Commentary on Political Economy

Friday 7 April 2017

Capitalism and Innovation: Schumpeter on Equilibrium vs. History

The aim of our study on Schumpeter is to draw the all-important link between Innovation, that is to say, technological change, and control over the social mode of production and distribution. There is an absurd tendency to address technologies as if they were technical-neutral or "scientific" aspects of social life that are wholly independent of human political decision-making. (Witness, for instance, Bill Gates's idiotic call "to tax robots", or Lawrence Summers's equally inane objection that "robots create jobs" or that "robots are responsible for the loss of American manufacturing jobs, not globalisation". As human beings, as workers, have known since the beginning of time, technologies are the interface of human being and tools or machines - and therefore they can never be "neutral" because the machine simply reflects the power of the human beings who stand behind it and control it - from Henry Ford to Mark Sucker-berg (!) or indeed Steve Jobs and even Warren Buffett.

So here is the second instalment in our series on Schumpeter enucleating further the intricate but enlightening nexus between technological change and capitalist command and, in the process, the categories of bourgeois "economic science". 

B. The Extrinsication of the Mechanical Equilibrium Schema into Political Market Process: Competition, Profit, Innovation
1. Equilibrium, Mechanics and Dynamics

Walras ... would have said (and, as a matter of fact, he did say it to me the only time that I had the opportunity to converse with him) that of course economic life is essentially passive and merely adapts itself to the natural and social influences which may be acting on it, so that the theory of a stationary process constitutes really the whole of theoretical economics and that as economic theorists we cannot say much about the factors that account for historical change, but must simply register them. ... I felt very strongly that this was wrong....
I was trying.... to answer the question of how the economic system generates the force which incessantly transforms it.... a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained.... If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build ...
It was not clear to me at the outset what to the reader will perhaps be obvious at once, namely, that this idea and this aim are exactly the same as the idea and the aim which underlie the economic teaching of Karl Marx. In fact, what distinguishes him from the economists of his own time and those who preceded him, was precisely a vision of economic evolution as a distinct process generated by the economic system itself.” (Schumpeter 1937/1989, p. 166)” (Preface to Japanese edition of “Theorie”, quoted in N. Rosenberg, ‘Endogeneity’, p.7.) of 

The contradiction in Schumpeter’s well-known exposition of his theory of economic development is absolutely evident: If indeed “the economic system” can be “propelled from one equilibrium to another”, then for him the notion of “economic equilibrium” must be theoretically valid. Yet if indeed there exists “a distinct process generated by the economic system itself...[through a] force or source of energy that incessantly transforms it..., which would of itself disrupt any equilibrium that might be attained”, then it is obvious that no such “equilibrium” exists or can exist, for the precise reason that “the economic system” is at all times – “incessantly”! – being trans-formed. It is the very trans-formation, the meta- morphosis, the trans-crescence of the economic system that precludes any “equi-librium”, any “equi- valence” of its internal values. An economic system that is able internally (“from within”) to undergo the “incessant transformation” that Schumpeter intends to theorize is quite simply conceptually incapable of being in “equilibrium” because equilibrium can be predicated only of economic systems based on “equal exchange”, that is, the exchange of equivalents. But Schumpeter’s “dynamic process” is one in which the values produced by the economic system are incessantly and qualitatively changing because of political forces that turn market prices into something entirely different from “equilibrium prices”, because they reflect a political reality rather than a reality of “pure competitive exchange” on the basis of marginal utility. This means that Schumpeter’s dynamic process, the Dynamik, is categorically different from the static economy, the Statik, intended by equilibrium theory. Schumpeter’s dynamic economy is one in which “equilibrium”, if attributed to it, is a contradictio in adjecto!

Schumpeter himself explicitly states in the Theorie that “dynamic equilibrium” is impossible because it is a contradiction in terms, an oxymoron: yet he does not seem to realize that for that very reason it is also impossible for the “distinct process” of Entwicklung to lead “from one equilibrium to another”! When speaking of Entwicklung, Schumpeter rightly treats equilibrium as a stationary state in which all “exchange values” or “market prices” are fixed in accordance with the utility schedules of market participants taken as individuals. But then, he fails to notice that for the “economic system” to move “from equilibrium to equilibrium”, those “exchange values” or “market prices” can no longer be fixed, first, in a regime of “pure competition”, and second, according to utility schedules, - because the very reality of Entwicklung, the “dynamic process”, determines values and prices not according to the pure economic laws of equilibrium theory with its axiomatic utility schedules, but rather according to the very “impure” practico-political processes that allow the economic system to be “trans-formed” and to mutate!

Schumpeter’s clear attempt here to reconcile Marx’s critique of political economy with Walras’s axiomatic schema of Neoclassical equilibrium theory by reconciling whilst maintaining the “distinct” character of the Statik and the Dynamik founders on the evident logical impossibility of the attempt – that is, of theorizing the capitalist economy on these two “distinct processes”: – that of Neoclassical stationary equilibrium which describes an economy of pure equal exchange based on marginal utility, and that of the Marxian critique of political economy based on the political antagonism of capitalist accumulation. This is so because a theory based on pure exchange leading to equilibrium views the economic system as one in which “prices” – the rate of exchange of goods, where supply meets demand – reflect the equi-valence of the determinant of prices, whether this be marginal utility or labour-power, whereas a theory based on political antagonism cannot regard prices as signifying the “equivalent values”, either objective quantities (labour-power measured by time) or rates of change of subjective estimations (marginal utilities), prescribed by the Law of Value of both Classical and Neoclassical Political Economy. (Note in this regard that the “Objective Value” described by the Austrian School from Menger to Bohm-Bawerk remains “subjective” in the sense that it springs from subjective “utilities” and its “objective” character – price – is dictated by the conflicting utilities of individuals in market transactions. For Marx, instead, this conflict is not over the utility of goods in exchange but over the violent objectification of living labour as labour- power by capitalists against producers.)
Differently put, equilibrium theory deals with equivalent values (whatever it is that is being “priced” for “exchange”) whose underlying “sub-stance” is “utility” because its “prices” are all relative to the utilities exchanged within the equilibrium system of exchange as defined, and cannot be determined until all exchanges have been completed. Furthermore, the axiomatic condition of perfect or pure competition prevents individual market participants from entering combinations or from changing production functions so as to obtain an advantage over other market participants. In complete contrast, Marxian theory treats the economic system as one in which political antagonism determines prices and therefore no independent market mechanism can fix prices as the exchange rates of equivalent values. Neoclassical equilibrium theory and the Marxian critique of political economy cannot be regarded as “distinct processes” except in the sense that they deal with subject-matters that are categorically different and therefore incommensurable and incomparable.

The all-important point that is being made here is that once we exit the axiomatic conditions of equilibrium theory and we allow market participants (a) to effect changes to production functions and (b) to co-operate,selectively to the detriment of others, then market prices are no longer determinable in accordance with the given utility schedules of market participants because these no longer act as “equals” in terms of their production functions and their market power. In neoclassical equilibrium theory it is the axiomatic “goal” of equilibrium that determines “prices” – so that these “prices” are necessarily “relative” to the constraint of equilibrium axioms that ensure the formal equality of market participants. (Tony Lawson, in the essay cited above, makes this perceptive point.) But once the axioms of the “atomicity” and formal equality of market participants are removed, then the determination of market prices is no longer possible because there can no longer be an “equilibrium” in what has become an economic system whose “prices” are affected by political conditions and antagonisms that are not amenable to “measurement”.

Yet, whilst he clearly contends here that the “economic system” already contains the internal “force” or “source of energy” that will “disrupt any equilibrium that might [temporarily] be attained” and degenerate into periods of profound instability and crisis, Schumpeter is also equally adamant that it is possible to theorize positions of “equilibrium” or “tranquility” (Joan Robinson’s preferred term, in The Accumulation of Capital) during which the behavior of “the economic system” is scientifically predictable or stable and can even be said to be “in harmony”. Whilst he wishes to construct “a purely economic theory of economic change” that relies on “endogenous” rather than “external factors”, Schumpeter still insists on the need to differentiate this “purely economic theory” from the more “static” theory of economic equilibrium as a “distinct process”, even though the two “processes” are quite evidently not only “distinct” but also in fact categorically inconsistent!

Schumpeter therefore bases himself on a dual typology of “economic science”: a “Statik” science represented by orthodox Neoclassical Theory as the “scientific” attempt to systematize empirical observations about “the economic system” founded exclusively on the empirical reality of “market exchange and pricing” that must lead to a state of equilibrium – which is why he insists that the economy moves from equilibrium to equilibrium; and a “Dynamik” science capable of being “a purely economic theory of economic change” founded on the fact that the capitalist economy seems to be able to trans-form itself and, in so doing, go through a wave-like or “cyclical” motion or “evolution” that propel[s] the economic system from one equilibrium to another”, - a “propulsion” not due to “external factors” unconnected with the scientific operation of the economic system, but much rather to the fact that
the economic system [itself] generates the force which incessantly transforms it..., a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained...

Apart from the fact that “external influences” could be hypothetically the ultimate cause of capitalist “disturbances”, it remains true for Schumpeter that

practically all the phenomena, difficulties, and problems of economic life in capitalist society... as well as the extreme sensitiveness of capitalism to disturbance, would be absent if productive resources flowed every year through substantially the same channels toward substantially the same goals, or were prevented from doing so only by external influences, [Business Cycles, p.83]
It follows therefore that any economic theory that limits itself to the task of describing or classifying or merely analyzing this “circular flow” (Kreislauf) of economic activity would not only fail to account for the “disturbances” (Storungen) and for “all the phenomena, difficulties, and problems of economic life in capitalist society”, but it would also fail to account for the actual combined “quantitative growth [Wachtstum] and qualitative development [Entwicklung]” of the capitalist economy and society, that is to say, it would not account for capitalist accumulation. Both Classical and Neo-classical equilibria represent only a “circular flow” (Kreislauf) of goods exchanged, because in a state of “pure competition” (reinen Wettbewerbs) market exchange leads eventually to the exhaustion of any “profits” or “surpluses”, and therefore of any “growth” or “development” or “evolution” or indeed even “crisis”, that may exist initially when the economy is in dis-equilibrium.

Following Marx in opposition to Walras, Schumpeter maintains that the economic system is characterized by two “distinct processes” that generate opposing forces, one of which guides it toward equilibrium (what Marx called “simple reproduction”) and one that pushes it out of that position (Marx’s “expanded reproduction”). In these premises, the Law of Value shared by both Neoclassical equilibrium theory and Classical Political Economy necessarily entails, at least theoretically, the inevitability of economic “stagnation” – the former because aggregate supply must equal demand until no further profitable exchange is possible (this is the outcome of Walrasian tatonnement), and the latter because competition among capitalists and competition for higher wages from workers will eliminate all possibility of profit arising from the exploitation of workers - as Schumpeter consistently and validly argues throughout his work. (This point is discussed at length in the next section.) 

No doubt, the fact that Schumpeter is able to mention Walras and Marx without pointing out the categorical incompatibility of the two approaches (the “distinct processes”) to economic theory testifies to Schumpeter’s own lack of dialectical comprehension of the fundamental politico-philosophical and even onto-epistemological concepts involved. (These more “dialectical” matters, obliquely invoked by the Schumpeterian notion of “creative destruction”, will be discussed in a later section in connection with Marx’s influence on Schumpeter.) Even so, however, there can be little doubt that Schumpeter had some idea of the difficult issues that capitalist accumulation posed for the development of a “purely economic theory of economic change”, as his attempts at conceptualizing these issues show quite clearly. Let us look closely at how Schumpeter engages in this difficult conceptual exercise. 

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