Schumpeter and "The 'Close'" of Bohm-Bawerk's System

[This is an excerpt from a much larger work on Max Weber's leitender Geist that I am preparing as one of the chapters of Krisis that follow the Nietzschebuch.]

The “system of needs” can be satisfied best, most efficiently, rationally and optimally, through the combination of industrial machinery, or means of production, and of “free labor”. The Law of Value as reformulated in the new marginal utility theory of the Neoclassical Revolution represents the “scientific” specification by political economy of the market price mechanism as the optimal system for allocating existing scarce resources according to individual choices. The “machinery of production”, the technologies adopted in the process of production, is determined by the system of needs that “demands” its “rational and systematic” utilization through bureaucratic rule so that its technically-determined “output” or “supply” can be maximized to satisfy the “individual choices” as fixed by the market price mechanism.

The “nature of the matter” is that from the standpoint of the individual’s self-interest the new Economics determines accurately the individual contribution to the production of goods for final consumption (in Schumpeter’s words quoted below, “the community has occasion to become conscious of the economic value of its members to itself”), which is what “interests” the “individual” ultimately, and what determines the “value” and “distribution” or “allocation” of privately-owned social resources between individuals in society:

Another application of this theory [marginal utility] is the next step to a height

from which a wide view into the innermost working of an economy
is gained. Means of production are also complementary goods. But
[171] their values are not directly determined: we value them only because
they somehow or other lead to consumers' goods, and their value
can thus, from the point of view of the subjective theory of value,
be derived only from the value of these consumers' goods. But many
factors of production are always involved in the production of a
single consumers' good, and their productive contributions are seem-
ingly indistinguishably intermixed. In fact, before Menger, one
economist after another thought it impossible to speak of distin-
guishable shares of the means of production in the value of the final
product, with the result that further progress seemed impossible
along this route, and the idea of subjective value appeared to be
unusable. The theory of the value of complementary commodities
solves this seemingly hopeless problem. It enables us to speak of a
determinate 'productive contribution' (Wieser) of such means of
production and to find for each of them a uniquely determined
marginal utility, derived from its possibilities of productive applica-
tion – that marginal utility which has become… the basic concept of the modern theory of distribution and the fundamental principle of our explanation of the nature
and magnitude of the incomes of economic groups. (JA Schumpeter, "Bohm-Bawerk" in Ten Great Economists)

The incessant message of all bourgeois intellectual forces at this critical time  in 1917 of global conflict and in the face of the Bolshevik challenge and the spread of revolutionary worker movements in Europe is the futility or the impossibility of Socialism. “Rational socialism” can amount to or end up in the identical system of production as capitalism, with only a lot more bureaucracy and a lot less free choice. At the very best, “rational socialism” could “minimize” the “frictions” of the market mechanism, its “transaction costs” and the negative effects of “disturbances” or “exogenous shocks”. At the worst, it would distort the “free individual choices” made by “free labor” by removing the ability of “labor” to determine “freely” the individual choices of workers, in such a way that “bureaucracy would rule alone” and would no longer be “kept in check” by private capitalism with its free market and free labour, through the conflictual and “ir-reconcilable” self-interests! Alternatively, were there to be no state bureaucracy, then free market capitalism would not be able to maintain the “laws of free market competition” that determine “scientifically” its optimal level of production for the satisfaction of individual needs and wants understood as “self-interest”.

(185) We now approach the last step of the stairway that takes us to

the top of Bohm-Bawerk's edifice . He was the first to realize fully
the significance of the length of the period of production in its two-fold aspect -
the aspect of productivity and that of the lapse of time.
He gave both aspects their exact content and their places in the
foundation of the system of marginal utility analysis. He further
made the length of the period of production into a determinant of
economic equilibrium, thus giving a sharply distinct meaning to the
concepts of 'productivity,' 'economic period, ''flow of goods'; and he
brought into the realm of analysis a rich multitude of relationships
in economic life which are as yet far from exhausted.  (JAS in “Ten Great Economists”)

Our proof shows further that, because only an agio on present

goods puts the relative demands of present and future into proper
(183) balance with one another, the values of present and future goods can-
not stand at par even in a socialist community, that the value phenom-
enon which is the basis of the rate of interest cannot be absent even
there, and hence demands the attention of a central planning board.
From this it follows that even in a socialist society workers cannot
simply receive their product, since workers producing present goods
produce less than those who are employed on the production of
future goods. Thus, whatever the community decides to do with
the quantity of goods corresponding to that value agio, it would
never accrue to the workers as a wage (but only as a profit) even
though it were divided equally among them. This could very well
have practical consequences whenever, for example, the community
had occasion to become conscious of the economic value of its mem-
bers to itself; in such a case it could assess the value of a worker
only at the discounted value of his productivity, and since all work-
ers equally able to work must obviously be evaluated equally, a
'surplus value' must even here emerge which would appear as an
income sui generis. (183)

Two corrections of the idea of exploita-

tion are now also in order: first, one can speak of 'exploitation' as a
cause of profit only in the sense in which such exploitation would
occur also in a socialist state; second, there is exploitation not only
of labor, but also of land. For moral and political judgment this is
of course irrelevant, since the socialist state would use its 'exploita-
tive gains' in a different way; but it is all the more important for
our insight into the nature of the matter.(183)

It follows that Socialism may well be able to remove some of the “anarchical” features of capitalism which preserve in large part the “free individual choices” of “free labor”. But it would do so at the cost of removing in large part that very “free consumer choice” and “free labor” that capitalism makes possible! In no way whatsoever could Socialism prevent or abolish the “separation”, the Trennung, of the worker from the means of production – the source of the Marxian “alienation”, of the ante litteram Lukacsian and Heideggerian “loss of totality”, “reification” and “facticity” – because these are “technically necessary” aspects of the efficient utilization of resources for the satisfaction of the system of individual “conflicting and irreconcilable” individual wants and needs!

There is not and there cannot be a “capitalist” economy and a “socialist” economy: these are only formal differences in “ownership” of the means of production that must give rise in any case to the “separation” of all workers, individually and collectively, from control over their work in favour of a technocratic “bureaucracy” for the sake of the paramount technical and rational “efficiency” of production and the paramount satisfaction of “the system of needs”, of “the iron cage”! There can only be one Economics, one “economic science”: the time for “Political Economy” is past because politics cannot determine the rationally calculable technical efficiency of industrial production and its utilization of resources.

Theoretically more important, however, is the

result - to use a terminology that has become accepted in treatments
of this topic – that the rate of interest is a purely economic and not
a historical or legal concept.(183)

This is the task and the supreme achievement of capitalism as a mode of production based on “free labor” that it “organizes” for the maximization of individual utilities. Its ultimate aim is the efficient production of consumption goods, not just for the present but also for the future, in accordance with the conflicting subjective valuations (needs and wants) of self-interested individuals!

In applying this 'theory of imputation' (Wieser), which owes

to Bohm-Bawerk one of its most perfect formulations, we arrive at
the law of costs as a special case of the law of marginal utility. As a
consequence of the theory of imputation, the phenomenon of cost
becomes a reflex of subjective value, and the law of the equality of
the cost and the value of a product is derived from the theory of
value – never in our science has there been a more beautifully closed
chain of logic.
But all this so far still refers only to the world of values. That
All of its forms express themselves also in the mechanism of the ex-
change economy can be shown only by a corresponding theory of
price. Bohm-Bawerk therefore turns to price theory, developing the
implications of the law of value for the behavior of buyers and
sellers, and his investigation culminates in that celebrated proposi-
[172] tion (for the case of bilateral competition) which has since become
'historic':' The level of price is determined and limited by the level
of the subjective valuations of the two marginal pairs' - i.e .on the
one hand by the valuations of the 'last' buyer admitted to purchase
and of the seller who is the 'most capable of exchanging' among the
ones already excluded from the exchange, and on the other hand by
the valuations of the seller 'least capable of exchanging' among those
still admitted to the exchange and of the 'first' excluded buyer.
All this is developed first for the situation with given quantities of
exchangeable commodities with the conclusion that, since the
forces operating on the supply side of the market are the same as
those operating on the demand side, the old 'law of demand and
supply' turns out to be simply a corollary of the law of marginal
utility. This is then extended to the case of the formation of the
prices of commodities whose available quantities can be varied by
production.

In reviewing the theoretical masterpiece of his Viennese mentor, Schumpeter remarks first on “the beautifully closed chain of logic” of Bohm-Bawerk’s elaboration and extension of marginalist theory – forgetting in the process that it was precisely the attempt by Karl Marx of closing his “system” by “trans-forming values into prices” that had led him to accuse the German theoretician of indulging in “metaphysics” in the appropriately named article “The ‘Close’ [Abschluss] of Karl Marx’s System”! Schumpeter is unable to see that the “metaphysics” of the socialist and Marxian “labor theory of value” have now become the “metaphysics of neoclassical marginal utility”! It is precisely the attempt to identify and define a “Law of Value” that leads to the “impossibility”, outside of “meta-physics”, of “quantifying mathematically” what are inextricably social relations of production!

Already in 1911, Schumpeter had celebrated at the very beginning of chapter two of the Theorie the advent of the Weberian Rationalisierung as the “overcoming” (Uberwindung) of “metaphysics” and the triumph of “empirical science” – totally mis-comprehending yet again the Nietzschean denotations of the word as applied by Weber. What Schumpeter overlooks in his Machian exultance is the evident and dramatic “conflict” that Bohm-Bawerk’s theory contains and exudes! For behind Bohm-Bawerk’s “scientistic” and lucid exposition lies all the explosive conflict of capitalist society even at the level of market pricing according to consumer choice – according to “marginal utility”! However much the “different subjective valuations” of goods on the market may be based on “fair and equal exchange” on the market, the terrifying fact remains that the self-interests of the “individual market agents” is determined through the sheer violence of “imposition” of their subjective, egoistic choices and preferences!

The level of price is determined and limited by the level

of the subjective valuations of the two marginal pairs' - i.e .on the
one hand by the valuations of the 'last' buyer admitted to purchase [!]
and of the seller who is the 'most capable of exchanging' among the
ones already excluded from the exchange, and on the other hand by
the valuations of the seller 'least capable of exchanging' [!] among those
still admitted to the exchange and of the 'first' excluded buyer.

The full conflict and sheer violence of the market mechanism is made evident here in all its stark nakedness! It is “futile” to seek recourse to “the beautifully closed logic” of the Neoclassical theory reformulated by Bohm-Bawerk: the inescapable fact remains that even behind the most “beautiful and elegant equations” there is all the ineluctable conflict of what Weber will soon call with astonishing (Marxian!) insight “the capitalist rational organisation of free labor”!

[F]or value to emerge, relative scarcity has to be added to utility. With the

aid of a distinction between want categories (or want directions)
and want intensities, and under careful consideration of the factor
of substitutability, Bohm-Bawerk arrives(in Menger's sense, and in
a way similar to Wieser's) at the law of decreasing marginal utility
with increasing 'coverage' of wants within each category - i.e. with
increasing quantities of the commodity in the possession [!] of an indi-
vidual. (169)

As Schumpeter quite uncritically reveals and concedes with this summation, this “scientific-rational economic mechanism” is still self-consciously dependent on the conflicting self-interests of individuals and on their “historical or legal” acquisition of “possessions” which determine both “the relative scarcity” of commodities as well as their “increasing or decreasing quantities”! It follows inexorably, by definition, that this “conflict” can never be in “equilibrium” and that contrary to what Schumpeter claims above it can never be “a purely economic and not a historical or legal concept”! Quite to the contrary, this “economic concept and process” instead must be “guided” and “governed”! Enter Weber’s leitender Geist.