Commentary on Political Economy

Thursday 2 October 2014

Schumpeter Between Formal Schema and Entrepreneurial Spirit

In ‘Statik’ classical and neoclassical economic theory, the capitalist economy was seen as founded entirely on the operation of the “self-regulating market”. It was “the market” which, by assuming the formal equality of all economic agents, ensured the orderly, “balanced”, “equilibrium” (also in German, Gleichwichtigkeit – ‘equal-weight’) of the economy by allowing the equi-valence of producers’ supply with consumers’ demand. In this institutional universe, “growth” was seen as a quantitative phenomenon reliant on the horizontal expansion (Wachstum) of the market. The factors of “growth” were seen as “external data” or “disturbances” (Storungen) that could jolt the economy out of its “equilibrium” but only temporarily. Above all, scientific-technological processes were interpreted as “exogenous” factors, as independent and autonomous “progress” extraneous to the functioning of the capitalist economy and therefore outside the purview of “economic analysis”.


This is in large part what allowed the “homologation” of the Economic (scientific-technological Zivilisation reflected in the productive process and its “division of labour”) with the Political (the equitable allocation of value and social resources through the self-regulating market). This “homologation” was the foundation of the “neutrality” of the State of Law (Rechtsstaat or ‘night-watchman state’) whose only function was to guarantee individual property rights as the basis of “free competitive exchange in the (therefore) ‘self-regulating’ market”. The market is “self-regulating” so long as the property rights of its “free competitive participants” are respected and protected.


To its credit, Classical Political Economy had stressed the “quantitative” importance of “wealth-creation” by focusing on the subordination of the market to the process of production and distribution of objective (yet ultimately metaphysical/essentialist) “value” in the classical “labour theory of value”. But the  Neoclassical Revolution shifted the focus of “economic inquiry” even further away from the sphere of production by substituting “value” with the “subjective” exchange of “endowments” through the “market mechanism” that alone, “by definition” (tautologously, in Hayek’s definitive analysis) ensured the optimal allocation of these “endowment/resources” according to (metaphysical) “marginal utility”.


Schumpeter’s theoretical greatness lies perhaps in breaking definitively with this liberal synthesis of classical and neoclassical “Political Economy”. For him, no such “reconciliation” between economic value and politically neutral claims to it is possible because, as he rightly noted, both Classical and Neoclassical Political Economy failed to confront the ‘Entwicklungs-problem’: they never tackled the reality of the “trans-formation” of the methods of production – their ‘trans-crescence’ - both in an “organizational” and in a “technological” sense. It is this “incessant change” which is the differentia specifica of the capitalist economy that determines the irreconcilability of economic theory and politico-economic praxis. And theory and practice are irreconcilable precisely because capitalism is an economic system based on the conflict of individual interests, because capitalism is a society in permanent crisis.


As we have sought to demonstrate throughout this study of Schumpeter’s work, two levels of scientific analysis are present then: an analytical or anatomical level where the “schema” or “skeleton” or the “organs” of the economic system are studied in their static functional relation to one another; and a sociological-historical or politico-physiological level at which the capitalist economic system is seen “in flesh and blood” as a dynamic or metabolic organism propelled by internal and antagonistic forces already axiomatically implicit in the theoretical schema of static equilibrium but now examined in their explicit practical ex-pression or extrinsication or manifestation, as in innovation, monopoly and bureaucracy. This “institutional framework”, as Schumpeter calls it, is the practical historical ex-pression or manifestation of the “tendencies” implicit in the axiomatic definitions of the equilibrium schema. (I have argued in a separate study that von Mises’s own concept of “praxeology” involves precisely this “practico-logical” requirement of the apparently “static” notions of equilibrium theory. This emphasis on the “procedural” aspects or moments of neo-classical equilibrium and marginal utility theory – against the more “static” side stressed by the “Aristotelian” Menger and Walras – is what provoked Schumpeter’s “evolutionary” theory in the first place.)


On one side, therefore, we have the “form”, the schema, the frame-work, and on the other we have the force, the substance, the energy. The most essential question of “economics” as a socio-theoretical discipline, then – one that is never posed by bourgeois economic “science” - is: how can the form be reconciled with the force? How can the equilibrium schema which is seemingly irreconcilable with the dynamic force of innovation and development, actually be “effectual” in guiding or containing its “source of energy”? The answer is quite simply that the form cannot be reconciled with its substance and that the content of the form can only be “contained” or guided by the form at the expense of the force of innovation itself! In other words, capitalism can survive only to the extent that it can curtail or contain or chain the dynamic force of innovation within the static form of the market mechanism: only to the extent that its source of energy, which is living labour, can be politically reduced to and “fitted” into its institutional “forms” – of which the most crucial is the wage relation measured through the monetary form. The monetary form furnishes the strict inflationary numerical limits within which the money wage must be contained and beyond which wage settlements cannot go – on pain of losing the “effectuality” of the money wage or monetary form as a “measure” of social antagonism. Here the bourgeoisie is truest to its positivist praxis of turning “truth” into “certainty” (cf. Book Four of Heidegger’s “Nietzsche”). Because Schumpeter leaves out the antagonism of the wage relation, the two “levels” of his work, the Statik form and the Dynamik content, have to be kept separate and cannot be unified. But, as we shall see in the next section linking and comparing Schumpeter’s Unternehmer-geist with Weber’s leitender Geist, to see just this separation or disjunction in Schumpeter’s theoretical framework and methodology and to dismiss it as “contradictory” or “flawed” (as do Lawson and Moura, for instance) would be to miss the entire point of his modus operandi!


(On the crucial interplay of form and substance, the important references, by no means exhaustive, are to Simmel’s sociological studies, Lukacs’s Die Seele und die Formen, and even Derrida’s L’Ecriture et la Difference, chapter on “Force et Signification”. Of course, Lukacs’s masterly Destruktion of “the antinomies of bourgeois thought” in History and Class Consciousness is inconceivable without Schopenhauer’s critique of Kantian epistemology in “On the Four-fold Root” which is the real theoretical springboard for not just the negatives Denken from Kierkegaard and Nietzsche but also for the post-Hegelian materialist reconstruction of ontology initiated by Marx. Our own attempt to go beyond the fictitious dualism of form and substance, mind and matter, is in “The Philosophy of the Flesh” on


Given that this “force of innovation” or “source of energy of capitalism” is both “endogenous” and “internal” (innersystematisch) to the operation of the capitalist economy and that it operates “incessantly”, and given that the effects of its operation are “spontaneous and discontinuous”, it is clear that all existing economic theories, founded as they are on the notion of “economic equilibrium”, are conceptually quite inadequate to provide “a box of tools” for understanding such a spasmodic and inharmonious movement between positions of “equilibrium” – which is why, contrary to all experience and empirical observation, they must attribute its origin to “exogenous factors” such as “external shocks” or to “events” such as political interference, notably by the State, or even to “exogenous” techno-scientific and organizational advances.



Nevertheless, Schumpeter treats the Dynamik and the Statik as if they were separate points in one uninterrupted logical line despite what we have shown, and Schumpeter himself accepted, to be their categorical inconsistency:


It is incessant change in the data of the situations, rather than the inadequacy of the data of any given situation, which creates what looks like indeterminateness of pricing. We conclude, on the one hand, that we must take account of this pattern when dealing with the process of change which it is our task to analyze in this book and which must be expected to create precisely such situations, and, on the other hand, that it does not paralyze the tendency toward equilibrium [Gleichgewichtstendenz](BC, p.43)


As we amply demonstrated in the sections above, and as Schumpeter himself often admitted, either we have a stationary equilibrium with determinate, although relative, prices; or else we have a metabolic process of change with indeterminate prices: Either we have a static schema with mechanically inert bodies; or else we have a dynamic process with economic agents capable of “innovative” actions. Tertium non datur! The state of equilibrium is one that does not admit of innovation. It is a state of “stagnation” because neither metabolic change nor therefore profit are possible. And the dynamic process is one that does not admit of equilibrium precisely because profit and metabolic change – which are possible only through innovation – are inconsistent with equilibrium.


But in the quotation above, Schumpeter has surely mixed up his metaphors: it is most certainly not “innovation” that “paralyzes the tendency toward equilibrium”: it is rather the other way around: it is the “forces [of reaction against development] that paralyze innovation” and lead instead to the static, stationary, stagnant “state” (!) of equilibrium! By contrast, far from “paralyzing” the Gleichgewichtstendenz, innovation certainly provides “an opposing tendency out 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.[Ch.7, 489]


Thus, we have a dyadic, aporetic and anti-thetical, pendular dynamic to capitalism: it is the leadership of the entrepreneur, his Spirit of Innovation, that forces out, that provides the centrifugal push away from stationary equilibrium, which is instead “paralyzed” by the competitive rivalry of self-interested atomistic individuals, as required implicitly by the axiom of pure competition. But in the process of escaping from the paralysis of stationary equilibrium – an escape required by the very “purity” of competition -, the need to preserve any temporary advantage leads the entrepreneur from leadership back to ownership, back to the state of imperfect competition which provides instead the centripetal “gravitational pull” of equilibrium stagnation to which the original axiomatic pure competition had led.


Conversely, it is the ownership of capital on the part of finance capital that leads to the restriction of competition and the search of rent-seeking interest, which lowers the rate of interest, providing thus the centripetal pull driving the capitalist economic system back toward its “gravitational centre” (Schumpeter’s Gravitationszentrum) of equilibrium stagnation - from which the profit-seeking of pure competition will seek to free it with a renewed centrifugal push out of equilibrium into the leadership of innovation. Here once again is the dyadic, pendular motion of Schumpeter’s theory of economic “evolution” – a motion that, as we saw earlier, cannot be said to be “dialectical” for the simple reason that the forces at play (profit and interest, leadership and ownership, innovation and adaptation, evolution and stagnation) do not supersede each other but instead perpetuate themselves indefinitely!


To repeat, it is not innovation that “paralyzes” the tendency toward equilibrium (Gleichgewichtstendenz) – but much rather the other way around: it is the tendency toward equilibrium that paralyzes innovation; and it does so by immobilizing its “author”, the Entrepreneur. Innovation is dynamism fighting paralysis; equilibrium is a state of paralysis. Indeed, because “the reaction against innovation” is – almost by definition – most likely to come from the established order, from the competitors currently in power and in charge of the status quo, that is to say, from the existing status quo of distribution of political power – then, it is evident that “the state of equilibrium” is institutionally represented by just that – by the State! Equilibrium is literally a “State”! The “tendency” is always toward equilibrium, toward a State of rest and stagnation because, as we saw above, the “friction” that is necessary for innovation ends up restricting the political and social room-to-manoeuvre (Weber’s Ellenbongsraum) required by pure competition. A political State is a “state” to the extent that it holds and contains political antagonism in the double sense of “holding within itself” and therefore “re-presenting” that antagonism, and of seeking to hold and contain that antagonism from destroying the State itself by bursting its legal and political boundaries, the establish order, the status quo.


Innovation is auctoritas, it is “initiative”, it is potentia, whereas the State is passive potestas. The State reigns but does not rule; and to the extent that it “rules” it only “administers” or “polices” its subjects but is quite incapable of mustering the productive forces of society! (Schumpeter may have had in mind here the work of Max Weber on Parlament und Regierung and that of Carl Schmitt, from the early research on The Crisis of Parliamentarism to the more philosophical Political Theology.) It is the innovative entrepreneur who has the authority to rule: to the Entrepreneur goes the “premium” – literally, the prize or spoils – of economic activity represented by “profit” (Unternehmer-gewinnen, literally, “entrepreneurial winnings”), just like the consuls of the Roman Republic who had the “auctoritas” to introduce laws in the Senate and its victorious generals who were eligible to receive the spolia opima. In other words, it is the State, the bureaucracy, the existing powers that be that wish to preserve the status quo, the established order, and therefore wish also “to bring development to an end”. Equilibrium is bureaucracy, it is Sozialisierung, it is Rationalisierung. These are “the forces of reaction”. Worse still, it is not just those who are “disrupted” or “threatened” by innovation who constitute the “reaction” that re-establishes the Gleichgewichts-tendenz: it is the innovators themselves (!), the Entrepreneurs, who now have an interest in restricting and restraining “pure competition” so as to protect their “advantage”! This “tendency toward equilibrium” Schumpeter calls “adaptation”.


Equilibrium is rigor mortis or death – which is “not allowed” to prevail by the “creative destruction” of the entrepreneurial Spirit - just like the whittling down of surplus value or profit, which are the “motive” behind innovation, that is “constantly recreated” by innovative acts. This is the Individualitat that sparks and revives the “static reason” of the economic system back into the “dynamic movement” or “creative destruction” of history! For Schumpeter, in stark opposition to both Classical and Neo-classical Political Economy, it is not “equilibrium” that is the goal of economic activity: the goal of economic activity in its specific historical capitalist manifestation is “innovation”; its force and source of energy or inspiration is “the entrepreneurial Spirit”; its hero or “carrier” or “economic Subject” is the Entrepreneur. Only the Entrepreneur has the authority of authorship: the Entrepreneur destroys the state of equilibrium, the bureaucratic status quo, so as to be able to lay claim to profits. Here therefore we have finally the distinctive elitist view of capitalist industry and society that Schumpeter inherited from Pareto and Weber against the egalitarian position of the “socialist” Walras and the “communist” Marx. Profit is not a “fixed quantity” that can ever be “equitably” distributed! Instead, profit is a “social relation” in that it is simply a legal-ethical claim to social resources by atomistic individuals in continual conflict with one another!


Once again, the originality of Schumpeter’s approach to “methodology” in economics rests almost entirely on his “un-dialectical” insistence on the irreconcilability of theoretical schema and political practice due to the utter irreconcilability of human conflict! Only by insisting on such irreconcilability of formal theory and historical content is it possible to do justice to their separate polar indispensability for the study and practice of “economics”:


There is however one thing of fundamental importance for the methodology of economics which he [Marx] actually achieved. Economists always have either themselves done work in economic history or else used the historical work of others. But the facts of economic history were assigned to a separate compartment. They entered theory, if at all, merely in the role of illustrations, or possibly of verifications of results. They mixed with it only mechanically. Now Marx’s mixture is a chemical one; that is to say, he introduced them into the very argument that produces the results. He was the first economist of top rank to see and to teach systematically how economic theory may be turned into historical analysis and how the historical narrative may be turned into histoire raisonnee. (CS&D, p.44)


Not that, indeed, Marx or anyone else could ever offer a “unified” reasoned history: Marx’s “mixture” may have been “chemical” rather than “mechanical”, but Marx’s claim to have reconciled theory and practice remains for Schumpeter a vacuous “prophetic” and deeply “unscientific” boast! As we explained earlier in this work, Schumpeter’s notion of equilibrium as Kreislauf is indeed more consistent with Joan Robinson’s own concept of “tranquility” – which is instructively adopted and adapted from Marsilius of Padua’s Defensor Pacis, a mediaeval theory of human society based on its interpretation as an organism that is either “healthy” or “unhealthy”. Specifically, Marsilius of Padua spoke of “tranquilitas”, meaning a period of social peace and prosperity (see O. von Gierke, The Political Theory of the Middle Age.) Interestingly, both Antiquity and the Middle Ages lacked the notion of “revolution”, which is a modern European concept originating in the 17th century (see H. Arendt, On Revolution). Antiquity knew only of “metabole”, meaning social change, of “stasis”, meaning civil war, and of “homo-noia”, meaning harmony or agreement, and “corruptio”, obviously meaning corruption, that is, degeneration from a perfect state (a perfectione ad defectum, from perfection to defect). (On all this, see S. Mazzarino’s invaluable and irreplaceable Il Pensiero Storico Classico.)


But such a “tranquil” society would not be capitalistic! And its “stagnation”, the absence of metabole, would lead inexorably to stasis. The “organicist” vision of the capitalist economic system by Schumpeter removes any antagonism having to do with “pro-duction”, with the “external environment”, because this “phylogenetic” aspect of production is reduced to the ontogenetic “individual existence” - and therefore reverts conflict to the “individual members” of the “body politic”, reducing the eris and polemos – the conflict – of capitalist society to an “ethical” problem – that of the creative authority of “innovation” -, where the ethos of the established order, of the status quo, is in any case the bureaucratic paralysis of the state of equilibrium – the eidolon.


Schumpeter ends up interpreting stasis and metabole as purely ethico-political concepts in the “psychological” sense, not in terms of “pro-duction” of material needs but of “psychological types” – the “enterprising” entrepreneur pitted against the “hedonistic” capitalist. This is the phenomenological aspect of his work. This is the basis of the Wirthschafts-Subjekte which are, as “subjects”, individual protagonists, again in an ontogenetic sense that reduces immanence/metabole/production to transcendence/stasis/exchange, the Political to the psychology of Individualitat.

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