Thorstein Veblen

Thorstein Veblen (1857-1929) was a maverick American economist and sociologist, famous for his biting critique of consumer culture and the habits of the wealthy. While not an investor himself, his work provides a timeless psychological lens through which to analyze businesses and, perhaps more importantly, our own financial behaviors. Veblen is best known for coining the terms conspicuous consumption and “pecuniary emulation,” describing the human tendency to buy goods and services to publicly display social status rather than for their intrinsic utility. His most influential book, The Theory of the Leisure Class, argues that modern society is driven by this status-seeking behavior, where the wealthy flaunt their success through extravagant and often wasteful spending. For investors, Veblen's insights are a powerful reminder that much of the economy is driven by psychology, ego, and social signaling—factors that can create both durable brand equity and dangerous speculative bubbles.

Imagine a brilliant outsider peering into the Gilded Age of America, a time of robber barons and extravagant wealth, and taking detailed notes with a skeptical eye. That was Thorstein Veblen. Born to Norwegian immigrant farmers in rural Wisconsin, he always remained an outsider to the elite academic and financial circles he studied. This unique perspective allowed him to see the economic world not as a neat system of rational actors, but as a messy, status-driven society. Veblen's work blended economics, sociology, and anthropology. He wasn't interested in elegant mathematical models; he was interested in the why behind economic decisions. He proposed a fundamental conflict in society between the “industrial class” (engineers, scientists, and workers who make useful things) and the “leisure class” (the wealthy elite who inherit or acquire wealth through ownership and financial maneuvering, rather than productive effort). His critique focused on the latter, whose economic role, he argued, was more about predation and waste than progress.

Veblen’s century-old ideas remain incredibly relevant for understanding modern markets, especially for those practicing value investing.

This is Veblen's most famous contribution. Conspicuous consumption is the act of spending money on luxury goods and services to signal one's wealth and social standing. It’s not about needing a watch to tell time; it's about wearing a Rolex to show you can afford one. This leads to the fascinating concept of a Veblen good. In standard economics, the law of demand states that as the price of a good falls, demand for it rises. A Veblen good completely defies this logic:

• A Veblen good is a luxury item for which demand increases as the price increases.
• The high price is not a deterrent; it is the main attraction. It creates an aura of exclusivity and status that a lower price would destroy.

Think of a Ferrari or a Hermès Birkin bag. If their prices were slashed, they would lose their prestige and their most coveted customers would lose interest. The high price tag is a feature, not a bug.

Veblen saw a stark divide:

• The Industrial Class: This group creates tangible value. They are the engineers who design better engines, the factory workers who build cars, and the farmers who grow food. They are focused on efficiency and productivity.
• The Leisure Class: This group profits from ownership, speculation, and what Veblen called “sabotage”—hindering industrial efficiency to maximize financial gain (e.g., creating monopolies). Their focus is on making money from money, often without creating any real value for society.

For a value investor, this distinction is crucial. It's the difference between investing in a company that builds essential infrastructure and one that engages in complex, opaque financial engineering with no underlying productive assets.

So, how can a long-dead sociologist make you a better investor? By helping you see the field more clearly and avoid common psychological traps.

Companies that sell Veblen goods often have incredibly durable economic moats. Their brand power is so strong that they have immense pricing power.

• Example: Luxury goods conglomerate LVMH can consistently raise prices on its Louis Vuitton handbags because its customers are buying status, not just a leather bag. This is a business Veblen would have instantly recognized, and it’s one that has been phenomenally successful for shareholders. Understanding this dynamic helps you identify businesses with loyal customers who are insensitive to price hikes.

Veblen’s work is a powerful warning against the “Keeping up with the Joneses” mentality.

• An investor's primary goal is to grow capital, not to display it. Every dollar spent on a fancy car or an expensive watch to impress others is a dollar that isn't compounding in your portfolio.
• Legendary investors like Warren Buffett are famous for their frugal lifestyles. They embody the opposite of conspicuous consumption, focusing on accumulating productive assets rather than status symbols.

Veblen encourages us to ask a simple question about a potential investment: Does this company actually make something or do something useful?

• Seek out businesses that belong to the “industrial class”—companies that innovate, improve efficiency, and provide real goods and services.
• Be skeptical of businesses that seem purely financial, overly complex, or whose primary purpose is to exploit loopholes rather than create value. As a value investor, your aim is to own a piece of a productive enterprise, not a speculative chip in a financial casino.