Thorstein Veblen's Theory of Business Competition

Article excerpt

Although almost all dimensions of Thorstein Veblen's analysis of modern capitalism have attracted adequate attention, his theory of business or market competition that lies in the heart of his understanding of modern capitalism has not received the interest it deserves. Even though there are attempts here and there, they do not provide us with a full picture of his conceptualization of business competition. This paper aims to elaborate on Veblen's theory of business or market competition. It is argued that he, in fact, developed a very sophisticated theory of dynamic business competition based on the idea that the economy is more than the market and as such it should be studied dynamically, holistically, and historically by primarily considering empirical phenomena instead of solely by focusing on a priori deductive mental exercises.

The first section of the paper elaborates on the foundations of Veblen's vision of the capitalist market economy. In the second section, his notion of "the state of industrial arts," which is the starting point in dissecting his two visions of competition, is explored. While the third and fourth sections elucidate his distinction between the two ideas of competition, the fifth section illustrates the working logic of competition in contemporary capitalism. His theory of competition is assessed in the final section by comparing it with other theories of competition to show the innovations he introduced. The overall conclusion is that he developed a very sophisticated theory of competition essential for analyzing contemporary capitalism.

Veblen's Vision of Capitalist Market Economy

Veblen's theory of competition attracted attention within the context of business cycles. Instead of treating it as a whole, those who were interested in Veblen's theory of business cycles discussed different aspects of his theory competition as long as they were useful for their purpose, while overlooking other dimensions (Bolbol and Lovewell 2001, 531-534; Raines and Leathers 1996, 146-150; Mouhammed 1994; Dillard 1987, 1628-1629; Dillard 1980, 262-263; Arrow 1975, 7-8; Sowell 1967, 186-187; Riesman 1953, 166; Anderson 1933). To come to the point, Veblen's theory of competition has attracted scant attention. The absence of any serious and systematic attempt to outline his theory of business competition has had serious consequences for critical institutional economics, resulting in the formation of a widespread judgment that "there is no institutionalist macroeconomic theory as such" (Peterson 1988, 170). Even some institutionalists have criticized him for not building any type of systematic theoretical framework at all (Hodgson 2001, 246). This is not a legitimate claim, given that Veblen left us with a very sophisticated, holistic, and dynamic understanding of modern capitalism to comprehend its essence by taking into account economic, political, social, and cultural dimensions together in an interrelated and historical way, as we will see below. The first step to see this is to start with his perspective of modern capitalism.

Veblen characterized the modern business situation as competitive. It is a system of pecuniary rivalry and contention because competition runs in terms of money. Thus, he, like Adam Smith, David Ricardo, Karl Marx, and Austrian economists, described market competition as a dynamic process of rivalry and contention, not a market structure (Veblen [1904] 1932, 218). The fundamental question to be answered for Veblen was: What is the main cause behind material scarcity? Is it just a material limitation or something else as well? He saw a clear link between competition and material scarcity. Accordingly, he developed an evolutionary theoretical framework that is aimed at examining "a cumulative sequence of economic institutions stated in terms of the process itself' (1898, 393). His ultimate goal was the construction of a set of the most effective institutions to overcome material scarcity (Anderson 1933, 620). …