There are two types of extraordinary economist. The first type includes pioneers of the field such as David Ricardo, William Stanley Jevons, and, in our own time, Robert Lucas. They all aimed to economize knowledge in order to explain the largest possible amount of behavior with the smallest possible number of variables.
The second category, which includes Thorstein Veblen, John Maynard Keynes, and Albert O. Hirschman, sought to broaden economic knowledge in order to understand motives and norms of behavior excluded by mainstream analysis but important in real life. The first type of economist is fiercely exclusive; the second has tried, largely in vain, to make economics more inclusive.
The first type of economist rather than the second has come to define the field, owing partly to the successful drive to professionalize the production of knowledge. Economics and other social sciences are heirs of the medieval guilds, each jealously preserving its chosen method of creating intellectual products. It also reflects the increasing difficulty in a secular age of developing moral content for the social sciences in general. We lack an agreed standpoint from outside “the science” by which to judge the value of human activity.
And yet Veblen, Keynes, and Hirschman are deservedly the subjects of three recent biographies. Following Richard Parker’s excellent 2005 life of John Kenneth Galbraith, these works help us understand how towering thinkers can be defined out of their discipline.
REBEL WITH (AND WITHOUT) A CAUSE
Charles Camic’s Veblen is a somewhat perplexing book, heavy on sociological theory and light on biographical insight. Camic is so keen to make Veblen a case study in the sociology of “knowledge production” that he misses the oddball character of Veblen’s genius.
Veblen’s life (he was born in 1857 and died 1929) spanned the shift in American capitalism from small-scale individual proprietorship to large agglomerations of concentrated power in agriculture, industry, and finance, accompanied by an explosion of consumption and severe fluctuations in business activity. The fluid state of economics in this era partly reflected these seismic social shifts. The discipline was divided into rival schools – cost of production battled subjective utility in theories of value; historical and institutional economics flourished. Veblen, says Camic, was an iconoclast not because he was an outsider, but because, in an “age of iconoclasm,” he was an insider. This is neat, but it hardly explains the unique character of Veblen’s iconoclasm or his failure to gain professional recognition.
The best place to start is Milwaukee. Veblen’s parents emigrated to the United States from Norway in 1847, owing to a shortage of land, and began to farm in Wisconsin. By the time Veblen was born, they owned a 200-acre (81-hectare) self-supporting farmstead. They were skilled craftspeople. His father built their house, and his mother made their clothes. Veblen was brought up in the Lutheran faith of hard work and frugality: nothing was wasted. There was a strong sense of community built on common worship, and a marked respect for “useful” knowledge – in contrast to the study of dead languages, which, Veblen would later write, merely served the “decorative ends of the leisure class.” Veblen’s crucial distinction between production and waste, and between virtuous and predatory capitalism, has its roots in his austere upbringing.
In the stylized picture of his youth that Veblen later reproduced in his work, the productive classes created wealth while the rich wasted it, and thus delayed the satisfaction of society’s real needs. This interpretation of the capitalist economy ran contrary to the classical and neoclassical economics of the day, which assumed efficient use of all available resources. It was to find incomparable expression in the two books for which Veblen is best known: The Theory of the Leisure Class (1899) and The Theory of Business Enterprise (1904).
WASTE AND WANT
In The Theory of the Leisure Class, Veblen aimed to develop a model of waste that would overturn the marginalist theory of distribution. According to Camic, this book made three surgical cuts in the corpus of marginalist economics. First, the value of products derives not from their marginal utility to individual consumers but from their social function as signifiers of wealth. Purchasers were engaged in a never-ending game of “invidious comparison,” involving everything from high-priced clothing and ornate dinnerware to exotic gardens and grotesque breeds of pets. “Conspicuous abstention […] from all useful employment” was a further mark of “superior pecuniary achievement,” expressed by men pursuing non-productive occupations like warfare, politics, and law and by women dressing in clothes that incapacitated them from “all useful exertion.”
Second, Veblen attacked the assumption of universally valid laws. This was a common position of Hirschman and Keynes as well, and, in the eyes of many, it marked all three as inferior scientists. According to Veblen, the leisure class was an institution that had developed in stages over many centuries in response to environmental challenges. Economics, he wrote, should be “a science of the evolution of economic institutions,” not the analysis of static equilibria. It was foolish to imagine “a gang of Aleutian Islanders slushing about in the wrack and the surf with rakes and magical incantations for the capture for shell-fish […] to be engaged on a feat of hedonistic equilibration in rent, wages, and interest.”
Third, Veblen argued, the unproductive classes acquire the wealth they need to support their “conspicuous consumption” not by useful work, but by “predation.” One of his central contentions was that the so-called robber barons of America’s Gilded Age – the Carnegies, Vanderbilts, and Rockefellers – were direct descendants of the pillaging barbarian chiefs of ancient times. His theory of conspicuous consumption had a profound influence on sociological theory, as well as on his foremost North American heir, Galbraith, another economist who was more than an economist but regarded by his profession as less than one.
Veblen’s second book, The Theory of Business Enterprise, developed the predation theme further. As Camic shows, it reflected the controversies caused by the growth of large corporations in their various organizational forms, including cartels, trusts, and merged entities. Using the old Aristotelian distinction between “making things” and “making money,” Veblen highlighted the “industrial” activities of inventors, engineers, chemists and mineralogists, mining experts, electricians, and skilled mechanics, which were shaped by the “instinct for workmanship.” He contrasted these endeavors with the “pecuniary” activities of business managers and entrepreneurs, corporate promoters, speculators, bankers, stockbrokers, lawyers, and real estate agents, which were driven by love of money. These groups were not just intermediaries, as orthodox economists held, but “leeches” who sucked the blood of producers.
THE LONELY ICONOCLAST
This brings us to the Veblen problem: Why was the most original US economic mind of his era a professional failure? Veblen never got tenure: two prestigious universities, Chicago and Stanford, dismissed him for conducting extramarital affairs. He subsequently languished in a junior position at the then-backwater University of Missouri, before quitting academic life altogether and living on handouts and journalism until his death.
Previous studies of Veblen by Joseph Dorfman and Daniel Bell portray him as the archetypal outsider – an “academic floater,” in Bell’s description – unable to establish solid academic links with his profession. Camic, a sociology professor, rejects this interpretation. Veblen, he says, was a thoroughly professional economist who took advantage of an exceptionally fluid period in the discipline to win space for his “variations” on orthodox themes. But this hardly justifies the claim in the book’s title that Veblen upended economics, and does nothing to explain his failure to win academic recognition. Camic wants to have it both ways by portraying Veblen as someone who strayed from a system while denying that there existed a system to stray from.
To do biographical justice to Veblen would have required much more attention to his personal style and circumstances. Camic is almost blind to the connection between the originality of Veblen’s thought and his use of words. His satirical language both signaled and disguised his iconoclasm. This made it easy for economists to treat his thinking as decorative rather than analytical. Like Galbraith, another famously ironic economist, Veblen’s main influence was on non-economists. He was marginal to his own profession.
Camic dutifully records that owing to a “rare anatomical abnormality,” Veblen’s first wife “was unable to have sexual intercourse,” but refused to give him a divorce. This raises questions of mental health that Camic’s method of applied sociology is ill-attuned to answer. What is clear is that Veblen was regarded as something of a hick in the world of elite US universities, and this bred a resentment that sharpened his perceptions but made him a testy colleague. He hit back with a scathing 1918 attack on higher education, The Higher Learning in America, which he initially subtitled A Study in Total Depravity.
It is a sign of Camic’s idiosyncratic treatment of his subject that he makes only one fleeting mention of Veblen’s most important later work, The Engineers and the Price System (1921). Its concluding chapter, entitled “A Memorandum on a Practicable Soviet of Technicians,” points to a future in which managers and engineers combine into a “new class” of technicians, who will take over from the vested interests of both capital and labor to guide the progress of industrial evolution. The new class will become directors of society, ironing out its “frictions” just as engineers iron out frictions in the production of goods. Camic thus misses an opportunity to show how Veblen’s disgust with capitalist civilization led him not to Marx but to St. Simon, Comte, and Plato.
Veblen died just before the start of the Great Depression. That calamity opened a new chapter in the theory of waste, which we associate with Keynes. The waste that Keynes discerned was caused not by inefficient distribution of existing resources, but by insufficient utilization of potential resources – making it a problem of demand instead of supply.
THE OUTSIDER INSIDER
Unlike Veblen, Keynes was too important be expunged from the economics profession. He was not only central as a policymaker, but, like Adam Smith, offered a rare combination of intellectual fertility and conclusiveness. Neither Smith nor Keynes presented formal models, but bits of their work could readily be formalized. Ricardo did this for Smith, and John Hicks did it for Keynes. But beyond Keynes’s “income-determination” model lies a profusion of suggestive asides that leave his thoughts open-ended.
Nevertheless, although Keynes – unlike Veblen – really did upend economics (at least for a time), the profession has persistently tended to belittle him as an economist and narrow the importance of his contribution. He was not a “real” economist, it is said, because he failed to understand the idea of a “budget constraint.”
I prefer the description of Keynes by his wife, the Russian ballerina Lydia Lopokova, who called him “more than economist.” Keynes knew all about budget constraints. His essential contribution was to point out that unmanaged market economies normally operated well below full employment, thus calling for a “general theory” in which full employment is only one of a number of possible stable positions. Furthermore, these two types of equilibria called for two types of economic policy, one suitable for full employment and the other to address underemployment. A “full investment” policy required the government to supplement private investment sufficiently in a depression to achieve full employment.
These were novel and thrilling insights that current talk about the “natural rate of unemployment” and “V-shaped recoveries” from slumps has all but obliterated. What has remained is Keynes’s memorable, mordant phrasemaking, such as “in the long run, we are all dead,” “it is better for reputation to fail conventionally than to succeed unconventionally,” and “when statistics do not make sense, I find it generally wiser to prefer sense to statistics.”
Keynes is the subject of Zachary D. Carter’s The Price of Peace, a superb work of political economy by a young financial journalist and scholar. As its full title indicates, it is not primarily a biography, but rather a study of Keynes’s impact on three topics, of which only one, money, is directly connected with economics.
There is almost nothing in the book about Keynes’s family and upbringing. This is a shame, because they help explain his relative indifference to questions of distribution, something that Keynesians are loath to acknowledge. “Escape was possible for any man of capacity or character at all exceeding the average, into the middle and upper classes,” he wrote in 1919, reflecting on his own rise into the British establishment. Poverty was mainly caused by a stuttering economic system, not by a skewed distribution of wealth or opportunity.
Carter is right, though, to emphasize the influence of the conservative philosopher Edmund Burke, and his doctrine of prudence, on Keynes’s intellectual development. This, together with a “civil-service mind,” kept Keynes’s feet firmly planted in the real world. Like the Greek philosopher Thales, he could both gaze at the stars and make a killing in the wheat market.
ECONOMICS IN WAR AND PEACE
Although Keynes’s economic theory, unlike Veblen’s, was reducible to a model that could become the basis of policy, his purpose was nothing less than to save civilization in an age of economic depression and war. “Keynes,” Carter writes, “was a philosopher of war and peace, the last of the Enlightenment intellectuals who pursued political theory, economics, and ethics as a unified design.” This wider aspect of Keynes’s thinking was lost when his ideas crossed the Atlantic to become the “New Economics” practiced in the US from World War II until the 1970s.
The economics part of this story is well known. Whereas Keynes made “underemployment equilibrium” depend on inescapable uncertainty about the future, leading US Keynesians like Paul Samuelson made it depend on sticky wages and prices. This opened the door to stabilization policy while eliminating the heart of Keynes’s theory, which was mathematically intractable.
This so-called “neoclassical synthesis” started to unravel in the late 1960s, when the Keynesian framework came under attack for causing inflation, leaving neoclassical theory as the only basis for policy. That was the cue for the supply-siders, who aimed to unstick the sticky wages and prices through labor-market reforms. Market-achieved equilibrium could now be plausibly restated as a full-employment equilibrium, while independent central banks would stop governments from being careless with the money supply. Milton Friedman replaced Keynes, and monetarism replaced fiscal Keynesianism. None of this stopped the 2008 global financial crisis, following which governments briefly resurrected Keynesian policy to bail out insolvent banks.
In Carter’s account of this counter-revolution, Friedrich von Hayek rightly plays a larger role than he is generally credited with. Whereas Friedman was essentially an extremely clever technician, Hayek was the counter-revolution’s philosophic progenitor. It was Hayek who clung resolutely to the view of economics as being exclusively concerned with the study of scarcity. He didn’t believe it was possible to democratize the elite; power, too, was a scarce resource.
Something new to me in Carter’s book is the story of Hayek’s link with Harold Luhnow, a half-mad home-furnishings magnate from Kansas City. Hayek’s 1944 book The Road to Serfdom struck the furniture tycoon like a clap of thunder. He began dreaming of a world “in which clunky and corrupt apparatuses of government might be replaced by the genius and generosity of the wealthy.” Luhnow persuaded the University of Chicago to appoint Hayek as Professor of Social Thought, and paid his salary. He helped him found the Mont Pelerin Society, which became “the world’s preeminent right-wing intellectual organ.” As Carter notes, “Luhnow’s financing changed academia.”
But there was something else. In his short 1930 essay Economic Possibilities for our Grandchildren, Keynes assumed that full-employment policy plus technical progress would go on long enough to bring abundance within reach of all, and thereby realize the ethical promise of the good life. In such a world, what would remain would be the social problem of wealth and income distribution.
It was this leap into the future that enables Carter to write that Keynes “reframed the central problem at the heart of economics as the alleviation of inequality, pivoting away from the demands of production and the incentives facing the rich and powerful.” In other words, once the production problem was overcome, we would be back to the problem posed by Veblen of how to prevent the waste of productive resources – not through unemployment, but by business predators and the idle rich.
This distant prospect was far from the center of Keynes’s concerns in the 1930s, and there was no explicit warrant in the General Theory for redistribution. So, those who had no desire for redistribution interpreted Keynes’s theory as a simple case of demand deficiency, to be cured by any kind of deficit spending. This opened the way to the capture of US Keynesianism by the military-industrial complex. Keynesian ideas “which had been developed explicitly to combat ‘militarism,’ became essential for the maintenance of a permanently militarized world,” Carter writes. “The idealized humanitarian aims of liberal imperialism that Keynes had admired as a young man were refitted for an era of US hegemony.” Massive military spending was a source of waste unimagined by Veblen, and ensured that scarcity, like the poor, would always be with us.
With capitalism’s triumph over communism after 1989, the rationale for military Keynesianism declined. But this did not lead to the rehabilitation of civil Keynesianism, because the intellectual battle had been lost. Carter ends his book with a devastating critique of US President Bill Clinton’s administration, which, at every opportunity, “transferred power from the government to the financial markets,” building financial boom and bust into the system. “The economic problem for humanity,” he writes, “is no longer a problem of production but of distribution-inequality.”
How to solve this problem remains a mystery. Keynes had always tried to steer a middle way between reform and revolution, preservation and disruption. But “perhaps the type of social change [Keynes] envisioned,” Carter concludes gloomily, “can be achieved only through revolution […] The greatest American victories for democracy and equality […] came at the end of a gun.”
With Hirschman, the scenery shifts from the traumas of developed countries to those of economic development. Although neither Veblen nor Keynes gave much thought to the world’s poor and backward regions, development economics drew inspiration from both. From Veblen came the distinction between productive and wasteful activity and the need to transfer resources from the latter to the former. Keynes’s idea of “underemployment” in industrial countries was turned into the idea of “disguised unemployment” in agricultural economies. As the late Canadian economist Harry Johnson put it: “the notion that there exist masses of ‘disguised unemployed’ people leads easily to the idea that ‘development’ involves merely the mobilization and transfer of these presumably costless productive resources into economic activities.”
Hirschman rejected such “big push” theories of development in favor of micro-schemes that would serve as learning platforms. Jeremy Adelman’s Worldly Philosopher is a superb biography of an elusive thinker who was both less and more than an economist. Hirschman was less than an economist because he never formally trained as one. But he was also more because his thinking overflowed the boundaries set by the formal sciences, while his mordant wit mocked their scientific pretensions.
Adelman, a historian at Princeton University, is attentive to how Hirschman’s German-Jewish background influenced his character and thought. In 1933, with Hitler having recently come to power, the 17-year-old Hirschman left his family in Germany and became a lifelong wanderer. “With [his] charm,” writes Adelman, “came a remarkable skill in deflecting personal difficulties and avoiding trouble.” Hirschman became a master of concealment and reinvention, and drew from his own history a Kafkaesque sense of being caught in the vises of an insane system that insisted on its rationality.
Hirschman’s most famous book, Exit, Voice, and Loyalty (1970), reflected the tensions in his own life “between leaving, fighting, and accepting.” One might add that no thinker of German origin can altogether escape the influence of dialectical reasoning, from which Anglo-American social science is exempt. For Hirschman, economic outcomes were the result of contradictions between politics and economics. He came to see the treatment of political relations as the “intrusive” bane of development economics.
DARING TO FAIL
Hirschman wanted to create a “social economics” rooted in time, contingency, politics, and institutions – a hopeless undertaking that would have abolished the discipline. Works like Exit, Voice, and Loyalty and The Passions and the Interests: Political Arguments for Capitalism Before its Triumph (1977) are classics of social thought, but have had little impact on the profession. As Adelman says, “what made Hirschman so influential beyond his discipline, speaking as an economist to social scientists, is what deprived him of all influence within it.”
Thus, Hirschman was “marginal” to Columbia University, and his Harvard University tenure was a “curio.” Like Veblen, he was a “catastrophically bad teacher,” escaping from the chore with foundation grants. Hirschman is not mentioned in Samuelson’s Economics (nine editions), nor in David Begg, Stanley Fischer, and Rüdiger Dornbusch’s Economics (five editions), and he is left out of the Oxford Dictionary of Economics. (Veblen fares little better.)
Hirschman’s work as a development economist challenged the hubris of experts from the World Bank and other institutions who descended from the sky with briefcases full of plans for abolishing poverty. He parodied their reasoning: “As long as nature is in charge of mishaps like floods, they are acts of God; when men undertake to remedy one of nature’s ills, this remedy is expected to cure all ills.” In 1954, he established his own development consultancy in Bogotá, Colombia. Its business was project assessment. The propensity to plan, Hirschman said, should be replaced by the “propensity to experiment and improvise.”
The subtext of his first major book, The Strategy of Economic Development (1958), was, Adelman writes, a “critique of […] the preference for abstract model-building in the service of big all-encompassing plans of modernization through top-down reform.” Policymakers should instead choose investment projects that had good potential “linkages” to other economic activities.
Hirschman accepted the risk of failure, but thought experimentation would create “pressure points” for further advance. He came close to advocating projects he thought likely to fail, in order to encourage popular protest to correct their shortcomings. He invented the crucial idea of the “optimal” crisis – deep enough to provoke change but not so deep that it wiped out the means of achieving it. Creating problems to solve as a method of progress has a distinctly Mephistophelian ring.
The background to Exit, Voice, and Loyalty was the explosion of the US counterculture in the 1960s. This stimulated Hirschman to explore the different forms that discontent with institutions could take, using the “consumer” as the stylized agent. His thesis was that consumers’ loyalty to commercial or political brands could no longer be taken for granted. They could express their discontent in the form of exit/desertion (the economist’s model of consumer choice) or voice/expression (the democratic form of protest).
Hirschman’s clear preference was for voice. In a famous example, he argued against wealthy, articulate parents or patients exiting public school or health systems for private provision, because this would ensure a downward spiral in the quality of public education and health care. Instead, Hirschman argued, they should campaign to improve public services for their families and themselves, which would generate pressure for improvement for everyone. But he never explained properly why they should do so. As some reviewers pointed out, he lacked a theory of loyalty.
Hirschman’s most ambitious attempt at cross-disciplinary fertilization was The Passions and the Interests. David Hume had written that “reason is, and ought only to be the slave of the passions, and can never pretend to any other office than to serve and obey them.” Constitutional checks were needed to channel the destructive passions into the service of the common good. But suppose the market could do so? Montesquieu had shown the way by sagely remarking that while men’s passions may lead them astray, their interest may impel them to cooperate with others. One might even argue that it was the selfish passions that awakened reason from its sleep. Adam Smith made this insight the foundation of political economy.
Hirschman brilliantly explained that by branding passions as interests, Smith destroyed the ground of their conflict:
“In the early modern age, man was widely viewed as the stage on which fierce and unpredictable battles were found between reason and passion or, later, among the various passions. At mid-eighteenth century, some hope was held out that the interests, which were increasingly understood in the purely pecuniary sense of the term, would be able to tame the disastrous, if aristocratic passions. But by the latter part of the century, the passions were collapsed into the interests by Adam Smith who pronounced the ‘great mob of mankind’ to be safely programmed. From the cradle to the grave its members were to be exclusively concerned with ‘bettering their condition.’”
In his later years, Hirschman battled inconclusively with the problem of finding a place for morality in the social sciences. His outlook became steadily gloomier as neoliberalism became orthodoxy in both developed and developing countries. His last book, The Rhetoric of Reaction: Perversity, Futility, Jeopardy (1991), used the tripartite scheme of Exit, Voice, and Loyalty to describe the different forms of rejection of social democracy. But he remained a hopeful contrarian.
Veblen, Keynes, and Hirschman were more than economists because they practiced their economics from a standpoint outside the profession, using it to criticize not only the assumption of rational self-interest, but also the consequences of economists’ indifference to “preferences.” Veblen’s standpoint was explicitly religious; he was still of a believing generation. Keynes, too, was an ethicist. G.E. Moore’s Principia Ethica remained what he called his “religion under the surface.” Hirschman wanted a “moral social science” that would be continually sensitive to the ethical content of its analysis.
The problem of moralizing economics in a secular age defeated all three. But their efforts are not just part of the history of ideas. They also serve as a rallying call to new generations of students.
These three economists’ frequently mocking style was their way of establishing their distance from their profession. Their irony was not ornamental but actually shaped the substance of their arguments. This style limited their impact on economics, but made them highly influential outside it, because critics of economics sensed something transgressive about them.
For Veblen and Hirschman, it was their refusal to take the bait of modeling which made them less than economists in the eyes of the profession. This cannot be said of Keynes. Not only did he have an impregnable base among economists, but he bequeathed a theory that could be applied. Nevertheless, the power holders in the profession (and outside it) marginalized him as soon as they felt confident enough to do so. “Who are you?” wrote Keynes’s friend David Garnett in 1915. “Only an intelligence that they need in their extremity […] then back you go into the bottle.”
Systematic thinkers close a subject, leaving their followers with “normal” science to fill up the learned journals. Fertile ones open up their disciplines to critical scrutiny, for which they rarely get credit. This has been the fate of the three great economists whose work – and enduring influence – these books describe.
(Jeremy Adelman, Worldly Philosopher: The Odyssey of Albert O. Hirschman, Princeton University Press, 2013, Charles Camic, Veblen: The Making of an Economist Who Unmade Economics, Harvard University Press, 2020, Zachary D. Carter, The Price of Peace: Money, Democracy, and the Life of John Maynard Keynes, Random House, 2020.)
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