Thursday, 3 August 2017

Mechanical Equilibrium and Political Market Process: From Profit-Seeking to Profit-Making

The relatively recent and prepotent surge of the so-called "FAANGS" or "tech stocks" - and specifically their rise to the position of unassailable monopolies in their respective "markets" - brings just as forcefully to the foreground the nature and substance of capitalist  (loosely called "market") innovation and competition. In this study we hope to lay bare, with the help of Joseph Schumpeter's insights on the Innovationsprozess, the potentially catastrophic consequences of the failure to understand the utterly political roots of these historical developments. This failure is both intellectual and political to the extent that it is powerful bourgeois-capitalist interests that seek to disguise and conceal its true social and political repercussions.


We showed in the last section how Schumpeter perceived that in equilibrium theory the very “purity” of self-interest means that “the laws of competition” imposed axiomatically on individual agents are in contradiction with that self-interest. Pure self-interest and pure competition (atomicity) are inconsistent apories because the limitation on pure self-interest imposed by the requirement of perfect competition contradicts the purity of the self-interest of economic agents as well as the purity of perfect competition. This is so, first, because pure self-interest would push economic agents to ignore the requirements of perfect competition, and second because perfect competition would induce economic agents to engage in imperfect competition as well! (“The union of opposites” is a logical flaw first identified by Nicholas of Cusa. For a discussion, see Ernst Cassirer, Individual and Cosmos.) This aporetic aspect of the axioms of Neoclassical equilibrium theory leads away from its “purity” or “perfection” and into the conceptual analysis of its real implementation which requires conceptual limits on the “purity and perfection” of both self-interest and competition. The formal equality of self-interests, their mutual free-dom, can ensure only a frozen or static mechanical equilibrium or, with Schumpeter, a “circular flow”. Self-interest works aporetically, then: on one side, it breaks out of pure equilibrium, it leads to the “impurity” of imperfect competition, as a logical-conceptual requisite of its “purity”; and on the other side, it leads back to equilibrium as a result of the countervailing equal “purity” of other self-interests, that is to say, as a result of “the laws of pure competition”.

 

By postulating a “development of the economy from within”, Schumpeter is simply making explicit what is implicit in the axiomatic “pure laws of economics” reduced to the status of “laws of mechanics”: he is trying to break free of the apories of pure equilibrium theory by introducing the “impurity” implied in the very “purity” of self-interest and competition – a self-interest so ab-solute (immune from regulation) that it cannot be bound even by the “externally-imposed”, axiomatic “laws of pure competition”, or what Schumpeter calls “pure laws of economics”. As we demonstrated above, if we understand equilibrium as a state of “pure laws of economics” and Entwicklung or “development” as a state of disruption or “crisis” of that equilibrium on the way to, in transition to, a “new” or “fresh” or “another” state or level of economic equilibrium, then such a “transition” is simply impossible because equilibrium and Entwicklung (development-through-crisis or “evolution”) are categorically different concepts or conceptually inconsistent categories.

 

And yet, as Cacciari has observed (in “Transformation of the State and Political Project”), the notions of “development” and “crisis” entail the existence of a state of “non-development” and “non-crisis”. Both development and crisis point to an ideal or pure model – whether this be Walrasian equilibrium or Robinsonian “tranquility” or Schumpeter’s “circular flow” – that provides a measure or a metre by means of which we can say that an economic system is developing or is in crisis. In a later section we will see how Schumpeter himself shows at one and the same time how his theory of economic development is bound to the pure model of equilibrium and also how it may be possible to define “development” or “crisis” in a novel and different way that does not imply “negatively” the actual existence of a state of theoretical equilibrium or even of a “harmonious” state of “tranquility” or of “circular flow”.

 

 

Once again, as we showed in the discussion above, Schumpeter seems to be quite aware of the impossibility of “the pure laws of economics” laid out in equilibrium theory being logically consistent with “the pure economic theory of economic change”: in his own words, he is aware that a “dynamic equilibrium is a contradiction in terms”, an oxymoron. Yet he persists with the idea that it is possible for an economic system that allows of economic change to transit “from one equilibrium to another” – a statement that must be contradictory given that this “transition” can be achieved only by infringing against the axiomatic rules governing “equilibrium”. Whilst he insists on the “distinctness” of the two “processes” – the Statik and the Dynamik – in the sense that they are logically inconsistent, Schumpeter obstinately persists with the attempt to base his entire theory of economic development, Entwicklung, precisely on the ability to transit these intransitable processes, to fuse and bond them together.

 

As we shall see presently, it was this “chemical mixture” or bonding that Schumpeter envied in the theoretical work of Karl Marx and specifically with regard to the concepts of “economic development” and of “histoire raisonnee”. Indeed it is possible to suggest that Schumpeter found his own theoretical vocation in his own critique of Marx’s labour theory of value – a critique that his mentor, Eugen Bohm-Bawerk, had already conducted and that enabled him to enucleate a novel theory of the nature and causes of “interest”. Schumpeter’s mission was instead to discover the nature and origin of “profit” and, by imitating Marx, to combine profit with a specific “economic subject” – the entrepreneur. Following and applying faithfully Bohm-Bawerk’s critique of Marx, Schumpeter insists that Marx’s labour theory of value has as supreme aim the demonstration of the presence of “exploitation” in capitalist enterprise, and that this demonstration is to be carried out under the overarching assumption of perfect competition. Just as he was able to show that profit is impossible in equilibrium theory, so is Schumpeter able to dispose easily of the existence of surplus value and of exploitation in conditions of perfect competition.

 

But it is the sequence of the reasoning that Schumpeter performs with regard to Marx’s theory of surplus value that is most enlightening in tracing the train of thought that led Schumpeter to his own theory of economic development. Let us examine this line of thought carefully:

 

Moreover, it can be shown that perfectly competitive equilibrium cannot exist in a situation in which all capitalist-employers make exploitation gains. For in this case they would individually try to expand production, and the mass effect of this would unavoidably tend to increase wage rates and to reduce gains of that kind to zero. It would no doubt be possible to mend the case by appealing to the theory of imperfect competition, by introducing friction and institutional inhibitions of the working of competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on. Only a moderate case could be made out in this manner, however, one that Marx would have heartily despised….
This is so easy only as long as we see in the theory of surplus value nothing but a proposition about stationary economic processes in perfect equilibrium. Since what he aimed at analyzing was not a state of equilibrium which according to him capitalist society can never attain, but on the contrary a process of incessant change in the economic structure, criticism along the above lines is not completely decisive. Surplus values may be impossible in perfect equilibrium but can be ever present because that equilibrium is never allowed to establish itself. They may always tend to vanish and yet be always there because they are constantly recreated…This aspect proves to be of considerable importance. (CS&D.)

 

Schumpeter is regurgitating here almost verbatim the arguments advanced by his mentor Bohm-Bawerk in Capital and Interest (at p.171, discussed by Dobb in Political Economy and Capitalism at p.32). Clearly, it is not the case that Marx thought that “capitalism can never attain a state of equilibrium”: in reality what Marx’s critique of bourgeois Classical Political Economy aimed at was showing that the reality of capitalism can never be theorized with the analytical categories of equilibrium analysis. It is not the case, therefore, that Marx thought that capitalism is incapable of attaining equilibrium because it is in “a constant process of incessant change” – as if this were just a matter of degree, just a matter of hitting a specific quantitative target. Rather, what Marx was saying is that the categories of equilibrium theory - which are certainly applicable to the Classical Political Economy of Smith and Ricardo as well as to Neoclassical economics - are conceptually inapplicable to its reality because it is not a quantitative reality but a political one. In other words, the value involved in the capitalist mode of production is not an objective quantity; value refers instead to historically specific “social relations of production”. (We shall examine this point closely in the next section.)

 

So long as surplus value is seen as an “amount”, a value over and above  what is needed for labour-power to reproduce itself (sur-plus, Mehr-wert or “added value”, in German), then it is clear that the laws of competition can serve to regulate the “distribution” of this fixed amount in such a way that any initial inequality or exploitation is gradually eliminated to a point where no “value” is extracted exploitatively from workers – for the simple reason that “perfectly competitive equilibrium…would unavoidably tend to raise wage rates and to reduce gains of that kind to zero”. We can see therefore that if we postulate the existence of equilibrium as an axiom of economic analysis, then surplus value or profit is impossible because the axiomatic requirement of equilibrium will reduce all economic values and prices to “relative” prices – which cannot be fixed until all transactions have been conducted once and for all – which in turn excludes the notion of surplus value when combined with perfect competition. Similarly, if we theorize surplus value as an objective quantity instead of as a quantity dependent on relative prices, then perfect competition will ensure equilibrium.

 

But the point is that although “surplus value may be impossible in equilibrium…it can ever be present because that equilibrium is never allowed to establish itself”! And it is never allowed to establish itself not because of “frictions” in the operation of market competition – not because of that “imperfection” -, but rather because the very notion of “surplus value” has a categorically different meaning once the productive system is transformed by the actions of its participants, of its “economic subjects”! In other words, it is the very “reduction” or “reification” of surplus value to a “thing”, to an amount, that (a) makes equilibrium theoretically possible, and (b) makes possible the gradual disappearance of surplus value or profit by means of competition, because capitalists will raise wages until all surplus value and exploitation vanish. To paraphrase Schumpeter’s own words, surplus value may “tend to vanish” because of inter-capitalist competition and rivalry; but it will never so vanish because it is “constantly recreated”. But for something to be “incessantly” recreated it simply cannot be a “thing” or a “quantity” or a “measurable value”: surplus value must be a social relation! If the determination of profit or surplus value is changing incessantly with the economic system, then this incessant change cannot be quantitative but must be qualitative because quite evidently surplus value and profit are not entities that can be determined precisely either in “relative prices”, as in Neoclassical equilibrium, or in absolute prices determined by “socially necessary labour time”, as in Classical equilibrium.

 

What this means is that once we accept that perfect equilibrium does not describe the reality of capitalism in which surplus value or its monetary equivalent, “profit”, is the essential feature of economic activity, then we must accept that capitalism is not a “thing” or “quantity” or “measurable value”, but it is rather a “political value”! In short, once we change our analytical perspective from the Statik of equilibrium analysis to the Dynamik of economic development, then even the subject-matter of our theory changes, it is trans-substantiated, and we must shift from the quantifiable relative or absolute “values” or prices of equilibrium theories to the “ethico-political values” of development theory!

 

Pure competition leads to a stationary and stagnant state because, although it makes profit-seeking imperative or axiomatic, under its conditions profit-making is utterly im-possible! But then, it is also the purity of competition - the political antagonism implicit in its conceptual inclusion of profit-seeking or the profit motive - that logically implies or entails its actual implementation as profit-making and therefore the competitive advantage of innovation. It is thus that “market process” becomes a conceptual requirement of the pure notion of equilibrium: market process is the applied version of pure equilibrium theory: market process is the extrinsication of equilibrium. Market process occurs when pure theoretical profit-seeking is allowed to become its impure or applied historical version – that is, profit-making.


It follows therefore that the transition from profit-seeking to profit-making involves the exit from conditions of perfect competition in such a way that some competitors will be dis-advantaged whilst some will gain a competitive advantage. This advantage must be of a kind that no exchange by the disadvantaged competitors will be able to eliminate, and that is not derived from “external or exogenous factors”. The only “endogenous factor” then is the profit-seeking motivation itself and the ability of some competitors (a) to change the production function, that is, to innovate, and (b) to restrain other competitors from adopting the innovations that lead to the new production function. Factor (a) necessarily involves innovation as defined by Schumpeter; and such innovation could hypothetically be originated by a single economic agent. But factor (b) necessarily requires the adoption of competition-restrictive measures, that is to say, of political measures! And these quite evidently cannot be carried out by a single economic agent but must be enforced by some economic agents – innovative entrepreneurs for Schumpeter - against others.

For any kind of competition to exist, short of all-out conflict, certain “rules of the game” must be agreed upon. But these “rules” cannot encompass every aspect of competition because, if they did, the end result would be competition so “pure” that no real competition could take place! At equilibrium, competition would be restricted and confined to being a velleity – the sterile “intention” to seek profit as a necessary trait of self-interest. But once this velleity of profit-seeking is given the opportunity to be implemented as profit-making, this fact by itself requires a fundamental change in the modus operandi of the economy, one in which for profit-making to be at all possible (a) innovation and (b) policies to protect it must be allowed to take place. Therefore, for actual competition to take place, there must always be room for competitors “to innovate”, that is to say, to introduce new and unforeseen or unforeseeable strategies or techniques that will undermine the existing competitive rules founded on the formal equality of the competitors. But the possibility of such “innovation” and therefore of such “inequality” will result inevitably in political conflict and antagonism that will have either to be mediated politically or else to be resolved violently. In either case the search for profit goes well beyond the nature of “profit” itself as “utility” or “welfare” or “ownership” to the very essence of political power!

 

(A similar point is made by Demsetz in “Freedom and Coercion”.)

 

Conventional competition – competition as it is theorized in all non-Schumpeterian economics – contains the ineluctable tendency, in terms of its axioms and its aims, to induce a state of equilibrium or stagnation. That is because innovation is not seen as a necessary aspect of the coercion intrinsic and endogenous to the very concept of competition! Yet to be truly competitive, and therefore to be able to realize a profit, the capitalist entrepreneur must compete with existing businesses not just on “price” or “quantity” – but indeed on “innovation”, that is to say, by introducing new products or techniques that fundamentally undermine and threaten to obliterate the business models of competitors! Competition without innovation would lead sooner or later to a stationary state of equilibrium.

All the more controversial is the proposition that entrepreneurs' profits and related gains which arise in the disequilibria caused by the impact of innovation are, as far as the business process itself is concerned and apart from consumers' borrowing, the only source of interest payments and the only "cause" of the fact that positive rates of interest rule in the markets of capitalist society. This means that in perfect equilibrium interest would be zero in the sense that it would not be a necessary element of the process of production and distribution, or that pure interest tends to vanish as the system approaches perfect equilibrium. Proof of this proposition is very laborious 39, because it involves showing why all the theories which lead to a different result are logically unsatisfactory, (Business Cycles, p.125. See also CS&D, p.131 on “The Obsolescence of the Entrepreneur”.)

 

It may well be that the search for profit motivates innovation; it is certainly not innovation that motivates the search for profits. And yet it is most certainly not the search for profits in and of itself that forces economic agents to innovate. So long as we define “profit” in terms of pure competition as all economic theory does, then it is impossible to explain the existence or possibility of profit! For innovation and economic change to occur, competition must be of such a character that at once it coerces and it enables some competitors to gain an advantage over other competitors by undermining not just their profitability but also their very existence! In other words, competition must reach far beyond the sphere of exchange; it must reach to the very foundations of civil society: – competition must extend to a type of conflict that goes beyond exchange and that encompasses the political relations between economic agents. Competition must include political antagonism!


In other words, the problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. As soon as it is recognized, his [the economist’s] outlook on capitalist practice and its social results changes considerably.

The first thing to go is the traditional conception of the modus operandi of competition. Economists are at long last emerging from the stage in which price competition was all they saw. As soon as quality competition and sales effort are admitted into the sacred precincts of theory, the price variable is ousted from its dominant position. However, it is still competition within a rigid pattern of invariant conditions, methods of production and forms of industrial organization in particular, that practically monopolizes attention. But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization…. - competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of existing firms but at their foundations and their very lives. (CSD, p.84)

 

Even in the case in which competition is over price, it can be said that lower prices can be achieved from a position of pure competition only when some form of innovation is present!

Competition, then, may well stand for an alternative way of describing political antagonism: the problem is, however, that the overall regulation of this competitive antagonism is to facilitate profit-making, and therefore the owners of capital; and secondly that competition has the overriding role as a repressive weapon against workers in competition with one another over employment, wages and working conditions.


Profit-seeking is the subjective motivation behind innovation; but innovation is the objective factor for the existence of profit, for profit-making as a practical activity! Except that, in turn, the implementation of innovation is impossible without impure or imperfect competition. And imperfect competition implies necessarily the presence of political antagonism to decide just how “imperfect” competition will be and to whose “advantage”. In equilibrium theory, although individual conflict is certainly present because economic agents seek to maximize their “individual utility” or self-interest, they can do so only through “exchange”, and therefore this “individual conflict” cannot axiomatically become “political” – again because individual economic agents are not allowed to combine their self-interests. But this means that “profit-making”, as distinct from “profit-seeking”, is axiomatically impossible in a Neo-classical economy and that it will be whittled away to zero in a purely competitive Classical economy. In other words, “pure competition” is at once inconsistent both with profit-making and therefore also with innovation, unless its definition is extended to cover not just “exchange” but the political antagonism of imperfect competition as well!

 

 

 

Thus, profit-making and innovation can be implemented only in a state of “imperfect competition” because a state of perfect competition excludes axiomatically the possibility of “advantage” that comes from innovation – that is to say, the entrepreneurial “premium”, Schumpeter’s “profit”, would be neutralized instantly. The entrepreneurial premium or profit requires this “friction” between the profit-seeking or motive of pure competition and the profit-making of innovation. This “friction” is what lies between pure and imperfect competition; it is the battleground of politics and political institutions. (Friction or traction, Wittgenstein would say, is what you need to be able to walk on a perfectly smooth surface. Pure competition is just such a surface: it implies the “static plane” of profit-seeking, but it cannot provide the “dynamic traction” of profit-making!) Schumpeter acknowledges the necessity of this political intervention:

 

The introduction of new methods of production and new commodities is hardly conceivable with perfect – and perfectly prompt – competition from the start. And this means that the bulk of what we call economic progress is incompatible with it. As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced – automatically or by measures devised for the purposeeven in otherwise perfectly competitive conditions. (CS&D, p.105)



2 comments:

  1. Where can I find your books? Who's your publisher?

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    1. Hi Henry, unfortunately I abandoned academic studies a long time ago to pursue legal practice - but then again, fortunately that's the reason I don't have to work any longer! Instead, I spend nearly all of my time globetrotting, which is another reason why - apart from the long absence from academ, that is - I have not had time to pursue publishers!
      Of course, your request is duly flattering. I have posted some material on scribd.com and less on academia.org. If you so wish, and you send me a safe email address, I could send PDF copies of my pieces, which are certainly book-length, on Schumpeter, on Max Weber and on Nietzsche. There is also a lengthy study on Hannah Arendt called "The Philosophy of the Flesh" that you could even retrieve through a google search, and disparate pieces on the Austrian School (Hayek and Menger among others), on classical political theory (Hobbes and Locke) and of course on Classical Political Economy.
      Much of this material can even be culled through searches on this blog - there is a search slot on the top left-hand side: simply enter a particular author, Keynes or Minsk, for instance.
      Thank you once more for your kind interest!

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