Veblen and the Origin of the Catching-Up Hypothesis
James M. Cypher

Veblen's book, Imperial Germany, and his essays, “The Opportunity of Japan” and “Outline of a Policy for the Control of the ‘Economic Penetration’ of Backward Countries and of Foreign Investment,” present his views on developing regions (Veblen, 1954; 1934a; 1934b).6 At best, Veblen presents oblique comments and startling insights that were never pursued in a detailed empirical manner. As such, determining Veblen's “place” in the field of development economics will likely remain a matter of dispute.

Clarence Ayres emphasized Veblen's idea that “...overall economic development of any people is conditioned by the interaction of the dynamism of technology and the inhibitory force of institutionalized tradition” (Ayres, 2003: 110; Veblen, 1954: 191). But, this will only be true to the degree that dominant classes are initially willing to forego an exorbitant rate of return (Veblen, 1954: 192). Societies that exhibit “permissive elasticity” in their cultural/institutional structures move ahead; the “dynamism of technology is the same in all societies” but “technical cultural traits” vary (Ayres, 2003: 108).

In Imperial Germany, a technologically-based argument underlies the interpretation of Germany's rapid economic ascendance. The nation that is most advanced in the industrial arts is, apparently, either ineffective at restraining the diffusion of advanced technologies, or willing to sell the “know-how” to “borrowing nations,” because necessary technologies are “readily acquired” (Veblen, 1954: 37, 187, 224). This ease of acquisition is worth noting since Veblen was more aware, arguably, than any 19th Century economist of the concentrated power of industrial capital and its proprietary vested interest in the status quo. Veblen did not clarify the fluid mechanisms through which borrowing nations acquired state-of-the-art technology.

Rather, the emphasis is on the socioeconomic impacts of borrowed technologies—Veblen argued that the recipient nation would be able to incorporate the technologies while ignoring the inhibitory institutional matrix extant in the nation wherefrom the “elements of industrial efficiency” were borrowed (Veblen, 1954: 38). The main drift of the argument is that the borrowing nation's economic possibilities are greatly enhanced because this nation can extract a greater level of “technological proficiency” (with much lower social costs) from the borrowed elements than can the nation that pioneered the technology (Veblen, 1954: 190-91). Borrowing nations have relatively low sunk costs in obsolete machinery, thus encouraging the adoption of a new technological path. And, in Germany's case few rentier elements existed, further encouraging a strategy switch (Veblen, 1954: 193-94, 196).

Germany's “exuberant growth”—notable from the 1825-50 period onward, resulted from population growth, industrial efficiency and military force (Veblen, 1954: 61). While industrial efficiency was the “prime mover” Veblen also singled-out the role of the State, particularly in terms of the synergistic impact of military spending serving to advance industrial capabilities.7 The State also plays a central role in removing internal barriers to production and trade. But, curiously, Veblen finds no role for import substitution industrialization: Germany's “self-contained” state intervention resulted in too much national agricultural production, thereby inhibiting industrial growth (Veblen, 1954: 180-81, 184). Here, and elsewhere, Veblen adopts an extreme free trade posture (Veblen, 1954: 242-43; 1934a: 262). Development economists since WWII have debated this perspective, commonly arguing that free trade will “lock-in” a resource dependent production system subject to decreasing returns (Cypher and Dietz, 2009, chapters 5-6). Veblen legitimately criticizes Germany's mercantilist, colonial structure. But, at the same time he fails to emphasize the crucial role of interventionist state policies—so successfully deployed in Asia since WWII—that would be necessary for a nation to rise from economic backwardness (Amsden, 2001).

Resource endowments, once a favorite explanatory element of development theory, play no role in Veblen's formulation of development/growth. Resources, for Veblen, are not destiny—unlike the then prevailing views suggesting trade specialization should be based on existing resources (commonly leading to the staples trap). Likewise, racialist formulations are rejected out of hand. Germany exhibited no special advantages in “workmanship.” The industrial arts of Germany were lodged in the handicraft stage of production. With the shift to manufacture/machinofacture, achieved through borrowed technology, Germany's archaic industrial system was transcended. Further, workers need less mastery of the industrial arts as work becomes more simplified, while productivity rises under the new production stage of the Industrial System (Veblen, 1954: 188). The spread of literacy, today know as “human capital,” is crucial to the growth process—as is the shift in the “higher learning” toward technological knowledge and away from more classical forms (Veblen, 1954: 194-95). Further, anticipating the “endogenous growth” theorist, Veblen argues that a dearth of capital per se, and the inability to raise investment funds, is much less an inhibitory factor than is the acquisition of theoretical knowledge. Shifting away from a “capital-centric” or “deterministic” analysis, Veblen further insisted that 1) the lack of industrial experience and knowledge; and/or 2) the presence of customs or laws that inhibit the use of new forms of production were more important considerations than were the ability to raise loan capital and/or investment funds for the acquisition of capital goods (Veblen, 1954: 187-88, 272). Another qualitative element, demonstrably lacking in Latin American nations but extant in Asia, was a “sentiment of solidarity” and “community will” allowing for the effective transition to the advanced industrial stage (Veblen, 1954: 163-4).

6 Veblen's ideas regarding “economic development” and/or “economic growth” are scattered about in numerous additional writings. No concise statement on the issue of development, apparently, was ever made. Because of his primary focus on Germany and Japan, dependency writers would likely argue, as did Andre Gunder Frank, that any analysis of a nation that had not been either colonized, indirectly controlled and underdeveloped by foreign powers or had been a “white settler” immigrant nation such as Australia was irrelevant for development studies (Frank, 1969: 4). Germany and Japan avoided colonization and later became colonizers. Nonetheless, a denial of the legitimacy of these case studies would only serve to limit understanding of development.

7 Nonetheless, a sub-optimal infrastructure was generated due to the institutional dominance of militarism—railroads and roads were built for strategic purposes and shipping technologies were distorted to serve naval ends (Veblen, 1954: 214).