In keeping with the critique of orthodox economic theory that we have developed in this Blog, what we present here in an entirely new approach to economic theory that takes into account not just how products are "exchanged" in an economy but also and above all how these pro-ducts are pro-duced ("brought forward") - and therefore how a system of exchange interacts with the environment - which is essential to understanding what human societies and "economies" are in substance and reality.
The commonsense of this tool of analysis may be formulated as follows: first, if we deal with, say, the organism of a dog, the interpretation of what we observe divides readily into two branches. We may be interested in the processes of life going on in the dog, such as the circulation of the blood, its relation to the digestive mechanism, and so on. But however completely we master all their details, and however satisfactorily we succeed in linking them up with each other, this will not help us to describe or understand how such things as dogs
Joseph Schumpeter, Business Cycles. (1939) 29
have come to exist at all. Obviously, we have here a different process before us, involving different facts and concepts such as selection or mutation or, generally, evolution. In the case of biological organisms nobody takes offense at the distinction. There is nothing artificial or unreal about it and it comes naturally to us; the facts indeed impose it on us.
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](Business Cycles, p.43)
As we can see, Schumpeter discusses in the same breath two matters that he does not link explicitly but whose link is necessary nonetheless: and the reason that he fails to make this link explicit is that he does not see that the link is indeed necessary! First, there is the fact that his shift in approach to economic theory from static analysis (Statik) to dynamic theory (Dynamik) involves the examination of “the economic system” not as an aggregate of inert mechanical bodies governed by pure economic laws that mirror exactly the laws of mechanics, so that any “change” to that system must be due to “exogenous factors”, but rather as a living organism made up of component members that interact meta-bolically both with one another and with their physical environment. But then, again discussed “in the same breath”, there is the fact that this novel approach of treating the economic system as a living organism so that there is “incessant change” in economic data means also that now “prices are indeterminate”, although Schumpeter hastens to add that this “does not paralyze the tendency to equilibrium”, falling thus into the error that we pointed out previously, namely, that of treating Dynamik and Statik as a categorical continuum when he himself admits throughout his oeuvre that the two processes, evolution and equilibrium, are categorically incompatible.
As we saw in an earlier section of this review, the real reason why prices must be indeterminate in Schumpeter’s novel approach – the Dynamik - is not so much that there is “incessant change” in economic data, as Schumpeter seems to believe, but rather that the economic system is now seen as a living organism that interacts metabolically with its physical environment - with its “physis”. Schumpeter does not see that his “economic agents” (Wirthschafts-subjekte) cannot be treated as “atomistic individuals” because these presumed “in-dividuals” are now able to pro-duce, “to innovate”, rather than merely to exchange existing “endowments”. In other words, in the Dynamik, the individual component members of the economic system become economic agents able to initiate economic activity, that is to say, they can pro-duce new economic resources and needs rather than merely exchange existing or “given” economic resources - the “endowments” of neoclassical equilibrium theory. These presumed “individuals” are now theoretically able to produce for exchange and to exchange for production, and not simply “to exchange”. Because of this, it is impossible to attribute a “scientifically objective” or “determinate” or “absolute” value or price to production because prices regulate the distribution of the product and it is quite impossible to attribute both the “ownership” of the product and the economic claim to the pro-duct on the part of different pro-ducers because pro-duction involves the metabolic interaction of individual economic agents, singly and collectively, with their physical environment. And this metabolic interaction is impossible to measure – to value and to price – because it constantly changes the relations among individual producers in both a quantitative and a qualitative sense. To repeat, it is impossible to attribute “ownership” and economic claims by producers to production because “economic agents” are now considered not merely to exchange existing resources (endowments) with one another, but instead are also able to produce new resources by interacting meta-bolically with the physical environment in which “the economic system” operates.
And they interact metabolically with the physical environment not ontogenetically, as atomistic individuals; instead, they must so interact phylogenetically, as component members of a living organic community. For it is impossible for an economic system that is a living organism to attribute ownership claims to its individual members given that, as a living organism, it must interact metabolically with its “physical environment”! Indeed, although it is tempting to refer to this physical environment as “the external physical environment”, it is quite misleading to do so because there is nothing “external” to a living organism about the physical environment in which it must metabolize.
This is why prices are indeterminate in this new framework of social analysis: if we treat the economic system not as a “closed totality” but rather as a living organism metabolizing with its physical environment it is quite impossible to calculate at all, through any “price mechanism”, the contribution of individual members to the production or welfare of the living organic community.
We can see therefore that by moving away from Statik to Dynamik Schumpeter ought to have added three new inter-related theoretical components to his analytical framework: the first is “social labour”, the second is “production”, and the third is “metabolism”. It can be objected that Schumpeter meant to include all three elements in his overall category of “innovation”, but we will show presently that although the concept of “innovation” certainly includes that of “pro-duction”, intended as the making of fresh resources and needs, Schumpeter fails to theorize “pro-duction” explicitly as “metabolism” or “living activity”, and the other two elements he either confuses (“individual labours” with “social labour”) or wholly neglects (metabolism) because of his obsessive focus on “the economic system” as “totality” and on metabolic production as “individual labour” rather than “social labour”.
The
fact that the economic system is now “transformed
from within” by its economic agents
who are not subject to inflexible
axioms set “from outside” –, this
fact means that the “prices” that obtain in the economic system must be “indeterminate” for the simple reason
that it is impossible to assign a logico-mathematical or “scientifically
absolute” value on the innovations
that transform the economic system by means of an “objective market mechanism”.
To be “objective”, prices and values in Schumpeter’s “pure economic theory of economic change” would have to be
determined objectively, from outside
- as if the economic system were a
“closed system” or “totality”. But this is precisely what his theory of
economic development (Entwicklung)
cannot allow because its central postulate is that any change, mutation,
trans-formation or e-volution of the economic system must be endogenous, must come “from within” as well as be “incessant”, and therefore the “change”
or “mutation” must be in relation to the “without”,
the “physical environment” in which “the economic system” operates – not as a
“closed” system but as a metabolic living organism.
Again,
what makes prices and values “indeterminate” is not so much that the economic
system is in a state of “incessant change”,
as Schumpeter maintains, but rather it is the fact that this “incessant change” is the outcome of decisions and actions taken by “economic
agents” - and not by the “inert
mechanical bodies” of neoclassical
equilibrium theory - in relation to a
physical environment that allows them to produce metabolically fresh resources
and needs that constantly transform the existing relations of production
between “economic agents” both individually and collectively. For this
reason, the very notion of “innovation” is simply categorically incompatible with the “objective” (meaning
“internally fixed”) determination of relative
prices based on Subjective Value that obtains in Walrasian equilibrium or
indeed with the “objective” (meaning “externally fixed”) determination of absolute prices prescribed by the Labour
Theory of Value of Classical Political Economy.
Because
this “dynamic” economic system is transformed from within by the innovative actions of what are now
properly-called “economic agents” and not by the “inert mechanical bodies” of
“static” Walrasian equilibrium – for this reason, the economic system is no
longer one of “pure exchange” but it becomes instead one in which pro-duction
takes place, one in which goods and services are pro-duced (“brought forth”) metabolically
by the interaction of economic agents not only with one another but also with
their physical environment. This means that not only are economic
agents interacting individually with
one another and with the physical environment: but it means also that “the
economic system” cannot be examined in its entirety, as a whole, as a totality, precisely because it is
interacting meta-bolically with its
physical environment – just like a living
organism. Only when “exchange” involves “pro-duction” can this exchange be
more than a sterile “id-entity” (the same entity); only then can it make a
“dif-ference” (a practical, unquantifiable, qualitative change): only then can
there be “change in the ex-change”
between economic agents - precisely because the exchange is un-equal in that its “value” is now
determined not relatively to its
individuals, not subjectively, but collectively in metabolic relation
between the economic system as a living organic community and its physical
environment.
This
means that market exchanges no longer constitute a “zero-sum game” but
effectively change the internal relations of individual participants both quantitatively
and qualitatively so that prices and
values are not just indeterminate but
in fact are meaningless in any other
than a political sense – in the sense
that any equality or equi-valence can be established only politically, either violently or legitimately.
In other words, unlike the Statik, in
the Dynamik “pure exchange” is no
longer possible: economic agents exchange
to pro-duce and pro-duce to exchange. This means essentially, as we are
about to see, that “pro-duction” is “living activity” or “living labour” and
that there can be no “individual labours” but only “social labour”. Put
differently, “labour” is a phylogenetic,
not an ontogenetic category.
Schumpeter’s
likening of the economic system to a “dog” in the quotation above reveals most
clearly his mental confusion in this regard: because if the economic system is
regarded as a living organism that, first, interacts metabolically with a
physical “medium” in which it can evolve, and therefore, second, can assess and
theorize this “evolution” in relation to some “frame of reference” that can be
“objective” only in the sense of being the result of decisions and actions
taken by the component members of that living organism as an organic community,
then it is obviously quite impossible to assign and attribute precise “values
and prices” to the contributions of individual
members of that living organism as if these individual members or “economic
agents” were separable from the
living organism! It is obvious that any such “separation” and assessment of
“individual contributions” can occur only by means of ethical or political standards that the organic community imposes
on itself – but most certainly not by
means of an “absolute scientific standard”.
The
fact that Schumpeter sees “the economic system” on one side as a living organism - as a “dog” - that must
confront its physical environment, and then on the other side as a collection
of atomic individuals who are able to
mutate the economic system “from within”
through their autonomous “innovations”
without interacting as a collective living
organism with their (“external”) physical environment – this fact is the
source of all the confusions in which Schumpeter gets mired. On the one hand,
Schumpeter wishes to examine “the economic system” as a “closed totality” whose
component members can be treated as isolated “individuals”; but then, he
forgets that this is impossible without considering how this “totality” or
“system” must interact metabolically
with its physical environment and therefore how it can no longer be treated as
a “totality” or “system” that can be mutated “from within” by its “individual members” without this “mutation” or
“evolution” having to be assessed not from the viewpoint of “the atomic
individual” but exclusively from the viewpoint of “the living organism”, of the
living organic community, by reference to its physical environment !
The
change from an atomistic theory like
that of equilibrium in which estimations of value are entirely individual and subjective and therefore
can be described – not measured, if
by “measure” we mean an absolute
standard! – and determined tautologically in terms of relative prices, to an organicist
theory in which the economic system is “measured” against its physical
environment in terms of a politically agreed and collective standard –, this
change in the theoretical framework of analysis means that now “the economic
system” is no longer based on competition
between atomic individual members but rather on an organism or better an organic community (in the case of
animals, a species) that is not a “closed totality “ but is instead a living organism dealing meta-bolically
with its “physical environment”!
The
point here is that if we start with an atomistic
state like equilibrium, then the rules of exchange must be imposed exogenously whilst at the same time it
is impossible to assess the efficiency of the “economic system” as a whole - as an “economic system”, at the “systemic” level, as a totality, because that “totality” would
have to encompass its physical environment and therefore it could never
constitute such a “totality” intended as a closed system whose prices and
values are determined internally or self-referentially. The axiomatic atomicity
of equilibrium theory, by making all values strictly individually subjective,
forces us to treat the economic system precisely as such a “closed
self-referential system” or “totality” and prevents us from treating it as a
living organism dealing “openly” or metabolically with its physical
environment! Yet, if we assume that “the economic system” is a living organism, then it will be
impossible to determine individual contributions from its “members” to overall
social production or wealth precisely because there are no “individual contributions” or “individual labours”, whereas in fact we
have social contributions or social labour.
Perhaps the greatest mistake that Adam Smith made in his
analysis of the division of labour (and therefore of production) in Book Two of
The Wealth of Nations was to treat
this “division of labour” as the effect
of exchange and not as the cause of
exchange! Anybody with any spark of historical and anthropological knowledge
and any scintilla of thoughtful
reflection will be able to conclude that human beings are able to exchange
anything not only because they cannot engage in “individual labours” but
because they are physiologically incapable of surviving, like the robinsonnade in Defoe’s Robinson Crusoe, as isolated
“individuals”! Human beings quite simply could not even exist as “individuals”, let alone be able to survive, in complete
isolation! All human labour is “social labour” and cannot even be conceived as
“individual labour”! Brian Loasby has reminded us that “exchange is a matter of
life and death”, without for that matter being able to perceive the inevitably
phylogenetic nature of human labour. But this notion of the indispensability of
the division of social labour – and therefore
of “exchange”! – is a conclusive counter-argument to the Hobbesian notion of
“the state of nature” – on which Neoclassical equilibrium theory is based - as
a system made up of atomistic self-interested individuals.
Atomistic theory can determine only “relative exchanges” whereas organicist
theory can assess only “communal goals”:
the two “systems” are simply incomparable and incommensurable because the first
can be viewed as a “totality” because its “individuals” are mechanically inert
bodies, whereas the second is in constant “becoming” and the decisions and
actions of its “individual members” cannot be assessed “individually”. Neither
theory can ever devise an Objective Value for the simple reason that living activity
– whether human or otherwise - cannot be measured in terms of a standard of value
that is “external” to that activity or “absolute”! For human communities, any
such “standard of value” can be applied only as the result of political
domination by some social agents over others or else by political consent – but
never “objectively” in terms of an absolute standard!
Once
again, the central point that we are making here is that, once we consider
human society from an organicist
rather than an atomistic viewpoint, “economics” as a sphere of social
analysis separate from “politics” becomes quite simply
im-possible because the partiality of all “economic” concepts, the
im-possibility of reducing human activity to “purely economic” categories,
implies their “dissolution” in any “scientific” sense. It was this
socio-political “separation” (Trennung)
of human society between economy and politics, between private property and political
institutions, between bourgeois
and citizen, between civil society and political State that was the ultimate theoretical concern of the
rationalist philosophers from Rousseau and Hegel to Marx. And it was the
assertion of the ultimate im-possibility of over-coming and super-seding this
“separation” (Trennung) – in fact,
the impossibility of any “social synthesis” both at the economic level, between economic agent and product, and at the sociological level, between private
(property) and public (political) spheres – that is the central and essential
feature of the negatives Denken from
Schopenhauer to Nietzsche and Weber, to the Austrian School and Heidegger.
Indeed, it is this very “separation” (Trennung) extended to the individual level of any “economic agent” – be it a
worker or entrepreneur - from (a) the immanently “social” nature of production in
a phylogenetic and physio-logical sense (not the division of “labour”, which is
an empty abstraction, but the division of social
labour which bourgeois economic theory reduces to “individual labours”),
(b) the means of production, and (c) the pro-duct - that constitutes the most
indispensable foundation of the negatives
Denken at the economic level as a
reaction to Hegel’s dialectic of “self-consciousness” first expounded in the Phenomenologie des Geistes and later
elaborated in Marx’s critique of political economy. As Weber makes clear from
the very opening of Parlament und
Regierung, the matter of “ownership” is always and everywhere one of sheer
violence: it is the overlord who enforces the separation of the peasant from
the land, of the artisan from the tools – and indeed of the soldier from the
weapons. – And therefore also from the “pro-duct” of their activities.
Schumpeter himself draws the essential distinction between “directing” and
“directed” labour in the opening chapter of the Theorie in a manner that clearly indicates the lack of con-nection
between worker and pro-duct. The simple fact that the claim by the Entrepreneur
to the “profit” generated from “innovation” can only be “legal” means
immediately that this claim will be disputed and will be the subject of conflict – and that indeed even the adoption of innovations will give rise
to social conflict.
The insuperable contradiction of
Neoclassical Theory and of the Austrian School is that they firmly espouse the negatives Denken with regard to this
“separation” – the Trennung - at the
individual and at the social level, and yet they claim to be able to establish
a scientific economic link between producers on one side and their claims to the distribution of the
product on the other side!