The Theory of Business Enterprise
Chapter 4: Business Principles
Thorstein Veblen
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The physical basis of modern business traffic is the machine process, as described in Chapter II. It is essentially a modern fact, - late and yet in its early stages of growth, especially as regards its wider sweep in the organization of the industrial system. The spiritual ground of business enterprise, on the other hand, is given by the institution of ownership. "Business principles" are corollaries under the main proposition of ownership; they are principles of property, - pecuniary principles. These principles are of older date than the machine industry, although their full development belongs within the machine era. As the machine process conditions the growth and scope of industry, and as its discipline inculcates habits of thought suitable to the industrial technology, so the exigencies of ownership condition the growth and aims of business, and the discipline of ownership and its management inculcates views and principles (habits of thought) suitable to the work of business traffic.
The discipline of the machine process enforces a standardization of conduct and of knowledge in
(67) terms of quantitative precision, and inculcates a habit of apprehending and explaining facts in terms of material cause and effect. It involves a valuation of facts, things, relations, and even personal capacity, in terms of force. Its metaphysics is materialism and its point of view is that of causal sequence.[1] Such a habit of mind conduces to industrial efficiency, and the wide prevalence of such a habit is indispensable to a high degree of industrial efficiency under modern conditions. This habit of mind prevails most widely and with least faltering in those communities that have achieved great things in the machine industry, being both a cause and an effect of the machine process.
Other norms of standardization, more or less alien to this one, and other grounds for the valuation of facts, have prevailed elsewhere, as well as in the earlier phases of the Western culture. Much of this older standardization still stands over, in varying degrees of vigor or decay, in that current scheme of knowledge and conduct that now characterizes the Western culture. Many of these ancient norms of thought which have come down from the discipline of remote and relatively primitive phases of the cultural past are still strong in the affections of men, although most of them have lost greatly in their power of constraint.
(68) They no longer bind men's convictions as they once did. They are losing their axiomatic character. They are no longer self-evident or self-legitimating to modern common sense, as they once were to the common sense of an earlier time.
These ancient norms differ from the modern norms given by the machine in that they rest on conventional, ultimately sentimental grounds; they are of a putative nature. Such are, e.g., the principles of (primitive) blood relationship, clan solidarity, paternal descent, Levitical cleanness, divine guidance, allegiance, nationality. In their time and under the circumstances which favored their growth these were, all and several, powerful factors in controlling human conduct and shaping the course of events. In their time each of these institutional norms served as a definitive ground of authentication for such facts as fell under its particular scope, and the scope of each was very wide in the day of its best vigor. As time has brought change of circumstances, the facts of life have gradually escaped from the constraint of these ancient principles; so that the dominion which they now hold over the life of civilized men is relatively slight and shifty.
It is among these transmitted institutional habits of thought that the ownership of property belongs. It rests on the like general basis of use and wont. The binding relation of property to its
(69) owner is of a conventional, putative character. But while these other conventional norms cited above are in their decline, this younger one of the inherited institutions stands forth without apology and shows no apprehension of being crowded into the background of sentimental reminiscence.
In absolute terms the institution of ownership is ancient, no doubt; but it is young compared with blood-relationship, the state, or the immortal gods. Especially is it true that its fuller development is relatively late. Not until a comparatively late date in West European history has ownership come to be emancipated from all restrictions of a non-pecuniary character and to stand in a wholly impersonal position, without admixture of personal responsibility or class prerogative.[2] Freedom and inviolability of contract has not until recently been the unbroken rule. Indeed, it has not even yet been accepted without qualification and extended to all items owned. There still are impediments in the way of certain transfers and certain contracts, and there are exemptions in favor of property held by certain privileged persons, and especially by certain sacred corporations. This applies particularly to the more backward peoples; but nowhere is the "cash nexus" free from all admixture of alien elements. Ownership is not all-pervading and all-
(70) -dominant, but it pervades and dominates the affairs of civilized peoples more freely and widely than any other single ground of action, and more than it has ever done before. The range and number of relations and duties that are habitually disposed of on a pecuniary footing are greater than in the past, and a pecuniary settlement is final to a degree unknown in the past. The pecuniary norm has invaded the domain of the older institutions, such as blood-relationship, citizenship, or the church, so that obligations belonging under the one or the other of these may now be assessed and fulfilled in terms of a money payment, although the notion of a pecuniary liquidation seems to have been wholly remote from the range of ideas - habits of thought - on which these relations and duties were originally based.
This is not the place for research into the origin and the primitive phases of ownership, nor even for inquiry into the views of property current in the early days of the Western culture. But the views current on this head at present - the principles which guide men's thinking and roughly define the right limits of discretion in pecuniary matters - this common-sense apprehension of what are the proper limits, rights, and responsibilities of ownership, is an outgrowth of the traditions, experiences, and speculations of past generations.
(71) Therefore some notice of the character of these traditional views and the circumstances out of which they have arisen in the recent past is necessary to an understanding of the part which they play in modern life.[3] The theory of property professed at a given time and in a given cultural region shows what is the habitual attitude of men, for the time being, on questions of ownership; for any theory that gains widespread and uncritical acceptance must carry a competent formulation of the deliverances of common sense on the matter with which it deals. Otherwise it will not be generally accepted. And such a commonplace view is in its turn an outcome of protracted experience on the part of the community.
The modern theories of property run back to Locke,[4] or to some source which for the present purpose is equivalent to Locke; who, on this as on other institutional questions, has been proved by the test of time to be a competent spokesman for modern culture in these premises. A detailed examination of how the matter stood in the theoretical respect before Locke, and whence, and by what process of selection and digestion, Locke de-
(72) -rived his views, would lead too far afield. The theory is sufficiently familiar, for in substance it is, and for the better part of two centuries has been, held as an article of common sense by nearly all men who have spoken for the institution of property, with the exception of some few and late doubters.[5]
This modern European, common-sense theory says that ownership is a "Natural Right." What a man has made, whatsoever "he hath mixed his labor with," that he has thereby made his property. It is his to do with it as he will. He has extended to the object of his labor that discretionary control which in the nature of things he of right exercises over the motions of his own person. It is his in the nature of things by virtue of his having made it. "Thus labor, in the beginning, gave a right of property." The per-
(73) -sonal force, the functional efficiency of the workman shaping material facts to human use, is in this doctrine accepted as the definitive, axiomatic ground of ownership; behind this the argument does not penetrate, except it be to trace the workman's creative efficiency back to its ulterior source in the creative efficiency of the Deity, the "Great Artificer." With the early spokesmen of natural rights, whether they speak for ownership or for other natural rights, it is customary to rest the case finally on the creator's discretionary dispositions and workmanlike efficiency. But the reference of natural rights back to the choice and creative work of the Deity has, even in Locke, an air of being in some degree perfunctory; and later in the life-history of the natural-rights doctrine it falls into abeyance; whereas the central tenet, that ownership is a natural right resting on the productive work and the discretionary choice of the owner, gradually rises superior to criticism and gathers axiomatic certitude. The Creator presently, in the course of the eighteenth century, drops out of the theory of ownership.
It may be worth while to indicate how this ultimate ground of ownership, as conceived by modern common sense, differs from the ground on which rights of the like class were habitually felt to rest in mediaeval times. Customary authority was the proximate ground to which rights,
(74) powers, and privileges were then habitually referred. It was felt that if a clear case of devolution from a superior could be made out, the right claimed was thereby established; and any claim which could not be brought to rest on such an act, or constructive act, of devolution was felt to be in a precarious case. The superior from whom rights, whether of ownership or otherwise, devolved held his powers by a tenure of prowess fortified by usage; the inferior upon whom given rights and powers devolved held what fell to his lot by a tenure of service and fealty sanctioned by use and wont. The relation was essentially a personal one, a relation of status, of authority and subservience. Hereditary standing gave a presumption of ownership, rather than conversely. In the last resort the chain of devolution by virtue of which all rights and powers of the common man pertained to him was to be traced back through a sequence of superiors to the highest, sovereign secular authority, through whom in turn it ran back to God. But neither in the case of the temporal sovereign nor in that of the divine sovereign was it felt that their competence to delegate or devolve powers and rights rested on a workmanlike or creative efficiency. It was not so much by virtue of His office as creator as it was by virtue of His office as suzerain that the Deity was felt to be the source and arbiter of
(75) human rights and duties. In the course of cultural change, as the medieval range of ideas and of circumstances begins to take on a more modern complexion, God's creative relation to mundane affairs is referred to with growing frequency and insistence in discussions of all questions of this class; but for the purpose in hand His creative relation to human rights does not supersede His relation of sovereignty until the modern era is well begun. It may be said that God's tenure of office in the medieval conception of things was a tenure by prowess, and men, of high and low degree, held their rights and powers of Him by a servile tenure. Ownership in this scheme was a stewardship. It was a stewardship proximately under the discretion of a secular lord, more remotely under the discretion of the divine Overlord. And the question then pressing for an answer when a point of competency or legitimacy was raised in respect of any given human arrangement or institution was not, What hath God wrought? but, What hath God ordained?
This medieval range of conceptions first began to break down and give place to modern notions in Italy, in the Renaissance. But it was in the English-speaking communities that the range of ideas upon which rests the modern concept of natural rights first gathered form and reached a competent expression. This holds true with
(76) respect to the modern doctrines of natural rights as contrasted with the corresponding ancient doctrines. The characteristically modern traits of the doctrine of natural rights are of English derivation. This is peculiarly true as regards the natural right of ownership. The material, historical basis of this English right of ownership, considered as a habit of thought, is given by the modern economic factors of handicraft and trade, in contrast with the medieval institutions of status and prowess. England, as contrasted with the Continent, during modern times rapidly substituted the occupation of the merchant and the ubiquitous free artisan as the tone-giving factors of her everyday life, in place of the prince, the soldier, and the priest. With this change in the dominant interests of everyday life came a corresponding change in the discipline given by the habits of everyday life, which shows itself in the growth of a new range of ideas as to the meaning of human life and a new ground of finality for human institutions. New axioms of right and truth supplant the old as new habits of thought supersede the old.
This process of substitution, as a struggle between rival concepts of finality in political theory, reached a dramatic climax in the revolution of 1688. As a battle of axioms the transition comes to a head in the controversy between John Locke
(77) and Sir Robert Filmer. Filmer was the last effective spokesman of the medieval axiom of devolution. Locke's tracing of natural rights, the right of property among the rest, back to the workmanlike performance of the Creator, marks the form in which, at the point of transition, the modern view pays its respects to the superseded axiom of devolution and takes leave of it.
The scope given to the right of ownership in later modern times is an outgrowth of the exigencies of mercantile traffic, of the prevalence of purchase and sale in a "money economy." The habits of thought enforced by these exigencies and by the ubiquitous and ever recurring resort to purchase and sale decide that ownership must naturally, normally, be absolute ownership, with free and unqualified discretion in the use and disposal of the things owned. Social expediency may require particular limitations of this full discretion, but such limitations are felt to be exceptional derogations from the "natural" scope of the owner's discretion.
On the other hand, the metaphysical ground of this right of ownership, the ultimate fact by virtue of which such a discretionary right vests in the owner, is his assumed creative efficiency as a workman; he embodies the work of his brain and hand in a useful object, -- primarily, it is held, for his own personal use, and, by further
(78) derivation, for the use of any other person to whose use he sees fit to transfer it. The workman's force, ingenuity, and dexterity was the ultimate economic factor, - ultimate in a manner patent to the common sense of a generation habituated to the system of handicraft, how ever doubtful such a view may appear in the eyes of a generation in whose apprehension the workman is no longer the prime mover nor the sole, or even chief, efficient factor in the industrial process. The free workman, master of his own motions and with discretion as to what he would turn his efforts to, if to anything, had by Locke's time become an habitual fact in the life of the English community to such a degree that free labor, of the character of handicraft, was accepted uncritically as the fundamental factor in all human economy, and as the presumptive original fact in industry and in the struggle for wealth. So settled did this habit of thought become that no question was entertained as to the truth of the assumption.
It became a principle of the natural order of things that free labor is the original source of wealth and the basis of ownership. In point of historical fact, no doubt, such was not the pedigree of modern industry or modern ownership; but the serene, undoubting assumption of Locke and his generation only stands out the
(79) more strongly and unequivocally for this its discrepancy with fact. It is all the more evidently a competent expression of the trend which English common sense was following at this time, since this doctrine of a "natural" right of property based on productive labor carries all before it, in the face of the facts. In this matter English thought, or rather English common sense, has led; and the advanced Continental peoples have followed the English lead as the form of economic organization exemplified by the English-speaking communities has come to prevail among these Continental peoples.
Such a concept belongs to the regime of handicraft and petty trade, and it is from, or through, the era of handicraft that it has come down to the present.[6] It fits into the scheme of handicraft, and it is less fully in consonance with the facts of life in any other situation than that of handicraft. Associated with the system of handi-
(80) -craft, as its correlate, was the system of petty trade; and as the differentiation of occupations was carried to a high degree, purchase and sale came to prevail very generally, and the community acquired a commercial complexion and commercial habits of thought. Under these circumstances the natural right of ownership came to comprise an extreme freedom and facility in the disposal of property. The whole sequence of growth of this natural right is, of course, to be taken in connection with the general growth of individual rights that culminated in the eighteenth-century system of Natural Liberty. How far the English economic development is to be accounted the chief or fundamental factor in the general growth of natural rights is a question that cannot be taken up here. The outcome, so far as it immediately touches the present topic, was that by the time of the industrial revolution a fairly consistent standardization of economic life had been reached in terms of workmanship and price. The writings of Adam Smith and his contemporaries bear witness to this. And this eighteenth-century standardization stands over as the dominant economic institution of later times.[7] Such, in outline, seem to be the histori-
(81) -cal antecedents and the spiritual basis of the modern institution of property, and therefore of business enterprise as it prevails in the present.[8] This sketch of the genesis of the modern institution of property and of modern business principles may seem dubious to those who are inclined to give it a more substantial character than that of a habit of thought, - that is to say, those who still adhere to the doctrine of natural rights with something of the eighteenth-century naivete. But whatever may be accepted as the ulterior grounds of that cultural movement which culminated in the system of Natural Liberty, it is plain that the industrial and commercial experience of western Europe, and primarily of England, from the fifteenth to the eighteenth century, had much to do with the outcome of the movement in so far as natural liberty touches economic matters. It is as an outcome of this recently past phase of economic development that we have incorporated in the law,
(82) equity, and common sense of to-day, these peculiarly free and final property rights and obligations, that is to say, those peculiar principles that control current business and industry. We owe to the eighteenth century a very full discretion and free swing in all pecuniary matters. It has given freedom of contract, together with security and ease of credit engagements, whereby the competitive order of business has been definitively installed.[9]
The subject-matter about which this modern pecuniary discretion turns, with all its freedom and inviolability of contract, is money values. Accordingly there underlies all pecuniary contracts. an assumption that the unIt of money value does not vary. Inviolability of contracts involves this assumption. It is accepted unquestioningly as a point of departure in all business transactions. In the making and enforcement of contracts it is a fundamental point of law and usage that money does not vary.[10] Capitalization as well as contracts are made in its terms, and the plans of the business men who control industry look to the money unit as the stable ground of all their transactions. Notoriously, business men are jealous of any attempt to change the value or lessen the stability
(83) of the money unit, which goes to show how essential a principle in business traffic is the putative invariability of the money unit.[11]
Usage fortified by law decides that when prices vary the variation is held to occur in the value of the vendible commodities, not in the value of the money unit, since money is the standard of value. There is, of course, no intention here to question the position, familiar to all economists, that fluctuations in the course of prices may as well be due
(84) to variation on the part of the money metals as to a variation on the part of the articles whose prices fluctuate. In so far as the distinction so made between variations in the one or the other member of a value ratio has a meaning - which it is not always clear that it has - it does not touch the argument. It is a matter of common notoriety, which has also had the benefit of reiterated statistical proof, that, as measured, for instance, in terms of livelihood or of labor, the value of money has varied incontinently throughout the course of history.
But in the routine of business throughout the nineteenth century the assumed stability of the money unit has served as an axiomatic principle, in spite of facts which have from time to time shown the falsity of that assumption.[12]
The all-dominating issue in business is the question of gain and loss. Gain and loss is a question
(85) of accounting, and the accounts are kept in terms of the money unit, not in terms of livelihood, nor in terms of the serviceability of the goods, nor in terms of the mechanical efficiency of the industrial or commercial plant. For business purposes, and so far as the business man habitually looks into the matter, the last term of all transactions is their outcome in money values. The base line of every enterprise is a line of capitalization in money values. In current business practice, variations from this base line are necessarily rated as variations on the part of the other factors in the case, not as variations of the base line. The business man judges of events from the standpoint of ownership, and ownership runs in terms of money.[13]
Investments are made for profit, and industrial plants and processes are capitalized on the basis of their profit-yielding capacity. In the accepted scheme of things among business men, profits are included as intrinsic to the conduct of business. So that, in place of the presumption in favor of a simple pecuniary stability of wealth, such as prevails in the rating of possessions outside of business traffic, there prevails within the range of business
(86) traffic the presumption that there must in the natural course of things be a stable and orderly increase of the property invested. Under no economic system earlier than the advent of the machine industry does profit on investment seem to have been accounted a normal or unquestionably legitimate source of gain. Under the agrarian-manorial regime of the Middle Ages it was not felt that the wealth of the large owners must, as a matter of course, increase by virtue of the continued employment of what they already had in hand - whatever may be the historical fact as regards the increase of wealth in their hands. Particularly, it was not the sense of the men of that time that wealth so employed must increase at any stated, "ordinary" rate per time unit. Similarly as regards other traffic in those days, even as regards mercantile ventures. Gain from investment was felt to be a fortuitous matter, not reducible to a stated rate. This is reflected, e.g., in the tenacious protests against the taking or paying of interest and in the ingenious sophistries by which the payment of interest was defended or explained away. Only under more settled commercial relations during the era of handicraft did the payment of interest gradually come to be accepted into full legitimacy. But even then gains from other business employments than mercantile traffic were apparently viewed as an increase due to
(87) productive labor rather than as a profit on investment.[14] In industrial pursuits, as distinct from mercantile traffic proper, profits apparently come to figure as a regular and ordinary incident only when the industries come to be carried on on a mercantile basis by relatively large employers working with hired labor.
This orderly increase is, of course, taken account of in terms of the money unit. The "ordinary" rate of profits in business is looked upon as a matter of course by the body of business men. It is part of their common-sense view of affairs, and is therefore a normal phenomenon.[15] Gain, they feel, is normal, being the purpose of all their endeavors; whereas a loss or a shrinkage in the values invested is felt to be an untoward accident which does not belong in the normal course of business, and which requires particular explanation. The normality, or matter-of-course character, of profits in the modern view is well shown by the position of those classical economists who are inclined to
(88) include "ordinary profits" in the cost of production of goods.
The precise meaning of "ordinary profits" need not detain the argument. It may mean net average profits, or it may mean something else. The phrase is sufficiently intelligible to the business community to permit the business men to use it without definition and to rest their reasoning about business affairs on it as a secure and stable concept; and it is this commonplace resort to the term that is the point of interest here.
At any given time and place there is an accepted ordinary rate of profits, more or less closely defined, which, it is felt, should accrue to any legitimate and ordinarily judicious business venture. However shifty the definition of this rate of profits may be, in concrete, objective terms, it is felt by the men of affairs to be of so substantial and consistent a character that they habitually capitalize the property engaged in any given business venture on the basis of this ordinary rate of profits. Due regard being had to any special advantages and drawbacks of the individual case, any given business venture or plant is capitalized at such a multiple of its earning-capacity as the current ordinary rate of profits will warrant.[16]
(89)
Proceeding on the common-sense view built up out of this range of habits of thought with respect to normal profits and price phenomena, the business community holds that times are ordinary or normal so long as the accepted or reasonable rate of profits accrues on the accustomed capitalization; whereas times are good or brisk if the rate of gain is accelerated, and hard or dull if profits decline. This is the meaning of the phrases, "brisk times" and "dull times," as currently used in any business community.
Under the exigencies of the quest of profits, as conditioned by the larger industry and the more sweeping business organization of the last few decades, the question of capital in business has increasingly become a question of capitalization on the basis of earning-capacity, rather than a question of the magnitude of the industrial plant or the cost of production of the appliances of industry. From being a sporadic trait, of doubtful legitimacy, in the old days of the "natural" and "money" economy, the rate of profits or earnings on investment has in the nineteenth century come to take the central and dominant place in the economic system. Capitalization, credit extensions, and even the productiveness and legitimacy of any
(90) given employment of labor, are referred to the rate of earnings as their final test and substantial ground. At the same time the "ordinary rate of profits" has become a more elusive idea. The phenomenon of a uniform rate of profits determined by competition has fallen into the background and lost something of its matter-of-fact character since competition in the large industry has begun to shift from the position of a stable and continuous equilibration to that of an intermittent, convulsive strain in the service of the larger business men's strategy. The interest of the business community centres upon profits and upon the shifting fortunes of the profit-maker, rather than upon accumulated and capitalized goods. Therefore the ultimate conditioning force in the conduct and aims of business is coming to be the prospective profit-yielding capacity of any given business move, rather than the aggregate holdings or the recorded output of product.
But this latest development in the field of industrial business has not yet come to control the field. It is rather an inchoate growth of the immediate present than an accomplished fact even of the recent past, and it can be understood only by reference to those conditions of the recent past out of which it comes. Therefore it is necessary to turn back to a further consideration of the old-fashioned business traffic as it used to go on
(91) by the competitive method before the competitive order began seriously to be dislocated and take on an intermittent character, as well as to a consideration of that resort to credit which has, in large part, changed the competitive system of business from what it was at the beginning of the nineteenth century to what it has become at its close.
