Saturday, 13 September 2014

Equilibrium and Market Process in the Austrian School – Schumpeter, Dialectics and Innovation

Equilibrium and Market Process in the Austrian School – Schumpeter, Dialectics and Innovation

Is the theory of development a correction of the picture of the static economy? Must
this picture . . . give way to a new theoretical reconstruction of reality? . . . We know already
. . . the core of static theory shall not be replaced.

(Schumpeter 1912: 511)


The idea that “the pure theory of stationary equilibrium” is inadequate as a tool for understanding the workings of a market economy, and that it should be replaced by a view of the market as a competitive-entrepreneurial process for the discovery and coordination of knowledge, has become a central tenet of Austrian thought. 5(Caldwell, ‘Hayek&Socialism’, p1866.)

Neither the static schema of economic equilibrium nor the dynamic theory of economic development is adequate as a tool for understanding the workings of a market economy: the first is unable to explain the “content” and “purpose” of economic activity while the latter is unable to determine the precise quantitative boundaries of that activity. Form and substance are simply irreconcilable in bourgeois economic theory. Yet this can only mean that the one is indispensable to the other – in other words, that it is impossible to understand the meaning of economic activity without having regard to its historical development or “evolution” and it is equally impossible to act upon, to intervene practically upon this historical evolution without the formal categories of the equilibrium schema.




As Murray Rothbard’s insightful discussion of “Market Process and Equilibrium” reveals:

While the neoclassicist believes, or affects to believe, that the market economy is always
in a state of general long-run equilibrium, Austrian economics, from Menger on, indeed from Cantillon on, has concentrated not on equilibrium but on the process by which the market moves toward it. The real world, the day-to-day world of markets, is one where the market is always moving toward equilibrium but never attaining it, since the determinants of market activity: values, resources, technologies, knowledge, products, and so on, are always changing. The Austrians, therefore, concentrate on market processes rather than on the final equilibrium state.” (The Present State of Austrian Economics, p.15)

Against Walrasian and neoclassical equilibrium economists, Ludwig von Mises admonished:
“They merely mark out an imaginary situation in which the market process would cease to operate. The mathematical economists disregard the whole theoretical elucidation of the market process and evasively amuse themselves with an auxiliary notion employed in its context and devoid of any sense when used outside of this context,” (Human Action, 1949, p.352.)
So what we need to know is “why” “the determinants of market activity – values, resources… and so on” are always changing. Rothbard is afraid that once equilibrium is achieved, history will stop. Indeed, “values” change all the time precisely for this reason – “the rivalry” inherent to the market process – its com-petition. But “what” is it that market agents are “together-seeking” (Lt., com-petere)? We will see that this “history” is really provided by “competitive entrepreneurship” and ultimately by the “incentives of profit” and disincentive of “loss”.





Moura, in his critique of Schumpeter’s “integration of theory and history”, neglects this fundamental point (essentially the same as Rothbard’s, except that Rothbard does not allow for “nomothetic” sociological studies). These studies and their theoretical assumptions are permissible, but the theoreticians must make their parameters clear in terms of the “choice of political goals” (Weber): what do “profit” and “loss” really mean? Schumpeter fails to pose himself this essential question: indeed, Moura is quite justified in arguing that Schumpeter is seeking to erect a “closed” theoretical framework that is in stark contradiction with the “open” premise of the subjective factors involved in the phenomenon of innovation – in other words, Schumpeter is trying to eliminate the political core from the economic shell.


The shortcoming in Moura’s critique, however, is that it merely stops at establishing the contradictoriness of Schumpeter’s attempt to reconcile “closed economic theory” with “open or historical innovation” – as if a “non-contradictory” theoretical “integration” of the two was at all possible! Like Rothbard, Moura is confusing “history” with “subjectivity”, political antagonism and conflict with existentialist “choice”, a congenital deficiency he inherits from Lawson’s philo-Heideggerian theses in Economics and Reality, which he utilizes for his critique of Schumpeter. Yet the much more interesting and important task is to understand why Schumpeter should have attempted, to paraphrase Moura’s title, just such an impossible “integration of [closed “pure economic”] theory and [open subjective] history’! It serves little purpose to call somebody crazy for attempting the impossible: we should seek instead to understand what causes the madness. And the madness lies in the antinomical way of posing the question as an either/or, that is, by using antinomic and aporetic concepts such as “equilibrium” and “evolution”, Statik and Dynamik – as simple “opposites” that admit of no historical dialectical supersession. For Schumpeter to have integrated these antinomic concepts “successfully”, as Moura demands, is quite simply logically impossible – precisely because they are “antinomies” that allow of no dialectical “resolution” because their definitions are mutually contradictory. And it is impossible because it is simply not possible to theorize capitalist society – its “economic science”! – in any other way than in a fragmented and antagonistic manner – in a manner that fully exposes or conceals the political antagonism that is its essence!


Yet again, what makes Schumpeter’s work so stimulating, provocative and certainly fruitful – just like Max Weber’s – is precisely his willingness to tackle this vital and fatal “problematic” of capitalist society in the most fearless manner, and then being quite open about the theoretical contradictions that he might incur – and that in any case are inevitable in all theoretical attempts to outline a theoretically “integrated” account of the dis-integrated society that is the society of capital! What we are suggesting here is that Schumpeter’s theoretical efforts do oscillate and even fall between the “two stools” of what is ultimately purposelessly self-referential, mathematically formal economic theory, on one side, and subjectivist voluntarism on the other. The reason for this is that Schumpeter always left out of his efforts the all-important political antagonism and conflict that was instead at the centre of the theoretical works of Marx and even Weber, both of whom he was trying to emulate. But to have made such antagonism explicit would still not have amounted to an “integrated” theory but rather to one partisan account of what is inevitably a conflictual capitalist reality. Schumpeter’s “instrumentalism” is significant in this respect.


What allows a particular “method” to fuse facts and theory “chemically”, as Schumpeter aspired to do, cannot be the formal characteristics of the “method” itself: - because no “methodology” in any “science” will ever be able to guarantee the “truth” of its results. Instead, the reconciliation of “facts” and “theory”, of “history” and “reason”, must be related to the “interest” that founds the theory on the facts and that selects the facts to be theorized. Marx makes explicit the “interest” on which his theory is founded, and therefore also what he too calls “the method” he will adopt to select the “facts” on which it relies. Only once this “interest” is made explicit may one speak broadly and loosely of a “method” in the sense of a Welt-anschauung that one adopts for one’s social theory.



[Gramsci and evolution]


We have in Schumpeter therefore a clear dualism, a dyadic system, in which there is a pendular oscillation between extremes – equilibrium/evolution, stasis/metabole, competition/adaptation, bureaucracy/innovation, interest/profit, capitalist/entrepreneur – but there is no “progress” because the “development” that Schumpeter envisages is not one that brings about the “supersession” of the opposing forces of Statik and Dynamik but is instead one that leads from one “level” of equilibrium to another “level”. But the difference between these two “levels” is not qualitative or categorical – the two levels are systemically and analytically identical – all of their “economic subjects” preserve and conserve exactly the same functions in the new equilibrium that they had in the old.


Hence, the concept of “creative Destruction” can simply not be said to be “dialectical” – it is a purely Nietzschean concept that belongs firmly to the negatives Denken because the “conflict” of individual self-interest is not removed but it is perpetuated. Indeed, self-interest is what drives the oscillation, the dyad, in any case – depending on whether the self-interest is allowed to act creative-destructively or innovatively, or else it is “paralysed” by the forces of reaction represented by the opposing self-interests. There is no dialectic in Schumpeter, and even when he sees the economic system as an organic community driven by the Ethical moment of Dynamik he simply reverts to the atomism of the individual entrepreneur. The entrepreneur gains a competitive advantage that makes the economic system (seen now as organic community) evolve. But because this evolution only re-produces the same initial conflict, the process of innovation is “paralysed” by its conflict with other self-interests back into the stasis of equilibrium. And because Schumpeter does not even consider that this “evolution” may be a goal that may unite the economic system into an organic community – because he does not consider this metabolism as a dialectical supersession of the “fever of self-interests” (Hegel), Schumpeter never overcomes theoretically his methodological individualism.



This is the essential problem with Schumpeter’s notion of Entwicklung and of entrepreneurial Innovation as its “source of energy” acting “from within” the capitalist economic system. It is true, as we have seen particularly in relation to his analogy of capitalism with the evolution of an animal species (dogs), that Schumpeter rightly perceives how any notion of Dynamik and Entwicklung must treat the economic system as a living organism, instead of as merely a “dead” organism that can be autopsied (described, classified, categorised) anatomically and analytically. But then he fails to examine how this social living organism or living organic community meta-bolizes with its physical environment – in other words, how indeed this living organism cannot be an “organic totality” or form a “whole” that can be theorized in isolation from its “physis” because the relations and interactions of its “members” or components between themselves and with their physical environment will trans-form or mutate  or meta-morphose this organic community in a manner that super-sedes its present distribution of social roles and power - the status quo, the established order - by dis-solving it.


Seen as an “organic totality”, Schumpeter’s “pure economic theory of economic change” becomes an eschatology  – that is to say, an insuperable and indeed “eternal” (fixed, constant, static, immutable) tautological analytical framework made up of simple anti-theses (Statik/Dynamik, equilibrium/innovation, interest/profit, entrepreneur/capitalist, individuality/bureaucratic State). This is why Schumpeter’s famous notion of “creative destruction” is not and cannot be “dialectical” in the proper Hegelian-Marxian sense – because it is an ahistorical, purely logical antithesis of opposites that are impervious to mediation and super-session. This is what we call an “aporetic” theory – it cannot “breathe” because there is no “osmosis” with any reality or “physis” that allows it to change, to mutate.


The notion of “organism” as an “organic totality” that may have a telos [a purpose, as in Lukacs] but is not “living” and is therefore deprived of physis and its theory is thereby reduced to an eschatology [cf. Bobbio on Marx] is in Heidegger’s Pathmarks, p.195. By contrast, the insistence on this fact is what characterizes Nietzsche’s approach to social theory. The limit of Nietzsche’s naturalism is that, like Heidegger’s, it is entirely ontogenetic – it does not consider human beings phylogenetically, as a species, but only as “individuals”. Heidegger does even worse than Nietzsche in that whereas the latter lays stress on the physio-logical, Heidegger always gave priority to the physio-logical as an aspect of ontology (and often of theo-ontology!). The complex analogy between Lukacsian “totality” and Heideggerian “Being” is explored most adeptly in L. Goldmann’s Lukacs et Heidegger. On Heidegger’s description of physis as “emergence” (p.199) and metabole as pro-duction (p.221) and their proximity to Schumpeter’s Entwicklung, see Pathmarks.



The reason why Schumpeter cannot see the need for tackling theoretically the meta-bolic evolution of the organic community – one that is living, one that is capable of endogenous change or mutation – is that he hypostatizes social conflict into a “totality” of aporetic concepts, of individual polar oppositions (entrepreneur/capitalist, innovation/stagnation, profit/ interest, individuality/State bureaucracy). Seen as a “totality” or as “one indivisible whole”, what Schumpeter calls “the social process” cannot but be analyzed in static polar terms, in a dyadic system that oscillates like a pendulum between simple abstract “opposites”, but one that cannot even envisage to resolve or over-come or super-sede its internal conflict because this conflict is an insuperable, irresoluble definitional element of its theoretical foundations! Schumpeter’s system of analysis constitutes a “dyad” - and not a “triad” as in the Hegelian dialectic, for instance – because the “dynamic kynesis” or “movement” of his economic system from one equilibrium “gravitational centre” to another does not even constitute an “evolution” – because the new and old equilibrium levels are analytically and systemically identical!





(Schumpeter’s “source of energy” is the “revolutionary” entrepreneurial Spirit, but its ultimate “reality” or validation as “successful innovation” – is entrusted to “the market”, the status quo. In this case the side that negates the existing order of stationary equilibrium relies for its validation on the very institution that preserves the existing order. Consequently, “innovation” is not a category that can objectively lead to the supersession of the social conflict and antagonism on which it is based – antagonism that is evinced by the scramble for “profit”, which is the “motivation” of the entire capitalist socio-economic system.)



As we are about to see, Schumpeter falls far short of understanding the full political import of the category of “innovation” for the theoretical analysis of the capitalist economic system. But for now, it suffices for us to understand that the claim of the innovator to the pro-duct in the form of “profit”, which now is central to Schumpeter’s economic theory, is neither logical nor mechanical: it can only be legal, in such a way that it must be either ethical or political or both but can never be said to be “scientific” because there can never be any causal link or determinate relation between “authorship”, initiative or leadership, on one side, and “ownership” on the other.






We established in the previous sections that the “exit” from the axiomatic framework of equilibrium analysis – what Schumpeter calls “the pure laws of economics” or Statik – into the dynamic process of what should be (yet ultimately is not for Schumpeter) metabolic change – what Schumpeter calls Dynamik or Entwicklung - means (a) that market prices are now wholly “indeterminate”, throwing into doubt all notions of economic “objective value” whether Classical (based on labour-time) or Neoclassical (based on relative prices as market rates of exchange ); and (b) that they are indeterminate because an ethico-political element is introduced in the determination of market prices as a claim on the “distribution and ownership” of aggregate production. For Schumpeter, that ethico-political element is innovation. And the reward, the “premium” – literally, “the prize” or “spoils”! - for “successful innovation” is “profit”:

[Profit…] is the premium put upon successful innovation in capitalist society and is temporary by nature: it will vanish in the subsequent process of competition and adaptation. (BC, p.104)


This reward is “ethico-political” in the sense that innovation requires a social agency, an economic agent, the Entrepreneur, whose novus actus interveniens causes the economic system to be trans-formed. But this transformation cannot be assessed by a standard of value that is internal to the economic system, which is what happens when the economic system is considered as a “totality”, because in that case the standard of value could only be “relative”, it could only be a Walrasian numeraire and, by that reason, the system could not properly be said to mutate in Schumpeter’s sense. Therefore, mutation and internal or endogenous measurement are inconsistent concepts. For the economic system to mutate, it must do so meta-bolically, that is to say, by “consuming” its physical environment, and therefore pro-ducing fresh human needs, not simply by “exchange” between its individual members. And this metabolic consumption of the physical environment will change in turn the relations of the component “members” of the organic community in a manner that is no longer “relative” to one another but indeed is meta-bolically meta-morphosed because the organic community will now be confronting – indeed, it will be pro-ducing! – a different environment from that in which it started!



The problem that Schumpeter perceived with the Statik was that in its theoretical framework the trans-formation of the economic system occurred as the result of “exogenous forces”. By contrast, for Schumpeter innovation and the entrepreneur are the “endogenous” force or source of energy that mutates the rigidity of the existing system. But because Schumpeter seeks to isolate “a purely economic theory of economic change”, he must then refer to an “economic system” that is incompatible with innovation as a product of the “individuality” of the Entrepreneur; it is incompatible with its “endogeneity” in the “economic system” because, as a “system”, even the fact of innovation must become “systematic” – indeed, in Schumpeter’s own terms, innovation is “inner-systematisch”! Were it not so, then innovation would still be a phenomenon that lies outside the economic system, a fact that is exogenous to this system. – Which is why Schumpeter must speak of a “process” of innovation (Innovationsprozess), and of a “mechanism” of transformation (Veranderungsmechanismus). This stress on “process” and on “mechanism” is intended by Schumpeter to remove the element of “accidentality”, of “in-vention” that is essential for the “authorship” of the entrepreneur, for the entrepreneurial “Spirit”.

[O]ne of the most annoying misunderstandings that arose out of the first edition of this
book was that this theory of development neglects all historical factors of change except
one, namely the individuality of entrepreneurs. If my representation were intended
to be as this objection assumes, it would obviously be nonsense. But it is not
at all concerned with the concrete factors of change, but with the method by which
these work, with the mechanism of change.

(Schumpeter 1934: 61, fn. 1)

Schumpeter’s attempt to differentiate “profit” from “interest” rests exclusively on this rationale: profit is simply an adventitious, epi-phenomenal, episodic “premium”, the trophy or spoils (“premium” in Latin, cf. the spolia opima bestowed on victorious Roman generals) of the heroic entrepreneur engaged in the competitive struggle, against “the rationalistic Type”, the capitalist financier, whose “interest” represents the more “systemic” part of capitalist enterprise because it is paid at a constant “rate” – one that is bound to atrophy and fall tendentially over the time of “adaptation” unless the competitive entrepreneurs can “constantly recreate” the profit or surplus.

Profit is spasmodic; interest is the portion of profit paid regularly and periodically by the entrepreneur to the capitalist. Profit is “temporary”; interest is more “permanent”. Interest is “paid out of profit” and is therefore dependent on the generation of profit – in other words, there can be no interest without profit. Although Schumpeter insists, somewhat inconsistently, that it is the “capitalist financier” who assumes the “risk” of investment by lending to the Entrepreneur, the fact remains that it is entrepreneurial Innovation that carries the “risk” of failure – because the capitalist finance capital can “average out” risk by “pooling” enormous sums of capital.


Because prices and values are entirely indeterminate in the Dynamik, profit now becomes a mere “psychological” function of “the entrepreneurial Spirit”; profit now becomes a mere “accident” of capitalism – an “incident of invention” (Latin, in-venire, to stumble against something, to come across by accident). But then, if “profit” – which is the essential element of capitalism – is merely “accidental”, if it is not “systematic”, it follows that there is no basis on which we may classify capitalism as an economic system. Because profit in Schumpeter’s dynamisch analytical framework is wholly indeterminate, it follows that his attempt to define innovation as a determinate source of profit leads him to qualify innovation that produces profit as against profitless innovation as “successful innovation”.


But in that case the only economic criterion for distinguishing between successful and unsuccessful innovation is – the market! Yet if this is the case, then it is impossible to determine the “quantum” of profit because “the market” can determine the distribution of profit but not its “production”, its “value”.  Then we are back to the tautological definition of value in neoclassical static equilibrium analysis: value is whatever the market fixes through prices and prices are fixed by the market according to its perception of the relative value of goods. We are back to a Walrasian general equilibrium framework of analysis in which prices are determinate but still relative and therefore ultimately meaningless because tautological or self-referential or circuitous. Worse still, we are back to a Statik analysis in which, against Schumpeter’s intention, the economic system changes exogenously, “from without”, and not endogenously as he wished, “from within” because “innovation” is not a “systemic” attribute of “the economic system”!


It is already apparent from this brief exegesis that Schumpeter’s attempt to perfect Neoclassical economic theory along Machian lines must crash against an insuperable barrier: - because his formulation of the Entwicklungsproblem already supersedes and invalidates his own attempt to dichotomise neatly economic “science” into, on the one hand, an “anatomical” or static part that describes the “circular flow” (Kreislauf) of a capitalist economy at or near “equilibrium”, and on the other hand a “metabolic” or “evolutionary” or dynamic part capable of explaining “scientifically” – because it needs to be “a purely economic theory of economic change” -  the historical development, mutation and evolution of capitalist economies. One of two things: either it is possible to establish scientifically the possibility of economic equilibrium – and then by necessity all disequilibria must be due to “disturbances” (Storungen) that are exogenous to the scientific operation of the economy; or else, as Schumpeter clearly contends, there is no such thing as “equilibrium” in a capitalist economy but at best only periods of “harmony” or “tranquility” that are incessantly undermined by a dynamic force or source of energy endogenous to the capitalist economy.


Yet if this force or source of energy is to be wholly “qualitative” and “transformational” in a manner that is not capable of being “quantified” or of being made “predictable”, if this force or source of energy is to operate in a “spontaneous and discontinuous” fashion, then it is absolutely obvious that this economic “transformation mechanism” can only be a “subjective” or “institutional” factor! Schumpeter himself gives the game away when he restates his thesis thus in a later work:


The capitalist process not only destroys its own institutional framework [m.e.] but it also creates the conditions for another. Destruction may not be the right word after all. Perhaps I should have spoken of transformation, (CS&D, ch.12)


But it is even harder to agree with Schumpeter’s reformulation of his central thesis because this statement also implies that “the transformation mechanism”, although it is “subjective and institutional” and threatens “to destroy its own [existing] institutional framework”, always and infallibly manages “to create the conditions for another [institutional framework]”, always and infallibly successfully manages “to propel the economic system from one equilibrium to another”! In that case not only is this “transformation mechanism” not “destructive” at all – it can only be “creative” –, not only is it not prone to “crisis”, but also it cannot be “subjective and institutional”: it can only always and everywhere be “mechanical” and “scientific”! Indeed, such an analytical framework would be indistinguishable from the “equilibrium analytical framework” of Neoclassical Theory – which, as we have seen, is purely analytical-descriptive or “anatomical” and cannot in any form assume “metabolic” status! That Schumpeter was inclined to excessive optimism is proven by one of his formulations:


“We must recognize that evolution is lopsided, discontinuous, disharmonious by nature—that the disharmony is inherent in the very modus operandi of the factors of progress,” (BC 100).



As we know, all human institutions have and can only have a political basis, origin or foundation. Indeed, this is the very reason why Schumpeter, in the quotation above, pointedly refused to allow historical and sociological matters to interfere with “purely economic analysis or theory”. In truly Weberian and Neo-Kantian fashion, in the Theorie he even speaks of die Autonomie des Welt der Wirtschaftlichens” from other social spheres (at p.90; on the epistemological noumenality of the sciences, cf. also Weber’s The Methodology of the Social Sciences).


Yet, the indispensability of just such “subjective” elements or even “subjective institutional” elements to “economic theory” is precisely what characterizes Schumpeter’s entire theoretical framework and must therefore clash with his aim to reformulate the foundations of “economic science” and to outline “a purely economic theory of economic change”!


Schumpeter begins by setting forth a general theory of capitalist
evolution. In his model, recurring “Innovation” propels the economy,
which exists in a state of constant tumult. …
All companies react “adaptively” to change, but creative “responses” come
only from innovative acts by Entrepreneurs. …
Meanwhile, powerful elements of society resist all major innovations,
because they wreak havoc on existing arrangements. As a result,
“the history of capitalism is studded with violent bursts and catastrophes.”
The building of a railroad where none had existed, for example, “upsets
all conditions of location, all cost calculations, all production functions
within its radius of influence.” Innovation, then, is very much a two-edged
In the end, “it is leadership rather than ownership that matters.” The failure
of both the classical economists and Karl Marx “to visualize clearly entrepreneurial
activity as a distinct function sui generis”—a distinction
Schumpeter always underscored—was a crucial flaw in their analysis of capitalism.22 (From McCraw’s Intro to Bus.Cycles: at fn.18.)


Hence, either we have a “static” economic science of equilibrium that cannot explain how equilibrium is attained and how it is lost – and that cannot explain the “content” of this “equilibrium” - what it is that is “equilibrated” at “equilibrium” -, in which case it can no longer be a “science” (again, see Dobb, Political Economy and Capitalism, ch.1.); or else we have a “dynamic” theory that is “a purely economic theory of economic change” that, just like equilibrium theory, cannot explain “qualitative development” as mutation and crisis because otherwise their “qualitative” and “unpredictable” and “antagonistic” character would completely nullify and invalidate any and all pretensions of this Dynamik to aspire to the status of “pure economic theory” and indeed of “economic science”!


In other words, Schumpeter’s insistence on this “division of labour” between Statik and Dynamik has the ineluctable effect that neither the one nor the other, neither equilibrium analysis nor Schumpeter’s own “theory of economic development”, can be said to be founded on satisfactory theoretical grounds because the first leaves out the empirically evident crises of the capitalist economy and society while the second reduces these crises to purely quantitative or procedural terms that make it indistinguishable from the formal and calculable analysis of equilibrium theory, and therefore unable to account for “development-through-crisis” (Entwicklung) endogenously as was Schumpeter’s intent.


We must clarify at this point that what we insist on here, and what is missing in Schumpeter’s theory of capitalist development, is most certainly not the “subjectivity” of human agents and institutions: what we insist on is the absence of political antagonism in what Schumpeter wishes to present as “pure economic theory”, which in reality is anything but “pure” even in its own terms, given its dependence on the “individuality” of the entrepreneur! What critics like Moura (and Lawson on whom he relies or indeed Joan Robinson) object to in Schumpeter is that he has not allowed for such Individualitat or else for “contingency” – whereas what we argue is that Schumpeter’s error is precisely to stress this Ethical and existential factor against the political one of antagonism where human beings act politically and in concert, not “individually”. It is Politics, not so much the humanistic historicist vision of “history” in the sense of “individual freedom” or “choice”, but much rather it is the “history” of human metabolic interaction that Schumpeter has neglected here.


Although he rightly rejects and refutes classical and neoclassical equilibrium theories to the extent that their own axiomatic assumption of equilibrium forces them to regard capitalism as a “stable” economic system intrinsically tending to equilibrium and capitalist development as caused by “exogenous” forces or shocks; and although he insists that capitalist growth is driven essentially by “incessantly endogenous” factors and not by “intermittent exogenous disturbances” (Storungen); Schumpeter simultaneously commits the grave error of treating these “endogenous factors” as being still reconducible to and consistent with an empirico-scientifically (erfahrungswissentschaftlich) discoverable “transformation mechanism”(Veranderungsmechanismus) despite the fact that they are clearly the products of subjective forces (innovation by entrepreneurs or “institutional framework”)! 

The problem with the transformation mechanism that Schumpeter identifies in the Innovationsprozess is that although we may allow for the possibility that a “mechanism” can bring about “trans-formations” (a “mechanism” can still be “animate” or institutional [cf. Carl Schmitt in The Leviathan, ch.3, and Weber’s “living machine” in Parlament und Regierung]), there is still an insuperable difficulty in that the processuality of innovation – which is a logical requirement of the “purity” of the theory of economic change - is utterly inconsistent with and antithetical to its innovativeness – which is a requirement of “innovation” as the source of profit! If indeed the Innovationsprozess is “innovative”, then it must give rise by definition to “trans-formations” of the economy that are either entirely “subjective” and “idiosyncratic” or else they are “political” and “institutional” and therefore indeterminate and unpredictable – not “processual” or procedural! In other words, the innovation process, if it is to be truly “innovative”, must be one that is just as likely to result in “crisis” as it is to bring about the “growth and development” or “evolution” of the capitalist economy!



Schumpeter is simply trying to have his cake and eat it too! Either the innovation process is “scientifically predictable”, and in that case it is hardly “innovative” in the sense intended by him, or else it is an entirely indeterminate, unpredictable and “destructive-creative” institution, in which case it quite simply cannot be described as a “scientific process” at all! Tertium non datur! Furthermore, a predictable innovation process would inevitably result in the stagnation that is the curse of the economy envisaged by Statik analysis, by the classical and neoclassical Kreislauf: - neither of which can consequently account for the transformation and mutation of the capitalist economy.



Clearly, Schumpeter totally fails to concede (unlike Keynes) what had prompted his entire research - that “evolution” (Entwicklung) contains not just “factors of progress” but also “factors of destruction and crisis” - indeed it contains at the very least the existential possibility of extinction (Keynes’s notion of “uncertainty” is all here) of the capitalist economic system and of human society! (The literal meaning of “crisis” as a medical term is that stage in the course of an illness when a patient has an even chance to survive or die – cf. Koselleck, Kritik und Krise.) Here Schumpeter clearly treats “the factors of progress” as being identical with his concept of “Entwicklung”. (On this “existentialist” critique of Schumpeter’s methodology, see Moura.)



On one hand, he pins the direction of the entire capitalist economic system on the “subjectivity”, on the Individualitat, on the “leadership”, of the Entrepreneur. But then on the other hand, Schumpeter speaks quite forthrightly of “progress”, of “science”, of “production functions”, and indeed of “rationalization” – that is, he speaks of social processes that, on any account, from every angle, clearly point to forms of social organization, to “institutional frameworks” that go far beyond the Individualitat or “leadership” of any “entrepreneur” and indeed of any “entrepreneurial Spirit” or “entrepreneurial Act”. They point to the social and political antagonism represented by the profit motive and capitalist accumulation and of its foundation, the wage relation. Schumpeter himself argues of course that the phenomenon of innovation is much more than an individual or subjective phenomenon, but is rather a socially objective “economic process” that combines various aspects of capitalist institutional and economic reality such as the existence of finance capital needed to finance entrepreneurs, and the existence of the latter within capitalist firms, as well as the motivations of these last to invest for profit. So nomothetic, institutional and procedural is this “process” that Schumpeter feels emboldened to speak of “economic evolution”:


The changes in the economic process brought about by innovation, together with all their effects, and the response to them by the economic system, we shall designate by the term Economic Evolution. Although this term is objectionable on several counts, it comes nearer to expressing our meaning than does any other, and it has the advantage of avoiding the associations suggested by the cognate term Progress, particularly the complacency the latter seems to imply. This terminological decision is but the expression of an analytic intention, namely, the intention to make the facts of innovation the basis of our model of the process of economic change. [83]

But this does not mean that he was not aware of the difficulties involved in his own theorization of these complex sociological concepts and realities. Here is an example, one of many illustrations of how Schumpeter used nomothetic theoretical formalism and idiographic subjective voluntarism as asymptotic “limit cases” of his conceptual framework. It could be said that the framework of equilibrium analysis is both the blueprint empyrean and the stagnant end-state or destiny of capitalism, its “first thing” and “last thing”, its initium and finis. In it we find all the potential and all the rigidity of capitalism, its foetus and its corpse.




To be sure, Schumpeter was well aware of this “problem” lying right at the heart of his theory of economic Entwicklung – not for nothing he called this the Entwicklungsproblem. Nonetheless, it is precisely this complex interaction between the free Individuality of the Entrepreneur, the subjectivity of the enterpreneurial Spirit, the initiative of the entrepreneurial Act and Leadership, on one hand, and the necessity of economic science, the mechanicity of economic transformation, the institutionalization and process of Innovation, the rationalization of techno-scientific progress, on the other hand, that Schumpeter has failed to com-prehend, that is to say, to theorize and explain in a unified and coherent manner! It is this very complex trans-ition between “trans-formation” and “mechanism”, “innovation” and “process”, leadership and techno-scientific bureaucracy – and finally, what is the real motivation of the Entrepreneurial innovative act for Schumpeter, between “economic evolution” as development-through-crisis and profitability: - these are the crucial passages that Schumpeter has almost totally neglected to analyze, failing almost even to perceive what lies at the root of what he himself calls the Entwicklungs-problem.


And this failure explains the irresoluble limitations of his Machian empiricist Schematismus (competition/adaptation, equilibrium/development, science/innovation, leadership/bureaucracy, spirit/rationalization, transformation/mechanism, innovation/process) – all seemingly concealed under the “veil of obscure thought” (Nietzsche) of a neo-Kantian “autonomy of the economic world”. (It is not a coincidence, then, that Schumpeter opens both the Theorie and Business Cycles with a strenuous but ultimately vacuous defence of the “autonomy of economic facts and science”, and that especially in Business Cycles he takes great pains and goes to extreme lengths to eliminate the element of “invention” from the concept of innovation, and to trace meticulously the “procedural” components of the Innovations-prozess – precisely because, as we contend here, he was concerned to blur the ineluctable antinomy present in his “theory” between the inventiveness of Innovation and its institutional-scientific process. He was concerned to hide the ineluctable subordination of economics to politics! The way out of this antinomy is through the study of political antagonism inherent in the capitalist process of production.


 As a result, the Weberian Rationalisierung is no longer seen, as it certainly was by both Marx and Weber, as an intrinsic feature of the capitalist “economic system” but rather as a “separate” and “parallel” factor, indeed as an “external factor” of rationality, which again defeats Schumpeter’s entire purpose in seeking to trace the “endogeneity” of science and technology to capitalist industry (cf. ch.11 on “The civilization of capitalism” in CSD in which science and technology are tied only co-incidentally to “the Rise of Capitalism”).


What needed to be explained is why and how, in a politico-historical and institutional sense, the capitalist economic system does not just “run into crises” as if they were ab-errations from an ideal scientific path, but rather how it “thrives on crises” and how and why it can manage to survive and reproduce and renew itself materially and politically through and by means of crises – knowing that each time the outcome is entirely “uncertain” (Keynes). If indeed it is the “leadership and “spirit” of the entrepreneur (Unternehmer-geist) that drives the “process of innovation”, how can this necessarily subjective “Spirit” (Geist), this transformational force, this innovative energy, this leadership, be combined scientifically with its objective, mechanical, rationalized, instrumental “process”?


How can something as “subjective” as “the entrepreneurial Act” give rise to and occasion a complex technico-scientific process that takes place in large monopolistic firms that already constituted the reality of capitalism in Schumpeter’s own time? How is the Unternehmer-Geist compatible with “the process of Rationalisation” [Rationalisierung] that Schumpeter assumes from Weber?

Schumpeter himself later accepted this new reality of capitalism by devoting much of his Business Cycles and Capitalism, Socialism and Democracy to “trustified or monopoly capitalism” and by accepting that “innovation” itself had become institutionalized through corporate research and development and had therefore lost that “subjective entrepreneurial” feature that he had championed as the differentia specifica of capitalist economies. Nevertheless, it is fair to say that, despite his best attempts at imitating Marx’s own “histoire raisonnee”, which he greatly admired, Schumpeter’s empiricist Machist bias always prevented him from fully understanding the Marxian concept of the capitalist “real subsumption of the production process” or indeed the Weberian concept of “rationalization”.

Rosenberg offers a choice example of this incomprehension in his own assessment of Schumpeter’s account of the “endogeneity” of science and technology to capitalist accumulation:

[S]chumpeter’s Weltanschauung is one in which science and technology, normally so far from the world of phenomena examined by neo-classical economics of his own time, are in reality highly endogenous to the capitalist world. This is so because they have become subject not only to the gravitational pull of economic forces, but also to the “habits of mind” inculcated by the rationalizing forces of the capitalist market place (S and the Endogeneity of Technology, p.12)

Just like McCraw and Schumpeter, Rosenberg treats “science and technology” and “economic forces” as being social realities that are separate from and parallel to “the capitalist world”, that is, to capitalist social relations of production. – Which is why he can then proceed to speak of “the rationalizing forces of the capitalist market place” when in fact even Weber himself could see that it was not “the market place” that mattered but rather the “exakte Kalkulation” based on “the rational organization of free labour under the rigid discipline of the factory”! What is at the centre of the real subsumption of society on the part of capital is not “the capitalist market place” but the “capitalist factory”: this is what Marx and Weber, and even Nietzsche, see correctly as the birthplace of the Rationalisierung. The difference between their theories of rationalization is that Weber still sees “rationality” as a category independent of “the rigid discipline of the factory”, whereas Marx to some extent but certainly Nietzsche see “rationality” not as an independent category but as an assertion of political “will to power”.


As Marx (in the Grundrisse) and even Weber (despite his mistaken belief in objective rationality or Zweck-rationalitat, in “Objektivitat”) were able to detect and explain, the process of techno-scientific and organizational “innovation” is endogenous to capitalist industry not because of “the gravitational pull of economic forces” but because the command of capital (dead labour) over living labour gradually transforms human society into a society of capital based on the command by dead labour over living labour, on the “exact calculation” (Weber) of living labour branching out from the workplace to encompass all aspects of social life (cf. Weber’s “Science as Vocation” and Vorbermerkungen). Once capitalist production and circulation have moved from being mere aspects of social reproduction (mercantile and entrepreneurial capitalism) to the point where they absorb every aspect of it in what we call “the society of capital” in the subjective genitive, human society belongs to capital and is shaped in its image and form. This is what Marx called the real subsumption of human society by capitalist industry.

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