improving collective welfare. This conclusion follows from his fundamental idea regarding their typical and ordinary working at the cost of the (largely manipulated) underlying population.

We offer only a brief sketch of Veblen’s historical account, according to which political institutions ushered in the institutionalization of the cynical and unscrupulous principle of playing at any cost through a time span that extends from pre-modern times to modern state-building. Veblen’s treatment of the social costs of business enterprise under the discipline of the price system in different market predicaments will be presented in far greater detail.

In particular, we will illustrate why and how Veblen’s concept of costs shifted by business onto the underlying population, while central to his institutionalist perspective, was in need of Kapp’s systematic theory of social costs of the business initiative taking place in a highly competitive and decentralized market situation. We shall deal in detail with Kapp’s reception of Veblen’s institutional approach in the next chapter. For the moment, it shall suffice to emphasize that Kapp’s most original contribution to an institutional theory of social costs has been to show that cost-shifting would systematically occur under the ideal competitive conditions that according to Austrian and mainstream economists would maximize allocative efficiency. Kapp’s development of Veblen’s idea of a cost-shifting mechanism inherent to the working of highly competitive market settings clearly anticipates many of the core arguments presented in the ‘original’ critique of the alleged social optimality of free competitive markets made by Akerlof and Shiller (2015).

Throughout the chapter we will concisely bring to the reader’s attention the conceptually converging contributions of four ingenious economists highly sympathetic towards Veblenian institutional economics – Karl William Kapp, Philip Mirowski, James Galbraith, and Michael Hudson – in order to analytically develop and refresh Veblen’s theory of social costs of business enterprise. In this regard, the inefficient – real and financial – markets hypotheses defined by these economists provide the theoretical ground and the empirical evidence required for an updated, consistent, and improved theory of social costs of business behavior in both real and financial markets. We devote the final two chapters of the book to outline a renewed institutionalist theory of market model failure, useful for the systematic investigation of the social costs of neoliberal financialized globalization in the context of an internet- and computer-based technological infrastructure.

We sketch out only a brief preliminary introduction to this integrative attempt with which we shall deal in deeper detail later in the book. An outline of Veblen’s handling with the social costs of business competition evidently amounts to an indispensable preliminary step.

A doctrinal note: Veblen’s theory of social costs of business enterprise as the conceptual basis of institutional economics

The idea of linking Veblen’s theory of social costs of business enterprise to the contemporary contributions of Kapp – together with those of Galbraith (2009), Hudson (2015), and Mirowski (2011, 2013) – is based on the fundamental assumption that institutional economics is indeed chiefly Veblenian. While shared by many, this interpretation cannot be altogether taken for granted and needs to be outlined in some detail. Undeniably, “institutionalism as it emerged in the years between the World War I was not just Veblenism” (Rutherford 2011, 33). As Rutherford makes clear, “it was Hamilton, Clark and Mitchell who were the principal active promoters of the idea of an institutional economics.” Veblen did not credit mainstream economics with the capacity to change its course and “cannot be described as other than a marginal presence within the economics profession at large, in contrast to Mitchell, Clark, and Hamilton” (Rutherford 2011, 34, 35). This state of affairs notwithstanding, “Veblen’s influence, whether direct or indirect, was one of the major elements providing a commonality and a bond between the members of the institutionalist movement mentioned earlier” (Rutherford 2011, 35).

Conceptually, his refutation of hedonistic psychology and marginal utility theory together with his critique of the actual working of the pecuniary institutions of business enterprise and the market – i.e. “a systemic failure of business’ institutions to channel private economic activity in ways consistent with the public interest” – had a significant and lasting impact on the successive development of the institutionalist movement (Rutherford 2011, 36; Tsuru 1993, 59–82). This meant first and foremost that, “For Veblen, the “invisible hand” notion of the market may have been applicable to conditions of small-scale manufacturing, but not to conditions of large-scale production, corporate finance, and salesmanship” (Rutherford 2011, 36).¹

In particular, Rutherford (2011, 36–37) highlights the frontal attack of Veblen towards the manipulative and unproductive tactics applied by business to generate income and the “waste” produced through the subsequent competitive process via business cycles, unemployment, monopolistic restrictions, and advertising. Income extracting procedures included, among others, consolidations, control via holding companies and different types of sharp practices ranging from financial manipulation and insider dealings to unscrupulous salesmanship. As will be shown throughout the chapter, Veblen focused his attack on the fundamental engines driving market evolution, offering an opposing set of incentives to those brought forward by Schumpeter when defining entrepreneurs and market dynamics. All in all, “Veblen held out little hope of change short of a complete rejection of ‘business’ principles” (Rutherford 2011, 37).

Although notoriously lacking in patient observation and evidence-based testing of his hypotheses, Veblen provided the seminal ‘sketch maps’ that needed to be integrated with further theoretical study and close examination of factual evidence (Rutherford 2011, 37). Hence, “Veblen played a vital inspirational role” and “it would be impossible to think of institutionalism without giving Veblen a central place” (Rutherford 2011, 35). However, most institutionalists focused on arguments dealing with the effective performance of economic institutions, placing special emphasis on the elaboration of scientifically based reformist solutions to the most troubling and pressing social problems. Furthermore, “Many institutionalists, including Hamilton, J. M. Clark, Commons, and Robert L. Hale, placed a much greater emphasis on the evolution of the legal institutions than did Veblen” (Rutherford 2011, 39).

The analysis of “business regulation, labor law, collective bargaining, health and safety regulations, and consumer protection” gained center stage in the efforts made by early institutionalists to humanize capitalism while rejecting Veblen’s radicalism. Therefore, while Veblen’s critique of the pecuniary institutions of capitalism was largely accepted, this was not the case for his theory of government failure. That is, institutionalists did not aim at replacing the market but at supplementing it using different forms of “social control” in order to “make production for profit turn out a larger supply of useful goods under conditions more conducive to welfare” (Rutherford 2011, 39).

Given the positive reception of Veblen’s evolutionary theory of business enterprise – a market model failure, an inefficient markets hypothesis – among institutionalists, the institutional approach to economics turned out to be “the critical study of the functioning of the existing set of pecuniary or business institutions and active and pragmatic liberal reformism” (Rutherford 2011, 53). Rutherford meaningfully points out that

Institutionalists did not use the terminology of market failure, but in the many references to the need for new methods of social control of business there is the clear implication that the existing institutions of the market are inadequate to the task of guiding business activity in socially desirable directions. In this broad sense, institutionalists found market failure to be widespread, in fact endemic to the existing system of business.

(Rutherford 2015, 78)

In sum,

Institutionalism was a program that certainly took a number of its key ideas from Veblen. Veblen’s criticism of hedonism and of the static nature of orthodox economics, his critique of the consumption habits of the leisure class, his distinction between the institutions of business and the technology of industry, and his major lines of criticism of business institutions fed directly into the works of institutionalists.

(Rutherford 2011, 348)

It should be highlighted that Veblen’s critique of the private business sector and the actual functioning of markets were a shared view among the leading institutional economists² well before Kapp revised his second version of Social Costs by acknowledging the fundamental influence of Veblen’s theory of business enterprise and business sabotage of industry in his work about systemic market failure. The endemic quality of this intrinsic malfunctioning constitutes a fundamental feature of the theory of social costs developed by Kapp.

Given these doctrinal premises, our contention is that, with minor but noteworthy exceptions – such as Myrdal and Perroux, to name just some among the most prominent and inventive figures – Veblen’s distinction between business and technology and his critique of business enterprise have been largely disregarded in the old institutionalist (self-proclaimed “Veblenian”) legacy since about the 1980s. Kapp, Mirowski, Galbraith, and Hudson share a critical attitude towards the pecuniary institutions of capitalism, i.e. business enterprise and market competition, as well as a radical and disenchanted scientific reformist attitude with the early institutionalists, as we shall illustrate in the two concluding chapters. These authors propose a congruent evidence-based theoretical refutation of the alleged efficiency properties of the unfettered working of business and market institutions in the interdependent spheres of production, distribution and finance.

Kapp applies cost-shifting systematically to free competitive markets – a configuration fit to the conditions of small-scale manufacturing in the money economy of efficient markets described in Adam Smith’s classical view. Even under the assumption required to guarantee ideal market conditions, the alleged efficiency of free competition is thoroughly undermined by the existence of endemic cost-shifting. In the next chapter we shall verify whether or not Veblen and Kapp differ in this precise respect. There are indeed sufficient elements to believe that, according to the latter, competition would bring about systematic social waste under a regime of handicraft in a money economy.

In the work of Hudson, the insistence on the neo-feudal concentration of wealth and power into the hands of restricted oligarchies of political mandataries selected and screened by absentee owners offers useful elements for a revitalization of Veblen’s theory of government failure in today’s rentier economy. In particular, the fundamental role played by the irrationality, i.e. “imbecility” or “mental deficiency”, of the common man or the general public as the institutional subterfuge that allows democratic governments to function on behalf of business interests (Leathers 1989, 295), obtains new relevance through the appalling metaphor employed by Hudson: a killing parasite – high finance – that manipulates and distorts the host’s preferences and choices. Under the new order of corporate finance and pecuniary capital that controls the statesmen’s decision-making, the helpless common man, sedulously fooling himself (Veblen 1923, 34), is “managed” (Veblen 1919, 127; Leathers 1989, 301–305). In this regard, through his investigation of “the new production of ignorance” or “the dirty secret of the new knowledge economy” – which can be subsumed under the heading “neoliberal agnotology” –, Mirowski consistently addresses the business capture process of go...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• Acknowledgements
• Introduction: critical institutionalism, market model failure, and the business control of society through cybernetic manipulation
• 1. Veblen’s dark places of business enterprise and the theory of social costs
• 2. Karl William Kapp’s critical theory of social costs: asset-specific cost-shifting, retardation of efficiency, and the paradox of social control
• 3. Neoclassical economics beyond externalities? Akerlof and Shiller’s Phishing for Phools and the theory of social costs
• 4. Digging into the dark places of business enterprise: revisiting the theory of social costs in the light of Mirowski’s institutional economics of knowledge
• 5. The darkest place of business enterprise: business surveillance, the financial crisis, and the swansong of the market in the information age
• Index