Commentary on Political Economy

Thursday 14 August 2014

Schumpeter: Capitalism as Permanent Crisis

 It is the intrinsic instability of capitalism (cf. Schumpeter’s article by the same title in Economic Journal [1928]) due to the presence of the social conflict expressed by the profit motive in a competitive market society that neither Classical nor Neo-classical economic theories with their “Law of Value” (whether based on Labor Value or on Marginal Utility) could explain theoretically: – the latter because it postulated axiomatically that the economy must be in equilibrium unless it is disturbed or displaced away from it by the presence of political interference through State regulation occasioned by ethical, religious or cultural opposition to individual self-interest; and the former because it also assumed that there can be such a thing as economic equilibrium provided that all exchanges correctly reflect the quantity of labor objectively embodied in the goods exchanged, and that therefore “dis-equilibrium” can be attributed solely to the “anarchy” of individual self-interest, particularly by inter-capitalist competition and rivalry occasioned by private property and the corresponding “theft of labour time”, due to the absence of political interference through State regulation (cf. M. Dobb, Political Economy and Capitalism, chpts.1 to 3).

In other words, for Neoclassical equilibrium theory it is political interference with the possessive individualism of the market mechanism that causes disequilibria and crises, whereas for Classical and Marxian political economy it is precisely the lack of such interference with possessive individualism that causes crises through the “anarchy” of the market mechanism. Classical and Marxian political economy therefore, to the extent that it too relied on “the market” to fix values or “socially necessary labour time”, reduced political conflict to the anarchy of possessive individualism – something that contradicts the Marxian notion of “class interests”, for how can capitalists in competition with one another ever form a political class?! And if they can, then how can Marx theorise that “the market mechanism” fixes the value of labour power below the value realized by capitalists? (We will discuss this objection moved by Bohm-Bawerk and Schumpeter against Marx’s theory of surplus value in the next section.) And in any case, other than the “mis-appropriation” of value by capitalists from workers and the fortuitous dis-connection between production and consumption due to the “anarchy” of competition, other than this inequality of distribution, there is nothing - nothing systemic - in Classical and Marxian political economy that is intrinsically wrong with capitalism, to induce the observable regular crises of the economic system.


It is legitimate therefore to conclude that for both Neoclassical and Classical Political Economy “crises” are only “mal-functions” of what is an inherently “techno-scientific” economic system – capitalism: – a system that is indeed so “scientific” as to coincide with the concept of “economics” tout court – because for bourgeois economic theory capitalism and economic science are one and the same thing! (This negative notion of crisis is in M.Cacciari, “La Transformacion del Estado”.) For both Classical and Neoclassical Political Economy the central problem of economic theory is the avoidance of crises, the removal of “obstacles” to the healthy or optimal operation of what is seen as a techno-scientifically determinable economic system. For these theories, the economic system deals either with “relations” (exchange in equilibrium theory) or with “quantities” (labour values in Classical political economy) that are capable of “scientific” measurement and “technical” manipulation, and it will succumb to crises only if “the market mechanism” fails to operate properly (Neoclassical equilibrium) or if the “product” is not distributed in proportion to labour values (Classical equilibrium). The only problem with capitalism, then, is that of economic co-ordination: for the Neoclassics, this is assured by the correct information signaled to all economic agents through the market mechanism by virtue of the “atomicity” and self-interest of market participants, whereas for the Classics this is done by eliminating from the process of distribution precisely the atomicity and self-interest of the Neoclassics which cause the “anarchy of the market” and the “unequal distribution of income” (crises of overproduction or underconsumption).


As we have seen in the preceding sections, Schumpeter concedes the ultimate inadequacy of the Statik analysis of the capitalist economy proffered by both Classical and Neoclassical Political Economy – which he himself had hitherto embraced wholeheartedly – to explain the “nature of the forces” that characterize capitalism for the very simple reason that capitalism is “endogenously” and “intrinsically” an economic system that is incompatible with any notion of “equilibrium”, whether static or dynamic, and is instead one whose differentia specifica consists precisely in the process of “creative destruction” (schopferische Zerstorung), that is, of “development-through-crisis”. Crisis therefore is not an anomaly to be eschewed, it is not an aberration to be corrected, it is not a temporary setback waiting to be remedied: crisis is the very essence of capitalism; capitalism is permanent crisis.




The essential characteristic of capitalism, to develop or grow through the “incessant mutation” of the economy – this trans-crescence makes both Neoclassical and Classical Theory wholly irrelevant to the understanding of how and why this economy has developed into its present state. At best, Neoclassical and Classical economic theories can “describe” positivistically and functionally the operation of the capitalist economy; they can pinpoint and formalize mathematically certain patterns and regularities in its behaviour (Jevons); but they cannot even begin to “understand” its development or evolution (Marshall’s aim) or indeed its “co-ordination” (Hayek’s objective). This fact reduces Neoclassical and Classical theories to mere “heuristic” or didactic or illustrative devices, descriptive synchronic and essentialist accounts of the separate aspects of the capitalist economy – its “skeleton” or function - that can never explain its diachronic evolution – its “flesh-and-blood” or metabolism (cf. BC, pp60ff).



Here in Schumpeter we find a very different rationale from that adopted in the natural sciences in which the sole apparent aim is to photograph reality, “to find the truth” about the world, “to discover the laws of nature and of society”. We also find a different rationale from the Lockean liberal vision of civil society in which the economy is a simple continuation of the jusnaturalist individual possessivism of the state of nature. Although, as we are about to see, Schumpeter’s aim is to unify economics and politics by associating different “economic agents” to different types of income, Schumpeter could no more believe in “natural rights” as the rationale of income distribution in capitalist society than he could lay faith in Walras’s axiomatic determinism or in Marx’s historical materialism.



Our main thesis here is that the most plausible and radical interpretion of Schumpeter’s notion of Entwicklung is that it seeks to theorize capitalism as an economic system founded on “incessant crisis” or “permanent innovation” (cf. Trotszky’s “permanent revolution”), in the sense that now capitalism is seen as an economic system that, far from seeking equilibrium, far from being founded on a Law of Value that validates the homologation and equivalence of Political and Economic, continually generates or “constantly recreates” crises.


The opening up of new markets…and organizational development…illustrate the same process of industrial mutation – if I may use that biological term – that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has to live in. (CS&D, p.83)

Cf. Marx’s Manifesto:

The bourgeoisie cannot exist without constantly revolutionizing the instruments of production, and
thereby the relations of production, and with them the whole relations of society.


Schumpeter’s theory of Entwicklung acknowledges – indeed it is founded on the assumption – that capitalism is a social system that must constantly recreate social and economic antagonism and crises because its entire rationale is the creation and containment of conflict in the expanded reproduction of society. The notion of Value, of an economy based on essence or substance or static Being, is now replaced by a ceaseless Becoming, a constant trans-formation, mutation, meta-morphosis or, more controversially, “evolution”.


The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process. It may seem strange that anyone can fail to see so obvious a fact which moreover was long ago emphasized by Karl Marx. Yet that fragmentary analysis which yields the bulk of our propositions about the functioning of modern capitalism persistently neglects it. Let us restate the point and see how it bears upon our problem.

Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. (p.83?)



But this is evolution in the sense of development-through-crisis: in this “evolution”, the antagonistic foundations of capitalism do not change, only the “form” of capitalism changes, not its conflictual content, not its antagonism, not its being a state of “crisis”. This is the “renunciation” (Entsagung) of Schumpeter’s negatives Denken: unlike the theoreticians of the dialectic – Hegel and Marx -, Schumpeter’s notion of “incessant revolution” does not contain the supersession or resolution of the social antagonism that “constantly recreates” capitalist crisis.


If you like, Schumpeter’s “creative destruction”, like Nietzsche’s similar concept in Zarathustra, preserves only the mechanical shell of Hegel’s dialectic – the “becoming” or “movement” – but not its “rationalist-idealist” foundation: cf. Gadamer’s quotation from Hegel:

"The reason why dialectic first seizes upon motion as its object lies in the fact that true dialectic is itself this motion; or, put another way, motion is the dialectic of all that is" (Logic, XIII, 313). (Hegel’s Dialectic, p.13.)



Unlike what both Walras (who was a “Socialist”!) and Marx believed, and in the footsteps of Nietzsche and Weber, Schumpeter is saying that in society there are no “laws”, no “truths”, no “inevitability” or “necessity” outside of the tendencies contained in the axiomatic postulates, the schemata, to which we reduce reality according to the goals to which we must adhere or comply. Quite obviously, the “we” here stands for “the bourgeoisie”, the only social agency in capitalist society with the power to enforce the validity (Latin valor, literally, power, strength) of its axiomatic principles. But there is no necessary connection between the schemata and the tendencies and then the ultimate outcome of social action. For Schumpeter, science is “a box of tools” – a pure “instrument” that must be “handled” or “utilized” by specific historical economic agents – the Wirthschafts-subjekte.



Thus, we find in Schumpeter a different “rationale” from both the Walrasian and the Marxian. In Marx just as much as in Walras, the solution to the political antagonism of capitalist society is already implicit in the definition of the problem! Just as Walras’s mathematical axioms lead inexorably to a general equilibrium that, whilst reducing its “economic agents” to mere mechanical “inert bodies”, at one and the same time maximizes their utility or welfare, so in Marx’s critique of political economy the antagonism of capitalists and workers is resolved and reconciled in the heaven of communism in which the surplus value unjustly appropriated by the capitalist is returned to its rightful owners, the associated producers! Both in Walras and Marx antagonism is indeed at the heart of the theory – but then the theory contains a “rationalist”, that is to say, a teleological or millenarian or eschatological or prophetic component (cf. the opening chapter of CS&D, “Marx the Prophet”) that pre-determines or pre-destines, and indeed vitiates, its conclusions: the scientific-materialist determination and calculability of Value implies even in Marx the scientifically quantifiable determination of human social organization – a political economy.


To put this in Euclidean axiomatic parlance, whereas in Walras the axiomatic definitions preserve their intrinsically antinomic and aporetic character, in Marx it is as if the axiomatic definition of “point” already contained the existence of a “line” – because Marx’s definition of political antagonism points dialectically to its supersession (Aufhebung) or reconciliation (Versohnung). (Cf. K. Lowith, Max Weber and Karl Marx. Note also the excellent identification by Bobbio in his final remarks on Lukacs [in Da Hobbes a Marx] of the eschatological Hegelian bent in Marx’s Paris Manuscripts – in line with Lowith’s treatment. But whereas Bobbio rightly stops at the Manuscripts, Lowith quite wrongly implies that this eschatological and teleological bent is a vital thread running along all of Marx’s work, including the Grundrisse.)


For Schumpeter instead this “reconciliation” or “convergence” or “harmony” (homonoia) of human interests, of the “point” of self-interest and the “line” of inter esse – this Neoclassical axiology and Classical teleology - is simply impossible so that the point – the Statik - must remain logically irreconcilable with, and separate and distinct from, the line – the Dynamik. That is why there are no dialectics in Schumpeter! There is no dialectical resolution of the Statik in the Dynamik: the latter does not supersede or abolish the former: indeed, for Schumpeter the two are avowedly and irresolubly contradictory! To be sure, Schumpeter allows for the theoretical dependence of instability or disequilibrium in capitalism on the real implementation of competitive equilibrium – the Dynamik is produced by the “social friction” or conflict that the Statik of “pure competition” dialectically implies. But for Schumpeter there is no dialectic in this process because there is no “supersession” and “reconciliation” of the conflict between the Statik and the Dynamik.


The Dynamik represents the inevitability of the social conflict implicit in the Statik between entrepreneurs and capitalists, leaders and bureaucrats, the energetic type against the hedonistic type: it is the specific institutional framework of political antagonism in capitalist society. But there is no “resolution” of this political antagonism in Schumpeter’s own version of the negatives Denken! For Schumpeter, the line is the ec-sistence of the point – its extrinsic-ation from the ideal realm of hypothesis or anatomical “skeletal structure” to the manifestation of its tendency in the real world of politico-institutional convention or “metabolic flesh-and-blood superstructure”. The Statik is the schema of the Dynamik; without the Statik the Dynamik could not be a “technique” that gives expression to the conflict contained in the Statik. The freezing of the Dynamik would entail the abolition of the Statik, its collapse or self-dissolution into mere stasis, stagnation, paralysis.

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