It has long been recognized that Thorstein Veblen and John Maynard Keynes share a common approach to the nature of "business enterprise" or "monetary production" in the modern capitalist economy (Dillard 1948; Dowd 1964). Keynes's most explicit treatment was in the early drafts of the General Theory, unfortunately the final version dropped some of the clearest statements. Veblen's best known exposition was in the Theory of Business Enterprise. This paper will provide a concise summary of Veblen's views on the "credit economy," comparing that with Keynes's "monetary economy." While there are many similarities, Veblen's version is in some important respects more complete, and still relevant for developing an understanding of modern business practice. On one hand, this is not surprising as Keynes had let many of the monetary details "fall into the background." However, as Matthew Wilson (2006) argues, it is surprising that most followers of Keynes have not mined the Theory of Business Enterprise for arguments that nicely complement and extend Keynes's better known approach.
Veblen and the Distinction between the Money Economy and the Credit Economy
Following "German writers," Veblen distinguished among the "natural economy," the "money economy" and the "credit economy." The first refers to one in which distribution is "in kind" without reliance on markets. The money economy is one in which there is "ubiquitous resort to the market as a vent for products and a source of supply of goods. The characteristic feature of this money economy is the goods market" (Veblen 1958, 75). This is the sort of economy addressed by classical political economy, in which "the welfare of the community at large is accepted as the central and tone-giving interest, about which a comprehensive, harmonious order of nature circles and gravitates" (69). The end of production is consumption; the means is "monetary" only in the sense that money is used in markets. While the conventional theory can be criticized for misunderstanding the nature of production even in the money economy, Veblen argues that regardless of the "merits of such a point of view," they "need not detain the inquiry" because "[m]odern business management does not take that point of view" (1) (69). By the 1870s, the money economy already had been displaced by the credit economy. (2)
Veblen's main purpose in the Theory of Business Enterprise was to examine the operations of the credit economy. His distinction between industrial and pecuniary pursuits and his argument that "the motive of business is pecuniary gain" (Veblen 1958, 16) are too well known to require explication. What is more interesting is his argument that in the credit economy, it is not the goods market that dominates, for "[t]he capital market has taken the first place ... The capital market is the modern economic feature which makes and identifies the higher 'credit economy' as such" (75). By "capital" he means the "capitalized presumptive earning capacity," "comprised of usufruct of whatever credit extension the given business concern's industrial equipment and good-will will support" (65). This is different from "effective industrial capital," the aggregate of the capitalized material items engaged in industrial output, as "business capital" comprises goodwill plus the credit that can be obtained using industrial capital and other nonindustrial property as collateral. The key to his analysis is the divergence between the value of industrial capital and the value of business capital, because this is the basis for credit extension that ultimately generates liquidation crises as well as trust formations.
The "putative earning-capacity" is subject to fluctuation (and, as we will see, manipulation) because it "is the outcome of many surmises with respect to prospective earnings and the like; and these surmises will vary from one man to the next, since they proceed on an imperfect, largely conjectural, knowledge of present earning-capacity and on the still more imperfectly known future course of the goods market and of corporate policy" (Veblen 1958, 77). When presumptive earning capacity rises, this is capitalized in credit and equity markets, with the "[f]unds obtained on credit ... applied to extend the business"; there is thus "in the nature of things a cumulative character" because "the money value of the collateral is at the same time the capitalized value of the property, computed on the basis of its presumptive earning-capacity" (3) (55). In this manner, credit fuels capitalized values, which fuels more credit and further increases the discrepancy between industrial and business capital values.
Management's interest is to maximize this differential, so as to increase capitalized value. (4) This then encourages concentration of ownership through two processes. First, credit expansion will normally proceed to "abnormal" levels as putative earnings are "over-capitalized." The inflation of the value of the business capital as collateral will rise faster than prospective earnings...