A revised version of this piece appears in Thorstein Veblen in the Twenty-First Century, edited by Doug Brown, published in 1999 by Edward Elgar.


William Hildred

“To get rich is glorious.”  (Deng Xiaoping)

 An American tourist created a small international incident when a security guard asked her to leave Harrods, London’s premier shopping center.  The stated reason for her ejection was her being inappropriately dressed.  She countered that her similarly dressed mother was not thrown out of the establishment, suggesting instead that discrimination against portly women (size 18) was the root of the situation.  Her conclusive evidence of discriminatory purpose was that she had spent $2,000 on varied merchandise, and “was wearing a $3,000 Cartier watch, a $600 Italian designer handbag, $100 brown leggings, and a $200 white shirt” [Lederer 1997] 

Several dozen pre-qualified bidders spent over $3.5 million for castoff clothing from the closets of the former Princess of Wales [Chang and Seligmann 1997].

 Officials of Citizens Utilities, provider of gas, electricity, and water services to communities across the nation, asked the Corporation Commission of Arizona to include in its rate base the expense of maintaining an office for a retired executive, the costs of several pieces of expensive artwork, and two luxury automobiles.  Also presented as legitimate costs of providing utility services to its customers were director’s fees for both the CEO and his wife, and expenditures for international travel [Smith 1996].          

What do these phenomena have in common?  What interpretation of their significance is warranted?  Nearly every university student coping with Principles of Microeconomics (presented by a professor whose dedication to “relevance” inspires creative application of the neoclassical paradigm to everyday events) will see examples of constrained maximization.  Shoppers and bidders are attending to their preexisting utility functions, exercising consumer sovereignty with incomes obtained through efficient market processes.  The utility firm’s officers are pursuing profit maximization (for the eventual good of society, whether intended or not) by ensuring that all costs of their services are covered by the allowable price.

This does not ring true to those who follow in Veblen’s tradition.  He would see the Harrod shopper’s affectation of costly attire as the visible display of personal worthiness to associate with the better social strata.  Slathering over the once-worn gowns of an ex-princess is emulation carried to absurd extremes. Public utility executives are less interested in the price and serviceability of their product than in the comfort and pageantry of their work life.

Veblen’s continuing relevance is due to his showing the necessity of going behind neoclassical assumptions, first with his incisive examination of consumer belief and behavior in America the Commercial, and his subsequent setting forth of a mode of analysis and categories of inquiry to aid in detection of the service rendered by chicane to the predatory interests of business.  This chapter interprets several social phenomena in the manner of Veblen, beginning with the presentation of contemporary evidence that reveals the enduring errors of the dominant economic theory. These errors concern the importance and formation of tastes, the rectitude of modes of acquiring income, the processes of determining costs of production, and the plausibility of achieving efficiency under extant market structure. The chapter also introduces a phenomenon of which Veblen could not have been aware, its evolution having occurred in large part since his death.  This phenomenon is dubbed “Stealth Consumption,” being largely invisible to all but those who are able to exercise it in varying degrees, but yet subject to emulation and invidious comparison within the favored group. The ideological residue of the foundation of conservative political preference, known to economists as neoclassical theory, will be clear.


Readers of the business section and society pages of the average metropolitan daily newspaper often get breathless glimpses of life at the top.  The following review of typical reports recalls Veblen’s portrayal of conspicuous consumption. Flagrant waste and communal detriment are major elements in its practice, even as ordinary consumers take cues from their social and financial betters in deciding upon objects of their desire.

It is here called “waste” because this expenditure does not serve human life or human well-being on the whole, not because it is waste or misdirection of effort or expenditure from the standpoint of the individual consumer who chooses it [Veblen, 78].


The astute man(’s) . . . functioning is not a furtherance of the generic life process.  At its best, in its direct economic bearing, it is a conversion of the economic substance of the collectivity to a growth alien to the collective life process -- very much after the analogy of what in medicine would be called a benign tumor, with some tendency to transgress the uncertain line that divides the benign from the malign growths [Veblen, 182]

Spending Guidance from the Highborn 

Royal status, European, Arabian and Asian alike, usually confers wealth sufficient to set those so chosen far apart from the simply wealthy.  The duties of monarchs of all ages and genders begin with establishing their uniqueness among humankind by proper display of that wealth.  Queen Elizabeth II is counted among the world’s richest persons [Sellers 1991].  Fashion designers found little to celebrate in her costume, but the obligatory exhibition of the family’s divinely sanctioned abundance was made possible by large expenditure by a daughter-in-law, Lady Diana Spencer, Princess of Wales, in fair exchange for her accepting Windsor DNA.  During the first decade of her official relationship with Prince Charles she was said to have spent nearly $2 million for hundreds of dresses and evening gowns, head coverings, shoes and purses.  Detailed disclosure of her spending revealed outlays of nearly $23,000 for “underwear” (royal conversation would probably have a more elegant characterization) and $11,000 for stockings [“Di’s Wardrobe”].  (Possibly capitalizing on this revealed preference for appealing lingerie, Chanel began to offer plain cotton women’s underwear, trusting its logo to confirm the singular qualities of the wearer and stimulating the ardor of selected bedmates, at $165 each [“Undies for $165”].)  Finally, rumors appeared of Lady Di’s negotiations to buy a $3.5 million, 12-room “apartment” in a Donald Trump building where she might occasionally enjoy the company of tenants Michael Jackson and the Sultan of Brunei, among others [“Diana may be Trump tenant”].  The latter ruler, sole owner of the $37 billion oil reserves and other countable wealth of his fiefdom, found his American quarters too small for the 3000 guests (including Michael Jackson and Prince Charles) at his fiftieth birthday party; he was obliged to invite them to his thousand-room palace in Brunei [“Wealthy sultan hits 50 in high style”]. 

Also among the elect (not theologically, as in the Calvinist lineage discerned by Max Weber, but like the sultan, pecuniarily, from intimate association with crude oil properties) a wife of the king of Saudi Arabia and her retinue of 300 flew to Phoenix, Arizona, for neurological treatment.  The expected three weeks of confinement ultimately became four months, during which a hospital floor of 28 rooms was reserved for her care.  Aides not needed at all times found shelter on entire floors at two luxury resort-hotels.  For the remainder of her 22-month recovery following release from the hospital, the group rented six houses at a cost of $30,000 to $50,000 per month and more than 50 cars [Snyder and Beard 1996]. 

Finally, aristocracies of humans and sheep occasionally combine in new ways.  In the case of the sheep, special care and feeding of 600 selectively-bred animals included indoor living and protection from dirt by being clothed in a special jacket.  From 190 of these, the owners selected the best wool and bundled it in a 255 pound bale that sold for $924,000 at auction, with a Japanese firm outbidding an Italian company.  The winner expected to use about $30,000 worth of wool in each of 30 suits, affordable by the human aristocracy [“Pedigree sheep’s ‘golden fleece’ nets $924,000”].  

Tutelage from the Merely Rich 

Purchasing power less than royal but decisively grand puts some families among the preferred clientele of the Peninsula Suites in Hong Kong: after a recent renovation, the hotel includes two-story suites renting for $4,820 per day [“Kowloon hotel towers in opulence”], and such families could appreciate the value of a $500,000 charge for a parking space [Shepherd 1994].

Nieman Marcus, the famous Dallas department store, offered in its 1996 Christmas catalog: a dog house, not to scale, but yet a model of, St. Peter’s Basilica ($9,400); a children’s Japanese-home playhouse ($10,000); and a customized house trailer ($195,000) [Kaul 1996].  Robb’s Reports, also a catalog for the refined subscriber (income over $750,000, net worth $3 million), made available for 1996 Christmas giving: a Manhattan penthouse ($35 million); a Bentley auto ($324,500); a wooden bathtub ($34,000); and--one that Veblen would savor--a walking stick ($795).  Among the more distinctive gift combinations for the owner of a large (250 acres) homestead: a customized golf course and clubhouse ($15 million) and a Cartier wrist watch that keeps both time and golf scores, actuated by buttons of emerald, sapphire, and ruby set in 18-karat gold and complemented by 342 diamonds ($79,300) [Goodykoontz 1996]. 

For the less affluent golfer, an opportunity to elude January cold in the United States and play golf in selected tropical locations was offered by Concorde Golf Tours.  The trip was open to 78 people, whose $49,000 payments would give them 22 days of flying on the Concorde to play golf and see sights in Brazil, Tahiti, Thailand, India, and the United Arab Emirates [Western 1997].  

People with more money than time to shop for gifts have recourse to “personal shoppers” employed by fashionable retailers.  One such aide provides services to women who spend between $50,000 and $400,000 on each year’s wardrobes.  In appreciation for his performance, he was honored on his 30th birthday, presented a first-class flight from New York to Los Angeles, a suite at the Bel Air, and a limousine to deliver him to festivities costing others $10,000 per plate [Whitaker 1997]. 

“Investors” with more money than sense can be viewed at classic-car auctions.  In 1996, a high point of an auction in Phoenix was reached when an owner announced that the $212,000 bid for his merchandise was too meager, but bidding was stalled.  The owner asked the auctioneer to forego his $15,000 commission; a coin was tossed over the proposal and the owner won [Golfen 1996].  

Respite from the demanding role of creating jobs for the masses can itself entail significant effort.  Fortunately, the entrepreneurial spirit has moved an Idaho man to compile a newsletter by which his $300,000 median income subscribers can locate suitable relaxation.  Selections in 1996 included a month-long global tour for $38,500, a private villa in Bali for $965 per night, a double room at London’s Savoy Hotel for $480 or the Ritz in Paris for $800 per night, or an 11-day Mediterranean cruise in a suite of 1,000 square feet including bedroom with queen bed, living room with private verandah, and marble bathroom for $14,395, or around-the-world on the Queen Elizabeth II for $100,000 [Jackson 1996]. 

Alternatively, with adequate means, one might purchase a simple family yacht.  The capital gains tax cut of 1981 stimulated such purchases (rather than the promised surge of productive investment) to the extent that long-distance telephone providers on the East and West coasts found it necessary to create two new area codes to handle the volume of calls from ocean-going craft [Phillips 1990, 44]. 

Hereditary monarchs probably do not seek out these treasures.  More likely, customers for these products are akin to the economic royalists decried by Franklin Roosevelt, who now consume as royalists with their highly developed incomes.  Within their ranks today is a new genus of pecuniary captaincy, whose forte may be creating giant corporations to produce useful products in the manner of Carnegie, but also involves manipulation of ownership claims to control and exploit the assets of firms largely built by others.  In either case, their gargantuan remuneration does not stem from masterful deployment of productive resources, but from a rising stock market.  This is apparent in the financial pages of the newspaper, not in the textbooks of neoclassical economics. 


Much celebrated in the business press as the archetype of the successful American business leader is the current Chairman and CEO of Sunbeam Corporation, Albert Dunlap (not unwillingly nicknamed “Chainsaw Al” for his through stable-cleaning at every institution he is called to lead).  In 1996, his salary related compensation amounted to $576,974.  Accompanying this pittance was the award of a million restricted shares in Sunbeam worth $12.5 million, and options on 2.5 million shares worth perhaps $13 million [“Sunbeam chief’s pay soars”].  A larger compensation package was claimed by a CEO more revered by his employees, Andrew Grove of Intel.  He attained this result with salary and other direct compensation approaching $800,000, and a bonus of $2.6 million.  The major element in his success was his decision to buy a million shares of Intel stock at prices from under $7 to over $61 per share, as permitted in previously granted option agreements.  The aggregate value of this action was estimated to be about $95 million, since the market price of the stock rose during the year from $50 to $137.  The company also gave him 72,000 new stock options to prepare yet more fully for the future [Kalish 1997].  

The largest “bonus” went to Lawrence Goss of Green Tree Financial Corporation.  His salary was only $433,000, but added to this was $102 million, including $95 million in stock [Walsh 1997]. 

One designer of executive compensation packages asserts that profits, not stock prices, trigger incentive awards [Pearlstein 1997], but he does not sing the praise of profits in a large choir.  In the business press, unfortunately for teachers of economics, profit is not held to be the appropriate performance standard for corporate leaders.  One finds nearly complete assent to the idea that the standard is the price of the company’s stock and its increase.  Thus stock incentive rewards of options and long-term “incentives” increased from 1989’s 31 percent of CEO’s compensation to 43 percent in 1995, as salaries fell from 37 percent to 27 percent of the compensation package during the same period [Blanton 1997].   

Finally, the hiring of key executives seems always to look ahead to the time of separation.  As the executive genius goes forth to the simpler life of retirement or to rescue yet other struggling corporations, we may presume that anxiety for the future is not a common affliction, for suitable departure pay is available in the initial or expiring contract.  This too is often in the form of stock.  One of the more lavish models of this generosity was reported to the Securities and Exchange Commission by the Walt Disney Company in 1997.  President Michael Ovitz’s exit was eased by provision for cash and stock options worth $76 million to $130 million, despite his performance in office for only 14 months, “. . . generally considered to have been undistinguished if not disastrous” [Usborne 1997].  (In answer to such criticism, Ovitz is reported to have stated, “I just made a smart deal for myself. . . . This is America.  This isn’t the Soviet Union.  It’s the supply and demand of the marketplace” [Grover 1997].) 

It follows, then, that as major incentive of riches from stock speculation should determine executive compensation, so should it influence the outlook of members of corporate boards, who determine the compensation of the executives.  In 1995, the National Association of Corporate Directors announced that directors 

. . . should be paid primarily in company stock rather than cash and perks, and they should be required to own large amounts of stock.  Unfortunately, the association found that growing numbers of directors are voting themselves valuable benefits, such as life insurance and pensions, that aren’t tied to company performance [Brown, 1995]. 

Only weeks before, an “investor” responded to an article on executive compensation in a national business weekly with the observation that: 

. . . Many in the finance industry would argue that the only meaningful way to judge company performance is based on the returns provided to shareholders, and that it is in fact dangerous to judge the performance of companies based on traditional accounting measures such as return on equity.  The reason this practice is dangerous is that accounting measures fail to consistently indicate the actual health and value of companies [Lukasik 1995]. 

 (The view that the majority of Americans are now providing for the future by becoming owners of American Business, and so will benefit from the diligence of top executives in the casino of Wall Street, while comforting to these executives and their stock traders, is not credible.  Ten percent of Americans owned 75% of all investment assets in 1989 [Henwood 1996]  Although 36 million (37% of all) households “hold” stock, 5% own 77% of equity holdings (individually held shares, defined contribution pension plans, IRAs, Keoghs, 401Ks, and mutual funds).  Of individually owned stocks, 1/2% hold 59% [Kuttner 1996].) 

The story has just begun.  Beyond the direct provision of spendable (albeit somewhat speculative) income, the high officials of corporate America are guaranteed additional real income in the form of luxurious consumption that is only occasionally remarked upon, and does not depend on stock market trends  This consumption is obtained as a cost of running the business, and like the most advanced military Stealth aircraft, is invisible under the appropriate conditions. 


“A few million dollars are lost in the sands of time.”  (Ross Johnson) 

A recent dramatic case involved J. Peter Grace, revered by “fiscal conservatives” in politics for his merciless exposure of waste in government, investigated and publicized over many years through his organization, Citizens Against Government Waste.  Recent events suggest the possibility that the intimate knowledge that guided his searches was acquired through personal practice of the art of dubious spending in the company that bears his family name.  His removal as head of the company followed revelations that he had spent “millions of dollars in company money . . . for private security guards, nursing care, and a private apartment” [Wilson 1995.]  A stockholder’s lawsuit might eventually have revealed these activities, but a power struggle within the inner circle was more assuredly effective; without it, he might have continued for many more years the support of his personal consumption by charges to company accounts.   

His case is unique only for its irony.  Indeed, it is quite reasonable to suspect that every business provides opportunities for personal consumption that is considered in law or custom to be a cost of getting the product in the hands of the consumer, from the small shopkeeper to the mightiest corporate mogul.  Let us continue the examination of this situation with several examples from the public record and others in the form of “ideal type” composite examples, some slightly modified to disguise the identity of the protagonists. 

The Small Entrepreneur 

After many years of saving and working in a large bureaucratic organization, Ted’s dream of operating his own restaurant (and getting rich) was suddenly possible as a company failed and offered its assets for sale at a price that he could afford.  One of the inducements was the seller’s revelation that the business produced somewhat more profit than was reported to the tax authorities; proof was provided in the form of a copy of the “real” account books.  Weeks of cleaning, seeking out agreeable suppliers, standing for health inspections, hiring cooks, servers, and cleanup people preceded the grand opening day.  These days signaled an endless future of fourteen-hour drudgery, as the enterprise required more nurturing than anticipated.  Despite the work load, he was his own boss and some benefits were now open to him that were not thinkable while in the employ of others.  Among these were providing jobs and learning opportunities to his own children and their extended-family cousins, taking meals on the job, and buying a computer with Internet access for the business (and for the educational advancement of the younger generation when the business purpose has been served for the day). 

Later, as the business prospered, the opportunity arose to buy a van (for deliveries, of course, but also handy for occasional family outings), and he could buy health care and dental insurance for some of the younger ones who had not been previously fortunate in this matter.  He gave discounts to several members of the business community, and in turn bought their merchandise at reduced prices.  He joined several business groups, and pleasantly found that their conventions were always held in desirable locations.  At business expense, he and his wife (conveniently designated as an officer of the firm) attended the meetings, and remained for a few extra days of leisure beyond the convention dates.  As a non-cash bonus, the entrepreneur also was assured of public gratitude for creating jobs, an accomplishment that obliged the community to applaud expression in the local newspaper of his understanding of the dangers of government meddling that disrupts the smooth execution of entrepreneurial decisions.  In this ritual, the entrepreneur was supported by attestation of the soundness of his ontology in the lecture halls and scholarly documents of professors of business who had read some of the writing of Joseph Schumpeter on the social virtues of entrepreneurship. 

The Bureaucrat 

A department head of a wholesale hardware regional office was excessively preoccupied with business matters.  “Excessively” meant that the obligations imposed by his employer were requiring too much attention; his wife’s 40th birthday loomed and he, along with several relatives, had decided that a cruise around the isles of Greece would be a perfect celebration of her passage into midlife.  Assuring himself that the work for which he is paid will be better accomplished if he did not have to attend to all the arrangements for the trip, he hosted lunch for the head of the firm’s travel office and asked that some help be rendered.  The travel officer made all arrangements, including reservations for air travel, a land package, and two weeks aboard a luxurious vessel for the department head and his wife, plus 30 other friends and relatives who paid their own expenses.  Some 80 hours of travel office employees’ time was used in making the arrangements; since no account was established for accumulating the expenses of this activity, they were charged to overhead or other accounts, and passed in that way into the elevated prices of nuts and bolts that appear in small but expensive packages at discount stores and supermarkets. 

Like Ted, his employment provides opportunities for subsidized leisure in the form of conventions, golf, and sundry parties; his menu was more substantial than Ted’s. 

The Financial Manipulator 

The entire top management of a financial institution of modest size found that harmonious collaboration on the job was seldom complicated by mistrust of others in the group, for they were all relatives, sons and sons-in-law, abetted by one or two daughters, of the founding genius.  His reported salary was several million dollars, and with that of the inbred group amounted to tens of millions annually.  The family enjoyed travel to European and Caribbean destinations as a group, on company aircraft large enough to accommodate them, their grandchildren, and an occasional United States Senator and spouse. 

In time, he might have lusted for a larger craft, such as the $35 million Gulfstream V, cruising at nearly 600 mph over 7,500 miles with 19 passengers [Field 1997].  If times were really good, he could aim for a Boeing 737, modified for conference rooms and offices, bath and shower, and a fitness area [“An updraft for corporate jets”].  Whichever craft he selected, he might hope to park it among the 1500 others at the Super Bowl [Western, 1996], and attend at the expense of the Host Committee.  (The Arizona legislature helped many executives in this matter, appropriating $2 million to help organize the 1996 event.  With this and other moneys, the Host Committee sent CEOs of the Fortune 500 gifts of paperweights ($21,000), complementary admission to area golf resorts, invitations to a country club reception hosted by the governor of the state, to a party before the game, and to a golf tournament.  In addition, 25 lucky CEOs received tickets to the football game.  In justification of this generosity, boosters pointed out that “59 percent of the people who attend a Super Bowl are decision makers at their companies” [Reagor 1996].  Not all who failed to get free tickets were dismayed: “Nearly all of corporate America is here. . . . [and] thirty-five percent attend the game on corporate expense accounts” [Bland and Van Der Werf 1996].) 

The costs of the family’s jaunts were allocated to central office administration, along with the fees charged by auditors who certify that the wealth displayed in the palatial furnishings of the clan headquarters has been obtained legally.  Thus armed, sellers of the firms “securities” (unkindly called junk bonds by some) found a ready market among the elderly whose Social Security and Medicare sustenance required augmentation.  Within a few years the paper empire collapsed, destroying the livelihood of the elderly savers.  For the securities fraud, the patriarch, who viewed “. . .regulations as challenges to his creativity rather than expressions of public policy” [Mayer 1990, 169] spent the next several years in federal prison. 

The Public Utility Deceiver 

Citizens Utilities Company provided gas, electricity, and water services across the nation, including the State of Arizona, where the rates charged for these services were determined by the Corporation Commission.  In rate filings over several years, the company repeatedly sought to inflate its rate base and allowable expenses, persisting even after the requests were denied, including (1) artwork for the Connecticut headquarters building; (2) furniture and equipment for an office for a retired executive; (3) other office equipment and machines; (4) structures and improvements; and (5) two Cadillac automobiles.  In a water rate filing, the (rounded) amounts sought for the rate base were, respectively, (1) $182,000; (2) $4,900; (3) $10,700; (4) $208,700; (5) $73,200.

Most of these items were also loaded with a charge for depreciation expense, in toto exceeding $211,000.  Other expenses resisted by the Corporation Commission included a rent charge for an empty building ($74,400), abnormally large payments for temporary help ($332,000), abnormally high consultants’ fees ($317,000), salary, benefits, and supplies for an executive chef’s work ( $40,600), company car expense ($9,600), videos for officers ($76,000), special corporate events ($43,000), wellness and company sports program ($59,000), physical examinations for executives ($3,500), community relations and contributions ($255,000), and miscellaneous ($102,000).  Two European members of the board of directors received travel reimbursement exceeding $66,000, and unspecified directors were reimbursed for legal expense of $35,000.  Direct benefits to the CEO’s family included his salary of $1,065,000 and directors fees to him of $28,000 and to his wife of $25,000, plus his $50,000 expense account, $12,000 for the premium payment on a life insurance policy, and international air travel and hotel expenses of $57,000. 

 (This CEO wasalso indispensable to other firms.  He simultaneously obtained salaries from Citizens and from Century Communication Corporation, where he was Chairman of the Board and CEO) [Smith 1996].

The Top Don  

The RJR Nabisco story is often cited as the epitome of lavish corporate living.  Whether or not corporate executives know of more outlandish operations, the general public, including movie-going non-readers who saw the movie “Barbarians At The Gate,” probably knows of no more egregious case.  It may be a source of inspiration for lesser CEOs. 

In short, following the merger of RJR and Nabisco, Ross Johnson emerged as CEO of the combination.  Like a Godfather, he ordered substantial pay increases for his loyal executives: 31 divided $14.2 million among them, not exactly mind-boggling.  The Stealth Consumption is notable, though.  The head of the tobacco-business part of the firm had a stretch limousine; the chauffeur was paid $50,000 annually. Johnson added to his utility function with 24 club memberships; another chose a $75,000 Mercedes for his company car.  Lower level managers were allowed one club membership and a $28,000 car.  Air transportation was emphasized.  Ten aircraft and 36 pilots were part of the overhead cost structure.  Johnson’s fascination with athletes and other celebrities led him to use these aircraft to support his social life among them, often putting the planes at their disposal.  (To be sure, they used them only on company business, easily assumed as they were paid for ill-defined public relations tasks.)  Each year Don Meredith received $500,000, Frank Gifford $413,000; golfing buddies Ben Crenshaw ($400,000) and Fuzzy Zoeller ($300,000) stood in the monetary shadow of Jack Nicklaus ($1,000,000).  O.J. Simpson may have resented his only getting $250,000, for he often missed the engagements for which he was paid.  The aircraft fleet was attractive to the members of the Board of Directors; Johnson gave them free access (not restricted to business purposes).  He also raised their annual compensation to $50,000 and devised other ways to reward compliant behavior, such as giving $2 million to Juanita Kreps to endow two chairs at Duke University.  Finally, Johnson supported the prosperity of architectural, construction, and interior design businesses in the region.  A new hangar for his air force was accompanied by an office building graced by a three-story atrium, $600,000 in furniture, $100,000 in art, and $250,000 worth of landscaping.  In the headquarters building in Atlanta, he accented antiques from China ($100,000 for a lacquered screen from the 18th Century and two newer $16,000 vases) and France ($30,000 each for two chairs and cabinets).  Other pieces included porcelain dessert services worth $40,000, porcelain china costing $20,000, and a $50,000 Persian rug [Burrough and Helyar 1991, 92-97]. 


“For every rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many.”  (Adam Smith)

 “The accumulation of wealth at the upper end of the pecuniary scale implies privation at the lower end of the scale.”  (Thorstein Veblen) 

The Wellsprings of Consumer Demand 

De gustibus non inquirandum; this dogma of neoclassical economics has always been rejected by followers of Veblen, both for its crippling effect on understanding the behavior of buyers in market exchanges and for its subversive result in supporting belief in the existence of consumer sovereignty. 

Veblen would have examined today’s extravagances with insistence on recognition of the hierarchical order of spenders, with each stratum taking its spending inspiration from those above it.  Estates, castles, and homes of the elite are viewable from a distance by members of the lower orders, but along with their travel and toys, are more surely envied by those within the same general range of the pecking order.  The invidious purpose is served within that venue. 

As to the behavior of more ordinary spenders, the development of highly potent advertising and marketing technique has assured survival and intensification of the emulative urge.  As normal members of modern acquisitive society tutored by television, young people begin to imbibe the required habits of invidious contrast before they speak or walk.  They have their own infant fragrances and bottom-wipes, to launch them early on proper appreciation of the finer things [Wood 1994].  The environment of formal schooling inculcates herd behavior of many kinds, not least in the matter of physical appearance; currently, emphasis is on oversized clothing inscribed with names of idolized athletic figures and teams.  Immersion in the cult of celebrity, including that of the multimillionaire athlete, inures even the preschooler to gross inequality and fosters ignorance of the nature of socially useful behavior and employment.  Accordingly, the value systems of post-pubescent citizens are fully formed as to the propriety of every manner of foolish outlay, even as it exceeds their realistic aspiration by hundred or thousands of times. 

The Right to Income and the Nature of Cost 

The situation is not discordant, because of supporting socialization in correct beliefs about the origins of incomes.  To secure the deadness of minds and consciences, youth in many states are required to endure a high-school “economics” course presented by the football coach, who has not heard of John Bates Clark, but teaches that the natural order delivers up incomes according to one’s contributions to the processes of market exchange. Thus, those who spend lavishly do so deservedly. 

In cognate fashion, university professors of economics carry through the indoctrination with the teaching that business firms are the agents by which our society provides for its livelihood; that in the hope of getting profits, these entities obtain resources at their opportunity cost, and use them to make goods and services at least cost and lowest price.  The special social role and status of the entrepreneur is notable here.  The entrepreneur is credited not only with creating the dynamism of the market system, but also justifies the portion of the firm’s revenues that go to profit.  That which is a cost is a necessary and legitimate deduction from revenue when calculating profit, and a necessary and legitimate addition to price when calculating the value of the product.  Economists teach the young from the first week that “normal” profit is a cost, and is the deserved compensation for the entrepreneurial function. 

However, “cost” is a social construct [Hildred and Watkins 1996].  The rulings of regulatory agencies that bear on the issue of allowable costs of providing utility services suggest insight to more general practices by which costs are identified or defined.  Public utilities reveal the lowest order of corporate Stealth Consumption, in that they must receive approval for compensation and other outlays in the forum of public regulation.  The distinctive quality of the regulatory decision in many of these matters, exemplified above in the salary of Citizens Utility’s CEO, consultants, and temporary workers, was that the requested expenditure is beyond the normal bounds, suggesting a question about the nature of the normal.  The regulatory agency’s focus on the egregious implies that all that is allowed is acceptable under ordinary standards.  What is, then, the normal compensation of these executives, so commonplace that it does not excite the curiosity of staff and consultants?  Since the generosity of compensation of executives in unregulated firms is probably greater, a minimum level of such expenditure is suggested from the record of treatment of the regulated firms. 

Regarding custom and legality in compensation portfolios, it seems also that the stock option is desirable compensation because the associated complexity of financial reports is a useful means of deluding shareholders [Blanton 1997].  As well, tax law provides additional advantage: the stock option is deductible for tax purposes, but need not be revealed in the annual report to stockholders as an expense.  This arithmetic happily increases the reported profit, when advantageous evidence of the extraordinary competence of the executives is needed [Gordon, 1997]. 

Other kinds of “long-term compensation” also owe their existence to sympathetic writers of tax law. 

The deal is simple: Rather than take all their pay and pay taxes on it, executives let the company hold on to some.  The company invests the money, and the executives do not pay taxes on any of it until they take the money years later. 


It sounds like the IRA or 401(k) used by tens of millions of Americans.  Except this deal excludes the rank and file and has special benefits: There are no government limits on how much can be put away, and many top executives have put away millions.  A lot of companies guarantee them high interest rates on the money and throw in a matching contribution [Drew and Johnston 1996]. 

In this arrangement, whether in the form of stock options or other instrumentalities, shareholders need not be informed [Drew and Johnston 1996]. 

The Stealth Compensation Hierarchy 

Thus, we discern a ranking of Stealth Compensation, each level with its own justifications.  The small shopkeeper converts personal consumption into business expense, but with some difficulty, as the borderline of the illegal is approached or as the presence of competitors makes it difficult to boost product prices sufficiently.  In this, though, the activity is entrepreneurial and the money that remains is justified profit.  Middle managers in the corporate enterprise may use company resources for personal benefit, from keeping an adequate stock of office supplies at home (for the work that sometimes must be done there, certainly), to having access to wellness centers and other corporate facilities that are legitimized as objects of expenditures by corporate authorizers.  In the role of middle manager, though, one is simply an employee, not an entrepreneur, and consequently suffers the inglorious status of the bureaucrat, albeit not as lowly as the public-servant bureaucrat.  Compliant corporate boards of directors recognize that top managers such as themselves, perhaps having risen to the pinnacle through the ranks of the bureaucrats, upon arrival are endowed with the potency of entrepreneur, and are allowed to assert the associated prerogatives in full.  This level of authority includes full conversion of specified personal benefit into recognized cost and an element of the price of the product of the firm.  (In all these instances, the impact of the activities in question on product price is rarely discoverable, but it seems unlikely ever to be such as to reduce the product’s price, as discussed below).  As to the determination of income through productive behavior, we must note that although stock options are touted as a method to reward performance, the cause and effect connection is doubtful because many (and unknown) influences other than profit are at work in determining stock prices, and the reward often seems to flow regardless of performance.  Graef Crystal, whose highly paid talents as a compensation consultant have been turned, since his formal retirement, to criticism of “excessive” compensation, comments: 

If you read these reports from the directors, when things are going well, it’s always because of the brilliance of the CEO. . . . But on the downside, it’s those damn politicians in Washington or its (sic) Wall Street or it’s the drop in oil prices--somehow it’s always someone else’s fault [Pearlstein 1997]. 

In the face of evidence about the importance of stock-market rewards for the highest-paid members of the “labor force,” there should be no quarter given those who speak of the just deserts of docile producers covering only the productivity-based costs of their commodities.  At every level, costs are socially determined, both for the application of productive agents in a real function and for the comfort of managers who have the power to influence that social process, directly or indirectly. 

Finally, it is necessary to examine the Veblenian function of invidiousness as an influence on the social construction of costs and the structure of compensation, as exemplified in Stealth Consumption.  Invidiousness requires that consumption be viewed by someone of lesser importance, but meddling stockholders and regulators must be deflected if the Stealth Consumption is to continue.  At least four modes of deception regarding managerial compensation are present.  The overriding deception is that of conventional theory, which sanctifies market outcomes as efficient; John Bates Clark “proved” that resources are compensated in accordance with their (competitive) marginal revenue product.  This diverts attention of the general public from the potential of excessive compensation.  Three subsidiary deceptions hide germane phenomena from stockholders or tax collectors or both.  Deferred compensation is not recorded as a cost, deceiving stockholders with inflated profit data and withholding (legally, of course, because of the current structure of the law) tax revenue from government.  Stock options delude stockholders and both defer and reduce tax liabilities of the favored executives.  Finally, the consumption in question reduces profits, thus harming stockholders (though by lessening tax liabilities, not in the full amount of the perquisite) and provide an untaxed benefit to the executives.

As Veblen indicated [71], different circumstances (audiences) decree different expressions of invidious display.  In the corporate world, the culture of corporate leaders will assure that the benefits of pay and perquisites are topics of conversation on many occasions.  The pecking order will be known, and this will ordinarily be sufficient.  It is also likely that the expression of exploit and prowess, from which additional prestige derives, takes the form of inner-circle storytelling about gulling stockholders and frustrating tax collectors, and accomplishing the gulling and frustrating more completely and cleverly than others with whom they share the splendid segregation of the sports arena skybox.  In this setting they may also rejoice collectively that the legality of their good fortune will continue, as the political influence of their class succeeded once more in preventing imposition of accounting rules that would have required the cost of stock options to be disclosed as an expense [Koretz 1996]. 

Prices and Efficiency 

Neoclassical economic theory holds, usually with no mention of any empirical evidence, that the lure of large profits is essential to the preservation of entrepreneurial vitality, but that competitive markets exist in sufficient strength to reduce eventually those profits to the minimal level at which the efficiency requirements of society as a whole are attained.  Since theoretical comprehension is absent regarding the behavior firms called “oligopolistic,” especially the manner of their pricing and derivation of profit, little comment is directed to them.  (In a rare display of candor, Rosen admits that we know almost nothing on this matter; he does not continue to the devastating conclusion that American business is dominated by oligopoly, so he is able to continue the fiction that neoclassical theory has some cogency for policy formulation, in his case, taxation [Rosen 1995, 289]).  A reasonable Veblenian insight would be that while we must remain agnostic about how prices are determined in the majority of modern business enterprises, we can be relatively confident that pricing according to marginal cost is not among the plausible explanations.  Oligopolists will determine prices according to their own lights, assuredly giving considerable attention to customary costs of production, including their Stealth Consumption.  As to the stock market portion of their compensation, they will do what they must and can to manipulate ownership claims by takeovers, restructurings, acquisitions and sell-offs, in that process mysteriously causing stock prices to move in directions comfortable for them.  That their focus of attention is not on the production and sale of commodities useful to the life process of the community is of no concern to them, if not to the general community. 


Veblen began his inquiries with rejection of crucial neoclassical assumptions.  One does not understand irrational behavior by compressing it into a mold of mythical rationality, nor does the influence of tastes become comprehensible by choosing to ignore the manner of their formation.  One does not understand the distribution of income by assuming that it results from blind forces of nature.  One does not discern the degree of efficiency in the matter of making the community’s living by assuming the salutary operation of imaginary competitive markets.  In his method, these matters are appropriately objects of inquiry, not assumption.  Accordingly, inquiry reveals that much consumption is harmful to the community; it allows resources to be devoted to the production of commodities whose only merit is that someone can be persuaded to purchase them, often with merely invidious intent.  Inquiry reveals that the largest incomes are obtained through extortionary processes and raging speculation, and not by virtue of useful contribution to the material well-being of the community.  Inquiry reveals that the dominance of the community’s provisioning activities by gargantuan firms assures not efficiency, but its opposite.  Thus, the unexamined premises from which neoclassical economic theory (and associated laissez faire policy predilections) derive are seen to be contravened by evidence; they remain viable only as elements of ideological obfuscation that deprive the community of warranted knowledge of its situation.  The community that understands the predatory thrust of successful businesses is in a position to understand the aid to that predation of the community’s acceptance of neoclassical doctrines.  That community is also able to begin questioning the desirability of current arrangements, and exploring through democratic processes the reconstruction of those arrangements for the purposes beneficial to all.  Veblen’s work remains one of the few constructive guides to this kind of social inquiry, and hopefully, rationality.  Sadly, the pessimism for which Veblen is known seems also a major part of his legacy, one that the judicious observer of contemporary life escapes only with great difficulty. 


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