Review of Veblen's "The Theory of Business Enterprise",
by J. St. G. Heath.

The Economic Review, Vol. XVI, (London, 1906)
Published Quarterly For The Oxford University Branch Of The Christian Social 
Union

The Economic Review. Vol. 16, Oct. 1906, pp. 493-497.

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[493]
THE THEORY OF BUSINESS ENTERPRISE. By Thostein Veblen, Professor of Political 
Economy in the University of Chicago. [400 pp. 8vo. 6*. Scribner. New York, 
1906.]

This is a most remarkable and valuable contribution to recent economic 
literature. It starts so many and such various theories, that, though we cannot 
agree with them all, we cannot but marvel at the originality and daring of the 
author. There are two different schools of thought which attack the existing 
economical framework of society. The one school, of a somewhat crude and 
unreflective character, vehemently denounces the wealth of the millionaire, and 
demands that some of his ill-gotten gains should be handed over to the deserving 
poor. The other school declares that the real evil at present is that we have 
not yet been able to produce enough wealth to overcome the struggle for 
existence. It insists that our unscientific methods of production and the waste 
caused by undue competition are responsible for this, and that the real remedy 
is to put production upon a scientific basis. Professor Veblen must be ranked 
among the adherents of this latter school, and his whole book is a daring attack 
upon the absurdity [494] of modern methods of production. The author wages war 
on the whole school of orthodox political economists, and declare that they have 
not jet adapted themselves to modern industrial methods. They still repeat the 
worn-out shibboleths of Adam Smith and J. S. Mill, and forget that the old order 
has changed, giving place to the new era of the joint-stock company and the 
trust, with their attendant train of dividends, debentures, and preferred stock. 
Political economy, we are told, still insists that in the long run the interests 
of the producer and consumer are identical. The producer wishes to get as much 
as possible for his goods, the consumer to get the goods for as little as he 
can. If the consumer offers too little, the producer will cease to produce; if 
the producer asks too much, the consumer will buy from another rival producer; 
and a stable equilibrium is produced by the divine laws of competition.

Such an economic harmony Professor Veblen declares to be totally inapplicable to 
modern methods of production. The producer, so long as he had complete control 
over the processes of production, made it his aim to turn out a steady stream of 
goods which would sell at a price sufficient to pay him interest on the capital 
invested. But the producer is no longer master in his own household. There has 
arrived upon the scene a new and strange phenomenon, the "business man" proper, 
who controls the financial part of the business, and leaves the productive 
process to the paid manager. The "business man" first appeared in the United 
States, and though he has recently appeared also in England, it is in America 
that he has attained the full stature of man- hood, in such giants as Carnegie, 
Rockefeller, Astor, or Pierpont Morgan. The aim of these "business men" is not 
to turn out the greatest number of goods which will sell at a profit. Their 
attention is mainly concentrated on the "vendibility of the corporate capital."

For example, let us consider the concrete instance of any one of the companies 
started within recent years. According to the economic text-books, just so much 
money would be raised as would pay for the cost of the plant and the raw 
materials. Interest would be paid to those who had lent the money out of the 
profits derived from the Bale of the articles produced. But at the present time 
the whole face of business has changed. A great financier or group of financiers 
decides upon starting a new company. Preference stock is issued in sufficient 
quantities to pay for the expense of buying the plant and raw materials, and a 
fixed return of interest, 5, 6, or 7 per cent, is guaranteed to the preferred 
stockholders, who thus hold practically a mortgage on the fixed plant. But the 
real aim of these "business men" is to gain complete control of the company. And 
this they secure by means of [494] the common stock, all of which they usually 
hold in their own hands. The striking fact is that this common stock represents 
no material assets at all. It represents only immaterial assets, such as good-
will, and the brains and financial backing of those who start the company. But 
it is obvious that there must be some limit to the amount of the common stock 
issued. So the limit is set by the prospective earnings of the company during at 
least the first two or three years of its existence, which are thus capitalized. 
Another important point to be noticed is that, as a rule, hardly any of the 
common stock is paid for by these financiers, and, as we shall see later, this 
has an important bearing upon the future history of the company.

Professor Veblen gives as a typical instance the American Chicle Company. The 
preferred stock was $3,000,000, no less than three times the amount of the 
tangible assets, while the common stock, which represented no material assets at 
all, was $6,000,000. The actual owners of the company, as far as we can talk of 
owners at all in such corporations, are the holders of the preferred stock. 
Their interest is that the Chicle Company shall turn out a steady quantity of 
goods at such a price as to secure themselves a safe return for their 
$3,000,000. It is their money which has bought the plant, and if the company 
fails all that they can hope to get is whatever price the plant will fetch in 
the market. But though we may call these the owners, the actual control is in 
the hands of the holders of common stock, usually a ring of financial magnates 
who control the company by thus holding the major part of the stock. Their 
interests are identical neither with those of the preferred stockholders, nor of 
the consumers. The preferred stockholder wishes to keep the price to such a 
level as to get a steady return for his money; the consumer wishes to be able to 
get a steady supply of goods at a cheap rate. But the financier who holds the 
major part of the stock manages the production solely with a view to the 
vendibility of the corporate capital. Sometimes he may sell the goods below cost 
price and thus momentarily benefit the consumer. By doing this he reduces the 
profits of the company; the value of the stock falls; and he then buys in more 
for himself. Or again, if he sells his goods for a time below cost price, he can 
ruin his rivals, buy up their concern, and start a monopoly; whereupon prices 
are raised again, and the consumer has to suffer. A still more favourite device 
is to raise the price of the articles produced to a very high level for a few 
years, before rival firms have time to spring up and enter into competition. 
During these few years the profits are enormous, and the value of the stock may 
double or even treble, while the dividends may rise as high! as 50 per cent. 
Then what if the crash comes from [495] competition? The financier has in most 
cases sold out before that to small investors; but even if he has not been able 
to do so, he cannot lose money which he has never paid in.

There is one obvious criticism of this theory. Professor Veblen seems to think 
that this process of watering capital will go on at an ever-accelerating rate. 
Bat he has forgotten that in most cases the only value of this watered capital 
lies in the possibility of selling it to small investors; and this fact sets a 
fixed and inexorable limit to the process of watering. The smaller investors can 
always refuse to buy stock from the big financiers; and in the United States we 
find a growing disinclination on the part of small investors to take up the 
stock offered by the financial magnates.

The harm done at present to production by these financiers must be obvious to 
all. But Professor Veblen does not stop here. We have had a great many books 
written lately on industrial depression, and we have heard a great deal about 
cycles of bad trade. Professor Veblen boldly declares that "cycles of trade 
depressions have disappeared for the last twenty years, and if our present 
economic conditions continue, will never occur again." - "For the last twenty 
years," he writes, "the normal condition in industrial business has been a mild 
but chronic state of depression." He then proceeds to give his reasons for this 
statement. We shall understand them more clearly if we compare and contrast them 
with those of Mr. J. A. Hobson. In the Evolution of Modern Capitalism, Mr. 
Hobson declares that overproduction is the cause of trade depression. We have, 
he says, so much capital that new concerns are continually being started which 
compete with former ones, and go on producing until the market is overstocked. 
Professor Veblen replies that "the supply of consumable goods is practically 
never greater than the community's capacity for consuming them." Depression, he 
insists, has been too often looked at from the side of production and 
consumption, instead of from the side of business enterprise. The tendency in 
every modern enterprise is to over capitalize at the start. This does not mean 
what Mr. Hobson means by overcapitalization. The tendency is not to introduce 
too much machinery, but to capitalize its future earnings on too high a basis. 
The body of financiers who have floated the company have invested in it perhaps 
a million pounds, with which they have bought common stock. It may be that they 
have paid down none of this in cash, because the preferred stock is enough to 
cover the cost of the plant. But they demand at least 5 per cent, on their 
money, while the interest on the preferred stock is a fixed charge always 
present. At first, if the company has been soundly started, it can easily pay 
such interest.

[496] But soon a new process of machinery or a new company is started which can 
produce the same goods more cheaply. In ordinary cases the remedy for the old 
company would be to sell its goods at reduced prices. But although the demand 
for such goods at a reduced price might be enormous, the original company cannot 
afford to sell at this reduced price, because of the heavy charges for interest 
to which it is liable. If it sells its goods at a cheaper rate and pays much 
below o per cent on its capital, the result is that the value of the shares goes 
down enormously; and if it wishes to raise new capital to put in up-to-date 
machinery, it finds that no one will invest any more in the company because of 
the lowness of the price at which its shares are quoted. The result is that in 
many cases the old company goes bankrupt, and the loss falls, as a rule, not on 
the original financiers, who have sold out, but on small investors who have 
bought up the stock. Twenty years ago, says Professor Veblen, many firms used 
thus to go bankrupt, and the result was that, as fewer articles were produced, 
prices used to go up, and then more companies would start and a fresh boom would 
begin. But now, he declares, prices are always falling so rapidly that there is 
no time for a boom, and the result is "a mild but chronic state of depression."

As an a priori piece of reasoning, this argument that cycles of trade depression 
are no longer possible is very convincing. I wish, however, that the author had 
given us some explanation of the fact patent to all, that during the last twenty 
years in England and America we have had the same cycles of trade depression and 
exaltation as we had in previous years.

Very interesting is the final stage of the argument, which deals with the 
inevitableness of trusts. The great financiers will not give up their methods of 
overcapitalization, because they find it so much more profitable than the 
methods of the past. On the other hand, they are still badly hit by the 
depressions which ensue when a fresh company with improved machinery has made it 
impossible for the old to pay the high rate of interest with which it is 
charged. It can only do this if prices can be kept at a steady level, and to 
effect this trusts and cartels are the best machinery. "They are," says 
Professor Veblen, "the necessary and logical outcome of the modern methods of 
business enterprise, and of the modern ideas of property which allow a man or a 
small group of men to have complete control over the supply of the staple 
necessities of life." But when he has shown us the impossibilities of the 
present state of affairs, and has brought us to the very brink of a solution, 
Professor Veblen tantalizes us by drawing back, and declaring that his duty is 
to state what is, and not what ought to be. Still, for [497] all that, the book 
is one which thoroughly deserves careful attention. It handles in a bold and 
vigorous manner the new economic problems which have sprung up during the last 
thirty years, and the book should be carefully studied by all who are interested 
in the economic developments of the future.

J. St. G. Heath.
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