Commentary on Political Economy

Wednesday 16 September 2020



We saw in our previous section that Paul Sweezy quite justifiably sought to replace or advance Schumpeter’s innovation hypothesis with a more objective one involving the need for individual capitalists in competition with one another to push for technological innovation to obtain competitive advantage over other capitalists. For our part, we objected to Sweezy’s theory on the ground that it is incomplete because it fails to consider the objective push by the capitalist class as a whole – not as individual competing capitalists – to innovate so as to prevail over the obvious antagonism in the working place and outside by the working class over pay and conditions.


Read in this light, Schumpeter’s novel emphasis on the process of “creative destruction” in the development of capitalism assumes a far more important “objective” and “historical” dimension – in line with his valiant attempt to imitate Marx’s “chemical mixture” of economic analysis and history. The ravages of the Great Crisis of 1905 could not but convince Schumpeter of the need to rebalance the theoretical formalism of Neoclassical Theory founded on the positivist empirical observation of market exchange, with the equally empirical observation of business cycles and the spasmodic operation of the capitalist economy from crisis to crisis. (We will tackle Machism soon in a new study.) Contrary to the neoclassical Walrasian axiomatic framework of “general economic equilibrium”, our actual experience is that the capitalist economy is rarely in such a blissful state. Schumpeter notes that what we witness in capitalist history are rather phenomena associated with dis-equilibria: the capitalist economy is in a constant state of “evolution” (Entwicklung) which entails not just “growth” but above all “trans-formation”, not just mutation but also crisis!


The instructive fact in Schumpeter’s attempt to place the Innovationsprozess at the centre of capitalist “evolution” (Entwicklung) is that this process comes between the capitalist Entrepreneur, on one side, and the ultimate goal of every capitalist – profitability (that is, not the mass of profit itself, but the “rate” of profit obtained on the capital invested). In their rush to criticize and split hairs, critics of Schumpeter’s theory of innovation have forgotten this cardinal point – which is that Schumpeter places at the very centre and core of capitalism this notion of “innovation” which he defines as a “force” and “a source of energy” that distinguishes this “economic system” from all others.


We certainly agree with Schumpeter on this, and here we wish to focus on his theory of innovation as the most important illustration of his approach to “economic science” which combines simultaneously methodological and sociological aspects. The fact that Schumpeter sought to keep these aspects of economic science as distinct as possible is not and could not be a contradiction or a failure on his part for the simple reason that he was aware of this apparent inconsistency and yet insisted on maintaining this “dual” or “two-pronged” approach to economic theory. Our aim here is to show the real practical reasons for this approach and his insistence on maintaining it.


The most important corollary of this Schumpeterian and Weberian advance on all previous social theory since Marx’s Grundrisse is that these great social theoreticians come to understand what are known as “science and technology” not as “neutral” human activities, but much rather as human practices that are capable of becoming, and indeed have already been, subsumed to the capitalist mode of production. Of course, they do this in the footsteps of Nietzsche, although Nietzsche went much further than Schumpeter or Weber or indeed Marx by insisting on the fact that science itself is a human practice even in its epistemological essence! Nietzsche effectively challenged and overturned our notion of “Truth” in all its conventional aspects. As is widely known, what Schumpeter admired most in the work of Karl Marx was precisely this “unification” or “integration” of formal economic theory and substantive historic content.


Karl Marx described the entire circuit of capitalist production as follows: - M….P….M’. In other words, between the initial outlay of capital (M) and its realization as profit (M’) lies P, the process of valourisation of capital or production. Put more specifically, the circuit becomes M-C….P….C’-M’. This means that the capitalist first purchases the commodities needed for production (C), which include “the commodity labour-power” and the means of production; then he puts these two commodities together in the production process (P), which yields a new product (C’), which finally the capitalist sells for an amount superior to the initial outlay of money (M’) – this is the realization of capital, from which he derives a profit (M’ – M = p). Nothing could be simpler.


What we need to examine here is this peculiar interaction between the realization of profit and innovation. It is clear from this schematic presentation that capitalist profit can be obtained only through the crucible of the production process (P). But there are two sides to the realization of profit: the first aspect is the valourisation of capital in the production process; but the second aspect involves the realization of profit in the process of consumption (that is, the final sale of the new commodity to workers). Now, what happens in the production process is that the capitalist brings together “labour-power” and machinery or means of production. It is equally clear therefore that when the capitalist entrepreneur “innovates” he trans-forms the relation of labour-power or workers to the means of production in order to reduce the cost of production. What happens in the production process, in the process of valourisation of capital, is that, first, workers are “separated” from the means of production, and, second, the capitalist feels the need to trans-form the relationship between the worker and the means of production through “innovation” of the production process so as to drive down the costs of production.


Equally, on the consumption or sale side, the capitalist relies on innovation to reduce the costs of production so as to increase sales or margins, and he also relies on innovation in the product so as to entice and increase sales to workers as consumers. In this dual process of innovation is encapsulated the process of capitalist development which is obviously not technical or scientific but is rather politically antagonistic. This is so, in the first instance, because in this dual process of innovation – of the production process and of the product -, the capitalist seeks to maximize profit against other capitalists. And to that extent the competition or antagonism between capitalists is very real. But given that capital can assume either a physical or a monetary form, in its monetary form capital is “fungible”, that is to say, it can be deployed very quickly to any physical use that is practicable. Given this fungibility and mobility of capital, there is a clear sense in which the owners of capital have a common interest in ensuring that the rate of profit is as high as possible for capital as a whole. Thus, among capitalists, we have a mixture of antagonism (or competition defined in narrow political terms) and of community (the rate of profit paid as interest to that part of capital that is in monetary form). The rate of profit, that is to say, the equalization of profit for capital in monetary form or money capital or finance capital, is what allows and fosters the socialization of capital, the formation of social capital. But this socialization of capital is a product of the other instance of political antagonism – by far the most important one for capitalist society -, that is, the antagonism between the capitalist class and workers.


It is this complex mixture of antagonism and socialization that is mediated by the capitalist State acting as “the collective capitalist”. Equally, we can see now that there are two sides to capitalist or entrepreneurial innovation: a destructive, or better disruptive, side brought about by inter-capitalist competition - or better, rivalry - over profit; and a creative or constructive side in the sense that capitalist innovation can raise the rate of profit for global capital by lowering costs and expanding consumption and, above all, by trans-forming the relation of capitalists to workers both in the productive process and in the sphere of consumption! Thus, “creative destruction” can be seen as a process, the Innovationsprozess, by means of which capitalists transform the mode of production and consumption not unilaterally but as a result of the political antagonism among themselves as capitalists but also and above all between themselves as capitalists on one side and workers on the other side. Marx saw antagonism only or mostly in the workplace, on the production side, but not in the marketplace, on the consumption side. This aspect of market “demand” as an essential element of class antagonism in capitalist society is something we shall canvass soon.


It is utterly clear, then, that capitalists can accommunate or unify or pool their interest most directly in the monetary form of capital, which is where the rate of profit is measured and, most important, money wage inflation can be measured also. It is in the form of money capital, of finance capital, that capitalists can find unity, and that is why we call this “social capital” – in the sense, that is, that in the monetary form capital tends to socialize and unify the interests of capitalists, whereas in the industrial form capital clearly has the tendency to intensify inter-capitalist rivalry. Schumpeter was most certainly aware of this paramount division between the functions of capital. Indeed, the whole theory of innovation is implanted, as we have seen, on the difference of function and purpose between finance and industrial or entrepreneurial capital, between “lenders” and “borrowers”. It is true that both parties seek a higher rate of profit or, as Schumpeter calls it, rate of interest; but the fact is that whereas finance capital seeks as “safe” a return on capital as possible, industrial or entrepreneurial capitalists know that the only way for them to make a profit is to take risks both in production as well as in distribution: and this is what pushes or compels them “to innovate” both their methods of production and their products. Entrepreneurs seek to compete against established businesses, finance capitalists seek to curtail competition to secure guaranteed profits in the guise of “interest” or “rent”.


It is equally clear that finance capital is more willing to socialize itself, to concentrate in large financial corporations or banks, and to restrict competition both at home and abroad by forming “cartels” or “monopolies” that exclude competitors, improve the safety of profitable investment, and maintain prices high to the detriment of competitors and workers and consumers. The last pages of Imperialism and Social Classes show how aware Schumpeter was of this “sociological dynamic” within the functions of capital. It is easy to forget, given his renown as an economist, that Schumpeter possessed one of the finest sociological minds in the history of social theory and that he was also a prominent Austrian politician. We find here that combination of economic rationality and sociological and political analysis that Schumpeter displayed ubiquitously in his work. On one side, we have the entrepreneurs who operate according to the “rationale” or “science” of capitalism. But then, on the other side, we have the (finance) capitalists or bankers who operate according to the bureaucratic socialisation or “rationalization” of capitalism: - the former represent competitive innovation, the latter represent monopolistic ossification. This is a theme that we find in Weber, with Marx perhaps the greatest sociologist ever to grace the earth, and one that Schumpeter undoubtedly adopted from his most genial German elder and collaborator at the Archiv fur Sozialforschung.


Thus it is not sufficient to argue that because perfect competition is impossible under modern industrial conditions—or because it always has been impossible—the large-scale establishment or unit of control must be accepted as a necessary evil inseparable from the economic progress which it is prevented from sabotaging by the forces inherent in its productive apparatus. What we have got to accept is that it has come to be the most powerful engine of that progress and in particular of the long-run expansion of total output not only in spite of, but to a considerable extent through, this strategy which looks so restrictive when viewed in the individual case and from the individual point of time. In this respect, perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency. It is hence a mistake to base the theory of government regulation of industry on the principle that big business should be made to work as the respective industry would work in perfect competition. And socialists should rely for their criticisms on the virtues of a socialist economy rather than on those of the competitive model. (CSD, p.106)



Yet this higher concentration of capital comforts the fantasy of the “transition to socialism”, of “evolutionary socialism”, shared by Schumpeter in his last great work. Both the Sozialismus and Schumpeter fail to see that “competition” and “monopoly” are antinomic concepts because “pure competition” will end up by definition in monopoly (the aim of competition is “to destroy all competitors”) and “monopoly” implies the existence of potential “competition”, without which it would be a meaningless concept (as Schumpeter himself perceives in CS&D). Schumpeter sees correctly that it is not “monopoly capitalism” that infringes against “the laws of competition”, but rather it is “the laws of competition” that lead straight to the formation of monopolies and finally to “the obsolescence of the Entrepreneur”!


The mythology of finance capital unable to absorb and invest excess surplus value (underconsumptionism) and turning therefore to imperialistic conquest will become a common theme of the work of John Hobson, Rudolf Hilferding and Lenin himself on the theory of imperialism. It will also become the theme of the work of one of Schumpeter’s most brilliant pupils, Paul Sweezy (see Sweezy, The Theory of Capitalist Development; Baran and Sweezy, Monopoly Capital, and P Sylos-Labini, Oligopoly and Technical Progress).

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