Veblen and the New Growth Theory: Community as the Source of Capital's Productivity

Abstract A century ago Thorstein Veblen argued that knowledge, which is produced and possessed by the community as a whole, is the foundation on which the productivity of "capital" rests. Orthodox economists chose to ignore Veblen and instead accepted John Bates Clark's definition of capital and the marginal productivity theory that goes with it. Recently, however, mainstream economists working on the "New Growth Theory" have rejected Clark's approach and have redefined capital so as to emphasize the importance of knowledge as well as its social character. Nevertheless, they still have an important lesson to learn from Veblen about growth, namely that technological development is nothing less than a process of cultural transformation. Keywords: Veblen, New Growth Theory, technological change, capital INTRODUCTION The history of modern growth theory might have turned out much better if more economists had listened to Thorstein Veblen. Instead, most sided with John Bates Clark in a debate about the nature of capital which involved Clark, Veblen, and Eugen Bohm-Bawerk. As a result, Clark's definition of capital eventually became part of the neoclassical dogma. It was not surprising, therefore, that Robert Solow (1956) employed Clark's concept of capital when he constructed his famous neoclassical growth model. Solow's model rapidly gained in popularity and is still a mainstay of economics textbooks (See, for example, Mankiw 2000: 77-118). The model eventually contributed to Solow receiving the Nobel Prize in economics in 1987. Despite this success, some mainstream economists have become disenchanted with Solow's model due to its theoretical and empirical deficiencies. These economists have put forth a "new" growth theory which is also referred to as endogenous growth theory (Romer 1986; Lucas 1988). This new theory, among other things, has concluded that a critical defect in Solow's neoclassical model is its concept of capital which was inherited from Clark. To correct this flaw, the new growth theorists have developed a new view of capital. What the proponents of the new growth theory seem not to realize, however, is that much of what is "new" about their definition of capital was anticipated by Thorstein Veblen in his debate with Clark. Specifically, the new growth theorists' view of capital reflects Veblen's argument that the productivity of "capital" is intimately related to society's pool of knowledge, which is produced and possessed by the community as a whole. One purpose of this paper is to demonstrate this point. Another is to show that modern growth theorists still have an important lesson to learn from Veblen. THE CAPITAL DEBATE AT THE BEGINNING OF THE TWENTIETH CENTURY: CLARK AND BOHM-BAWERK The concept of capital which is at the heart of Solow's growth model is largely the product of a debate which took place from 1895 to 1907 between Eugen Bohm-Bawerk and John Bates Clark (Bohm-Bawerk 1895a, 1895b, 1896, 1906, 1907a, 1907b; Clark 1895a, 1895b, 1907). One of the points in dispute was the distinction Clark drew between "capital" and "capital goods." Capital goods, in Clark's view, are physical entities such as machines, but capital is a fund of value equal at any point in time to the sum of the value of all capital goods. Capital goods are constantly wearing out and being replaced, but capital is a permanent fund of value. One implication of this view is that capital is mobile even when capital goods are not. When the capital goods in one industry wear out, they can be replaced by capital goods in an altogether different industry. The size of the capital stock would remain the same even though its composition differed. Clark uses the analogy of a waterfall, which is a permanent entity of a given size even though the drops of water of which it is composed are constantly changing. Bohm-Bawerk rejects Clark's distinction as superfluous at best, arguing that anything produced with "capital" is produced with physical capital goods. …