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.

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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).