Countering Veblen’s Understanding of Investment
It is impossible to imagine a modern economy without investments. They constitute the essence of any development in the business, governmental, or financial sphere. However, there is a debate on what an investment entails. American economist Thorstein Veblen believes that the point of any financial transaction is profit in the form of money. In my opinion, Veblen is wrong, because there are investment payoffs that are not measured by financial values.
Firstly, to understand the goal of investing, it is important to remember what forms an investment can take. The classic example is having a share of a public entity. An external person buys a stock and becomes a shareholder, hoping to get dividends of the organization’s profits. It is evident that in this case, all transactions are purely financial. Subsequently, once the organization stops being profitable, or more precisely, once the shareholder stops benefitting, they withdraw their involvement.
However, not all shareholders are external. Many of the employees are represented on the board, meaning they have invested in the company. Mallin (2018) notes that there is a distinction between shareholders and stakeholders. Whereas the interests of shareholders are protected by law, the same cannot be argued about stakeholders. This difference is important because stakeholders are the people who do not count their participation in terms of how much money they are going to make. For instance, an employee who is also an investor is interested in more comfortable work conditions. Therefore, their goal is not financial at all, yet they still invest in the company.
This was an example of a non-financial goal, but an investment itself is also not necessarily financial. Lan and Heracleous (2010) provide numerous examples of investments. They include “locating factories close to the firm, placing their employees within the firm to participate in product design and innovation, and developing their capabilities in line with the customer’s supply requirements” (p. 300). All of these cases comprise a direct investment, which is using the immediate resources to help an organization rather than their money equivalent.
It might be argued that the ultimate goal is related to money nonetheless. Even if the payoff is not monetary, it may still be measured in it. For instance, a company that uses the equipment of another firm saves money by not buying it. That said, some benefits are immaterial. Customer loyalty is a controversial phenomenon, which is difficult to measure. Companies engage in charity and other activities that do not yield any financial gain. It is also a form of investment, but instead of getting dividends, the stakeholder builds trust and raises awareness about itself.
Generally speaking, investment is an extremely broad term incorporating practically anything. Similarly, Putterman and Kroszner (1996) discuss the multidimensional nature of a firm. According to their reasoning, a corporation is not simply an accumulation of financial resources, which are expected to give profit in the future. Firms are multilayered entities with different goals. Investments work the same way, with many iterations of the same transaction.
Altogether, Veblen’s view of investments is one-dimensional because it presupposes that money is the ultimate goal of all financial relationships. This viewpoint excludes instances of non-financial resources and payoffs, which hold equal and sometimes greater importance. Ultimately, it is important to understand that money itself is a means to an end, and this means can take any form. Therefore, the most important investments are not pecuniary and should not be considered such.
Lan, L. L., & Heracleous, L. (2010). Rethinking agency theory: The view from law. Academy of Management Review, 35(2), 294-314.
Mallin, C. (2018). Corporate governance. Oxford University Press.
Putterman, L., & Kroszner, R.S. (1996). The economic nature of the firm: A reader. Cambridge University Press.