The Theory of Business Enterprise. Thorstein Veblen

the older days, when handicraft was the rule of the industrial system, the personal contact between the producer and his customer was somewhat close and lasting. Under these circumstances the factor of personal esteem and disesteem had a considerable play in controlling the purveyors of goods and services. This factor of personal contact counted in two divergent ways: (1) producers were careful of their reputation for workmanship, even apart from the gains which such a reputation might bring; and (2) a degree of irritation and ill-will would arise in many cases, leading to petty trade quarrels and discriminations on other grounds than the gains to be got, at the same time that the detail character of dealings between producer and consumer admitted a degree of petty knavery and huckstering that is no longer practicable in the current large-scale business dealings. Of these two divergent effects resulting from close personal relations between producer and consumer; the former seems on the whole to have been of preponderant consequence. Under the system of handicraft and neighborhood industry, the adage that "Honesty is the best policy" seems on the whole to have been accepted and to have been true. This adage has come down from the days before the machine's regime and before modern business enterprise. Under modern circumstances, where industry is carried on on a large scale, the discretionary head of an industrial enterprise is commonly removed from all personal contact with the body of customers for whom the industrial process under his control purveys goods or services. The mitigating effect which personal contact may have in dealings between man and man is therefore in great measure eliminated. The whole takes on something of an impersonal character. One can with an easier conscience and with less of a sense of meanness take advantage of the necessities of people whom one knows of only as an indiscriminate aggregate of consumers. Particularly is this true when, as frequently happens in the modern situation, this body of consumers belongs in the main to another, inferior class, so that personal contact and cognizance of them is not only not contemplated, but is in a sense impossible. Equity, in excess of the formal modicum specified by law, does not so readily assert its claims where the relations between the parties are remote and impersonal as where one is dealing with one's necessitous neighbors who live on the same social plane. Under these circumstances the adage cited above loses much of its axiomatic force. Business management has a chance to proceed on a temperate and sagacious calculation of profit and loss, untroubled by sentimental considerations of human kindness or irritation or of honesty.

      The broad principle which guides producers and merchants, large and small, in fixing the prices at which they offer their wares and services is what is known in the language of the railroads as "charging what the traffic will bear."²⁷ Where a given enterprise has a strict monopoly of the supply of a given article or of a given class of services this principle applies in the unqualified form in which it has been understood among those who discuss railway charges. But where the monopoly is less strict, where there are competitors, there the competition that has to be met is one of the factors to be taken account of in determining what the traffic will bear; competition may even become the most serious factor in the case if the enterprise in question has little or none of the character of a monopoly. But it is very doubtful if there are any successful business ventures within the range of the modern industries from which the monopoly element is wholly absent.²⁸ They are, at any rate, few and not of great magnitude. And the endeavor of all such enterprises that look to a permanent continuance of their business is to establish as much of a monopoly as may be. Such a monopoly position may be a legally established one, or one due to location or the control of natural resources, or it may be a monopoly of a less definite character resting on custom and prestige (good-will). This latter class of monopolies are not commonly classed as such; although in character and degree the advantage which they give is very much the same as that due to a differential advantage in location or in the command of resources. The end sought by the systematic advertising of the larger business concerns is such a monopoly of custom and prestige. This form of monopoly is sometimes of great value, and is frequently sold under the name of good-will, trademarks, brands, etc. Instances are known where such monopolies of custom, prestige, prejudice, have been sold at prices running up into the millions.²⁹

      The great end of consistent advertising is to establish such differential monopolies resting on popular conviction. And the advertiser is successful in this endeavor to establish a profitable popular conviction, somewhat in proportion as he correctly apprehends the manner in which a popular conviction on any given topic is built up.³⁰ The cost, as well as the pecuniary value and the magnitude, of this organized fabrication of popular convictions is indicated by such statements as that the proprietors of a certain well-known household remedy, reputed among medical authorities to be of entirely dubious value, have for a series of years found their profits in spending several million dollars annually in advertisements. This case is by no means unique.

      It has been said,³¹ no doubt in good faith and certainly with some reason, that advertising as currently carried on gives the body of consumers valuable information and guidance as to the ways and means whereby their wants can be satisfied and their purchasing power can be best utilized. To the extent to which this holds true, advertising is a service to the community. But there is a large reservation to be made on this head. Advertising is competitive; the greater part of it aims to divert purchases, etc., from one channel to another channel of the same general class.³² And to the extent to which the efforts of advertising in all its branches are spent on this competitive disturbance of trade, they are, on the whole, of slight if any immediate service to the community. Such advertising, however, is indispensable to most branches of modern industry; but the necessity of most of the advertising is not due to its serving the needs of the community nor to any aggregate advantage accruing to the concerts which advertise, but to the fact that a business concern which falls short in advertising fails to get its share of trade. Each concert must advertise, chiefly because the others do. The aggregate expenditure that could advantageously be put into advertising in the absence of competition would undoubtedly be but an inconsiderable fraction of what is actually incurred, and necessarily incurred under existing circumstances.³³

      Not all advertising is wholly competitive, or at least it is not always obviously so. In proportion as an enterprise has secured a monopoly position, its advertising loses the air of competitive selling and takes on the character of information designed to increase the use of its output independently. But such an increase implies a redistribution of consumption on the part of the customers.³⁴ So that the element of competitive selling is after all not absent in these cases, but takes the form of competition between different classes of wares instead of competitive selling of different brands of the same class of wares.

      Attention is here called to this matter of advertising and the necessity of it in modern competitive business for the light which it throws on "cost of production" in the modern system, where the process of production is under the control of business men and is carried on for business ends. Competitive advertising is an unavoidable item in the aggregate costs of industry. It does not add to the serviceability of the output, except it be incidentally and unintentionally. What it aims at is the sale of the output, and it is for this purpose that it is useful. It gives vendibility, which is useful to the seller, but has no utility to the last buyer. Its ubiquitous presence in the costs of any business enterprise that has to do with the production of goods for the market enforces the statement that the "cost of production" of commodities under the modern business system is cost incurred with a view to vendibility, not with a view to serviceability of the goods for human use.

      There is, of course, much else that goes into the cost of competitive selling, besides the expenses of advertising, although advertising may be the largest and most unequivocal item to be set down to that account. A great part of the work done by merchants and their staff of employees, both wholesale and retail, as well as by sales-agents not exclusively connected with any one mercantile house, belongs under the same head. Just how large a share of the costs of the distribution of goods fairly belongs under the rubric of competitive selling can of course not be made out. It is largest, on the whole, in the case of consumable goods marketed in finished form for the consumer, but there is more or less of it throughout. The goods turned out on a large scale by the modern industrial processes, on the whole, carry a larger portion of such competitive costs than the goods still produced by the old-fashioned detail methods of handicraft and household industry; although this distinction does not hold hard and fast. In some