Veblen and the Origin of the Catching-Up Hypothesis
James M. Cypher
THE CATCHING-UP HYPOTHESIS:
AN INSTITUTIONALIST APPRAISAL

Since at least the 1970s, growth theorists have made common reference to a “Veblen-Gershenkron hypothesis”–claiming that it is “well-known” and “celebrated” (Findlay, 1978; Gries and Naude, 2008: 250; Targetti and Foti, 1997: 29). In these formulations, it is claimed that Veblen–like the neoclassical growth theorists, but for different reasons–maintained “that there will be convergence in levels of per capita income across countries” (Targetti and Foti, 1997: 29). Although the above cited articles (as well as many others) from the economic “growth theory” literature make reference to Veblen's work Imperial Germany, none offer even a single citation to document their central idea that Veblen argued that “the greater the relative disparity in development levels between a country at the outset of a process of industrialization and the already industrialized part of the world, the faster the rate at which the backward country can catch up...” (Findlay, 1978: 2). On this sweeping point in a widely-referenced article, Findlay fails to cite Veblen. There is apparently no evidence that Veblen ever presented such a grandiose “hypothesis.” This body of literature argues that foreign direct investment (FDI) would provide positive externalities, constituting an important avenue for “catching up”–but Veblen did not propound such a view. Germany, as Veblen knew well, was not “sneaking ahead” while Britain was “falling behind” because of FDI. In fact, almost nothing of importance in the vast transition of the German economy occurred due to FDI; rather, by 1913 Germany was one of the top four nations in the world in terms of outbound FDI (Bairoch & Kozul-Wright, 1996: 12).

Methodologically, Veblen's ‘institutional’ analysis stands distinctly apart from that of Gerschenkron, and even more so from those neoclassical analysts who have attempted to advance the idea of a “Veblen-Gerschenkron hypothesis”:

[T]he neoclassical method is inherently deductive [and] starts from premises that are introduced. When laws are applied expected results are generated....The neoclassical method is likewise universalist. ...the set of laws–supported by data conveniently presented to support such laws–is applied broadly across historical time and geographical space.

In contrast, the Institutionalist method is inherently abductive and substantive. ...abduction takes observed events and seeks to infer an explanation based on comparison to analogous phenomena. Instead of seeking universal laws, Institutionalists [seek to] uncover the reality of the substance of society. Hence their school is aptly classified as substantive. This means that historical, sociological, political and cultural variables remain of central concern... (Hall and Ludwig, 2009: 959).3

As Hall and Ludwig point out in the above quotation, Veblen neither stated or implied that his work on Germany could, in the abstract (i.e. the non-substantive), be extended to any other national economic structure. For Veblen, and the Institutionalists, there is no general “hypothesis” arising from Imperial Germany–broader applicability is contingent on an array of complex societal and historically-given conditions (Veblen, 1954).

Nonetheless, to the degree that broader applicability can be made, Abramovitz's widely cited and illuminating article “Catching-up, Forging Ahead, Falling Behind” owes its formulation almost completely to Veblen, and nothing to Gerschenkron (Abramovitz, 1986).4 Yet Abramovitz does not capture Veblen's stress on the tension between the advancing forces of technologically-induced change, and the retarding forces of ceremonial institutions, including most particularly the drag that “business” structures (or “pecuniary” pursuits) imposed upon the upward “industrial” trajectory of Germany, had rapidly and easily acquired and assimilated from Britain's most recent technological innovations. In Abramovitz's economistic summary of the catching-up hypothesis, Veblen's stress on the role of ideology, state power, social regimentation and many other key ideas are largely absent:

Countries that are technologically backward have a potentiality for generating growth more rapid than that of more advanced countries, provided their social capabilities are sufficiently developed to permit successful exploitation of technologies already employed by technological leaders. The pace at which potential for catch-up is actually realized in a particular period depends on factors limiting the diffusion of knowledge, the rate of structural change, the accumulation of capital and the expansion of demand (Abramovitz, 1986: 390).

3 Institutional economics is considered, from this perspective, to be integral to the Other Canon; yet institutional economics appears to play only an anecdotal role in the emerging work written from this perspective (Jomo and Reinert, 2005; E. Reinert, 2008).

4 Indeed, Veblen's importance is commonly linked to Gerschenkron's work. Thus references can be found in development literature to the “Veblen-Gerschenkron effect” of catch-up, or to those that argue that the ideas of cumulative growth and catching up can be traced to Veblen and Gerschenkron (Findlay, 1978; Targetti and Fofi, 1997: 29).