The Theory of Business Enterprise

Thorstein Veblen

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351302463
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Veblen has been claimed and rejected both by sociologists and economists as being one of theirs. He enriched and attacked both disciplines, as he did so many others: philosophy, history, social psychology, politics, and linguistics. Because he took all knowledge as necessary and relevant to adequate understanding, Veblen was a holistic analyst of the social process.

First published in 1904, this classic analysis of the U.S. economy has enduring value today. In it, Veblen posited a theory of business fluctuations and economic growth which included chronic depression and inflation. He predicted the socioeconomic changes that would occur as a result: militarism, imperialism, fascism, consumerism, and the development of the mass media as well as the corporate bureaucracy. Douglas Dowd's introduction places the volume within the traditions of both macroeconomics and microeconomics, tracing Veblen's place among social thinkers, and the place of this volume in the body of his work.

CHAPTER VII

THE THEORY OF MODERN WELFARE

BEFORE business principles came to dominate everyday life the common welfare, when it was not a question of peace and war, turned on the ease and certainty with which enough of the means of life could be supplied. Since business has become the central and controlling interest, the question of welfare has become a question of price. Under the old régime of handicraft and petty trade, dearth (high prices) meant privation and might mean famine and pestilence; under the new régime low prices commonly mean privation and may on occasion mean famine. Under the old regime the question was whether the community’s work was adequate to supply the community’s needs; under the new régime that question is not seriously entertained.

But the common welfare is in no less precarious a case. The productive efficiency of modern industry has not done away with the recurrence of hard times, or of privation for those classes whose assured pecuniary position does not place them above the chances of hard times. Distress may not be so extreme in modern industrial communities, it does not readily reach the famine mark; but such a degree of privation as is implied in the term “hard times” recurs quite as freely in modern civilized countries as among the industrially less efficient peoples on a lower level of culture. The oscillation between good times and bad is as wide and as frequent as ever, although the average level of material well-being runs at a higher mark than was the case before the machine industry came in.

This visible difference between the old order and the new is closely dependent on the difference between the purposes that guide the older scheme of economic life and those of the new. Under the old order, industry, and even such trade as there was, was a quest of livelihood; under the new order industry is directed by the quest of profits. Formerly, therefore, times were good or bad according as the industrial processes yielded a sufficient or an insufficient output of the means of life. Latterly times are good or bad according as the process of business yields an adequate or inadequate rate of profits. The controlling end is different in the present, and the question of welfare turns on the degree of success with which this different ulterior end is achieved. Prosperity now means, primarily, business prosperity; whereas it used to mean industrial sufficiency.

A theory of welfare which shall account for the phenomena of prosperity and adversity under the modern economic order must, accordingly, proceed on the circumstances which condition the modern situation, and need not greatly concern itself with the range of circumstances that made or marred the common welfare under the older régime, before the age of machine industry and business enterprise.¹ Under the old order, when those in whose hands lay the discretion in economic affairs looked to a livelihood as the end of their endeavors, the welfare of the community was regulated “by the skill, dexterity, and judgment with which its labor was generally applied.”² What would mar this common welfare was the occasionally disastrous act of God in the way of unpropitious seasons and the like, or the act of man in the way of war and untoward governmental exactions. Price variations, except as conditioned by these untoward intrusive agencies, had commonly neither a wide nor a profound effect upon the even course of the community’s welfare. This holds true, in a general way, even after resort to the market had come to be a fact of great importance in the life of large classes, both as an outlet for their products and as a base of supplies of consumable goods or of raw materials,— as in the better days of the handicraft system.

Until the machine industry came forward, commerce (with its handmaiden, banking) was the only branch of economic activity that was in any sensible degree organized in a close and comprehensive system of business relations. “Business” would then mean “commerce,” and little else. This was the only field in which men habitually took account of their own economic circumstances in terms of price rather than in terms of livelihood. Price disturbances, even when they were of considerable magnitude, seem to have had grave consequences only in commerce, and to have passed over without being transmitted much beyond the commercial houses and the fringe of occupations immediately subsidiary to commercial business.

Crises, depressions, hard times, dull times, brisk times, periods of speculative advance, “eras of prosperity,” are primarily phenomena of business; they are, in their origin and primary incidence, phenomena of price disturbance, either of decline or advance. It is only secondarily, through the mediation of business traffic, that these matters involve the industrial process or the livelihood of the community. They affect industry because industry is managed on a business footing, in terms of price and for the sake of profits. So long as business enterprise habitually ran its course within commercial traffic proper, apart from the industrial process as such, so long these recurring periods of depression and exaltation began and ended within the domain of commerce.¹ The greatest field for business profits is now afforded, not by commercial traffic in the stricter sense, but by the industries engaged in producing goods and services for the market. And the close-knit, far-reaching articulation of the industrial processes in a balanced system, in which the interstitial adjustments are made and kept in terms of price, enables price disturbances to be transmitted throughout the industrial community with such celerity and effect that a wave of depression or exaltation passes over the whole community and touches every class employed in industry within a few weeks. And somewhat in the same measure as the several modern industrial peoples are bound together by the business ties of the world market, do these peoples also share in common any wave of prosperity or depression which may initially fall upon any one member of this business community of nations. Exceptions from this rule, of course, are such periods of prosperity or depression as result from local (material) accidents of the seasons and the like,—accidents that may inflict upon one community hardships which through the mediation of prices are transmuted into gain for the other communities that are not touched by the calamitous act of God to which the disturbance is due.

The true, or what may be called the normal, crises, depressions, and exaltations in the business world are not the result of accidents, such as the failure of a crop. They come in the regular course of business. The depression and the exaltation are in a measure bound together. In the recent past, since depression and exaltation have been normal features of the situation, every strongly marked period of exaltation (prosperity) has had its attendant period of depression; although it does not seem to follow in the nature of things that a wave of depression necessarily has its attendant reaction in the way of a period of business exaltation. In the recent past — the last twenty years or so — it has been by no means anomalous to have a period of hard times, or even a fairly pronounced crisis, without a wave of marked exaltation either preceding or following it in such close sequence as conveniently to connect the two as action and reaction. But it would be a matter of some perplexity to a student of this class of phenomena to come upon a wave of marked business exaltation (prosperity) that was not promptly followed by a crisis or by a period of depression more or less pronounced and prolonged. Indeed, as the organization of business has approached more and more nearly to the relatively consummate situation of to-day, — say during the last twenty years of the nineteenth century, — periods of exaltation have, on the whole, grown less pronounced and less frequent, whereas periods of depression or “hard times” have grown more frequent and prolonged, if not more pronounced. It might even be a tenable generalization, though perhaps unnecessarily broad, to say that for a couple of decades past the normal condition of industrial business has been a mild but chronic state of depression, and that any marked departure from commonplace dull times has attracted attention as a particular case calling for a particular explanation. The causes which have given rise to any one of the more pronounced intervals of prosperity during the past two decades are commonly not very difficult to trace; but it would be a bootless quest to go out in search of special causes to which to trace back each of the several periods of dull times that account for the greater portion of the past quarter of a century. Under the more fully developed business system as it has stood during the close of the century dull times are, in a way, the course of nature; whereas brisk times are an exceptional invention of man or a rare bounty of Providence.

What current economic theory has to say on the common welfare is more frequently found under the caption of crisis and depression than in any other one connection. And the theory of crisis and depression has, as is well known, been one of the less happy passages in the economists’ repertory of doctrines. It has been customary to approach the problem from the side of the industrial phenomena involved — the mechanical facts of production and consumption; rather than from the side of business enterprise — the phenomena of price, earnings, and capitalization. This untoward accident of a false start is probably accountable for the fact that no tenable theory of these phenomena has yet been offered. The solutions attempted have commonly proceeded by an analysis of industrial life apart from business enterprise; that is to say, they have sought to explain the occurrence of crises under that old-fashioned “natural economy” or “money economy” under which crises did not normally occur.¹

Taking as a point of departure the patent fact that crises, depressions, and brisk times are in their first incidence phenomena of business, of prices and capitalization, an explanation of their appearance and disappearance, and of thier bearing upon the common welfare, may be sought by harking back to those business principles that underlie modern capitalistic enterprise. An analysis of the current, common-sense business views of price and investment should indicate the genesis and manner of growth of these mass movements of the business community, as well as the character of those circumstances which may further or inhibit such movements. Business depression and exaltation are, at least in their first incidence, of the nature of psychological fact, just as price movements are a psychological phenomenon.

The everyday circumstances which condition the modern business management of industry are sufficiently well known, and they have already been reviewed in some detail in earlier chapters; but they may perhaps advantageously be outlined again in so far as they bear immediately on the question in hand.

(1) Industry is carried on by means of investment, which is made with a. view to pecuniary gain (the earnings). The business man’s endeavors in managing the affairs of the concern in which investment has been made look to the same end. The gains are kept account of as a percentage on the investment, and both they and the industrial plant or process through the management of which they are procured are counted in terms of money, and, indeed, in no other terms. The plant or process (or the investment, whatever form it takes) is capitalized on the basis of the gains which accrue from it, and this capitalization proceeds on the ground afforded by the current rate of interest, weighted by consideration of any prospective change in the earning-capacity of the concern. The management of the concern is effected by a more or less intricate and multifarious sequence of bargains. The decisive consideration at every point in this traffic of investment and administration is the consideration of price in one relation or another.

(2) The industry to which the business men in this way resort as the ways and means of gain is of the nature of a mechanical process, or it is some employment (as commerce or banking) that is closely bound up with the mechanical industries. Broadly, it is such industry as lies under the dominion of the machine, in that it is involved in that comprehensive quasi-mechanical process of modern industrial life that has been discussed in an earlier chapter. This implication of each industry in a comprehensive system, or this articulation with other branches of industry, is of such a nature as to place each industrial concern in dependence on one or more other branches of industry, from which it draws its materials, appliances, etc., and to which it disposes of its output; and these relations of dependence and articulation form an endless sequence. That is to say, the interindustrial relations into which any branch of industry necessarily enters do not run to a final term in any direction; within the process of industry at large there is no member that stands in the relation of an initial term to any sequence of processes. The ramification of industrial dependence is without limits. The method of these relations of one concern to another, or of one branch of industry to another, is that of bargaining, contracts of purchase and sale. It is a pecuniary relation, in the last resort a price relation, and the balance of this system of interstitial relations is a price balance.

(3) These interstitial pecuniary relations, between the several concerns or branches of industry that make up the comprehensive industrial system at large, involve credit relations of greater or less duration. The bargaining, by means of which industry is managed and the interstitial relations adjusted, takes the form of contracts for future performance. All industrial concerns of appreciable size are constantly involved in such contracts, which are, on an average, of considerable magnitude and duration, and commonly extend in several directions. These contracts may be of the nature of loans, advances, outstanding accounts, engagements for future delivery or future acceptance, but in the nature of the case they involve credit obligations. Credit, whether under that name or under the name of orders, contracts, accounts, and the like, is inseparable from the management of modern industry in all that concerns the working relations between businesses that are not under one ownership, or between which the relations resting on separate ownership have not been placed in abeyance by some such expedient as lease, pool, syndicate, trust agreement, and the like. Credit relations of one kind and another are also found expedient and profitable at many points where their employment is not precisely unavoidable. These extended credit relations are requisite to the most expeditious and profitable conduct of business, and so to the highest degree of success of the business. Under the régime of the machine industry and modern business methods it is probably fair to say that the use of credit, apart from loan capital and leases, unavoidably goes to the extent required to cover all goods in process of elaboration, from the raw material to the finished goods, in so far as the goods change hands (in point of ownership) during the process.

(4) The conduct of industry by competing business concerns involves an extensive use of loan credit, as spoken of in Chapter V. above.

The four conditions recited are characteristic features of that recent past during which brisk times, crises, and depressions followed one another with some regularity as incidents of the normal course of business.¹ Certain qualifications of this characterization are necessary to fit the immediate present. These will be indicated presently.

In brisk times the use of credit is large; it may be as a cause or an effect of the acceleration of business; most commonly it seems to be both a cause and an effect. No appreciable business acceleration takes place without an extension of credit, at least in the form of contracts of purchase and sale for future performance, if not also in the form of loans. In times of protracted depression the use of credit seems on the whole to be somewhat restricted, at least such is the current apprehension of the case among business men. Still, it cannot confidently be said that seasons of protracted depression are due solely to an absence of credit relations or to an unwillingness to enter into credit relations. A comparison of the course of interest rates, e.g., does not warrant the generalization that the readiness with which loans can be negotiated need be appreciably different in brisk and in dull times.¹ The readiness with which contracts of purchase and sale are negotiated is appreciably greater in brisk times than in times of depression; that, indeed, is the obvious difference between the two.

Of the three phases of business activity, depression, exaltation, and crisis, the last named has claimed the larger and livelier attention from students, as it is also the more picturesque phenomenon. ...