Veblen’s Theory of Business Enterprise and Keynes’s Monetary Theory of Production
L. Randall Wray
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 mostexplicit 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 insome 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 nicelycomplement 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 tothe 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
The author is a Professor in the Department of Economics at the University of Missouri – KansasCity. This paper was presented at the annual meeting of the Association for Evolutionary Economics in Chicago, January 5-7, 2007.
©2007, Journal of Economic Issues
L. Randall Wray
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 isused 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 crediteconomy.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 marketthat 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...