Commentary on Political Economy

Tuesday 18 October 2011

From Schumpeter to Steve Jobs - Studies on the Significance of the Entrepreneurial Spirit

Let us take up the thread from where we left it. We wish to inquire into and enquire over the nature and causes of entrepreneurship. We saw that Schumpeter, approaching the problem from Neoclassical perspectives (and we are examining the Neoclassical Revolution together with its "strategic" origins in a separate work that is part of Krisis), can view the source of economic "evolution-development-growth" (this is the meaning of the complex German word he uses - Entwicklung) in the "trans-formation mechanism" (Veranderungsmechanismus) that is "intrinsic" to the capitalist economy and that he claims to have discovered. This "mechanism" has at its base "the capitalist", who is simply the financier (banks) who "aggregates" the collective savings of the economy of the "circular flow" (Kreis-lauf). The "capitalist" here plays a purely "instrumental" function: he simply gathers what "savers" have made available to "borrowers" by way of "renouncing" the immediate consumption of their "endowments" and by so doing have earned the right to charge "interest" on the resources that they have lent. According to Bohm-Bawerk, the right to this "interest" arises from the fact that economic pro-duction of goods and services depends on the "roundaboutness" of technologies. Technologies improve the "productivity" of human labour. But they can be used only if we "defer" the consumption of goods and services that are "readily available". Thus, the more "roundabout" - the more "technological" - is the process of production, the more "productive" it becomes. And as a result, those who "renounce immediate consumption", the "savers", make possible the greater "productivity" of human tools and resources, so that they can charge "interest" over the use of this "capital" from those who wish to apply it for more immediate consumption.

Schumpeter accepts this basic framework derived from the novel "neoclassical revolution" of marginal utility analysis (Gossen, Menger, Jevons). But this framework assumes that the same "technologies" of production are utilised at all stages. What it leaves out is the possible "mechanism" by means of which "new" technologies are developed. The entrepreneur is the social agent that plays the all-important role of introducing "innovation" in the technologies of production - and the higher "product" that comes out as a result is the "profit" that the entrepreneur derives from the application of the savers' "capital". (In our review of the Krugman-Eggertsson paper, you will see that the capitalist is the "patient" investor and the entrepreneur is the "impatient" one who borrows capital for profitable use.) This schema essentially reverses the roles of "entrepreneur" and "capitalist" in Richard Cantillon's original treatment so popular with Schumpeter and the Austrian School. For Cantillon, the entrepreneurial profit is merely a "deduction" from "interest" that the "entrepreneur" charges to the capitalist for taking goods to the market. For Cantillon, the entrepreneur is a mere merchant, and his "profits" are a mere charge that contribute nothing to the calculation of "interest".

For Schumpeter, instead, it is the "capitalist" (the lender) who is the "facilitator", the mere go-between, the "rentier". The real protagonist instead, the social agent or figure who pushes the capitalist economy from one stage of development to another and creates "growth" in the economy is the "entrepreneur" - and it is the "entrepreneurial spirit" that constitutes the differentia specifica (as Schumpeter calls it) of capitalism from previous forms of production.

This institutional differentiation of the entrepreneur who trans-forms capitalist industry through "innovation" that is "creative" and that, therefore, is also "destructive" of previous methods of production and technologies as well as "products" - this distinction between the "creative-destructive", "dynamic" captain of industry - the entrepreneur, the leader - and the "rentier capitalist" who is the passive and "static" figure - this distinction between the "static" economy of the "circular flow" run by finance capital and the "dynamic-innovative" leadership provided by the entrepreneur closely resembles the distinction drawn by Max Weber between the process of "secularisation" and "rationalisation" of bourgeois capitalist society leading to its "massification" with the rise of mass "democratic socialist" parties and the consequent "bureaucratisation" of Western societies through the rise of Welfare States, on the one hand, and the growing concentration of political leadership (leitender Geist) in the hands of "charismatic" figures (from Napoleon to Bismarck) in whose hands political power is confided. There is an obvious Cartesian dualism here between Body and Mind, Nature and Spirit, Mechanism and Soul.

Schumpeter clearly adopts Weber's schema of capitalist "secularisation" and "bureaucratisation" reflected in the "static" anatomical structure of the "circular flow" of the economy, and the "leadership", the "guidance", the "transformative and innovative" Spirit provided by the political leader and by the entrepreneur. It is certainly very strange that Max Weber never inquired into the origins of "the entrepreneurial spirit" - which is instead the focus of Schumpeter's entire theory of capitalist development. The reason for that lies in the fact that Weber did devote his most famous monograph on The Protestant Ethic and the Spirit of Capitalism to the impact of religious faith on the rise of capitalism as a mode of production that "secularised" modern societies and their political systems. But Weber failed to identify a "specifically bourgeois", a specifically "capitalist" spirit different from the "work ethic" inspired by Christian asceticism. Quite by contrast, Schumpeter did exactly that. But even so, he failed to identify the central feature of "entrepreneurship". This major failure will be the subject of a fresh intervention in the near future.

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