Thursday, 25 August 2011

Schumpeter, Innovation, Markets and Profit Motive

With the retirement of Steve Jobs as Apple CEO, we wished to reward our friends with a short study (only notes for the Schumpeter chapter of our 'Krisis' book) that would help us understand the role of the entrepreneur in the capitalist economy.
Of course, as a human being, we sincerely wish Jobs all the best. But we have to desist from and resist all "hagiographies" of capitalist entrepreneurial roles - with which wi will doubtless be bombarded over the next few days and weeks. Cheers to all.



Schumpeter’s “theory of economic development” must be placed in the philosophical-intellectual context of the “empiriocriticism” of Ernst Mach adopted and expounded by the ‘Wiener Kreis’ (the Vienna circle of philosophy) according to which science must be based on ‘experience’ and must dispel all ‘metaphysical’ notions.



Contrary to the neoclassical economic concept of “general equilibrium”, the experiential reality of capitalism is that the economy is rarely in a state of “equilibrium”. Schumpeter notes that what we witness in capitalist history are rather phenomena associated with dis-equilibria: the capitalist economy is in a constant state of “evolution” (Entwicklung) which entails both “trans-formation” and “growth”. In short, classical and neo-classical economic theory with their “Law of Value” (whether Labour-Value or Utility) could not explain theoretically the reality of capitalist “development”. Equilibrium and the Law of Value lead only to economic “stagnation”, they represent only a “circular flow” (Kreislauf) of goods exchanged in a state of “pure competition” (reinen Wettbewerbs). What needed to be explained was the empirical existence of “crises” and “growth” in a capitalist economy – but “growth” understood not as mere “quantitative expansion” or “greater output” (which is what Keynes understood), but rather “growth” as “development” (Entwicklung), as qualitative leap, as….progress, as….”Innovation”.



Schumpeter pays grateful tribute to Marx for being the only classical theoretician to identify the “evolutionary” force of capitalism. But he could not espouse Marx’s “metaphysical” notions of “value” or “socially necessary labour time”. The question then arose for Schumpeter: if “value” or “utility” are not capable of explaining the evident “empirical phenomena” of capitalist “crisis” and “development”, what other driving force or “agency” is there that is “endogenous”, “intrinsic” to capitalism that determines and explains its historical behaviour?



Here Schumpeter realizes immediately that the one factor that can lead capitalism out of its “circular flow”, the factor that leads to the formation of new “enterprises” and new “markets”, is the process that “destroys” old “enterprises”, that “destroys” old “markets” and….”creates” new goods and services, a process of “entrepreneurial Innovation” that gives new “enterprises” a “competitive edge” and leads to the formation of new “firms” that rapidly “conquer” the “market” and by so doing establish new “monopolies” able to absorb higher “profits” and, indeed, to create more “profits” from new “markets” as these new firms “expand” the “needs” or “demand” of “consumers”.



Schumpeter takes pains to explain (in “Business Cycles”) that it is not “consumer demand” that drives “Innovation” because, if anything, this demand tends to be “conservative” and “retrograde”. No, what must drive this demand is an “innovative”, “entrepreneurial spirit” (Unternehmergeist) that drives the process of “technological innovation” in a dramatic dis-equilibrating, “crisis-inducing” struggle of “creative destruction” (shopferische Zerstorung).



Three questions arise at this precise and dramatic juncture:- first, if indeed it is the “spirit of the entrepreneur” (Unternehmergeist) that drives the process of “innovation”, how then can this necessarily “subjective”….”Spirit” (Geist) be the pro-duct of the “objective” process of capitalist pro-duction? How can something as “subjective” as “the spirit of the entrepreneur” give rise to and occasion a complex technico-scientific process that takes place in large monopolistic firms that already constituted the reality of capitalism in Schumpeter’s own time?



And the second question is, even assuming, as Schumpeter allowed in his later work (“Business Cycles”) that the process of “innovation” and “creative destruction” is indeed subsumed within the large “monopolistic firm” rather than in the heroic figure of the individual “entrepreneur”, -  even allowing all  this, what is it then that “motivates” innovation and development? Why indeed do “entrepreneurial individuals or firms” engage in this “innovative” process of “creative destruction” except to maximize profits or market share or a mixture of both?



The third question, a corollary of the previous two, is the most important: - what does “profit” mean in this process of “Entwicklung”?



In a future contribution we will look at the extreme lengths Schumpeter went (in the ‘Theory’ and in ‘Business Cycles’) to dis-count the profit motive as the “driver” of “innovation” and capitalist “development”. – Which is why he did not tackle the meaning and source of “profit”, relying surely on Bohm-Bawerk’s theory of interest.



The above presentation shows how in effect Schumpeter could “empirically” contest the scientific relevance of “equilibrium”, which could only serve “didactic” or “heuristic” (Hayek in I&EO) purposes. Even in his review of Bohm-Bawerk, Schump had stressed the “elegance” of his theory and its empirical foundation. But Schump’s own philosophical attachment to “empiricism” - whilst it drove him to confront the “reality” of crisis and cycle and development as “intrinsic” moments or aspects of capitalism - was always going to relegate him to the sphere of mere observation and so prevent him from understanding the reality BEHIND the empirical data. Indeed, the “subjectivism” of the “Unternehmergeist”, Schump’s tribute to bourgeois “Individualitat”, could NOT be reconciled with the ‘Rationalisierung’ propounded by Weber (as Schump wished at footnote 2 of Ch.2 of ‘Theorie’) precisely because the “objective” “organizational” subsumption of the process of “Innovation” relegated the “entrepreneur” to a mere “manager” and deprived the “captain of industry” of its “Individualitat” within the process of “Innovation”.

(Again the whole “science of management” and “theory of the organization” that recently received great bourgeois approbation with the award of the Nobel Prize to Oliver Williamson, achieve nothing more than TO MASK capitalist command behind “the theory of the firm” and “transaction costs” and “contractual enforcement”- PURELY, again, TO DISGUISE the real nature of the “political” antagonism within the capitalist firm as a structure of COMMAND, of force and violence, in terms of “rational expectations” or “bounded rationality” – again within that ‘Rationalisierung’ indicated by Weber. The “limited rationality” of the firm – the “rationality” that de-limits its “boundaries” [cf. R.Coase, “The Limits of the Firm”] and de-termines its “internal organization” – is clearly an “instrumental rationality” that only serves to hide the overall function or agency of the “firm” as a structure of command. EVEN the reduction of “profit maximization” for the purpose of retaining “market share” can only be seen as an orientation toward the realization of profit and the extraction of “value”.)



What is lacking in Schumpeter is the ability and willingness to admit, to acknowledge and understand that the “entrepreneur” ALSO is “constrained” and “compelled” by the relations of production. What is lacking is the “motivation” as “will to power”, as the need to command and control the process of pro-duction THROUGH and BY MEANS OF “innovation”. The ‘COM-PULSION’ of the “entrepreneur” or “monopolistic firm” is the compulsion of “profit-making” – THAT is the “battlefield”, the “system of forces” in which individual capitalists must “com-pete” or fight. NOT for the sake of “competition” or “innovation” (as Schump always attempts to argue – see esp. Ch. On ‘Capital’ in the Theorie), but rather TO RE-PRODUCE the relations of production that have brought about the “domination” or “command” of the capitalist-entrepreneur. So here the figure of the entrepreneur starts to e-merge in its TRUE CHARACTER….as “Capitalist”!



But once the “motivation” of the entrepreneur is explained and com-prehended, what RESULTS from it, its “out-come” is NOT the “entrepreneurial” function but RATHER the “political” function of “command” of the antagonism of the relations of production – and here we return to Weber’s “leitender Geist” which is a much more consistent agency or figure AT THE END of the ‘Rationalisierung/Bureaucratisation’.

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