Tuesday, 8 September 2020

WILLE UND WELLE in Schumpeter’s Subjective Theory of Entwicklung

 To understand how the FAANGs go from innovation to stifling monopolies, you may have to understand the content and import of the piece below, which continues our series From Logos to Freedom. Cheers.


WILLE UND WELLE in Schumpeter’s Subjective Theory of Entwicklung

 

 

Unlike the waves of the ocean, the waves of the economy do not return to the same level. They always tend to swing like a pendulum around a certain level, but the level itself is not always the same. It is not just the observable facts that change. The explanatory pattern, i.e. the ideal type, changes as well. Let us grant that the first problem of economics was: how, based on its entire circumstances of life, does a population reach a particular level of the economy? Then [466] the second problem is the following: how does an economy make the transition from one level-which itself was viewed as the final point and point of equilibrium-to another level? This question takes us to the very essence of economic development [wirtschaftlichen Entwicklung]. (Schumpeter, TwE, ch.7, pp465-6)

(Refer also to “Wille und Welle”, Hannah Arendt’s discussion of this section of ‘Zarathustra’ in her essay on “Nietzsche’s Refutation of Free Will”.)

 

 

 

 

It is quite simply impossible to over-estimate the importance of this paragraph in the famous unpublished “Seventh Chapter” of the Theorie der wirtschaftlichen Entwicklung that Schumpeter “suppressed” for its second edition and the English translation, owing to its “sociological” content – already sharply criticized by Bohm-Bawerk, and liable to adverse review from the academic censors at Harvard College whom he was lobbying for a job! [An infamous example of the kind of “thought-policing” that goes on in academia when the interests of the bourgeoisie are at stake!]

 

 

 

“It is not just the observable facts that change” as the capitalist economy “does not return to the same level”. It is “the explanatory pattern - that is, the ideal type - that changes as well”! The phenomenon of capitalist “growth” is not one of a simple “quantitative, cumulative increment”, or even of a homogeneous “steady-state” expansion as in the Cobb-Douglas function. There is no “continuity”, no “smoothness” in this “growth”, in this “development”. The phenomenon of capitalist “growth” is not a “quantitative” one at all! It is not a problem of “magnitude”! It is a “qualitative leap”! It is a “quantum leap” that challenges the incremental laws of physics and our notion of “continuous space”! It is not an “increment” but much rather a “trans-form-ation”, a “becoming other than before” – a Ver-ander-ung!... It is a “meta-morphosis” whereby the “change” cannot be described in the same terms as what existed before the change! Capitalist growth-development-evolution is a “change”, a “trans-formation”, a “meta-morphosis”, a “trans-crescence” that destroys as much as it creates!! It is a “creative destruction” (schopferische Zerstorung) that dis-integrates the entities that it trans-forms into the new “creation”!

 

 

 

The “growth” of the capitalist economy cannot be homologated, it is quite simply not “com-parable” or “equalisable” (the Nietzschean term is “Ver-gleich-ung”, as-simil-ation) – it cannot be “equated” with the “economy out of which it has grown”! The Weberian ideal type applicable to it, its “key of interpretation” or “understanding” (the Weberian-Diltheyan Verstehen) has changed as well! Swelling to a crest of almost Nietzschean inspiration that recalls the Wille und Welle (Will and Wave) in the Zarathustra, Schumpeter poetically describes how “the waves of the economy, unlike those of the ocean, do not return to the same level” – “level” understood here in a “quantum”, not “quantitative” (!) sense . Like the “wave” that sweeps the “will” in Zarathustra, so does the “static” economy here carry the “spirit”, the “will to conquer”, the “will to power” – the “entrepreneurial Spirit” (Unternehmer-geist) that will trans-form the Statik economy into the Dynamik.

 

 

 

No economic “equi-librium” is possible in reality, then. Equilibrium analysis is valid only for ana-lytical, for heuristic and illustrative purposes! In reality instead the capitalist economy is in a state of constant crisis, in continuous trans-formation! Indeed, this is its differentia specifica – its historical specificity: - that the capitalist economy is in a constant state of qualitative transformation, of meta-morphosis, of “change” that destroys in the process of creating! And this “process of creating” is called Innovations-prozess, a process of “innovation” through which the “Will to Power” of the “entrepreneur” – the “entrepreneurial Spirit” - utilizes the swelling, surging energy of the existing economy – “the waves of the economy”! – to destroy and “overcome” (uber-winden) the old “level” of the economy, its status quo ante.

 

 

 

Schumpeter it is who makes “crisis” the specific difference, the historical peculiarity of capitalist economies with the publication of the ‘Theorie’ in 1911. Like Keynes, he perceives that Classical and Neoclassical theories are “static” analyses because they cannot account for the transformation of the means of production (intermediate goods) and of consumption goods (primary goods) – and this is quite apart from the fact that “want” is a purely passive and negative notion that must assume the exogeneity of production techniques and of changes in consumption patterns. Here he is:

 

 

 

What we want to show now becomes obvious. The development of wants, which we observe in reality, is a consequential creation of the economic development that has already been present. It is not its motor. The fact that the human economy has remained constant over centuries heavily weighs in favor of our argument. But if the development is already under way, then it can, in a concrete case, certainly be preceded by the development of needs and desires which can trigger special economic transactions. In principle, needs sustain their own demand through economic development, and it is economic development that stirred them up in the first place. The amplification of needs is a consequence and symptom of development. Insofar as truly new needs and desires exist they will not have a practical effect on the economy. As has already been shown in the discussion above, new needs and desires as such mean nothing. But even then, if there were an original cause in the development of needs and desires, this would still require creativity and energetic activity in order to create anything new of importance, so that even the assumption of such a Law of the Heterogeneity of Social Purposes would not have much to offer in the field of economics. It is beyond doubt that in a single case a concrete demand can bring forth an entire industry. [486] (TwE, 1st edition, ch.7)

 

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)

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 bourgeois 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.

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! (Quote from Robinson re measurement of capital and dynamic change/decision.) The state of equilibrium is one that does not admit of capitalist decisions – specifically, of innovation. It is a state of “stagnation” because neither metabolic change nor therefore profits are possible. (Profit here is intended as income that is re-invested, which is antithetical to equilibrium because re-invested income would upset the original equilibrium conditions.) And the dynamic process is one that does not admit of equilibrium precisely because profit and metabolic change – which are possible only through innovation from a position of equilibrium – are inconsistent with equilibrium. These considerations apply also to “steady-state” equilibria because – as even Joan Robinson acknowledged – they do not allow for innovation among other things, like what she called “historical” as against “logical” time (see her “Time in Economics”).

INNOVATION AND THE SUBJECTIVE THEORY OF VALUE

We shall deal with Joan Robinson’s own profound incomprehension of the nature and meaning of the theory of value in our next section. Presently, however, we wish to outline the problem of the theory of value in connection with pricing and innovation. Because, as we have seen above, bourgeois economic theory is entirely incapable of accounting for the significance of prices as a complex, market-mediated, and therefore indirect, indicator of values, - and consequently, because bourgeois economic theory has to take market prices as direct indicators of value, bourgeois “economic science” is quite unable to account not just for prices in Statik or equilibrium analysis, but also and far less is it able to account for prices in the Dynamik or disequilibrium analysis where economic growth or development is concerned through “technological progress” leading to the accumulation of capital!

Again, we shall deal with this complex “objective” interaction of value, prices, development and capital accumulation in our next section. But just to indicate how complex this relation between value, market prices and capitalist accumulation really is, we wish to focus here on Schumpeter’s own attempt to account for the trans-crescence of the capitalist economy in exquisitely politico-economic terms – that is, in terms that are not strictly “objective” in terms of the class analysis indicated by Marx and, to a lesser extent even Smith and Ricardo, but rather in terms of the Individualitat of the capitalist entrepreneur whose heroic figure leads the Innovations-prozess. To elucidate, we use the word “trans-crescence” rather than development or evolution to translate Schumpeter’s use of the term Entwicklung precisely because this word has deep philosophical overtones dating back to Schopenhauer and Nietzsche (see generally, Georg Simmel’s homonymous work on the two philosophers). The profound influence of these philosophers – including Simmel and his pupil, Max Weber – is especially evident in the famous Chapter Seven of Schumpeter’s Theorie der wirtschaftlichen Entwicklung which was omitted in the “Harvard” edition (for obvious reasons we think, because Harvard would never have awarded a professorship to the Austrian if he had published that “deeply compromising” theoretical chapter, despite its undeniable centrality to Schumpeter’s entire work!).

 

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 seek to 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 [Entwicklung] 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 (cf. Weber’s Leitender-geist in “Politics as Vocation”) 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 rule, potestas. The State reigns, has passive rule or potestas, but does not rule actively; 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, the best spoils. 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!

 

 

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 psychology/Individualitat.

 

The entrepreneurial Spirit is “un-ethical” or “extra-moral” (Nietzsche) in this sense: its “innovation” is also a breaking of the rules, a making of Value without “being valued”. The entrepreneur is an initiator, an “author” possessing a Nietzschean “extra-morality” (aussermoralischen Sinne), a Heideggerian “authenticity” (Eigentlichkeit) – the recognition of the Zuhandenheit of the world, of its “mundanity” - that therefore, in its “resolve” (Entschlossenheit) is able to rise above the “quotidianity” (Alltaglichkeit) of “the masses” and their Sartrean mauvaise foi (bad faith).

 

The “State” of equilibrium represents the Ethics of “formal equality”, of equi-valence, identity not difference: the bourgeois liberal State is  bureaucracy (Hegel), Rationalisierung and Entzauberung (Weber) – a “Positivity” (Heidegger’s “presence”) that is shattered by the negativity (“creative Destruction”, not “destructive Creation”) of the Entrepreneur – who represents the dynamic creative Individualitat opposed to the “tranquility” of the body politic. Again, the polemos of the state of nature is turned into the “dynamic energy” (dynamisch, energisch) of the captain of industry, of leadership – against the “statisch, hedonisch Impuls der rationalistischen Typus”, of the “capitalist owner”, the banker and financier reliant not on “entrepreneurial profit” but on passive “interest”. (See Joseph A. Schumpeter: ein Sozialökonom zwischen Marx und Walras by Heinz D. Kurz, p.46.)

 

The bourgeois liberal State – the “State” of equilibrium – is the true political State of capitalism. But the Schumpeterian entrepreneur is not the pro-duct of this “ethical” and “hedonistic” State! Capitalism creates the con-ditions, the institutional ingredients for the emergence of the entrepreneur – but the entrepreneur must not be confused with and mistaken for a “capitalist”! The entrepreneur is the antithesis of the “capitalist” – as we have sought to demonstrate throughout our study of Schumpeter and his “capitalist metaphysics”. The capitalist seeks the “tranquility” of the economy – its “equi-librium” on the economic side. And the homologation, the equi-valence of Economic equilibrium and Political “tranquility” is the “social Peace” of bourgeois liberal society – its Kantian-Hegelian Ethics. It is not capitalism that induces “creative destruction”: it is the entrepreneur that does so against the “hedonism” of the capitalist financier, against the “social Peace” of the bourgeois liberal State!

 

These innovations occur whenever the entrepreneur needs them, and if it were not the case that an entrepreneur, in his particular role as an entrepreneur, would already be waiting in order to use any new invention, then these innovations would never be realized in practice. It is not the innovations that have created capitalism, but capitalism that has created the innovations needed for its existence. One could gain the opposite impression only from the fact that we know only of an economy replete with development, and here, everything takes place so fast and immediately, that we cannot always distinguish between cause and effect…. The process of development itself and its driving force would in this case also lie somewhere else, particularly in the personality of the entrepreneur. In the absence of people with such leadership qualities these kinds of innovations would never come alive.[479-80]

 

In other words, capitalism has created the conditions for the emergence of the entrepreneur: but the entrepreneur is distinct and separate from “capitalism” and its Ethical Ideal of an equilibrated, static and hedonistic liberal bourgeois societyin which the capitalist market economy provides the underpinnings for the Political liberal public sphere of freedom of expression. This neat homologation or equivalence of capitalist Economy and bourgeois Politics is absolutely impossible for Schumpeter because the real essence of capitalism is not “equilibrium” but quite to the contrary it is “permanent crisis”, it is “creative Destruction” – conflict, not “social peace”!

 

A minority of people with a sharper intelligence and with a more agile

imagination perceive new combinations. … Then there is an even smaller

minority—and this one acts. … It is this type [the Entrepreneur] that scorns the

hedonic equilibrium and faces risk without timidity. He does not consider the

implications a failure will inflict upon him, or care whether everyone depending

upon him will lose their keep for old age. … The decisive moment is therefore

energy and not merely ‘insight’. (Schumpeter, 2002b, 413–14; cf. 1912, 163–4)

 

Most people tend to their usual daily business and have enough to do at that.

Most of the time such people are on slippery ground and the effort to stand

straight exhausts their energies and suppresses all appetite for further

exploration. … [Furthermore, t]hey do not have the force and the leisure to

think the matter through. The daily work keeps them down, organization as well

as the influence of their colleagues inflict untearable chains on them. This is the

masses. (Schumpeter, Theorie, 2002b, 412–13; cf. 1912, 162–3)

 

In each sector there are statically disposed individuals and there are leaders. Statically disposed individuals are characterized by essentially doing what they have learnt, by moving within the received boundaries and by having in a determining way their opinion, dispositions and behaviour influenced by the given data of their sector. Leaders are characterized by perceiving new things, by changing the received boundaries to their behaviour and by changing the given data of their sector. (Schumpeter, 2002b, 428; cf. 1912, 542–3)

 

 

Es gibt Wirtschaftssubjekte …deren Verhalten durch den hedonische Impuls definitive charakterisiert ist, Wirtschaftssubjekte die man als “statisch” kat Esochen bezeichnen kann. [Theorie, 35]

 

 

By Schumpeter’s own admission, the trans-crescence of the capitalist economy gives rise to profoundly revolutionary and unsettling “crises” or “extraeconomic effects” through the “creative destruction” brought about by the competitive innovation of entrepreneurs that quite simply cannot be “governed” by them and that therefore require exquisitely “politico-institutional” intervention on the operation of the market economy by capitalist State institutions. In other words, far from being a self-regulating mechanism at or near any form of “equilibrium” - whether “static” or “dynamic” or “evolutionary” -, the capitalist economy needs to be constantly guided and governed by a central political institution such as the modern State that necessarily invalidates the notion of entrepreneurial competition and innovation as pure scientific economic categories!

Schumpeter theorises the entrepreneurial spirit and the process of innovation in isolation from the political institutions of capitalism, which he belittles as the “hedonic and static” state of equilibrium. As we saw earlier in this study, the chief objection moved by Max Weber against Schumpeter’s theory was precisely that it unduly neglected the paramount relation between state bureaucracy and private capitalist factory – both of which Weber saw as aspects of “enterprise” (Betrieb). In the words of Cacciari,

 

“Ecco perche’ Weber parla del Politiker, non dell’ Imprenditore. Egli non dimentica l’ Imprenditore: ne aveva gia’ ricercato le origini. Ma, tra il 1905 e il 1918, il problema decisivo diviene la scelta politica sulla forma e sui tempi del rapporto scienza-sviluppo, le istituzioni politiche atte a assumere gli effetti dell’ innovazione. In realta’, nessun mercato puo’ piu’ funzionare in forma schumpeteriana “pura”. In termini espliciti: nessun Imprenditore potrebbe piu’ esistere senza Stato,” (Pensiero Negativo e Razionalizzazione, pp.158-9).

 

[That is why Weber speaks of the Politiker, not of the Entrepreneur. He does not neglect the Entrepreneur – he had already traced his origins {in the ‘Protestant Ethic’}. But for Weber the decisive problem between 1905 and 1918 became that of the political choice of the modality and timing of the relationship science-development, of the political institutions able to govern the effects of innovation. In reality, no market could function any longer in ‘pure’ Schumpeterian fashion. Explicitly put: no entrepreneur can exist any longer without the intervention of the State.]

 

The final point then becomes a question – the answer to which we have already outlined in our initial summary of the essential ingredients of capitalism: why, when all is said and done, must capitalist society proceed or evolve or develop or trans-cresce through crises? And what does that tell us about the nature of “innovation” or “technological progress” and its motivation, that is to say, profit? And what is the role of the “State” of equilibrium – the static aspect of capitalism – in the permanent crisis induced by profit and innovation?

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