Veblen's theory of finance capitalism and contemporary corporate America.

Author:Cornehls, James V.

The modern conservative is engaged in one of man's oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.

--John Kenneth Galbraith

One of the myths of U.S. capitalism is that major economic organizations (corporations) exist principally to develop and produce products and services for the benefit and use of consumers and other businesses. This is how they are alleged to earn their keep. When they do a good job they are supposed to be rewarded by sales and repeat sales to loyal customers, who value both the quality of the goods and the services received. If the businesses fail to do this faithfully, they are expected to lose sales and money. Eventually, if they do not improve, they are supposed to go out of business.

Thorstein Veblen's theories of business enterprise are especially pertinent in the present day economic context for they illuminate what lies behind the current economic debacle in the United States. Allegations of financial mismanagement, corporate book "cooking," and insider trading currently rage in the United States. What was originally proclaimed to be one or two rogue corporations, and their executives, enriching themselves and their friends and minions now has become a flood of reported ill-gotten gains and financial irregularities. The fingers of greed and fraud even point to the nation's CEO and his deputy CEO and possibly to other members of his cabinet, many of whom are former corporate executives (Rich 2002; "Bush Defends" 2002; Mike Allen, "Bush Urges 'New Ethic' for Execs," Arlington Star-Telegram, July 10, 2002, and

"Bush Got Type of Loans He Opposes," Arlington Star-Telegram, July 11, 2002; "Bush's Ghosts" 2002; Parrott 2002; "Cheney Question" 2002; Saporito 2002; Gerth and Stevenson 2002).

The list of major corporations and top executives already having faced or facing allegations of fraud, corruption, and possible indictments or implicated or under investigation is astonishing. It ranges from Enron to Merrill Lynch to Johnson & Johnson. And there is little reason to believe it stops with these corporations. Each week seems to bring yet another revelation of corporate malfeasance. (1)

Many large, modern corporations give the appearance of caring very little about their customers. Their self-serving advertisements, all indirectly subsidized by the public via tax write-offs, proclaim their benevolent contributions to everything from the good life to a better quality of the environment and support for the Special Olympics. Putting a positive spin on the American corporation is itself a separate, major industry, and billions of dollars are spent annually to burnish the corporate image. The top 500 advertising agencies in the United States had total billings of almost $150 billion in 2001 ("Ten Years" 2003).

While a significant number of major corporations acquire reputations for providing poor service or shoddy merchandise, they still often tank among the financial titans of the economy. They continue to reward their top executives with extraordinary salaries and huge overall compensation packages, frequently in the hundreds of millions of dollars, including stock options and stock price appreciation, and often accompanied by sweetheart loans for their directors, while the corporation tailspins downward (Colvin 2002; Mike Allen, "Bush Urges 'New Ethic' for Execs," Arlington Star-Telegram, July 10, 2002, and "Bush Got Type of Loans He Opposes," Arlington Star-Telegram, July 11, 2002). Why do they do this? How do they do this? How can they do this?

Are the seemingly senseless and endless mergers and acquisitions, huge rewards and bonuses for governing boards and CEOs, and financial improprieties and questionable accounting practices central to the main purpose of the corporations which engage in them? Are they isolated instances of excessive rapaciousness on the part of some rogue executives and their underlings? Or are these by-products of some systemic flaw that assures their continued repetition?

This is not the first time U.S. corporations have been called to task for engaging in unwholesome business practices. The great trust movement of the 1880s, 1890s, and early 1900s led to the trust-busting policies of the administration of President Theodore Roosevelt (Ely 1900). Trusts, or "combinations" as they also were called, were eliminating competition by combining corporations for the purpose of monopolizing trade. These corporate "leaders" were supposedly going to be reined in by new, stronger federal laws and by newly created agencies charged with their enforcement. The Sherman Anti-Trust Act of 1890 created the legal machinery to prosecute monopolists and other economic malefactors. The Clayton Act was passed in 1914 to prevent pro-business courts from using the new anti-trust laws to suppress unions. Corporate combinations were generally considered undesirable because they usually resulted in price fixing, the destruction of competition, and undue political influence.

Following the 1929 stock market crash and in the midst of the great world depression, additional reforms were undertaken to try to regulate industry and the stock market. The purpose of these reforms was to curb the market's excesses and restore balance to the opposing sides in the economic struggle among tank and file employees, the public, and corporate enterprise. The Securities Act of 1933, the Securities and Exchange Act of 1934, and the creation of the Securities and Exchange Commission in 1934 were all responses to the financial irregularities of corporations leading up to and precipitating the stock market crash. The Public Utility Holding Company Act was passed in 1935, and the Trust Indentures Act followed in 1939. These soon were followed by the Investment Company Act and the Investment Advisors Act in 1940 (Securities and Exchange Commission 1999).

Later, as many Americans grew affluent and more content and many of them were employed by one of the big corporations, a kind of complacency settled in and no one really seemed to care any longer about corporate behavior. Frequently, if a corporation was accused of wrongdoing its employees were the first to come to its defense, extolling its virtues as a good corporate citizen and a good place to work. Even recently a number of Enron's employees, seeing their life savings disappear as a result of their own employer's misconduct, still praised it as one of the best companies to work for in the nation. As an example, an Enron pilot who lost both her job and her pension benefits nevertheless publicly stated she had been paid a six-figure income while employed, that Enron was a great company to work for, and that she had no regrets.

At the close of World War II, with millions of soldiers returning to the labor force, there were fears of a return to the depression years. Additionally, because industry had faltered and either fired or laid off millions of workers during the depression, thus worsening the crisis, in 1946 the Full Employment Act was passed. Despite this and the passage of significant statutory regulations intended to end corporate abuses, problems in the conduct of business affairs continued to plague the U.S. economy on a more or less continuous basis. The question lingered whether or not some intrinsic failure of the economic system was responsible for these repetitive failures and abuses. Veblen addressed these concerns in the early twentieth century, and his theories are relevant today.

Veblen's Theory of Finance Capitalism

Veblen's theory of finance capitalism is set out in The Theory of Business Enterprise and in a two-part article, "On the Nature of Capital I & II," published in the Quarterly Journal of Economics in August and November 1908. Together, these works detail his theory of the workings of modern, industrial capitalism. They focus on Veblen's treatment of the use of real (tangible) capital and what Veblen called "assets," or money capital, and on the use of loanable funds and credit in the conduct of the modern corporation.

Veblen examined the confusing duality of capital itself, sometimes treated as capital goods and machinery and sometimes treated as loanable funds or intangible assets. He made a sharp distinction between the two because capital, in the pure sense, refers solely to the machines and equipment which are the subjects of property or ownership by the capitalist class. What originally belonged, informally, to the community at large was partitioned by force and made secure under formal, separate rules of ownership and control (1969, 331-332). (2)

But as the common stock of technological knowledge increases in volume, range, and efficiency, the material equipment whereby this knowledge of ways and means is put into effect grows greater, more considerable relatively to the capacity of the individual. And so soon, or in so far, as the technological development falls into such shape as to require a relatively large unit of material equipment for the effective pursuit of industry, or such as otherwise to make the possession of the requisite material equipment a matter of consequence, so as seriously to handicap the individuals who are without these material means, and to place the current possessors of such equipment at a marked advantage, then the strong arm intervenes, property rights apparently begin to fall into definite shape, the principles of ownership gather force and consistency, and men begin to accumulate capital goods and take measures to make them secure. Veblen faulted the neoclassical economists' treatment of capital because it confused the concept of capital as material goods--machinery and equipment--with the modern business concept of capital as pecuniary assets (Raines and Leathers 1996, 138). Veblen's purpose was to demonstrate how the modern development of business finance, which includes capitalized "good will" and pecuniary...

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