31 July 2007

Disequilibrium Economics

One of the problems with economics is that it assumes economies gravitate towards equilibrium. In this model, economies are all about moving towards a resting point, a balance between supply and demand, a quiescent state that suggests that the status quo is normal.

Yesterday would have been Thorstein Veblen's 150th birthday. (Curiously, had he actually been alive, that would have made him the world's oldest living economist.) Veblen is probably best known for coining the phrase "conspicuous consumption." Referencing the potlatch ceremonies in which Indians gave away or even destroyed surplus goods to gain status, Veblen explained the robber barons who might light a cigar with a $100 bill.

But to me, a more interesting dimension of his economics was his adoption of Darwin's (at the time) novel idea of evolution as a model upon which to base economic analysis. He emphasized two things that most economists of his time ignored, two things that have proven to be of vital importance to progress (as opposed to equilibrium): technology and institutions.

We all realize how disruptive and defining technology has been to economic growth in century since Veblen began publishing. We still tend to overlook the importance of institutional change. Veblen saw institutional change as essential to economic progress, and reminded us that institutions can be thought of as habits of thought. Changing habits of thought is often harder than changing technology.

Thanks to the Bob Edwards show and Edwards' interview of economist Ken McCormick for alerting me to Veblen's birthday yesterday and for the refresher on his influence. If you'd like to learn more, one great place to start is with Heilbroner's Worldly Philosophers, which includes a chapter on Veblen (whose penchant for fellow professors' wives did little to help him overcome resistance to his novel ideas).


Katarina said...

I'll have to look this one up. I just brought home a couple of huge books on economics, and I am doing my best to get through them. I was looking through your writing here and you seem to bring a perspective to the whole thing that helps me get into it better.

I think some people will never, ever learn, though, because they are so tied to the way that has always worked for them.

Life Hiker said...

Someone ought to remind President Bush that "institutions" have vital importance to progress. Since functioning Iraqi institutions are virtually non-existent, progress is unlikely.

Oh - I almost forgot about Iraqi technology. Aside from cell phones, Iraqi access to basic technology like electric power is also minimal. Strike two!

I thought Harvard MBA's were supposed to know something about the ideas of Veblen and other eniment economists. GWB must have been hung over that day.

Katarina said...

Hi Ron, I went back and saw your reference. It was very interesting. There was some suggestion that his misgivings were due to an unsuccessful first marriage, though, as opposed to a pronounced character flaw.

I liken his perception of status behaviors to certain trends which are of interest to me in my academic research for my sociology course.

Dave said...

Veblen was quite important to me for another reason.

Back in the Seventies, I learned that you could list your phone number under a false name and thus not have to pay to have an unlisted number. You just had to swear that you weren't doing it for the purpose of defrauding anyone. You could be Clown, Bozo the, if you wanted to be.

I used Mr. Veblen. When a telemarketer called and asked to speak to Mr. Veblen, with remorse in my voice, I explained that that damned phone company (AT&T, that I'm still and again swearing at) just couldn't get it right - he had died years ago, and I was still getting calls. Or if I wasn't in a mood to toy, I just hung up when T.V. was asked for.

Ron Davison said...

Ha! Thorstein Veblen reads my blog! I do believe my day is now complete - and it's only 4 in the afternoon.

Know about ideas and having respect for them are two very different ideas.

heilbroner's book is a pretty cool start if you're looking for an introduction to economics. he was a great writer.

Katarina said...

No thanks, I already have some books to read. Over 2000 pages between them. I read them by placing them on my head, and absorbing the knowledge via the cranium. It's very efficient. ;)