We showed in the
last section how Schumpeter perceived that in equilibrium theory the very
“purity” of self-interest means that “the laws of competition” imposed
axiomatically on individual agents are in contradiction with that self-interest.
Pure self-interest and pure competition (atomicity) are inconsistent apories
because the limitation on pure self-interest imposed by the requirement of
perfect competition contradicts the purity of the self-interest of economic
agents as well as the purity of perfect competition. This is so, first, because
pure self-interest would push economic agents to ignore the requirements of
perfect competition, and second because perfect competition would induce
economic agents to engage in imperfect competition as well! (“The union of
opposites” is a logical flaw first identified by Nicholas of Cusa. For a
discussion, see Ernst Cassirer, Individual
and Cosmos.) This aporetic aspect of the axioms of Neoclassical equilibrium
theory leads away from its “purity” or “perfection” and into the conceptual
analysis of its real implementation which requires conceptual limits on the “purity and perfection” of both
self-interest and competition. The formal equality
of self-interests, their mutual free-dom,
can ensure only a frozen or static mechanical equilibrium
or, with Schumpeter, a “circular flow”. Self-interest works aporetically, then:
on one side, it breaks out of pure equilibrium, it leads to the “impurity” of
imperfect competition, as a logical-conceptual requisite of its “purity”; and
on the other side, it leads back to equilibrium as a result of the
countervailing equal “purity” of other self-interests, that is to say, as a
result of “the laws of pure competition”.
By postulating a “development
of the economy from within”,
Schumpeter is simply making explicit what is implicit in the axiomatic “pure
laws of economics” reduced to the status of “laws of mechanics”: he is trying
to break free of the apories of pure equilibrium theory by introducing the
“impurity” implied in the very “purity” of self-interest and competition – a
self-interest so ab-solute (immune
from regulation) that it cannot be bound even by the “externally-imposed”, axiomatic
“laws of pure competition”, or what Schumpeter calls “pure laws of economics”. As
we demonstrated above, if we understand equilibrium as a state of “pure laws of
economics” and Entwicklung or
“development” as a state of disruption or “crisis” of that equilibrium on the
way to, in transition to, a “new” or
“fresh” or “another” state or level of economic equilibrium, then such
a “transition” is simply impossible
because equilibrium and Entwicklung
(development-through-crisis or “evolution”) are categorically different concepts or conceptually inconsistent categories.
And yet, as
Cacciari has observed (in “Transformation of the State and Political Project”),
the notions of “development” and “crisis” entail the existence of a state of
“non-development” and “non-crisis”. Both development and crisis point to an
ideal or pure model – whether this be Walrasian equilibrium or Robinsonian
“tranquility” or Schumpeter’s “circular flow” – that provides a measure or a metre by means of which we can say that an economic system is
developing or is in crisis. Schumpeter himself shows at one and the same time
how his theory of economic development is bound to the pure model of
equilibrium and also how it may be possible to define “development” or “crisis”
in a novel and different way that does not imply “negatively” the actual
existence of a state of theoretical equilibrium or even of a “harmonious” state
of “tranquility” or of “circular flow”:
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.[489]
Once again, as we
showed in the discussion above, Schumpeter seems to be quite aware of the
impossibility of “the pure laws of economics” laid out in equilibrium theory
being logically consistent with “the pure economic theory of economic change”:
in his own words, he is aware that a “dynamic
equilibrium is a contradiction in terms”, an oxymoron. Yet he persists with
the idea that it is possible for an economic system that allows of economic
change to transit “from one
equilibrium to another” – a statement that must be contradictory given that
this “transition” can be achieved only by infringing against the axiomatic
rules governing “equilibrium”. Whilst he insists on the “distinctness” of the
two “processes” – the Statik and the Dynamik – in the sense that they are
logically inconsistent, Schumpeter obstinately persists with the attempt to
base his entire theory of economic development, Entwicklung, precisely on the ability to transit these
intransitable processes, to fuse and bond
them together.
As we shall see
presently, it was this “chemical mixture”
or bonding that Schumpeter envied in the theoretical work of Karl Marx and
specifically with regard to the concepts of “economic development” and of “histoire
raisonnee”. Indeed it is possible to suggest that Schumpeter found his own
theoretical vocation in his own critique of Marx’s labour theory of value – a
critique that his mentor, Eugen Bohm-Bawerk, had already conducted and that
enabled him to enucleate a novel theory of the nature and causes of “interest”.
Schumpeter’s mission was instead to discover the nature and origin of “profit”
and, by imitating Marx, to combine profit with a specific “economic subject” –
the entrepreneur. Following and
applying faithfully Bohm-Bawerk’s critique of Marx, Schumpeter insists that
Marx’s labour theory of value has as supreme aim the demonstration of the
presence of “exploitation” in capitalist enterprise, and that this
demonstration is to be carried out under the overarching assumption of perfect
competition. Just as he was able to show that profit is impossible in
equilibrium theory, so is Schumpeter able to dispose easily of the existence of
surplus value and of exploitation in conditions of perfect competition.
But it is the
sequence of the reasoning that Schumpeter performs with regard to Marx’s theory
of surplus value that is most enlightening in tracing the train of thought that
led Schumpeter to his own theory of economic development. Let us examine this
line of thought carefully:
Moreover,
it can be shown that perfectly competitive equilibrium cannot exist in a
situation in which all capitalist-employers make exploitation gains. For in
this case they would individually try to expand production, and the mass effect
of this would unavoidably tend to increase wage rates and to reduce gains of
that kind to zero. It would no doubt be possible to mend the case by appealing
to the theory of imperfect competition, by introducing friction and
institutional inhibitions of the working of competition, by stressing all the
possibilities of hitches in the sphere of money and credit and so on. Only a
moderate case could be made out in this manner, however, one that Marx would
have heartily despised….
This is
so easy only as long as we see in the theory of surplus value nothing but a
proposition about stationary economic processes in perfect equilibrium. Since
what he aimed at analyzing was not a state of equilibrium which according to
him capitalist society can never attain, but on the contrary a process of
incessant change in the economic structure, criticism along the above lines is
not completely decisive. Surplus values may be impossible in perfect
equilibrium but can be ever present because that equilibrium is never allowed
to establish itself. They may always tend
to vanish and yet be always there because they are constantly recreated…This
aspect proves to be of considerable importance. (CS&D)
Clearly, it is not
the case that Marx thought that “capitalism
can never attain a state of equilibrium”: in reality what Marx’s critique of bourgeois Classical
Political Economy aimed at was showing that the reality of capitalism can never
be theorized with the analytical categories of equilibrium analysis. It is not
the case, therefore, that Marx thought that capitalism is incapable of
attaining equilibrium because it is in “a
constant process of incessant change” – as if this were just a matter of “hitting
a quantitative target”. Rather, what Marx was saying is that the categories of
equilibrium theory - which are certainly applicable to the Classical Political
Economy of Smith and Ricardo as well as to Neoclassical economics - are conceptually inapplicable to its reality
because it is not a quantitative
reality but a political one. In other
words, the value involved in the
capitalist mode of production is not an objective quantity; value refers instead to historically
specific “social relations of production”. (We shall examine this point closely
in the next section.)
So long as surplus
value is seen as an “amount”, a value
over and above what is needed for
labour-power to reproduce itself (sur-plus, Mehr-wert
or “added value”, in German), then it is clear that the laws of competition can
serve to regulate the “distribution” of this fixed amount in such a way that
any initial inequality or exploitation is gradually eliminated to a point where
no “value” is extracted exploitatively from workers – for the simple reason
that “perfectly competitive
equilibrium…would unavoidably tend to raise wage rates and to reduce gains of
that kind to zero”. We can see therefore that if we postulate the existence
of equilibrium as an axiom of economic analysis, then surplus value or profit
is impossible because the axiomatic requirement of equilibrium will reduce all
economic values and prices to “relative” prices – which cannot be fixed until
all transactions have been conducted once and for all – which in turn excludes
the notion of surplus value when combined with perfect competition. Similarly,
if we theorize surplus value as an objective quantity instead of as a quantity
dependent on relative prices, then perfect competition will ensure equilibrium.
But the point is
that although “surplus value may be
impossible in equilibrium…it can ever be present because that equilibrium is
never allowed to establish itself”! And it is never allowed to establish
itself not because of “frictions” in the operation of market competition – not
because of that “imperfection” -, but rather because the very notion of
“surplus value” has a categorically different meaning once the productive
system is transformed by the actions of its participants, of its “economic
subjects”!
In other words, it
is the very “reduction” or “reification” of surplus value to a “thing”, to an
amount, that (a) makes equilibrium theoretically possible, and (b) makes
possible the gradual disappearance of surplus value or profit by means of
competition, because capitalists will raise wages until all surplus value and
exploitation vanish! To paraphrase Schumpeter’s own words, surplus value may “tend to vanish” because of
inter-capitalist competition and rivalry; but it will never so vanish because it is “constantly
recreated”. But for something to be “incessantly” recreated it simply
cannot be a “thing” or a “quantity” or a “measurable value”: surplus value must
be a social relation! If the determination of profit or surplus value is
changing incessantly with the economic system, not in a quantitative sense but
indeed in a qualitative sense, then it is evident that surplus value and profit
are not entities that can be determined precisely either in “relative prices”,
as in Neoclassical equilibrium, or in absolute prices determined by “socially
necessary labour time”, as in Classical equilibrium.
What this means is
that once we accept that perfect equilibrium does not describe the reality of
capitalism in which surplus value or its monetary equivalent, “profit”, is the essential
feature of economic activity, then we must accept that capitalism is not a
“thing” or “quantity” or “measurable value”, but it is rather a “political value”! In short, once we
change our analytical perspective from the Statik
of equilibrium analysis to the Dynamik
of economic development, then even the subject-matter
of our theory changes, it is trans-substantiated,
and we must shift from the quantifiable relative or absolute “values” or prices
of equilibrium theories to the “ethico-political
values” of development theory! Once again, it is true to say, with
Cacciari, that the notions of development and crisis ineluctably point to the
existence of a state of equilibrium and tranquility: but this is so only if we “measure” development and
crisis by means of a fixed quantity or mechanical value – a price system – that
is quantifiable either internally to the system (the relative prices of
Walrasian equilibrium based on a numeraire),
or externally to the system (the “values” of the labour theory of value). In
both cases, the economic system is seen as a neo-Kantian dimension of
scientific inquiry that responds to an objective Law of Value – whether this is
determined by “the laws of pure competition” or else by “socially necessary
labour time”.
Despite his
reluctance to acknowledge this departure
from the “scientific” logico-mathematical mechanical paradigm of Neoclassical
and Walrasian equilibrium analysis, what Schumpeter has clearly introduced with
his Dynamik is precisely this ethico-political dimension in economic
theory that effectively transforms economics into a specific area of politics. – Which is why, again,
Schumpeter needs so desperately to retain and uphold the tenets of equilibrium
theory so as to preserve the scientific
economic status of the Dynamik by
anchoring it to the mechanical foundations of the Statik!
Pure competition leads to a
stationary and stagnant state because, although it makes profit-seeking imperative or axiomatic, under its conditions profit-making is utterly im-possible!
But then, it is also the purity of
competition - the political antagonism implicit in its conceptual inclusion of
profit-seeking or the profit motive - that logically
implies or entails its actual implementation as profit-making and therefore the competitive
advantage of innovation. It is thus
that “market process” becomes a
conceptual requirement of the pure notion of equilibrium: market process is the
applied version of pure equilibrium theory: market process is the extrinsication of equilibrium. Market process occurs when pure theoretical
profit-seeking is allowed to become its impure or applied historical version –
that is, profit-making.
It follows therefore that the transition from profit-seeking to profit-making involves the exit from conditions of perfect
competition in such a way that some competitors will be dis-advantaged whilst some will gain a competitive advantage. This advantage
must be of a kind that no exchange by
the disadvantaged competitors will be able to eliminate, and that is not
derived from “external or exogenous factors”. The only “endogenous factor” then
is the profit-seeking motivation itself and the ability of
some competitors (a) to change the production function, that is, to innovate, and (b) to restrain other competitors from
adopting the innovations that lead to the new production function. Factor (a)
necessarily involves innovation as
defined by Schumpeter; and such innovation could hypothetically be originated
by a single economic agent. But factor
(b) necessarily requires the adoption of competition-restrictive
measures, that is to say, of political
measures! And these quite evidently cannot be carried out by a single economic
agent but must be enforced by some economic
agents – innovative entrepreneurs for Schumpeter - against others.
For any kind of competition to exist, short of all-out conflict, certain
“rules of the game” must be agreed upon. But these “rules” cannot encompass
every aspect of competition because, if they did, the end result would be
competition so “pure” that no real competition could take place! At
equilibrium, competition would be restricted and confined to being a velleity –
the sterile “intention” to seek profit as a necessary trait of self-interest. But
once this velleity of profit-seeking is given the opportunity to be
implemented as profit-making, this fact by itself requires a
fundamental change in the modus operandi
of the economy, one in which for profit-making to be at all possible (a) innovation and (b) policies to protect it must be allowed to take place. Therefore,
for actual competition to take place, there must always be room for competitors
“to innovate”, that is to say, to introduce new and unforeseen or unforeseeable
strategies or techniques that will undermine the existing competitive rules
founded on the formal equality of the competitors. But the possibility of such
“innovation” and therefore of such “inequality” will result inevitably in political
conflict and antagonism that will have either to be mediated politically or
else to be resolved violently. In either case the search for profit goes well
beyond the nature of “profit” itself as “utility” or “welfare” or “ownership”
to the very essence of political power!
(A similar point is made by Demsetz in “Freedom and Coercion”.)
Conventional competition
– competition as it is theorized in
all non-Schumpeterian economics – contains the ineluctable tendency, in terms of its axioms and its aims, to induce a state of
equilibrium or stagnation. That is because innovation is not seen as a
necessary aspect of the coercion
intrinsic and endogenous to the very concept of competition! Yet to be truly
competitive, and therefore to be able to realize a profit, the capitalist
entrepreneur must compete with existing businesses not just on “price” or
“quantity” – but indeed on “innovation”, that is to say, by introducing new products or techniques that
fundamentally undermine and threaten to obliterate the business models of
competitors! Competition without innovation would lead sooner or later to a
stationary state of equilibrium.
All
the more controversial is the proposition that entrepreneurs' profits and
related gains which arise in the
disequilibria caused by the impact of innovation are, as far as the
business process itself is concerned and apart from consumers' borrowing, the
only source of interest payments and the only "cause" of the fact
that positive rates of interest rule in the markets of capitalist society. This means that in perfect equilibrium
interest would be zero in the sense that it would not be a necessary element of
the process of production and distribution, or that pure interest tends to
vanish as the system approaches perfect equilibrium. Proof of this
proposition is very laborious 39, because it involves showing why all the
theories which lead to a different result are logically unsatisfactory,
(Business Cycles, p.125. See also CS&D, p.131 on “The Obsolescence of the
Entrepreneur”.)
It may well be that the search for profit motivates innovation; it is
certainly not innovation that motivates the search for profits. And yet it is
most certainly not the search for profits in and of itself that forces economic
agents to innovate. So long as we define “profit” in terms of pure competition
as all economic theory does, then it is impossible to explain the existence or
possibility of profit! For innovation and economic change to occur, competition
must be of such a character that at once it coerces and it enables some
competitors to gain an advantage over
other competitors by undermining not just their profitability but also their very existence! In other words,
competition must reach far beyond the sphere of exchange; it must reach to the
very foundations of civil society – competition must extend to a type of
conflict that goes beyond exchange and that encompasses the political relations
between economic agents. Competition must include political antagonism!
In other words, the
problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is
how it creates and destroys them. As
soon as it is recognized, his [the economist’s] outlook on capitalist practice and its social results changes considerably.
The first thing to
go is the traditional conception of the modus
operandi of competition. Economists are at long last emerging from the
stage in which price competition was all they saw. As soon as quality
competition and sales effort are admitted into the sacred precincts of theory,
the price variable is ousted from its dominant position. However, it is still
competition within a rigid pattern of invariant conditions, methods of
production and forms of industrial organization in particular, that practically
monopolizes attention. But in capitalist
reality as distinguished from its textbook picture, it is not that kind of
competition which counts but the competition from the new commodity, the new
technology, the new source of supply, the new type of organization…. - competition which
commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of
existing firms but at their foundations and their very lives. (CSD, p.84)
Even in the case in which
competition is over price, it can be said that lower prices can be achieved
from a position of pure competition only
when some form of innovation is present!
Competition, then, may well stand for an alternative way of describing
political antagonism: the problem is, however, that the overall regulation of
this competitive antagonism is to facilitate profit-making, and therefore the
owners of capital; and secondly that competition has the overriding role as a
repressive weapon against workers in
competition with one another over employment, wages and working conditions.
Profit-seeking is the subjective
motivation behind innovation; but innovation is the objective factor for the existence of profit, for profit-making
as a practical activity! Except that, in turn, the implementation of innovation is
impossible without impure or imperfect competition. And imperfect competition
implies necessarily the presence of political
antagonism to decide just how “imperfect” competition will be and to whose
“advantage”. In equilibrium theory, although individual conflict is certainly present because economic agents
seek to maximize their “individual utility” or self-interest, they can do so
only through “exchange”, and therefore this “individual conflict” cannot
axiomatically become “political” – again because individual economic agents are
not allowed to combine their
self-interests. But this means that “profit-making”, as distinct from
“profit-seeking”, is axiomatically impossible in a Neo-classical economy and
that it will be whittled away to zero in a purely competitive Classical
economy! In other words, “pure competition” is at once inconsistent both with profit-making and therefore also with innovation,
unless its definition is extended to cover not just “exchange” but the
political antagonism of imperfect competition as well!
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