Despite the substantial body of literature interpreting the works of Thorstein Veblen, his theory of rationality is rarely discussed. Analyzing his theory of rationality is not just important for understanding the nature of his critical stance on the mainstream economics of his time, it is also important for focusing on reconstructive elements in his analysis.
In order to clarify Veblen's theory of rationality, the concept of rationality should be discussed at a two levels. The first level concerns the nature of human action and its rationality; called "the problem of individual rationality." Veblen's rejection of rational calculative action is well known. Although he never formulated an alternative theory of action in a standard form, implicit pragmatism in his analysis gives us a chance to define his theory of action in pragmatic terms. The evidence of pragmatism in both his intellectual roots and his work should be analyzed in detail to clarify his theory of rationality in terms of the theory of action.
The second level of rationality, which in Veblen's work is related to his assessment of the fate of the machine age, could be called "the problem of social rationality" (Tilman 1999, 93). To Veblen, the machine process represents the distinctive characteristics of modern industry. It both pervades modern society and determines all types of social action within that society. The habits of thought disciplined by the machine process lead society to rationalize the irrationalities of the price system. For critics, this kind of rationalization process implies the universalization of instrumental rationality. In this manner, his works are perceived to both universalize technology and as an instrumentalistic conception of action.
The reduction of Veblen's individual rationality to the mere rejection of a calculating rationality of mainstream economics, or to interpret his rationalization process as just a vulgar mechanization of society would undermine two important opportunities for understanding Veblen's theory of rationality. The first one is the opportunity for defining Veblen's individual rationality in terms of contemporary pragmatic literature on human action. The second opportunity is the attempt to establish a connection between Veblen's individual rationality and his social rationality.
The distinctions between individual and social actions (and their corresponding forms of rationalities), like the other traditional distinctions, for instance between macro and micro, agency and structure, action theoretical and systems theoretical approaches, represent two extreme approaches to theorizing about the actor. Rational choice theory, the paradigmatic core of neoclassical economics represents one extreme, in which only the individual matters. The individual and his/ her rationality are viewed as separate or isolated from the rest of society and social relations. This is an "undersocialized conception of human action" (Granovetter 1985, 483). At the other extreme is an approach in which only society matters. This is an "oversocialized conception" of action where "actors acquire customs, habits, or norms that are followed mechanically and automatically, irrespective of their bearing on rational choice" (Granovetter 1985, 485).
Veblen's conception of action lies between these two extremes. The creative action in Veblen's thought, representing a pragmatistic conception of action, provides a framework with which to ground and connect the individual-society discussion. Veblen's action theory both criticizes the neoclassical model of action and constructs a wider framework by referring to the question of how to conceive of economic action.
The first and primary goal of this paper is to argue that the problem of rationality in Veblen's work should be discussed on these two levels, and that the compatibility of individual rationality and social rationality in Veblen's work should be clarified. This compatibility can be achieved by reference to "the creativity of action" (Joas 1996).
The discussion proceeds as follows. First, the relationship between economics and the theory of action is discussed. Second, to clarify the problem of rationality in Veblen, his explicit and implicit reflections on the theory of action are analyzed through reference to his intellectual roots and the contemporary pragmatic literature, such as the work of Hans Joas. We will next examine social rationality as a machine-induced rationality in Veblen's social theory and how it leads to the compatibility problem of individual rationality and social rationality in Veblen's thought. Finally, the possibilities and limitations for establishing a compatible connection between these two levels is discussed.
The Theory of Action and Economics
Any study on rationality should first be concerned with action theories. Although action is a fundamental concept in all social sciences, the debates on action theory, as a study area, formally belong to the sociological side of the traditional divisions of disciplines. The reason for this lies in the historically determined division of intellectual labor between economics and sociology. The roots of the division are traced to early generations of economists and sociologists, like Adam Smith and Auguste Comte (Zafirovski 1999, 584), but the standard division of labor, as a kind of implicit gentlemen's agreement, is constructed based on Pareto's dichotomy between rational and non-rational actions. The field of economics, then, is restricted to rational action: irrational action is implicitly relegated to sociology (Ingham 1996, 258). While the systematic foundations for both economics and sociology were developed, in mature and modern form, by Max Weber, "[t]hese foundations were ... classically elaborated for modern economics by Lionel Robbins in An Essay on the Nature and Significance of Economic Science and for modern sociology by Talcott Parsons in The Structure of Social Action. The foundations of this intellectual division of labour were laid by the marginalist revolution: it was marginalist economics that introduced the distinction between economy and society by abstracting economic relations from all social content" (Clarke 1982, 234).
Through the triumph of marginalism, and then the formalization and mathematization of economics as an inevitable consequence of this triumph, the rigid intellectual separation between these disciplines has become institutionalized. The formalization in economics began in the 1930s and was completed in the 1950s. "By then the axiomatic methods of formalist mathematics were being systematically applied to the fundamental concepts of economic theory. The choices of an agent were now said to be rational if and only if they satisfied the axioms of preference theory or (in models with risk) of expected utility theory" (Walsh 1996, 4). Defining action on the basis of rationality, and defining rationality as the means-end framework in choosing the most efficient means for the achievement of given ends, leads to action theory that depends on instrumental rationality. "Instrumental rationality equates the rational action with the choice of the means most likely to satisfy a given set of ends" (Hargreaves Heap 1989, 39). Instrumental rationality as a potent doctrine of economics is then defined in terms of "internal consistency of choice" and "the maximization of self-interest" (Walsh 1994, 401; Sen 1993; 1994). The road taken to rational choice theory also explains why economics leaves discussion of the theory of action to sociological thought. Instrumental rationality for economics is a core concept, one that requires no redefinition. Economics just tries to universalize its action theory, which is constructed on the basis of instrumentalistic concepts of rationality.
Thorstein Veblen could provide the most promising alternative action theory for modern economics. To identify Veblen's assessment of action theory and rationality, these concepts should be analyzed in terms of pragmatism. Pragmatism does not just form the philosophical basis of institutional economics (Mirowski 1987); it also challenges the role of Cartesian philosophy and its action theory, upon which mainstream economics was developed.
It has been conceded that debates on action theory formally belong to sociological theory; however, this intellectual division is between sociological theory and mainstream economics. In the case of Veblen, who had wider intellectual interests than the established division of intellectual labor between sociology and economics, debates on action theory should primarily be taken into consideration by institutional economics. Moreover, "the contemporary Grand Canyon in academic research and departmental organization between 'economics' and 'sociology' means that many of the most interesting questions in social science have become lost in the intervening abyss" (Hodgson 1994, 69). To avoid this loss and to have an opportunity to clarify Veblen's thought in a broader conceptual framework, debates on action theory can be imported into institutional economics literature.
Veblen and the Theory of Action
To interpret rationality in Veblen's thought will require clarification of his concept of action. One of the most persistent topics within Veblen scholarship has been the opposition of Veblen to rational action theory. It is well known that Veblen criticized the economic preconceptions from the pragmatistic point of view (Kilpinen 1998, 31), and it can be said that he "wages a continuous war against the prevalent presuppositions of economic science" (Kilpinen 1999, 187). Another key point in Veblen scholarship is the distinctive role ascribed to the machine process. According to Veblen ( 1958, 146) "[t]he machine process pervades the modern life and dominates it in a mechanical sense." Due to his emphasis on the machine process, some critics have labeled Veblen a...