Joseph Schumpeter's Entwicklung: Capitalist Innovation as Development-through-Crisis (A Humble Homage to Professor Michael Pettis)

  I have had occasion many times on this blog to extol the quality of Professor Michael Pettis's work. This is Section 3 of Part One of my 'Weberbuch', a book dedicated to Max Weber, and I am publishing it here as a tribute to Prof. Pettis for his most kind appreciation of my humble efforts. (This is what Pettis had to say:

"Belbruno is too polite to post the address [of his blog], so I will: http://www.eforum21.com/

And while it is not beach-side reading, he exaggerates the difficulty. I strongly recommend it to readers who want to understand economics in the context of the history of economic thought.... His is one of the best blogs out there.")                         

             
Joseph Schumpeter's Entwicklung: Capitalist Innovation as Development-through-Crisis
   

Schumpeter is a contemporary of Weber, but he is also the heir of Mach. Through Weber he is linked to Nietzsche, but he is already too much under the spell of Machism fully to comprehend the significance of Nietzsche's radical critique of bourgeois society through the tracing of the “completion” (Heidegger’s Vollendung) of Western metaphysics into “science”. Schumpeter looks at capitalism through the "scientific" prism of Machian empiricism. The task of the "scientist" is not to look "beyond" or "behind" mere phenomena, it is not to discover “substances” or “values” behind “events” (Geschehen), but rather to find the simplest mathematical "con-nection" between them; it is to describe reality, not to explain it: indeed, description that is mathematically regular is or amounts to explanation. The task of science is to describe phenomena in the simplest and most "predictable" manner: simplex sigillum veri (simplicity is the seal of truth). (A discussion of Nietzsche’s vehement critique of the ontological assumptions behind Machian and Newtonian science is in our Nietzschebuch.) Just as Menger’s theory of marginal utility does not inquire about the “value” of “utility”, its “substance”, its quidditas, relegating these matters to the realm of “metaphysics”, but relies instead on the observable behavior of individuals to formalize mathematically an Aristotelian logic of human economic action, so Mach’s philosophy of science does not question the empirical validity of Newtonian physics, its ability to predict real events by con-necting them by means of mathematical equations: what it questions is instead the cosmology of the Newtonian system, its reliance on “absolute frames of reference” to explain the cosmos, the uni-verse or “reality” (the res, the “thing-iness” of the Kantian “thing-in-itself”, the noumenon that pro-duces the empirical phenomena) that are dis-covered as “the laws of nature”. That is why Schumpeter never goes beyond the simple "observation" and "analysis" (literally, retrospective dissection) of the empirical behaviour of capitalist institutions and adopts uncritically the Machian presuppositions of his Viennese academic training:

 

According to this conception the purely economic plays only a passive role

in development. Pure economic laws describe a particular behavior of

economic agents, whose goal is to reach a static equilibrium and to re-establish

such a state after each disturbance. Pure economic laws are similar to the

laws of mechanics which tell us how bodies with mass behave under the

influence of any external "forces", but which do not describe the nature of

those "forces".

 

It shows [471] how the economy responds to changes in those conditions

coming from the outside. Therefore, in such a conception, pure economics almost

by definition excludes the phenomenon of a "development of the economy from

within".

 

It is the conception that there is an independent element in technical and

organizational progress, which carries its law of development in itself and

mainly rests on the progress of our knowledge. (Schumpeter, ch.7, Theorie)

 

 

 

In the Theorie der wirtschaftlichen Entwicklung, Schumpeter seeks to enucleate scientifically “the mechanism of transformation” that can account for “the phenomenon of a ‘development of the economy from within’”, that can elevate the capitalist economy from one “level” or “Gravitationszentrum” (centre of gravity) to another – from one “equi-librium” to another. Granted that there is a “system of forces” that at any given time allow “the economic system” to operate and function, it may then be possible to define for that given moment in time an “equilibrium state” that does not “explain why” the economic system is “in equilibrium” but that may yet allow us to identify those “forces” that, when altered, “caeteris paribus”, determine a corresponding alteration in other “forces” affecting the “system”. An “equi-librium” is therefore “a balance of forces” whose nature we do not know but around which the economic system tends to gravitate. Equi-librium is literally a “Gleich-gewicht”, an “equal weight”, a balance of forces around which the economy gravitates: hence, for Schumpeter, economic equilibrium is not an eternally fixed mathematical identity, as it is for Walras, but rather a Gravitations-zentrum, “a centre of gravity” around which an economic system revolves but one from which this system may well move or diverge, in a direction that completely upsets and trans-forms the “balance of forces” and even the nature of the “forces” that determined the previous “state of equilibrium”, the previous “centre of gravity”!

 

Unlike the waves of the ocean, the waves of the economy do not return

to the same level. They always tend to swing like a pendulum around a certain

level, but the level itself is not always the same. It is not just the observable facts

that change. The explanatory pattern, i.e. the ideal type, changes as well. Let us

grant that the first problem of economics was: how, based on its entire circumstances

of life, does a population reach a particular level of the economy? Then [466] the

second problem is the following: how does an economy make the transition from one

level-which itself was viewed as the final point and point of equilibrium-to another

level? This question takes us to the very essence of economic development

[wirtschaftliche Entwicklung]. (Schumpeter, TwE, ch.7, pp465-6)

 

But by insisting on the existence of a scientifically ascertainable “centre of gravity” for the capitalist economy and of its equally scientific “mechanism of transformation”, Schumpeter ends up oscillating between two untenable antinomic positions: - on one hand, the scientific hypothesis of the tendency of the economic system toward “equilibrium” (hence the notion of “centre of gravity”) or “circular flow” (Kreislauf); and on the other hand the historical experience of the proneness of the economy to grow and develop, to change from one “ideal type” to another – an “experience” that is both “empirical” as well as “necessary” for the simple reason that an “economy” is and must be subject to historical transformation, but a transformation that is nevertheless impossible to formalize as a “mechanism”!

 

“Equilibrium” is either “static” or it is not an “equi-librium” at all! For the “system” to change, it must be subject to “forces” that are not the “mathematical” or “mechanical” ones of “equilibrium”. In short, “dynamic equilibrium” is a contradiction in terms! Schumpeter himself rightfully contends as much:

 

It follows from the entire outline of our line of reasoning that there is no such

thing as a dynamic equilibrium. Development, in its deepest character,

constitutes a disturbance of the existing static equilibrium and shows no

tendency at all to strive again for that or any other state of equilibrium.

Development has a tendency to move out of equilibrium. This is quite

different from what we could call organic development; it leads to quite

different pathways that lead somewhere else. If the economy does reach a new

state of equilibrium then this is achieved not by the motive forces of development,

but rather by a reaction against it. Other forces bring development to an end, and

by so doing create the first precondition for regaining a new equilibrium.

Actually, what happens first is that when a new development begins, there is again a new

disturbance in the equilibrium of the economy. Thus, development and

equilibrium in the sense that we have given these terms are therefore opposites,

the one excludes the other. Neither is the static economy being characterized by a

static equilibrium, nor is the dynamic economy characterized by a dynamic

equilibrium; an equilibrium can only exist at all in the one sense mentioned before.

The equilibrium of the economy is essentially a static one.`19

 

And not only is “the equilibrium of the economy… essentially a static one”, but it is also above all a stagnant one! Yet we know that one of the vital features of capitalist industry is – precisely – its ability “to grow”, “to develop”. It follows therefore that there must be some internal feature of capitalism that forces it to trans-cresce and that therefore constitutes its differentia specifica. Orthodox economic theory, both Classical and Neoclassical, treats the “forces of development” as “essentially” exogenous to the capitalist “system” of production:

 

It is the conception that there is an independent element in technical

and organizational progress, which carries its law of development in

itself and mainly rests on the progress of our knowledge, (Schumpeter, ibid.)

 

Here Schumpeter seizes on the realization that in point of fact there can be no such “independent element in technical and organizational progress” and that both of these must be treated as part and parcel of the social relations of production, and not be attributed to “an independent element”, a purely mechanical and adventitious factor – “independent” of what Weber styles “capitalist economic action”. It comes as no surprise, then, that because Schumpeter takes “the economy” and “economics” as “objects or phenomena of scientific analysis” that are separate and distinct from the rest of social reality, including those “technical and organizational” forces (!), he must then necessarily isolate them from the “trans-formation mechanism” of the capitalist economy! When Schumpeter looks for a "trans-formation mechanism" (Veranderungsmechanismus) to explain the "meta-morphosis" of capitalist industry - its "development, evolution and growth" (Entwicklung) – he can find it only in a subjective, voluntary factor, something that closely resembles Weber’s own thesis of the “spirit of capitalism” (der Geist des Kapitalismus) expounded in the Ethik published in 1904, that is, only seven years before the publication of Schumpeter’s path-breaking Theorie!

 

Following Weber’s lead, Schumpeter finds “the carrier” (Trager) of the “transformation mechanism”, the “driver” of capitalist Entwicklung, (the expressions have a curious Hegelian-Marxist ring) in the "entrepreneurial spirit" (Unternehmer-geist) without noticing the contra-diction between "mechanism" and "spirit"! His search immediately contra-dicts itself – because the “factors of development”, the forces that “trans-form” the economy, that buffet it from crisis to crisis and therefore “elevate” or “lower” it from “level” to “level” can quite evidently not themselves constitute a “trans-formation mechanism”! A “mechanism” will always be “static” because whatever “factors” cause it to develop must be “endogenous” and therefore, by definition, “re-conducible” to the existing definition of the system! An endogenous or internal “mechanism of trans-formation” would always be re-definable in terms of those “equi-librium conditions” that Schumpeter’s “theory” was supposed to confute and discard! There can be no freedom in a system of economic analysis or “science”. There can be no “trans-formation” in a “mechanism”- no internally-generated scientifically measurable “development” or “growth” from one equilibrium to another. And that is the exact reason why Schumpeter is unable to com-prehend in his “theory” the “real subsumption” of the “technical and organizational processes”, which he erroneously relegates to the Statik or exogenous components of “the mechanism”, within the social relations of capitalism itself, within the “Dynamik” of the “system of needs and wants” (Weber’s “iron cage”) that “drives” or pro-pels the “modern industrial work” or “the lifeless machine” of capitalist industry (the Simmelian “Form”) which in turn is guided by the capitalistic “rational conduct of business” – the living machine (Simmel’s “Soul”).

 

One can almost feel the agony of Schumpeter’s theoretical contortions as he grapples and fumbles with these complex conceptual matters:

 

[490] Economic development is not an organic entity that forms a whole;

it rather consists of relatively separate partial developments that follow

one upon the other. Here we build on what has been said in the chapter on

crises. Accordingly, development of the economy occurs in a wavelike

fashion. Each of these waves has a life of its own.

 

With this we really get closer to reality. In particular, we win a clearer

insight into that peculiar jumble of conditioning and freedom, which

economic life shows us. The static circular flow and the static

phenomena of adaptation are dominated by a logic of things, while it is

completely irrelevant for the general problem of freedom of will,

nevertheless in practice - with fixed given social relationships - it leaves

as good as no maneuvering room for individual freedom of will. This can

be demonstrated and yet it was always a point of criticism, since the creative

work of the individual was so obviously visible. We know now that the

latter observation is correct. Yet, this observation does not contradict the

theorems of statics. We can precisely describe the place and function of this

work. Of course, in development the logic of things is not missing; and just as

one cannot demonstrate with the static conception the case for philosophical

determinism, one cannot maintain the case against it with the dynamic

conception. But despite this we have shown that an element is present in the

economy, which cannot be explained by objective conditions and we have put

it in a precise relationship to those objective conditions.23 (Theorie, ch.7)

 

 

By identifying a subjective factor as the historical “carrier” (Trager) of the meta-morphosis of the capitalist economic system, of the “trans-crescence” of capitalist industry – the “entrepreneurial spirit” and the “process of innovation” (Innovationsprozess) that it unleashes “subjectively” (!) on the scientifically and mathematically definable static equilibrium of the capitalist economy to move it from one “centre of gravity” to another, to transport it “like a wave” from one ocean level to another -, Schumpeter is also validating and sharpening Weber’s original thesis in the Ethik of the “religious ascetic origins of capitalism” in the “entrepreneurial spirit”.

 

But the reason for Schumpeter’s agonising ambi-valence and ambiguity over the dualism of “freedom and necessity” and his acquiescence in his own theoretical answer to it can be found once again in Ernst Mach's philosophy of science. The "empirical observation" of entrepreneurs in capitalist industry and their empirical connection to the provision of "finance" by "capitalists" is all that counts: both factors can be reconciled as parts of “one mechanism" for the trans-formation of capitalist industry through "innovation" and "creative destruction". Just as in marginalist theory the axiomatic assumption of “utility” (a “metaphysical” notion at best, by Menger’s own admission, an inscrutable Aristotelian “entelechy”) does not and cannot explain the determination of “market prices”, and yet the mere proof of a simple mathematical connection between individual prices and the axiomatically assumed marginal utilities of individuals is sufficient to prove the mathematical existence of an economic equilibrium and to found the new “science of Neoclassical Economics”, so now Schumpeter concludes that the empirical derivation by the "entrepreneur" of a "profit" from his "innovative leadership", from his "enterprise", combined with the existence of a pool of financial capital made available by “capitalists” is sufficient to establish the existence of a “Mechanismus” that trans-forms the capitalist economy. Indeed, the Unternehmer-Gewinn (the entrepreneurial profit) is the only "profit" that is worthy of the name for him. All other "profits", as the subtitle to the Theorie loudly suggests, are simply "interest" or “rents” charged by "capitalists" for advancing their "working capital" to the entrepreneur.

 

In other words, Schumpeter never even attempts to locate the source of "profits" beyond the mere "innovation process" of the entrepreneur, beyond the "reward" for his "enterprise". Schumpeter does not look at the "motive" behind the activity of the entrepreneur except to allude to a vague Nietzschean "will to conquer", to the simple "pleasure of success". Again, this failure is largely due to the fact that, unlike Weber, Schumpeter does not see the Rationalisierung as a political process but simply as a "scientific development", as the supersession of the Enlightenment notion of "progress", understood in a teleological or moral sense, and its replacement with the strictly empirical scientific principles of the Economics applicable to human organisation and industry.

 

Put differently, Schumpeter interprets "profits" as a function of and reward for the "entrepreneurial spirit". Yet he does not even suspect that it may be "profitability" that makes the "entrepreneurial spirit" a matter of life or death for every "capitalist", whether an “entrepreneur” or not!

                                                            *********

 

 

The timeless mathematical “scientific” description of the capitalist economy clashes irremediably here with the living experience of its existence! This is a leitmotiv of the period that will preoccupy Wilhelmine culture from Nietzsche to Husserl, Lukacs and Heidegger – that is to say, the Neo-Kantian dualism of “knowledge” and “experience”, of “living spirit” and “objective process” or “machine”, between “Soul” and “Forms”, and between “Forms” and “content”. Weber himself will mock the evident contra-diction between the scientific proof of capitalist collapse proffered in The Communist Manifesto with its prophecy of the inevitable advent of human socialist freedom – applying thus the Nietzschean demolition of Western metaphysical transcendentalism and “subjectivity”, of the Freiheit that Weber’s initial formulation of the Rationalisierung in the Ethik and in Roscher und Knies had failed fully to comprehend but that – what is one of our central theses in this piece – he will begin to tackle seriously with the articulation of the interaction between the Political and the Economics in “the triptych” of 1917 to 1919 formed by Parlament und Regierung and the two Munich lectures, in the lecture on ‘Der Sozialismus’ delivered in June 1918, and then finally with the Vorbermerkungen written in 1920.

 

The profound, almost absurd in-comprehension of this vital reality – the overwhelming, conditioning necessity of the “system of wants and needs” and the social antagonism of the capitalist wage relation - on the part of Schumpeter, he himself exhibits in this blunt statement in the Theorie:

 

The leader personality… never happens as a response to present or revealed needs.

The issue is always to obtrude the new, which until recently had been mocked or

rejected or had just remained unnoticed. Its acceptance is always a case of

compulsion being exercised on a reluctant mass, which is not really interested in

the new, and often does not even know [545] what it is all about….

 

What we want to show now becomes obvious. The development of wants, which we

observe in reality, is a consequential creation of the economic development that

has already been present. It is not its motor. The fact that the human economy

has remained constant over centuries heavily weighs in favor of our argument. ….

The amplification of needs is a consequence and symptom of development. Insofar as

truly new needs and desires exist they will not have a practical effect on the economy,

…new needs and desires as such mean nothing. But even then, if there were an

original cause in the development of needs and desires, this would still require

creativity and energetic activity in order to create anything new of importance…

 

 

It is at this fateful juncture that Weber takes his distance from Schumpeter, even as he obviously “stands on the shoulders” of the Austrian’s evolutionary problematic. For whilst he accepts that “the economy” can never be in “equilibrium”, Weber correctly rejects the proposition that in any case “science” could ever explain “rationally” the “trans-crescence” of the economic system, its “Entwicklung”. Weber rejects dismissively Schumpeter’s thesis that it is the “entrepreneur” with his “creativity and energetic activity” who is solely or even chiefly “responsible” for the meta-morphosis of “the system” and that “new needs and desires as such mean nothing”! To the Nietzschean Weber, this proposition would smack unacceptably of the jejune “subjectivism” and “emanationism” of the German Historical School’s Historismus – of the Hegelian “Providence” (Weis-heit) and of the idolatry of “Freiheit”, the “freedom of the will” whose dialectical reconciliation in German Idealism leads to the “freedom from the will” of the Demokratisierung and its “Socialist utopia”, that triumph of the Individualitat against which Nietzsche had devoted much of his critical genius with devastating effect! It is this Individualitat, the “personality” of the “entrepreneur” that Weber could never entertain approvingly.

 

(The concept of ‘freedom’ in German Idealism is canvassed with supreme mastery from the viewpoint of the negatives Denken by Heidegger in his Schelling’s ‘Essence of Human Freedom’. It is interesting to advert here to the incomprehension of Weber’s entire theoretical orientation on the part of those critics – of all persuasions – who wave his concept of “charisma” as conclusive evidence of a ‘voluntaristic streak’ or ‘subjectivism’ in Weber’s methodology, and the even greater incomprehension of those epigones who make “charisma” the central concept in Weber’s entire sociology! However much these quite erroneous views may be justified on the basis of the static typology contained in the Ethik and in Weber’s later classificatory efforts, it is very wide of the mark when it comes to his incisive reformulation of the Problematik of capitalism in his later writings. There is no “charismatic voluntarism” in this methodological stance, no ‘Caesarism’! There is only a coherent application of Nietzschean immanentist “ontology of thought” to the phenomenology of the social world. Nor is there any ‘irrationalism’ in the post-Nietzschean “De-struktion” [Heidegger’s term] of the philosophia perennis and scientism of the Aufklarung and its German Idealist apotheosis.)

 

 

Not only does Weber realize with unmatchable acuity that the “creative entrepreneur” is not “responsible” for the phenomenon of capitalist “development” and the concomitant crises that it ineluctably inflicts on the “economic system”; but also and above all else he sees that the “entrepreneur” is “responsible” instead in a Nietzschean sense diametrically opposed to the one suggested by Schumpeter! For the entrepreneur can be merely the “carrier” of a “trans-formation” of the economy that must originate endogenously from its very foundations, from its “ground” – that is to say, from its “Wants and Provisions”, from its “system of needs and wants”. But not as a “mechanism of transformation” such as Schumpeter had sought on the mistaken assumption that “wants” are “static”! On the contrary, it is the conflict inherent and intrinsic to the very notion of “want” and of “self-interest” that creates the “objective con-ditions and circum-stances” that allow the emergence of the “entrepreneurial spirit”, of his “Will to Power” at the very crest of this surging wave of conflict that transports with itself the entrepreneur and the rest of the capitalist “economy and society”!

 

 

“The nature of the matter”, the essence of capitalism and of the Economics, must consist then in the historically novel and specific manner in which capitalism “organizes” this “conflict”! This signifies the end of Political Economy not only as the market-based mirage entertained by Neoclassical Theory of a “rigorous science of Economics” devoid of political conflict, but also as the utopia embraced by liberalism and socialism of a “free public sphere of Politics” devoid of economic antagonism.

 

The “personality” that truly counts, the Individualitat that “drives” the “system”, the “machine” – the “motor” of the “mechanism of transformation” that Schumpeter was so desperately seeking - is emphatically not the “entrepreneur” with his “creative individuality” causing the inertia of “the system of needs and wants” - the “rentier” capitalist, finance capital, “trustified” capitalism, the “passive” consumer - to change through the Innovationsprozess facilitated by the mechanism of capitalist financial institutions. A million times “No!” The real “motor”, the true “spirit” of capitalism (however “soul-less” it may have become now) is exactly and precisely that “conflict” inherent to “the system of needs and wants”, to the “iron cage”, that capitalism has “freed”, has “unleashed”, has “vented and released” by institutionalizing bureaucratically “the rational organization of free labor”! The most effective way to organize a society is to utilize its “labor”, intended as “labor force” or “labor power”, in a manner that responds “rationally” to the politically “free” specification of their conflicting “needs and wants” by the workers through the market mechanism (filter, osmosis, synthesis) so that these may be “provided for” most efficiently.

 

In regard to this point, Weber can detect now another major fallacy or oversight in Schumpeter’s limited and flawed analysis in the fact that the “entrepreneur” may well be the “material functional carrier” of “trans-formations” to the structure and orientation of “enterprise”, but that these “trans-formations” occasion profound “shocks” and “crises” that cannot be limited or confined to “the economy” alone, and that therefore require a form of mediation and governance – of “political responsibility”! - that is absolutely inaccessible to the “entrepreneur” or indeed even to the “bureaucracy”! In fact, it is not merely “the entrepreneurial function” that loses its “autonomy”, its “individuality” under the iron law of “socialization”, but it is also that “scientific research” that becomes increasingly subsumed to the “political needs and wants” of “the system” rather than be dictated by the narrow needs of industry or the exogeneity of “pure research”. In other words, there may well be no scientifically ascertainable “mechanism of development” for the simple reason that scientific activity itself (!) has lost its “autonomy” from that “rational organization of free labor” that is capitalist enterprise.

 

This is the more so, the “freer” that “free labor” becomes – precisely by reason of its Demokratisierung and the constitution of the proletariat as a class (!) with its own “socialist democratic” political parties that defies and prongs the state bureaucracy out of its inertia, out of its myopic search for “scientific equilibrium”! It is no accident that the sub-title to Parlament und Regierung refers specifically to the binary interplay, the antithetical dualism between “Parteienwesen” (the nature of parties or party system) and “Beamtentum” (bureaucracy)! To be sure, Schumpeter himself had foreshadowed this problem during his discussion of his “problematic” in the quotations we selected above:

 

In other words, there is no true economic development, no development

emanating from the economy itself, but only development that conforms

to one pattern of imagination or does not conform to it. Yet, in any event

economic development brings about extraeconomic effects in the social

realm that have further repercussions within the economy. This kind of

development expresses itself everywhere in national life. (Schumpeter, ibidem)

 

But in pointing to the “personality” and “leadership” of the entrepreneur, even within the confines of the Innovations-prozess, as the differentia specifica of capitalism, Schumpeter neglected these essential “extraeconomic effects” of modern capitalist industry and society that Weber is already theorizing from the standpoint of political sociology and that Keynes will start to dress up in economic garb after the Paris Conference of 1919: – (a) the ineluctable presence of “conflict” in the relationship between market effective demand (or “wants”) and its “provision” through development and growth; (b) the problematic of bureaucratic-technical and scientific-technological capitalist organization of this irreducible and irrepressible conflict; and then (c) the articulation of the forms of political organization able to mediate the inevitable “dis-equilibria” and  “crises” that “development” inevitably engenders so as to “govern” these effectively. This is the gigantic task that Weber would now tackle with his overall “program” or Entwurf of Parlamentarisierung for the effective Regierung of a “re-constructed Germany” (neu-geordneten Deutschland).