Lee Schafer
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With nothing new to say about CEO pay, I decided to look for inspiration by driving south to Nerstrand, a village of about 350 an hour or so from St. Paul, and to the rural homestead of the social critic of the late 19th and early 20th century, Thorstein Veblen.

It’s beautiful farm country on the edge of Rice County, but there’s not much to see at the Veblen farm without driving — uninvited — into a private yard. Yet even by the time I arrived, I had decided Veblen provided a way to understand just how a CEO could make 300 times average worker pay and still feel disappointment for not getting a bigger bonus.

If Thorstein Veblen’s name doesn’t ring a bell, he’s the guy who came up with a notion that still gets talked about a lot, what he called conspicuous consumption. Basically, rich people wanting money and spending money just to show off.

As Veblen understood it, economic activity and the choices people made all happened in the context of the rules of society and a shared understanding of what really mattered in a social group, said Paul Vaaler, an associate professor at the University of Minnesota. People choose all the time to skip what might be considered efficient or optimal, all because of unwritten social rules.

That’s why, Vaaler added, Veblen called himself a “sociologist economist.”

Veblen seems to have died mostly forgotten in 1929, but his insights are still taught. Economics students now might hear a term called a Veblen good, meaning something where the amount people want to buy increases if the price does, like an annual back-to-school sale in reverse.

It is obviously idiotic to want something even more just because the price doubled, unless someone wanted it in the first place only to advertise his or her high status in the world.

How Veblen’s thinking was shaped by his Minnesota farm background isn’t easy to know. One thing he shares with Vaaler is that they are both alums of Carleton College in Northfield, just up the road from Nerstrand.

When Veblen was at Carleton he grew close to his professor, John Bates Clark — even though Veblen didn’t think much of Clark’s notions of people using math and thinking carefully about the single best choice available in a market, said Vaaler, who splits his time between the U’s law school and the Carlson School of Management.

Veblen later earned graduate degrees from fine universities, but with an apparent knack for causing trouble. Veblen’s career as a professor had a lot of ups and downs.

Among his stops as a graduate student was Yale University. It lies between New York and Newport, R.I., a popular summer place in the late 1800s for emerging tycoons. He would have been able to observe these titans of business at close range, and he didn’t seem to like what he saw.

One curious way this comes out is how he made a distinction between industry and business. In this view, the work of industry includes enhancing efficiency and building the highest quality and most useful things in the market.

The work of business, though, might mean lobbying regulators to block upstarts, judging how much to gouge farmers utterly reliant on your railroad to get their corn to market, hiring away a competitor’s top salespeople and so on.

“The business executives are saboteurs,” Vaaler said, summarizing this argument. “The sabotage is to somehow upset the market, the invisible hand, to your benefit.”

And the “reward for effective sabotage,” he added, “is conspicuous consumption.”

That Veblen term about showy spending is the best remembered part of his 1899 book “The Theory of the Leisure Class.”

By leisure class, he didn’t exactly mean just people who goofed off all the time. Stalwarts in the leisure class might still work — but not at anything Veblen considered productive, and probably just to move up a little in their social standing. And no one wanted to get caught doing manual work.

Working in order to buy food, housing and health care for the family had long been pointless for these folks.

The money was still vitally important, but for what it signaled about someone’s place in the world. That’s why spending all that money had to be conspicuous, so people already in the club could see how easily someone could afford an even grander summer estate.

“That’s an apt analogy,” Vaaler said, “those robber barons to the executives of the big multinational public companies.”

There’s clearly signaling going on in awarding the whopping pay packages of American CEOs. Relative pay seems far more important than what the money can buy, as CEOs look at what their peers are getting and what that says about their own status.

The median pay of the top 20 on the Star Tribune’s list is about $14 million, so maybe the board thinks it’s paying the boss that much just to show employees they are working for a winner. Big CEO pay packages could even be granted to let customers share a little in the prestige.

“I don’t think Veblen had in mind that they did this as a fiduciary duty to the organization,” Vaaler said. “It’s another purpose. And it’s not a rational signaling.”

Vaaler pointed me to a British writer who some years ago also had connected Veblen’s thinking about wealth and social status to ballooning CEO pay, and historians and economists certainly know this work, too.

By channeling Veblen, it’s even possible to explain a fascinating footnote in the compensation disclosures for Ameriprise Financial CEO James Cracchiolo.

Ranked at No. 9 on this year’s list of CEO pay, Cracchiolo’s compensation actually slipped in the most recent year, although he still made $16.5 million. And shareholders who read closely enough can see that included the company paying more than $56,000 for an apartment for his “business travel to Minneapolis.”

That amount of money can’t mean much to somebody who is paid so well. But imagine what the others in the CEO club can see.

“Hey, look at this. He even got the company to pay his rent. Top that.”

lee.schafer@startribune.com 612-673-4302