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Robin I think that I agree with your point about Veblen and the neoclassical economists of
the day, in this early part of the history of neoclassical economics (although I am not
sure about your phrase "capitalizing on inefficiency.") Around the turn of the century, an
understanding of capitalization was one of the telling differences between those American
economists who understood the new economics and those who did not. And Veblen certainly
understood it, along with Frank Fetter, Herbert Davenport, and Irving Fisher.
 
An understanding of capitalization means the ability to conceive of a market economy in
which assets are valued on the basis of speculators' predictions of the future income to
be derived from the assets. For example, consider the value of a firm that has a stable
price-fixing agreement with other specialist firms. The price of its stock would be
higher, other things equal, because the firm is expected to earn higher future income than
otherwise.
 
To calculate the value of an asset, one would want to include her predictions about the
future law. In the example, if she expected the government to adopt efficient antitrust
institutions, for example, she would value conspiratory monopoly assets lower, other
things equal.
 
Of course, inefficiency arises from all sorts of other activities besides conspiratory
monopolies. Astute business leaders would value all assets according to the income they
expected the assets to yield. If that income was expected to be earned in an environment
that neoclassicals would call inefficient, then one could roughly refer to that as the
"capitalization of inefficiency."
 
For another example, consider a monopoly garbage disposal firm. It could be valued highly,
other things equal, even though it causes pollution harm that is greater than the price of
its product. This would occur if speculators predict that the law regarding liability will
not change. The inefficiency would be capitalized, roughly speaking, in the price of the
monopoly right. If garbage disposal is competitive, the capitalization of inefficiency
would be evident in the rental price of the resources specialized in this form of
disposal.
 
Pat Gunning 
 
 
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