Veblen’s last book
What follows below is largely based on Thorstein Veblen’s last book: .. Absentee Ownership. ..
On Marketing
Quantity Production of Customers
The next passages in quotes are from Veblen’s 1923 book: Absentee Ownership. __The passages paraphrase material found on pages: 304 to 307, and 313-14. _[The 1997 reproduction by Transaction Publishers has the same pagination as the original book.]
“By judicious expenditure of a sufficiently large sum, the sales of any line of merchantable goods may be increased indefinitely, or such is a well~assured proposition of folk~psychology. _However, beyond a certain point (to be determined by experience) additional sales will come only at increased sales~cost per unit sold; _and beyond another certain point (found by experiment) any such increase in sales will cost more than it brings in. So an expenditure on sales~costs should not surpass this latter mark.”
This being marginal analysis, it is both familiar and comforting to believers in orthodox economic doctrine, at least in procedure. But they do not, as it happens, routinely apply it to marketing expenditures made in order to increase sales revenues.
Generally, this aspect of business is discomforting for the orthodox, and so most ignore it completely. Their familiar ‘pure competition model’ has no place for it at all. Indeed, the orthodox seem to believe production sells itself, after the manner of Monsieur Say.* _[At least, the orthodox presume sales effort is too unimportant to be worthy of their attention.]
“Experience of the last few years has revealed another peculiarity of selling. A large and increasing number of lines lend themselves effectually to large~scale sales production, wherein more expenditures on publicity results in what may fairly be called a quantity production of consumers for purchase of the goods or service in question. _(footnote: Effectively a diversion of customers from one to another competing seller. However, from any one seller’s stance this amounts to a quantity production of new customers, which may be reckoned at a stated cost per.)
“As is familiarly known to economists, up to a limit an increasing volume of output may be turned out by methods of quantity production at a decreasing cost per unit.” [Giving also increasing returns on the investment, though Veblen does not mention it.] “This will apply also to the production of customers by large~scale publicity, where the upper limit of increasing returns is relatively high. Although not uniform, this rule does seem to apply quite widely.”
|| Though Veblen did not use the example of Coca~Cola, from sales of 9000 gallons in 1890, its use of widespread advertising boosted sales to some 400,000 gallons ten years on. _It was then still the real deal — coca as an ingredient was not removed until 1905.|
The innovator’s reward
“It then follows: that larger concerns with larger funds and expenditures will have something of an advantage over concerns of a smaller or middling size. Thus larger advertisers will tend to displace those of small or middling size, who drop out of the running inconspicuously.”
“Large~scale publicity has made good as a profitable enterprise, and the pioneers of it are enjoying the fruits of their businesslike initiative. But what one concern with ample funds can do, another as equally endowed in the same business — or in another line of merchandise — can do also.
“Others imitating their methods will cause sales~costs to rise to the maximum the traffic will bear, leaving only ordinary returns on the investment.”
This is a classic example of the incentive propelling innovation: ..that the innovator reaps excess profits until competitors catch up. Of course in classical economics (as noted by Ricardo and Smith) more production then lowers the market price thereby removing any excess profits, the producers being competitive in production.
But here it is a sales competition and price remains as it was, with sales costs rising to eliminate the excess. Marketing is the newly dominant factor. Price competition is presumed dormant — which has often enough been so wherever the bulk of all sales are obtained by an oligopoly of providers.
______________________
_* J. B. Say: __His major book was Traite d’Economie Politique of 1803. Say also inspired the so~called monetarists, who believe money, money, money is what it is all about — quantities of same, that is — a notion once nearly dead but resurrected and staggering about in Central Bank corridors. [More as a ghostly presence, perhaps, the bank economists having mostly gone off it in recent years. …Or have they? “Explaining” price inflation is clearly not one of their strengths.]
Of course, in exceptional circumstances this may be true — but only in exceptional instances, for ordinary levels of price inflation do not arise from growth in the quantity of money, however one chooses to measure it. __Moreover, the quantity aspect really only made sense when metals were the only money. _When money becomes mainly numbers in a ledger –and a digital one especially — quantity loses its meaning, ordinarily.
Of course, issuing too much in gov’t bonds, or having far too many people whose income comes from governments, may result in price inflation. But this is exceptional for responsible governments.
Subsistence under consumerism
Not What It Once Was.
It was Thorstein Veblen who updated the notion of subsistence in order to have it fit a consumerist society where marketing, to the extent it is successful, shapes desires and thereby influences the pattern of expenditures on consumption. This challenged the assumption of rationality embedded in the then conventional wisdom of economists, something surprisingly still alive in orthodox economics doctrine even today.
“Salesmanship may divert fractions of this purchasing~power from one line of sales to another …[so that] continued and progressively increasing attention to salesmanship, and an increasing expenditure on sales~cost [by any firm], are primary and essential to any reasonably large success in business under current conditions.”
{footnote: “In great part salesmanship aims to establish a conventional need for articles previously regarded as superfluities, making them necessary articles of livelihood, necessities by conviction of morals and decency: …for example furs, cosmetics, high heels … enlarging by so much the subsistence minimum to be provided for out of wages.”}
The above paraphrasing is from pp 391-2 of Absentee Ownership, Veblen’s final book (1923). ___Here he was giving a nod to Ricardo who used superfluities (kin to superfluous) — as also had Adam Smith — to indicate something more than mere necessaries, extras though not actual luxuries. Both those gentlemen included customary items, not strictly needed for mere physical survival, as part of what a subsistence wage needed to buy, which was the wage workers were expected to be paid.
Veblen was being deliberately provocative in relating workers’ wages of the day to that long~ago standard.
BACKGROUND:
From Ricardo’s Principles of Political Economy and Taxation, 3rd edition 1821 {1st was 1817}__ chapter V “On Wages” ….. “It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. … It essentially depends on the habits and customs of the people … Many of the conveniences now enjoyed in an English cottage would have been thought luxuries in an earlier period of our history.”
Similarly, Smith in The Wealth of Nations 1776, (Book V; chapter II; article IV): said: “By necessaries I understand, not only the commodities that are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.” __He then went on to explain … “Custom has rendered leather shoes a necessary of life in England … In Scotland a necessary to the lowest order of men … [though] women may, without any discredit, walk about bare~footed. In France, they are necessaries neither to men nor to women of the lowest rank…”
__Ricardo agreed with Malthus (Essay on Population, 1798) about growing population outstripping the food supply, and so he formulated his ‘Iron Law of Wages’, that workers should be paid only a subsistence wage [with customary necessaries] but no more. For then more of their children would survive to overpopulate the place with prospective labourers, which would drive down their wage rates even as food became more expensive with so many more mouths to feed — and so they might well starve to death.
To save them from such a fate, it was best not to overpay workers and to keep the rate of mortality among their very young high. …With good reason, Political Economy was at that time labelled ‘the dismal science‘ by one English commentator.
___Concerning this, Smith had noted: “Poverty is extremely unfavourable to the rearing of children … Very few, it seems, arrive at the age of thirteen or fourteen. In some places one half the children born die before they are four years of age; _in many places before they are seven; _and in almost all places before they are nine or ten. This great mortality, however, will every where be found among the children of the common people, who cannot afford to tend them with the same care as those of better station. … It is not uncommon, I have been frequently told, in the Highlands of Scotland for a mother who has borne twenty children not to have two alive…” (Book I; chapter VIII, two~thirds in).
Mandeville
Mandeville much earlier, in 1714, had said: __ “Strictly speaking, anything is a luxury if it is not immediately necessary for man’s survival as a living creature, and by this standard there are luxuries to be found everywhere in the world. … Everybody will say that this definition is too rigorous, and I agree; …but if we relax its severity at all, I am afraid we shan’t know where to stop …” He then explained:
“For if our wants are innumerable, what is needed to meet them has no bounds; [such that] what some degree of people would regard as superfluous will be thought requisite [necessary] to those higher up the scale; and nothing could be too curious or extravagant for some gracious sovereign to count as a necessity of life — not meaning everybody’s life, but that of his sacred person.”
{note: the divine right doctrine still had some potency then.}
In short, Mandeville argued that anything above the bare minimum to assure survival may be thought a luxury by some yet a necessity by others, and necessaries multiply with higher incomes, such that at the peak income level nothing is considered a luxury, for every thing becomes a necessary to that person. (Presumably it being a matter of status, for what then could possibly be beyond one’s grasp?)
The above quotes were from Mandeville’s ‘Remark L’ comment on his bit of doggerel he supposed could be called a ‘poem’, The Fable of the Bees: or Private Vices, Public Benefits 1714, which reproduced, with added comments on, the original of 1705 titled: The Grumbling Hive, or Knaves Turned Honest, which had been widely pirated and sold for a ha’penny when the legitimate went for six pence. __Bernard Mandeville lived from 1670 to 1733.
In case you’re wondering, here is the bit of verse that remark was about …
Luxury employed a million of the poor,
and odious pride a million more:
envy itself, and vanity,
were Ministers of Industry;
their darling folly - fickleness,
in diet, furniture and dress,
That strange ridiculous vice, was made
the very wheel that turned the trade.
Their fashion and clothes were equally
objects of mutability;
for what was well done for a time
in half a year became a crime;
.....
Thus vice nursed ingenuity,
which joined with time and industry,
had carried life's conveniences,
in real pleasures, comforts and ease,
to such a height, the very poor
lived better than the rich before.
And nothing could be added more.
On Factors of Production
It was once usual in Economics to speak of three ‘factors of production’, specifically: land, labour, and capital, each with its corresponding income of rent, wages, and profits.
Notice this assumes that whatever yields an income is a productive factor. Which in the case of rent, one might question. The schema came down from the 1700s and it presumably reflected generally the conditions prevalent then.
However, a couple of things were missing. It assigned no productive effect to industrial knowledge. This is largely accumulated experience in the public domain, so to speak, and therefore not the property of anyone specifically. Though clearly necessary for industry to function, in itself it yields no income and so was not part of that schema.
Another omission was the businessman, who in the 1800s came more obtrusively to the fore and came in for a more and more generous portion of the country’s annual income. …Arguably that indicated such persons also contributed increasingly to the annual production of goods and services.
So a fourth factor of production was added carrying the label ‘entrepreneur’, the instigator of the business enterprise. Chief executive would be a more apt label really, since most had no hand in starting the business concern they now head, nor typically are they especially entrepreneurial. ..Indeed, often quite the opposite, but they are ultimately in charge of the financial end of the business, however much they delegate tasks of that nature to other executives.
Nowadays such persons are excessively well compensated for their contribution, particularly in the USA, and as the foregoing schema equates income with productive service, it would appear they render a very substantial service to the community they are part of, reflecting their creative endeavours.
Indeed, “Since the top one hundred chief executives of US corporations were paid forty times what the average worker earned in 1970 and a thousand times what the average worker got in 2000, some astonishing improvement in their marginal productivity must decree that it be so.”
[..This sarcasm is a quote from the first page of chapter Nine in The Assumptions Economists Make, by Jonathan Schlefer, published in 2012 by the Belknap Press of Harvard University.]
Of course, such an imputation is open to ridicule and deservedly so most often. Moreover, such overly generous compensation seems more a reward for being so accommodating or obedient to the financiers who install them and keep them in place. ..With chains of gold, one might say.
From an overall view this does not appear anything particularly productive for anyone other than those financiers and their chosen executives, who both benefit monetarily.
Much of the above is based on Veblen’s 1921 book The Engineers and the Price System from the beginning of part two.
Advertising as a Business Resource
But the world has progressed since that era and textbooks of Economics today generally eschew those old~fashioned labels and refer instead to …
‘Business Resources,’ though the change is cosmetic as the content is really not different. Should it not be?
After all, as Veblen emphasized, ..Business and production are different matters, business being about buying and selling. ..Therefore, what enhances this activity ought to be included as a ‘business resource’, and working capital spent on marketing should be included therein. …In this way advertising would take its rightful place in the business schema. ..Considering how much is spent on advertising, surely it ought to have been included long since.
A modern oddity
Another oddity in this area, perhaps owing to mere sloppiness, may be found in some introductory textbooks. Factor payments — sorry, payments for business resources — has Capital paid interest while the Entrepreneur grabs all the profits! ..This smacks of a silly simplification. ..Of course, the Chief Executives are generously paid, but there is a problem here.
Bonds certainly are paid interest, but ordinary (common) shares instead get any dividends paid out, a distribution of some of the annual profits (at least in theory). _But if the Entrepreneur is assigned the profits, as some textbooks state, what do these shareholders get?
And how is the Top Executive to corral all the profits anyway? _Really, it is rubbish. Such textbook authors apparently forgot that part of the capital of a company is its shares. (Which may be of several types, something I’ll ignore here.)
Credibility suffers when a textbook includes this sort of nonsense. ..And regrettably, such logical gaffes are far from rare in today’s textbooks.
Inflation
On ‘Stagflation’
To Veblen it was business as usual among oligopolists
The combination of inflation and recession, a stagnation of business while prices rose, was shocking to economists circa 1974 when it caught them by surprise. They had no good explanation to offer that would explain it in their pretend world of modelling. The catchy label of ‘stagflation’ was given this conundrum.
Fifty years’ earlier Veblen had observed the same thing, which he explained as mere business as usual among oligopolists, the US economy at that time having enough of them to make a difference. It was a result of over twenty years of rapid business consolidations perpetrated by financiers for their own enrichment. New then but commonplace now: that finance rules industry. Today, even professional sports is typically an industry that finance rules. (But I digress.)
The stagflation conundrum of the mid 1970s created a lacuna in the canon of orthodox economic doctrine that naturally had to be addressed. Perhaps predictably, it was filled with something weird, in this case monetarism, so~called. Why anyone would believe that the rate of ‘money’ creation (as distinct from the much larger credits creation*) should be deemed responsible for inflation is something of a puzzle.
After all, it took considerable mental contortions to explain away sharp rises in grain and petroleum prices (circa 1973) as being due to increased money creation. [Had these been physical contortions, it would have taken a prolonged regime of physiotherapy to restore the unfortunate to a condition nearly normal.]
{* Credits may arise from the creation of new financial assets – such as new mortgages and leases – or indirectly from revaluation of existing assets – such as real estate or company shares on a stock market. Yet none of these figure in the monetarist conception of ‘money’.}
<<note: This item was written before the covid 19 virus caused lock-downs, during which many governments supplied much newly created ‘money’ to their citizens, at the same time that price inflation fell! __Clearly, a monetary explanation of inflation is a fairy tale that this health crises has exposed. ..Yet, earlier such exposures (during bouts of “quantitative easing”), hardly dented such belief, and I expect the doctrinaire will continue believing in this fantasy.
After all, Economics is a doctrine, not a science, and doctrine is meant to be believed in. ..[see also the page: 300 billion$ Gift, which argues it in not debt.]>>
Here is what Veblen observed on the same phenomenon, paraphrasing from his last book Absentee Ownership which was issued in early 1923. Page numbers refer to it:
“The secure upward trend of the price~level, and its buoyant endurance under difficulties during the last few years … a progressive, automatic, and presumably interminable inflation of money~values, or a continued depreciation of the effectual money~unit, according to how one may choose to view it … Provided the rise continues at such a temperate rate as will not jar the popular credulity … then there should be no reason … that this price~level may not safely be advanced indefinitely, to the continued gain of those who stand to gain by it. ..To any footloose observer it will be evident that the price~level has been rising, without serious break or abatement, during the past quarter~century.” __pp 371/2
“Hence, money~values have advanced, resulting in an effectual recapitalisation of American business concerns, of both their assets and presumptive earnings*.. [so] as a matter of common honesty, it is incumbent on the business men in charge to keep this – in a sense fictitious – capitalisation intact, and to make it good by bringing earnings up to the mark.
“This they have been endeavouring to do by curtailing employment and output to such a point that the resulting increased price per unit will yield the requisite increased total price~return … [on the] smaller volume of output. … This does not differ notably, unless in degree, from the orderly run of business and industry during the times of peace immediately preceding the War.” ___pp 220/1
*footnote:_ The capital value of a business concern at any given time, its purchase value as a going concern, is measured by the capitalised value of its presumptive earnings. {share prices on a stock market, typically}__p220
The period from mid 1907 to year’s end 1914 saw the US economy technically in recession two~thirds of the time, with two brief periods when it was not. Yet, Veblen notes that prices kept advancing the entire time, at least for large companies.
Today …
Over-capitalisation of companies, especially those that become part of an oligopoly of producers, increases prices over what they would be otherwise. ..The creation of an oligopoly typically sees the capitalisation of the firms involved increase over what the former firms, the several more of them pre~consolidation, had in total. ..Which in itself is usually inflationary, prices having been raised. ..More significantly, how competition then proceeds among the few (which is what oligo means) is itself inflationary. They keep increasing prices gradually with scant competitive pressure to check this.
Here is where Veblen is most relevant today, for his take on competition differs markedly from what is still standard fare in textbook economics. ..He replaced price competition with selling competition, which has marketing rather than production as the main focus. Competitive marketing puts upward pressure on prices as selling expenses increase, for sales of each player depend on it. ..However, cost reductions in production may attenuate the extent of all this.
“Nonetheless, continued growth of technology has cheapened production so as to have greatly masked that progressive inflation of prices “_p 372
Chapter eleven of Absentee Ownership is the core of this new conception of competition. Of course, being among oligopolists — whose marginal costs definitely do not rise within the normal range of their outputs — creates a problem for modelling an industry or an economy. Marginal~cost pricing is not relevant in reality, but modellers still rely on it – for otherwise indefinite outcomes are usual (and very much unwanted).
________________
Just as an afterthought, fear of morphing into hyperinflation — wherein prices may double within a few days in an ongoing fashion, until the currency is destroyed — spooks central bankers as something very much to be avoided. ..Completely understandable, of course, but this should not mean being skittish when the annual inflation rate hits double digits. _Even say eleven percent annual inflation may be lived with for a considerable time. This is less than 1.0% per month inflation, a price path most can live with provided incomes are adjusted several times a year. But the bankers tend to be very nervous even at seven or eight percent annual inflation. Such an attack of nerves is not then really justified.
Of course, a eleven percent annual rate of inflation in prices would mean interest rates would need to be somewhere near double digits, which then get incorporated into the costs structure of businesses. ..Which is inflationary though not crippling. Such a situation has existed for years at a time in some economies: ..hyperinflation is not the inevitable outcome. …An economy can exist with such rates, though the prospect is no doubt scary for anyone who has not had the experience of them, and knows only interest rate regimes in the low single digits.
On inflation in general
Veblen depicts several sources of inflation:
1._ Too much money seeking a finite supply of goods;
2._ Industry consolidations, which typically involved raising prices in order to obtain sufficient earnings on the bloated capital structure created;
3._ Bond issues by companies, requiring even more earnings;
4._ Marketing expenses of oligopolists;
5._ Bank credits creation (out of nowhere), particularly to large corporations. [Though here Veblen was wrong – see below] ..He claimed it results in higher spending by them and triggers the above first source of inflation.
He is very consistent in stating that more money chasing a finite stock of goods will result in higher prices being paid than otherwise. Typically, he ignores the fact that stock will get replenished with new production, and were it in excess of immediate demand, discounting might well occur. ..This is never so much as hinted at.
Veblen does note a few instances of lowered prices due to enhanced efficiency in production or distribution, but mostly he felt lower production costs served only to moderate price increases, prices being largely set by oligopolists with an eye on total profits. A typical example:
“To any footloose observer it will be evident that the general price·level has been rising, without serious break or abatement during the past quarter century. .. The new credit facilities have had much to do with it … In a very appreciable degree the movement of price inflation has been masked by a continued advance in the industrial arts over the same period …. which has acted powerfully to lower the cost of production of the output ..” p.372 of Absentee Ownership
The book depicts banks as contributing greatly to inflation through providing bank credits. This is consistent with what he wrote in a 1905 article1 on this topic. … Everything in that article appears also in the later book, with one exception: that banks create the credits they provide. While that is not explicitly stated in Absentee Ownership, yet it appears he still believed in this creation myth he set forth in 1905: ..{The quotes are somewhat abridged; emphasis added}
1Credit & Prices; J of Poli Econ (1905) vol 13, p 460-472.
“Of immediate interest to modern theory is, ‘of course’, the current use of credit in business, and the relation of this business credit to the current price·level, rather than the occasional resort of credit under relatively primitive conditions.”
|| Sarcasm: this topic was of no great interest to most adherents of the ‘modern theory’ of neoclassicism (of which Marshall’s Principles of Economics (1890) was then the standard textbook). ..Notice the loans are to businesses.||
“Banking is profitable chiefly because the banker lends more than he has or borrows. … When making a loan on collateral representing property not intending to be sold, the banker [or similar lender] creates a new volume of credit. …[It] adds to the borrower’s funds available for purchases increasing the effective demand for goods, and in doing so helps enhance prices. <Perhaps so.> The banker lends funds that he does not possess.” <Untrue>
Here Veblen is wrong. While it is true that each bank’s total lending relates to the amounts of money on deposit at the bank, the deposit specific to any loan does not come out of nowhere — it is not created money. _See page: Banks Create New Assets. ..What banks create are new financial assets in the economy, a rising volume of which could be inflationary. (But then so can be a rising stock market or a real estate bubble, which increase total credits in an economy.)
Veblen went on in that article to state the “enhancement of general prices due to this cause, has apparently been offset by a cheapened production of goods, due to technological improvements. … The volume of goods seeking a market has also greatly increased .. another countervailing effect.”
In short, he was putting forth a theory of inflation that could not be captured in statistics – because it was being masked by a presumed lowering of production costs during the same period. He will contend this is so in several places in his final book.