Hobson's Choice

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Thorstein Veblen on human nature

January 09, 2004

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On the train into Concord today read "Why is Economics Not an Evolutionary Science?" by Thorstein Veblen.¹ I've never read substantial portions of Veblen before, but my future father-in-law is a specialist in him, and about the time I learned that, I also learned—serendipitously—that Veblen (1857-1929) was an admirer and friend of J.A. Hobson—and vice versa. Their friendship turns out to have been quite important because Veblen was able to organize a school of economic thought that incorporated many of Hobson's ideas about economics. (Review of Imperialism by Veblen, PDF)

Your humble correspondent has found this sort of thing handy to know because it allows me to draw ready inferences about the harmony of certain ideas. In the case of Veblen and Hobson, you have theories of domestic economics melded rigorously with theories of imperialism. Veblen was interested in the role of social conventions and institutions in determining economic outcomes, and his insights were heretical to the neoclassical economic thought that prevailed during his lifetime. In this passage from "Why Economics is not an Evolutionary Science," he explains the core premise of the "Austrian School," whose most famous recent defender was Friedrich von Hayek.²

The economists of the classical trend have made no serious attempt to depart from the standpoint of taxonomy and make their science a genetic account of the economic life process. ...The Austrians ...have taken up a detached portion of economic theory [viz., value theory—JRM], and have inquired with great nicety into the process by which the phenomena within their limited field are worked out. The entire discussion of marginal utility and subjective value as the outcome of a valuation process must be taken as a genetic study of this range of facts. But... nothing further has come of the inquiry, so far as regards a rehabilitation of economic theory as a whole. ...It must be said that the Austrians have on the whole showed themselves unable to break with the classical tradition that economics is a taxonomic science.
The reason for [this] failure seems to lie in a faulty conception of human nature... [Human nature] is conceived in hedonistic terms; that is to say, in terms of a passive, ...inert, and immutably given human nature. ...The hedonistic conception of man is that of a lightning calculator of pleasures and pains who oscillates like a homogeneous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He has neither antecedent nor consequent. He is an isolated definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. ...Spiritually, the hedonistic man is not a prime mover. He is not the seat of a process of living, except in the sense that he is subject to a series of permutations enforced upon him by circumstances external and lien to him. [Redacted for clarity & brevity; emphasis mine—JRM]

This is really interesting to me because, of course, economics hovers in a twilight zone between the prescriptive sciences and the pure sciences, with the descriptive bridge in between washed out.³ A prescriptive science has to have a strong descriptive component, which—for economics—is mere taxonomy. But the nature of those categories is examined mathematically. Regression analysis is only useful if you have a theory (like a production function linking capital, labor and technology to output, or currency exchange rates to exports). And theory is developed by endless applications of pure math—dynamic optimization and eigenvectors (for Real Business Cycle Theory), matrix algebra (for equilibrium analysis) and so on.

In between, there is missing, as I've attempted to explain, a true descriptive science. The relationships cannot really be "observed" because they are (a) too complicated, and (b) involve preferences that the economist cannot observe. Welfare economics—the category of economics that involves indifference curves and analysis of consumer optimization—basically can never be observed directly, although Vernon Smith (Nobel, 2002) claims to have done so. But of course Smith's experiments, ingeniously designed, cannot actually map out preferences and he doesn't pretend to.

However, one important reform I had overlooked was the ability of the RE/RBC analysts to include in their analysis the efforts of actors to seek out a better future. There has been the introduction of far richer analytical models than the absurdity cited by Veblen.

NOTES: 1 Thorstein Veblen is honored at The Veblenite, an excellent site that features this extremely helpful listing of Veblen writings online. A special thanks to Ralf J. Schreyer for setting up the site.

2 Friedrich August von Hayek (1889-1992) won the Nobel Prize in Economic Science in 1974. He is most famous amongst non-economists for The Road to Serfdom, which sought to explain that the encroaching social welfare state, public education, and the National Center for Disease Control were insidiously turning the citizens of the OECD into pod people.

His main contribution to economic thought was declared by the Nobel Committee to have been the recognition of the markets as irreplaceable sources of information required by the economy. Your humble correspondent disagrees (a) because he thinks identical insights were expressed by Adam Smith in The Wealth of Nations (IV.ii), and because (b) Hayek's real contribution was to the analysis of human welfare in ways that made it amenable to Game Theory. I'm not at liberty to check mine right now, but if you have a copy of Von Neumann & Morgenstern's Theory of Games and Economic Behavior, check the name index for "Hayek" and you'll see what I mean.

3 A prescriptive science observes, makes statements about cause and effect, and makes statements about the best course of action. The most obvious example is medicine; a doctor not only observes the patient, but gives orders that the patient is likely to obey. Descriptive only seeks to observe and explain. Physics and chemistry are familiar examples of descriptive sciences. A pure science, like mathematics, requires no observation and is based on logic.

A "taxonomical science," which Veblen accuses economics of being, merely organizes observed phenomena into categories. The categories are assumed to have a relationship with each other, but the dynamics of that relationship are subjected to far less rigorous scrutiny than the phenomena. Economics is said to be a taxonomic science because economist argue mainly about what category each thing belongs to. For example, I would guess that, of all the economists I disagree with, I disagree with Ronald Coase (Nobel, 1991) the most vehemently. Coase—to all intents and purposes—is the ideological godfather of modern GOP economic ideology. He doesn't believe in public goods. Needless to say, to my inaugust mind, most goods have an element of publicity to them, and there are a huge number that are not only public goods, but merit goods as well. Markets will always undersupply public goods, and they will supply an even lower volume of merit goods. Well, imagine Ronald and I are on an economic reality TV show. Ronald says, "You numbskull, you just pointed at a goddamned Buick and said 'merit good.'?" I say, "I actually pointed at the turning indicators, Prof. Coase. And the catalytic converter."

"James, you prattler. Even you admit the stoplight is a public good. If the stoplight is a public good, why are turning indicators a merit good?"

"Because stoplights are publicly owned. The stoplight obtained by the state on behalf of the citizenry. Whereas the turning indicators are a public good, but they must be acquired by individuals. You benefit from other people owning them." Coase, whose IQ is massively higher than mine, makes a snappy rejoinder I am unworthy to predict. But it's definitely a taxonomical argument.