economic equilibrium and politics 1 - schumpeter's entwicklung

8/12/2019 Economic Equilibrium and Politics 1 - Schumpeter's Entwicklung

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Capitalism, Equilibrium and History: A Theoretical and Practical Analysis of Schumpeters

Methodoloy andInnovationsprozess

Thus, development and equilibrium in the sense that we have given these terms are therefore opposites, the

one excludes the other. Neither is the static economy being characterized by a static equilibrium,nor is the dynamic economy characterized by a dynamic equilibrium; an equilibrium can only

exist at all in the one sense mentioned before. The equilibrium of the economy is essentially astatic one.`!"Theorie, ch.#$

%ith this we really get closer to reality. &n particular, we win a clearer insight into that peculiar 'umble of

conditioning and freedom, which economic life shows us. The static circular flow and the static

phenomena of adaptation are dominated by a logic of things, while it is completely irrelevant forthe general problem of freedom of will, nevertheless in practice ( with fixed given social

relationships ( it leaves as good as no manoeuvering room for individual freedom of will. This can

be demonstrated and yet it was always a point of criticism, since the free creative work of the

individual was so obviously visible. %e )now now that the latter observation is correct. *et, this

observation does not contradict the theorems of statics. %e canprecisely describetheplace and

functionof this creative work. +f course, in development the logic of things is not missing; and

'ust as one cannot demonstrate with the static conception the case for philosophical determinism,

one cannot maintain the case against it with the dynamic conception. ut despite this we haveshown that an element is present in the economy, which cannot be explained by ob'ective

conditions and we have put it in a precise relationship to those ob'ective conditions.-/Theorie,!-, ch.#0

Damit kommen wir der Wirklichkeit tatsachlich naher. Besonders gewinnen wir einen klarern Einblick in daseigenturmliche Gemisch von Bedingtheit und Freiheit das uns das Wirtschaftsleben zeigt. Der statische

reislauf und die statischen !npassungserscheinungen sind von einer "ogik der Dinge beherrscht# die fur das$roblem der Willensfreiheit zwar ganz irrelevant ist# aber praktisch % bei fest gegebenen sozialen&erhaltnissen % so gut wie keinen 'pielraum fur individuelle Willkur lasst. Das ist nachweisbar und war dochstets ein 'tein der !ntstosses# das man das individuelle freie 'chaffen ganz deutlich am werken sah. Wir

wissen nun dass der letztre Beobachtung richtig ist und ()*+ den ,heoremen der 'tatik nicht wiederspricht#wir vermogen prazise $latz und Funktion dieses 'chaffens anzugeben. -aturlich fehlt auch in derEntwicklung die "ogik der Dinge nicht und ebensowenig man mit der statischen !uffassung etwas fur

philosophischen Determinismus beweisen kann# kann man mit der dynamischen etwas gegen ihr ausrichten.!ber dennoch haben wir ein durch sachlichen Bedingungen nicht erklarbares Element in der Wirtschftlichennachgewiesen und mit diesen sachlichen Bedingungen in eine prazise Beziehung gebracht. /From G.Backhaus0

A. Equilibrium and History: Conceptual and Political Aspects of Bourgeois Economic !eory

1lassical and -eoclassical $olitical Economy from !dam 'mith to "eon Walras is founded on the

a2iomatic static e3uilibrium of the marketplace economic system. 4et this clashes most violently

with the empirically evident instability of the capitalist economy and its e3ually violent

convulsions and# worse still# its transformations intended not 5ust in the sense of quantitative

growth/%achstum0 but actual qualitativeevolution/1ntwic)lung0# with its meta(morphosesandmutations# with its trans(crescenceand crises. ,he static6stationary# a2iomatic6analytical#

anatomical and ob5ective schema of bourgeois e3uilibrium economic theory is evidently and

empirically shattered then by the dynamic6historical# metabolic and sub5ective unfolding or

evolution of its real operation. ,he end of history that the bourgeoisie always desperately seeks

has been 7greatly e2aggerated8 yet again. ,he 3uestion here is9 can history be reduced to science:

!nd then again# is it indeed science or logic that is opposed to history in the bourgeois

interpretation of economic systems:

,he con6fusionof science and logic in the sphere of economic analysis was evident already in !dam

'mith;s theorization of market capitalism. 'mith;s 7invisible hand8 was a necessary1s)amotage


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or deus absconditus /hidden god0because the circularity of his reasoning reduced science to logic

6 to a tautology in fact9 prices are determined by value which is determined by the 3uantity of

labour# whose price is determined by the market which determines prices. ,he problem lies in the

definition of 7market89 if indeed the 7market8 is made up of entirely self6interested atomistic

individuals# then it is impossible to see how such in6dividuals could ever reach the 7agreement8that is indispensable to determine 7prices8< =n other words# 7the rules of market competition8 have

to be set or agreed upon by market agents even before market competition takes place. But this isimpossible by definition# because any restriction on the 7self6interest8 of market agents turns the

entire e2ercise into a meaningless and purposeless tautologyyrdal insightfully seized on this point# in The 2olitical 1lement in the 3evelopment of 1conomic Theory . >yrdal#

however# like all economics theoreticians after him# totally failed to see the purposeorpolitical elementbehind the tautologousschemaof e3uilibrium theory % a 7political element8 that was to be the very ob5ect ofhis studyacpherson;s towering study by that name. !lchian6Demsetz#to give yet another e2ample of the rampant stupidity of -obel prize laureates in economics# 3uite incorrectlyselect a negativedefinition of capitalism % the absenceof government in the economic process 6 andcompletely leave out the 7individual89

The mar of a capitalistic society is that resources are owned and allocated by such non-governmental

organiations as firms, households, and marets. [*irst sentence of +roduction, nformation osts and

/conomic 0rganiation1.


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,his is 3uite clearly nonsense because# in practice and in reality# governments have historically played a crucial role in

7the ownership and allocation of (social+ resources8 and in bourgeois economic theory# it is individuals# not7firms and households8# that must axiomaticallytake precedence over 7firms and households and markets8ar2 called 7simple reproduction80 and one that pushes it out of that position/>ar2;s 7e2panded reproduction80. =n these premises# the "aw of &alue shared by both

-eoclassical e3uilibrium theory and 1lassical $olitical Economy necessarily entails# at least

theoretically# the inevitability of economic 7stagnation8 % the former because aggregate supply

must e3ual demand until no further profitable exchange is possible /this is the outcome of

Walrasian tatonnement0# and the latter because competition among capitalists and competition for

higher wages from workers will eliminate all possibility of profit arising from the e2ploitation of

workers 6 as 'chumpeter consistently and validly argues throughout his work. /,his point is

discussed at length in the ne2t section.0

-o doubt# the fact that 'chumpeter is able to mention Walras and >ar2 without pointing out the categorical

incompatibility of the two approaches /the 7distinct processes80 to economic theory testifies to

'chumpeter;s own lack of dialectical comprehension of the fundamental politico6philosophical and even

onto6epistemological concepts involved. Even so# however# there can be little doubt that 'chumpeter had

some idea of the difficult issues that capitalist accumulation posed for the development of a 7purely

economic theory of economic change8# as his attempts at conceptualizing these issues show 3uite clearly.

"et us look closely at how 'chumpeter engages in this difficult conceptual e2ercise.

,he first fundamental issue that 'chumpeter addresses for his entire monumental theoretical effort in

economic and social theory is contained in this 3uestion9

[2ow does an economy mae the transition from one level - which itself was viewed as the finalpoint and point of equilibrium - to another levelB This question taes us to the very essence ofeconomic development.[$?A

,o this fundamental 3uestion# 'chumpeter gives the following answer % an answer consistent with andborne out in all of his subse3uent work9

[$?9 This [present wor, the Theorie is an attempt to present a theoretical analysis of development,

of its mechanism, in the form of a scheme to which the facts of development would generallyconform. We look first at a general cause for the changes in the fundamental structure,

i.e. in the level of the circular flow. We locate this cause in the fact that as we

e!pressed it new combinations get driven through. We saw that when new

combinations are carried through this can be attributed to the actions of a particular

type of economic agent whom we called an "entrepreneur".

-ow# let us sift carefully through this statement and state e2actly how and where 'chumpeter has gone

wrong in seeking to tie the two 7distinct processes8 in economic analysis. First# 'chumpeter clearly


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assumes that there is such a thing as 7astateor levelof e3uilibrium8. ?is 3uestion then is how to account

for changes in the 7level8 of e3uilibrium. !nd 'chumpeter claims to have found the cause for this change

in 7levels8 of e3uilibrium in

the actions of a particular type of economic agent whom we called an CentrepreneurD [who isresponsible for@ the new combinations [that cause@the changes@in the level of [equilibrium or

circular flow.

But the difficulty with this reasoning is that the notion of e3uilibrium applies to a theory of the economic

system in which any 7changes8 in 7combinations8# any 7new combinations8# are instantly 7semaphored8 or

communicated to all other economic agents because these 7changes8 are not changes occurring in time butare rather changes in the logical structure of the e3uilibrium level< =n e3uilibrium theory the 7economic

agents8 do not make any 7changes8 at all because all market participants are absolutely a2iomatically#formally and logico6mathematically 7e3ual8 due to the a2iomatic conditions of 7pure competition8 in

which 7e3uilibrium prices8 are fi2ed and determined by the theory< What 'chumpeter is proposing here#

instead# is a theory /one of economic change0 in which prices are no longer determined by the formal#

a2iomatic# logico6mathematical 7e3uality8 of market participants# but rather by one specific market

participant capable of causing or 7carrying out new combinations8 or 7innovations8 % 'chumpeter;s

entrepreneur.

But in t!is case t!e fundamental condition of equilibrium t!eory ' t!e condition of (pure competition) '

no longer obtains* $c!umpeter !as introduced into t!e analysis& entirely illicitly& a ne+ condition t!at

allo+s t!e entrepreneur to c!ange autonomously and independently (t!e rules of e"c!ange). But if t!is

is t!e case& t!e (prices) t!at no+ obtain in (t!e mar%et) as a result of t!e entrepreneur,s actions can no

longer be (equilibrium prices) and indeed can never be (equilibrium prices) because t!e economic

system can never be said to be in (equilibrium) for t!e simple reason t!at (mar%et prices) are no+

determined not t!roug! (pure e"c!ange) or (pure competition) but rat!er by t!e political conditions

t!at allo+ entrepreneurs to c!ange (t!e rules of competition) independently of ot!er mar%et

participants*

$lease note that here we speak of 7political conditions8 and not# as the critics of e3uilibrium theory from

'raffa to oan Lobinson and beyond do# of 7imperfect competition8 because /a0 such an e2pression

suggests that 7perfect or pure competition8 is possible and indeed conceivable /


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influence of conditions coming from the outside. $t shows %*+) how the economy

%that is, economic agents, now only bodies() responds to changes in those

conditions coming from the outside. Therefore, in such a conception, pure

economicsalmostby definition%a!iomatically] excludes the phenomenon of a

"development of the economy from within".

*o% +t is not "almostby definition$ that "pure economic las$ e)clude "a de!elopment of the

economy from ithin$: it is indeed "by definition$ -%. that they do so% !nd this is because the

market participants of e3uilibrium theory# its 7self6interested in6dividuals8# are not alloweda2iomatically to act as 7economic agents8< 'chumpeter;s confusion is shown 3uite clearly when

he states above that

[pure economic laws describe a particular behavior of economic agents, whose goalis to reach astatic equilibrium@

*ot at all%,he 7self6interested in6dividuals8 of economic theory do not and can never have any 7economic

goals8 of their own and most certainly not the oal of reachin equilibrium/


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=n summary# 'chumpeter;s attempt to derive 7a purely economic theory of economic change8 has led him

to refute the theoretical legitimacy of e3uilibrium theory# because of its a2iomatic inability to

change# and also of his own 7pure theory of economic change8# because it shows that economic

change cannot be e2plained by a 7purely economic theory8. ,he "aw of &alue has finally been

e2posed for what it is % one of the biggest intellectual frauds in the history of humanityar2;s labour theory of value % a criti3ue thathis mentor# Eugen Bohm6Bawerk# had already conducted and that enabled him to enucleate a

novel theory of the nature and causes of 7interest8. 'chumpeter;s mission was instead to discover

the nature and origin of 7profit8 and# by imitating >ar2# to combine profit with a specific

7economic sub5ect8 % the entrepreneur. Following and applying faithfully Bohm6Bawerk;s

criti3ue of >ar2# 'chumpeter insists that >ar2;s labour theory of value has as supreme aim the

demonstration of the presence of 7e2ploitation8 in capitalist enterprise# and that this demonstration

is to be carried out under the overarching assumption of perfect competition. ust as he was able to

show that profit is impossible in e3uilibrium theory# so is 'chumpeter able to dispose easily of thee2istence of surplus value and of e2ploitation in conditions of perfect competition.

But it is the se3uence of the reasoning that 'chumpeter performs with regard to >ar2;s theory of surplus

value that is most enlightening in tracing the train of thought that led 'chumpeter to his own

theory of economic development. "et us e2amine this line of thought carefully9


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8oreover, it can be shown that perfectly competitive equilibrium cannot e'ist in a situation in whichall capitalist-employers mae e'ploitation gains. *or in this case they would individually try to e'pandproduction, and the mass effect of this would unavoidably tend to increase wage rates and to reducegains of that ind to ero. t would no doubt be possible to mend the case by appealing to the theory ofimperfect competition, by introducing friction and institutional inhibitions of the woring of

competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on.

0nly a moderate case could be made out in this manner, however, one that 8ar' would have [email protected] is so easy only as long as we see in the theory of surplus value nothing but a proposition aboutstationary economic processes in perfect equilibrium. =ince what he aimed at analying was not a

state of equilibrium which according to him capitalist society can never attain, but on the contrary aprocess of incessant change in the economic structure, criticism along the above lines is notcompletely decisive. =urplus values may be impossible in perfect equilibrium but can be ever present

because that equilibrium is never allowed to establish itself. They may alwaystendto vanish and yetbe always there because they are constantly recreated@This aspect proves to be of considerableimportance. (=EF)

1learly# it is not the case that >ar2 thought that 7capitalism can never attain a state of equilibrium89 in

reality what >ar2;s critiqueof bourgeois 1lassical $olitical Economy aimed at was showing thatthe reality of capitalism can never be theorized with the analytical categories of e3uilibrium

analysis. =t is not the case# therefore# that >ar2 thought that capitalism is incapable of attaining

e3uilibrium because it is in 7a constant process of incessant change8 % as if this were 5ust a matter

of 7hitting a 3uantitative target8. Lather# what >ar2 was saying is that the categories ofe3uilibrium theory 6 which are certainly applicable to the 1lassical $olitical Economy of 'mith

and Licardo as well as to -eoclassical economics 6 are conceptually inapplicableto its reality

because it is not a quantitativereality but apoliticalone. =n other words# the valueinvolved in the

capitalist mode of production is not an ob5ective 3uantity valuerefers instead to historically

specific 7social relations of production8. /We shall e2amine this point closely in the ne2t section.0

'o long as surplus value is seen as an 7amount8# a value over and above what is needed for labour6power

to reproduce itself /sur6plus#7ehr(wertor 7added value8# in German0# then it is clear that the laws

of competition can serve to regulate the 7distribution8 of this fi2ed amount in such a way that anyinitial ine3uality or e2ploitation is gradually eliminated to a point where no 7value8 is e2tracted

e2ploitatively from workers % for the simple reason that 7perfectly competitive equilibriumA

would unavoidably tend to raise wage rates and to reduce gains of that )ind to zero8. We can see

therefore that if we postulate the e2istence of e3uilibrium as an a2iom of economic analysis# then

surplus value or profit is impossible because the a2iomatic re3uirement of e3uilibrium will reduce

all economic values and prices to 7relative8 prices % which cannot be fi2ed until all transactions

have been conducted once and for all % which in turn e2cludes the notion of surplus value whencombined with perfect competition. 'imilarly# if we theorize surplus value as an ob5ective 3uantity

instead of as a 3uantity dependent on relative prices# then perfect competition will ensure

e3uilibrium.

But the point is that although 7surplus value may be impossible in equilibriumAit can ever be present

because that equilibrium is never allowed to establish itself8< !nd it is never allowed to establishitself not because of 7frictions8 in the operation of market competition % not because of that

7imperfection8 6# but rather because the very notion of 7surplus value8 has a categorically

differentmeaning once the productive system is transformed by the actions of its participants# of

its 7economic sub5ects8oura make precisely this mistake of confusingpolitical antagonism

with 7e2istential human choice8# which is a purely 7individual8 category that conceptuallyobscures the sphere of politics because politics cannot be reduced to individual e2istence or to free

will. !s we have amply e2plained# bourgeois economic science in the 'chumpeterian version that

e2its e3uilibrium to theorize market process need not be inconsistent with 7human choice8

because nomotheticregularities can be defined legitimately as 7scientific8 once we acknowledge

that human 7freedom of choice8 can be bounded by the 7free6dom8 of self6interest and self6

preservation on the part of other atomic individuals and must then be theorized in terms of the

logical6practical e2it from mechanical e3uilibrium to political market process.0

,wo levelsof scientific analysis are present in 'chumpeter;s work# then9 an analytical or anatomical or

physiological level where the 7schema8 or 7skeleton8 or the 7organs8 of the economic system are

studied in their static functional relation to one another and a sociological6historical level at whichthe capitalist economic system is seen 7in flesh and blood8 as a dynamic metabolic organism

propelled by internal and antagonistic forces already a2iomatically implicitin the theoretical

schema but now e2amined in their e2plicit practical e26pression or e2trinsication or manifestation#

as in innovation# monopoly and bureaucracy. ,his Binstitutional framewor)@# as 'chumpeter calls

it# is the practical historical e26pression or manifestation of the 7tendencies8 implicit in the

a2iomatic definitions of the e3uilibrium schema. 'chumpeter leaves out the antagonism of the

wage relation# and it is for this reason that the two 7levels8 have to be kept separate and cannot be

unified. But to see 5ust this separation or dis5unction in 'chumpeter;s theoretical framework and

methodology and to dismiss it as 7contradictory8 or 7flawed8 would be to miss the entire point ofhis modus operandihat counts in any attempt at social prognosis is not the Ies or Jo that

sums up the facts and arguments which lead up to it but those facts and argumentsthemselves. They contain all that is scientific in the final result. /verything else is not

sciencebut prophecy. 5nalysis, whether economic or other, never yields more

than a statement about the tendenciespresent in an observable pattern. ndthese never tell us what will happen to the pattern but only what would happen if theycontinued to act as they have been acting in the time interval covered by our observation andif no other factors intruded. -nevitability or -necessity can ne%er mean more than this.

>hat follows must be read with that proviso. %ut there are other limitations to our results and their

reliability. The process of social life is a function of so many variables many of which are not


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amenable to anything lie measurementthat even more diagnosis of a given state of thingsbecomes a doubtful matter quite apart from the formidable sources of error that open up assoon as we attempt prognosis. These difficulties should not be e'aggerated, however. >eshall see that the dominant traits of the picture clearly support certain inferences which,whatever the qualifications that may have to be added, are too strong to be neglected on the

ground thatthey cannot be proved in the sense in which a proposition of !uclid"s

can.

!t the interface of scientific model and social reality lies the 7tendency8. ,he aim of 7economic science8for 'chumpeter is not to describe 7reality8# because reality is very different from the scientific

framework constructed to analyze it. 'cience is not a 7closed system8 of the type 7whenever 2#

then y# where 2 is a dependent variable or function of y8. ,his kind of 7closedness8 /6b(schluss0 is

in fact a tautology# as Bohm6Bawerk showed to the detriment of >ar2# because the effect follows

necessarily from the definition of the cause /in >ar2;s 7transformation problem8 observable

market prices are determined by unobservable labour values# making the empirical proof of the

theory a mere article of faith0.

'cience is an open system if its hypothesesrepresent tendenciesthat furnish a guide to action by warning

against the necessityof the economic system# its 7closedness8. ,he closed theory is 7a bo2 oftools8# a 7frame6work8 from which hypotheses can be derived with which to frame andto correct

reality according to one;s will. ,he aim of science is to provide 7a bo2 of tools8 needed to correct

reality or at least to take into account the ineluctable conflict contained in its a2ioms when we

attempt 7to bring them into being8# to pro6duce them or turn them into reality# into ec(sistence.

?ere in 'chumpeter we find a very different rationale from that adopted in the natural sciences in

which the sole apparent aim is to photograph reality# 7to find the truth8 about the world# 7todiscover the lawsof nature8. !nd we find a different 7rationale8 from the >ar2ian one in which

antagonism is indeed at the heart of the theory % but then the theory contains a 7rationalist8millenarian orpropheticcomponent that directs and affects and indeed pre6determines or pre6

destines its conclusions< nlike what >ar2 believes# and in the footsteps of Weber# 'chumpeter is

saying that in society there are no 7laws8# no 7truths8# no 7inevitability8 or 7necessity8 outside of

the tendenciescontained in the a2iomatic postulates# theschema# to which we reduce reality

according to the goals to which we must adhere or comply. @uite obviously# the 7we8 here standsfor 7the bourgeoisie8# the only social agency in capitalist society with the power to enforce the

validity/"atin valor# literally# power# strength0 of its a2iomatic principles.

?ere is a most splendid instance of how 'chumpeter is able 7to integrate theory and history8 /pace>oura

and "awson0# and of how in fact he can do so from an internal conceptuale2amination of the practical

implications of 7pure theory8. !nd he can do so also within the boundaries of what he defines as 7science8

because his conceptual reformulation of 7pure competition8 contains a scientific hypothesis about the

practical implementation of pure competition< ,his scientific hypothesis is simultaneously a logical

requirementof the concept of pure competition and the practical implementationof the concept# which is

what makes it 7logical8 yet not 7closed8 or self6referential and therefore tautologous. ,o repeat# a closed

system is one in which the final effect is connected by definition to the initial cause so that cause becomeseffect and effect becomes cause % a circulus vitiosus. ?ere instead the real outcome of a concept is the

result of its practical implementation and causalityplays no role whatsoever in the connection betweenconcept and reality. ,he outcome is what mustoccurif the concept is to be realized but there is no

causality between the concept and its realization.

,his is a point that completely escapes "awson in his assessment of 7the confused state of e3uilibrium theory8 becausehe is too preoccupied with the idea that a 7closed8 system simply abstracts from the 7contingency8 of

7e2istence8 or 7reality8 % hence# the title to his work# 71conomics and Ceality8< For "awson# and for >oura#a system is 7closed8 if it does not allow for 7contingency8# if it presumes to predict the future and thereby

banishes history. But this 7prediction8 is the property of all nomotheticsocial sciences# and "awson;s


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ob5ection is both pathetic in the face of the brutal violence of the bourgeoisie and unwarranted because no

7science8 is possible e2cept as a theoretical framework for a given political practice< f course# even?eidegger would not share "awson;s 7e2istentialist humanism8# the petulant pretense# reminiscent of 'artre#

that 7human beings are free8# that they have 7choice8< /1f. ?eidegger;s9etter on =umanism.0"awson hassimply misunderstood ?eidegger entirelyar2;s definition of 7point8 already contained the

e2istence of a 7line8 % because >ar2;s definition of political antagonism points logically to itssupersession or reconciliation /cf. . "owith#7ax %eber and ar2

because he ably combined each 7category8 of economic analysis and income such as profit and

interest and rent to a specific social class. ,his is an operation that 'chumpeter himself will

attempt to carry out in his own work. But another aspect of this peculiar 7fusion8 that is >ar2;s7histoireraisonnee8 is the fact that >ar2 escaped early from the clutches of e3uilibrium analysis.

?ence# economic science cannot tell us whatto do it can tell us only what we must doif we wish to attain

a particular goal. =t is this instrumental purpose dictated by the inevitable conflict or clash of willsin society that is theorised by economic science and that can be applied to the reality of society to

achieve stated goals. E3uilibrium theory assumes that all economic agents are e3ual participants in

the process of market competition both formally and materially. Dynamic theory instead assumes

that for the system to escape the stagnant gravitational pull of competitive forces keeping the

system at e3uilibrium there must be 7frictions8# sociological and historical# that arise from the

operation of the mar)et processitself and that lead it away from theoretical e3uilibrium. Both

these theories can be 7pure8 but the latter can be so only in the sense that it considers the empirical

operation of economic agents in the social network.

,he transition between e3uilibrium points cannot bepurein the same manner of static analysis but only inthe sense that it takes into account the 7real operation8 of competitive conflict at its interface with

the social system. 'chumpeter tries to capture the 7purity8 of the3ynami)by focusing on the

necessity of innovation as the e26pression of profit6seeking pure competition % that is to say# on

the necessary implication that the 7purity8 of competition in e3uilibrium analysis must be

relin3uished the minute the analysis comes into contact or 7friction8 with reality. =t can be argued

that the 7necessity8 or pre6supposition /?eidegger;s famousEuruc)trittwhere he comes closest to

?egelian dialectics0 of this 7friction8 is what preserves the conceptual 7purity8 of the3ynami)

itself< /1f. Bobbio;s similar argument with regard to elsen;s 7pure theory of law8 re3uiring not


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5ust the concept of 'tate and $eople# but also that of 71o6action8 or 7enforcement8< ,he purity of

the perfect mechanism is lost when somebody has to switch it on (3a =obbes a 7arx# p.*P+.

Bobbio;s discussion of >acpherson on "ocke is a brilliant e2position of these points with regard

to their different interpretations of the state of nature.0

=nnovation is the ob5ective procedure or 7entrepreneurial !ct8 that causes the economic system to be 5oltedout of its e3uilibrium position and thereby makes profit economically possible. 'weezy does not

capture this 7disturbing act8 because he understands 7competition8 in a 7formal8 sense but not in

its 7ob5ective8 implications. Formally# competition between capitalists need not result in

innovation % it could be 5ust price competition or competition that leads to the evaporation of

profits9 =nnovation is a separate actionre3uiring 7leadership8. 'weezy does not capture this

7political8 aspect of 'chumpeter;s theory and relies instead on >ar2;s 7utilitarian automatism8 inthat 7surplus value is automaticallyreinvested8 in >ar2;s schema of e2panded reproduction as a

result of its being a 73uantity8# that is# the 7amount8 of socially necessary labour 7over and above8

what is needed to reproduce the labour force< 'urplus value is 7theft of labour time8 % which is

why there is no need for innovationar2ian labour theoryof value which ultimately relies on a quantifiablenotion of 7surplus value8.

=t is clear here that the essence of 'chumpeter;s hypothesis is what all bourgeois economic analysis before

him and ever since has failed to grasp. What 'chumpeter is concentrating on here is not the quantumof7wealth8 or 7profit8 that may well be the 7ultimate8 aim of capitalist enterprise9 -o< What 'chumpeter is

doing is shift the focus of his theorization of capitalism from the 7utilitarianJhedonistic8 ultimate ends#

from the 7gain8 or 7profit8# to the very essence of profit and competition# to their 7procedural8 or

7operational8 implementation that overflows unavoidably into the political sphere# turning therefore from

mere 7profit8 or 7ownership8 or 7welfare8 into social power< =n other words# it is impossible to account forinnovation without introducing politics or imperfect competition in the concept of pure competition itself as

a necessary or logical aspect of its ec(sistencear2 on this point as is humanly possible to be. ?ollander and 'weezy rightly dispute 'chumpeter;s view

too# but on totally spurious grounds. f course# if we define capital as a 73uantity8# a 7surplus8# as does

'weezy (cf. his The Theory of 5apitalist 3evelopment+# then the generation and reinvestment of this

surplus and profit becomes 7wholly automatic8 for capital even though the ultimate motivation for seeking

this 7surplus8 may be social power# as 'weezy allows. What we are showing here is that capital# andtherefore value# as >ar2 amply demonstrated# is not a 3uantity but a social relation# which re3uires

innovation# and therefore entrepreneurial capitalists# for capitalist social relations of production to be keptantagonistically alive. ,o the e2tent that >ar2 believed that (a+ surplus value is a 3uantity and therefore

innovation is about the relative share of production going to capitalists and workers and (b+ that science and

technology are e2ogenous to capitalist relations of production# and insofar as >ar2 did not derive the

necessity of innovation and leadership from a conceptual criti3ue of the notion of pure market competition#

then 'chumpeter;s charge is 3uite founded.

Blaug echoes 'chumpeter on this criticism of >ar2. Both are 3uoted in -. ?ollander# The 1conomics of ar2;s allowance for 7uncertainty8 for the necessity of leadership in decidingthe direction of investment at least in the early stages of capitalism (pp.NHQff+. Both ?ollander and Blaug# however#


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8ociologia. /'chumpeter;s manifest elitarianviews % by which = mean not necessarily politically

elitist but sociologically highlighting the prominent role of elites in society % are 3uite cognate to

the views of >osca and $areto# a close collaborator of Walras# and then >ichels and Weber in the

first postwar period. 'chumpeter dedicated a study to $areto in his Ten 4reat 1conomists.0 4et# as

Bobbio has shown /+n 7osca and 2areto0# the geniality# breadth and sheer intrepidity with whichthese great thinkers e2plore their themes can bear copious fruit if we resist the temptation to

dismiss them as nonsense.

C. !e Confusionof Equilibrium and

,he ravages of the Great 1risis of HQP could not but convince 'chumpeter of the need to rebalance thetheoretical formalism of -eoclassical ,heory founded on the positivist empirical observation of market

e2change# with the e3ually empirical observation of business cycles and the spasmodic operation of the

capitalist economy from crisis to crisis. /We will tackle >achism soon in a new study.0 1ontrary to the

neoclassical Walrasian axiomaticframework of 7general economic e3uilibrium8# our actual experienceis

that the capitalist economy is rarely in such a blissful state. 'chumpeter notes that what we witness in

capitalist history are rather phenomena associated with dis6e3uilibria9 the capitalist economy is in a

constant state of 7evolution8 /1ntwic)lung0 which entails not 5ust 7growth8 but above all 7trans6formation8#

not 5ust mutationbut also crisis


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were# a descriptive or 7ana6tomical8 e2ercise that can only 7photograph8 or sketch an economic system and

7classify8 its individual organs. =t relies e2clusively on 7e2change8 and on the ma2imization of welfare or

utility. What e3uilibrium analysis cannot do# however# is understand and e2plain how the economic system

metabolises# how it interacts with its social and political environment# how it grows# mutates# and dies % or#

phylogenetically# how it evolves and becomes e2tinct. !s we have seen# without this metabolic or frictionalinteraction# capitalist competition or enterprise is unthinkable because innovation and profit6making are

unimaginable# and so is therefore economic 7change8.

The commonsense of thistool of analysismay be formulated as followsL first, if we deal with, say,the organism of a dog, the interpretation of what we observe divides readily into two branches. >e

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. -ut 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 dogsMoseph =chumpeter, %usiness ycles. ("9#9) G9

have come to e!ist at all. 0bviously, we have here a different process before us, involvingdifferent facts and concepts such as selection or mutation or, generally, evolution. n the case ofbiological organisms nobody taes 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.t is incessant changein the data of the situations, rather than the inadequacy of the data of any givensituation, which creates what loos lie indeterminateness of pricing. >e conclude, on the one hand,

that we must tae account of this pattern when dealing with the process of change which it is our tasto analye in this boo and which must be e'pected to create precisely such situations, and, on the

other hand,that it does not paralye the tendencytoward equilibrium.[$#

,he 7tendency8# then# is always toward e3uilibrium# toward a state of rest and stagnation

because# as we saw above# the 7friction8 that is necessary for innovation ends up

restricting the political and social room /Weber;s Ellenbongsraum and 'ozialisierung0 forpure competition. ,he very notion of 7e3uilibrium8 or 7tran3uility8 /the term preferred

by oan Lobinson0 as applied to 7the body politic8 was very common in the >iddle !ges.

'pecifically# >arsilius of $adua spoke of 7tranquilitas8# meaning a period of social peaceand prosperity /see . von Gierke# The 2olitical Theory of the 7iddle 6ge.0 =nterestingly#

both !nti3uity and the >iddle !ges lacked the notion of 7revolution8# which is a modern

European concept originating in the HIthcentury /see ?. !rendt# +n Cevolution0.

!nti3uity knew only of 7metabole8# meaning social change# of 7stasis8# meaning civilwar# and of 7homo(noia8# meaning harmony or agreement# and 7corruptio8# obviously

meaning corruption# that is# degeneration from a perfect state /a perfectione ad defectum#

from perfection to defect0. /n all this# see '. >azzarino;s invaluable and irreplaceable&l2ensiero 8torico 5lassico.0

,he difficulty that 'chumpeter perceives in -eoclassical economic theory /as did eynes shortly after0 isthat it simply 7side6steps8 the reality of capitalist economic crises and of the business cycle and

thus# to that e2tent# threatens to turn itself into a rigid fundamentalist 7dogma8 that will never be

able to tackle the enormous mortal threats that crises pose for the political survival of the capitalist

economy and of society itself. Even before eynes# but certainly after Weber# 'chumpeter realizesthus that however 7rationally8 or 7scientifically8 the capitalist economy may operate# it cannot

ensure its own survival because it unleashes forces that are 3uite capable of destroying its own

operation as well as the social fabric for good. /For a historical account of how the rigid

application of economic theory to English society threatened to tear its social fabric# see above all

. $olanyi# The 4reat Transformation.0


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,he instructive fact in 'chumpeter;s attempt to place the&nnovationsprozessat the centre of capitalist

7evolution8 /1ntwic)lung0 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 7rate8 of profit obtained on the capital invested0. =n their rush to criticize and split hairs#

critics of 'chumpeter;s theory of innovation have forgotten this cardinal point % which is that

'chumpeter places at the very centre and core of capitalism this notion of 7innovation8 which hedefines as a 7force8 and 7a source of energy8 that distinguishes this 7economic system8 from all

others.

We certainly agree with 'chumpeter on this# and here we wish to focus on his theory of innovation as the

most important illustration of his approach to 7economic science8 which combines simultaneously

methodological and sociological aspects. ,he fact that 'chumpeter 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 onmaintaining this 7dual8 or 7two6pronged8 approach to economic theory. ur aim here is to show

the real practical reasons for this approach and his insistence on maintaining it.

,he most important corollary of this 'chumpeterian and Weberian advance on all previous social theory

since >ar2;s 4rundrisseis that these great social theoreticians come to understand what are

known as 7science and technology8 not as 7neutral8 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. f course# they do this in the footsteps of -ietzsche# although -ietzsche went

much further than 'chumpeter or Weber or indeed >ar2 by insisting on the fact thatscience itself

is a human practice even in its epistemological essence< -ietzsche effectively challenged andoverturned our notion of 7,ruth8 in all its conventionalaspects. !s is widely known# what

'chumpeter admired most in the work of arl >ar2 was precisely this 7unification8 or

7integration8 of formal economic theory and substantive historic content.

(1olletti+

arl >ar2 described the entire circuitof capitalist production as follows9 6 >.$.>;. =n other words#

between the initial outlay of capital />0 and its realizationas profit />;0 lies $# the process of

valourisationof capital or production. $ut more specifically# the circuit becomes >61.$.1;6>;. ,his means that the capitalist first purchases the commodities needed for production /10#

which include 7the commodity labour6power8 and the means of production then he puts these two

commodities together in the production process /$0# which yields a new product /1;0# which

finally the capitalist sells for an amount superior to the initial outlay of money />;0 % this is the

realizationof capital# from which he derives aprofit/>; % > R p0. -othing could be simpler.

What we need to e2amine here is this peculiar interaction between the realization of profit and innovation.

=t is clear from this schematic presentation that capitalist profit can be obtained only through thecrucibleof the production process /$0. But there are two sides to the realization of profit9 the first

aspect is the valourisation of capital in the production process but the second aspect involves therealization of profit in the process of consumption /that is# the final sale of the new commodity to

workers0. -ow# what happens in the production process is that the capitalist brings together

7labour6power8 and machinery or means of production. =t is e3ually clear therefore that when the

capitalist entrepreneur 7innovates8 he trans(formsthe relation of labour6power 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 7separated8 from the

means of production# and# second# that the capitalist feels the need to trans6form the relationship


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between the worker and the means of production through 7innovation8 of the production process

so as to drive down the costs of production.

E3ually# 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 productso asto entice and increase sales to workers as consumers. =n this dual process of innovation is

encapsulated the process of capitalist development which is obviously not technical or scientificbut is rather politically antagonistic. ,his is so# in the first instance# because in this dual process of

innovation % of the production process and of the product 6# the capitalist seeks to ma2imize profit

against other capitalists. !nd to that e2tent 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 7fungible8# that is to say# it can be deployed very 3uickly to any physical use that is

practicable. Given thisfungibility and mobility of capital# there is a clear sense in which theowners of capital have a common interest in ensuring that the rate of profit is as high as possible

for capital as a whole. ,hus# among capitalists# we have a mi2ture of antagonism /or competition

defined in narrow political terms0 and of community /the rate of profit paid as interest to that part

of capital that is in monetary form0. ,he rate of profit# that is to say# the e3ualization of profit for

capital in monetary form or money capital or finance capital# is what allows and fosters the

socialization of capital# the formation ofsocial 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

6# that is# the antagonism between the capitalist class and workers.

=t is this comple2 mi2ture of antagonism and community that is mediated by the capitalist 'tate acting as7the collective capitalist8. E3ually# we can see now that there are two sides to capitalist or

entrepreneurial innovation9 a destructive or better disruptive side brought about by inter6capitalist

competition 6 or better# rivalry 6 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 e2panding

consumption and# above all# by trans6forming the relation of capitalists to workers both in the

productive process and in the sphere of consumption< ,hus# 7creative destruction8 can be seen as a

process# the&nnovationsprozess# by means of which capitalists transform the mode of production

and consumption not unilaterally but as a result of the political antagonism amongthemselves ascapitalists but also and above all betweenthemselves as capitalists on one side and workers on the

other side. >ar2 saw antagonism only or mostly in the workplace# on the production side# but not

in the marketplace# on the consumption side.

=t is utterly clear# then# that capitalists can accommunate or unify or pool their interest most directly in the

monetaryform of capital# which is where the rate of profit is measured and# most important#

money wage inflation can be measured also. =t is in the form of money capital# of finance capital#

that capitalists can find unity# and that is why we call this 7social capital8 % 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 inter6capitalist rivalry. 'chumpeter

was most certainly aware of this paramount division between the functions of capital. =ndeed# 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 7lenders8 and

7borrowers8. =t is true that both parties seek a higher rate of profit or# as 'chumpeter calls it# rate

of interest but the fact is that whereas finance capital seeks as 7safe8 a return on capital as

possible# industrial or entrepreneurial capitalists know that the only way for them to make a profitis to take risks both in production as well as in distribution9 and this is what pushes or compels

them 7to innovate8 both their methods of production and their products. Entrepreneurs seek tocompete against established businesses# finance capitalists seek to curtail competition to secure

guaranteed profits in the guise of 7interest8 or 7rent8.

=t is e3ually clear therefore 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

7cartels8 or 7monopolies8 that e2clude competitors# improve the safety of profitable investment#

and maintain prices high to the detriment of competitors and workers and consumers. ,he last


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pages of&mperialism and 8ocial 5lassesshow how aware 'chumpeter was of this 7sociological

dynamic8 within the functions of capital. =t is easy to forget# given his renown as an economist#

that 'chumpeter possessed one of the finest sociological minds in the history of social theory and

that he was also a prominent !ustrian politician. We find here that combination of economic

rationality and sociological and political analysis that 'chumpeter displayed ubi3uitously in hiswork. n one side# we have the entrepreneurs who operate according to the 7rationale8 or

7science8 of capitalism. But then# on the other side# we have the /finance0 capitalists or bankerswho operate according to the bureaucratic socialisationor 7rationalization8 of capitalism9 6 the

former represent competitive innovation# the latter represent monopolistic ossification. ,his is a

theme that we find in Weber# with >ar2 perhaps the greatest sociologist ever to grace the earth#

and one that 'chumpeter undoubtedly adopted from his most genial German elder and collaborator

at the6rchiv fur 8ozialforschung.

/1'D# pHQ*0

4et this higher concentration of capital comforts the fantasy of the 7transition to

socialism8# of 7evolutionary socialism8# shared by 'chumpeter in his last great work.

Both the 8ozialismus and 'chumpeter fail to see that 7competition8 and 7monopoly8 areantinomic concepts because 7pure competition8 will end up by definition in monopoly

/the aim of competition is 7to destroy all competitors80 and 7monopoly8 implies the

e2istence of potential 7competition8# without which it would be a meaningless concept/as 'chumpeter himself perceives in 1'OD0. 'chumpeter sees correctly that it is not

7monopoly capitalism8 that infringes against 7the laws of competition8# but rather it is7the laws of competition8 that lead straight to the formation of monopolies and finally to7the obsolescence of the 1ntrepreneur8oura# in his criti3ue of 'chumpeter;s 7integration of theory and history8# neglects this fundamental point

/essentially the same as Lothbard;s# e2cept that Lothbard does not allow for 7nomothetic8

sociological studies0. ,hese studies and their theoretical assumptions are permissible# but the

theoreticians must make their parameters clear in terms of the 7choice of political goals8 /Weber0.

'chumpeter fails to do this9 indeed# >oura is 3uite 5ustified in arguing that 'chumpeter is seeking

to erect a 7closed8 theoretical framework that is in stark contradiction with the 7open8 premise ofthesub'ective factorsinvolved in the phenomenon of innovation. ,he shortcoming in >oura;s

criti3ue# however# is that it merely stops at establishing the contradictoriness of 'chumpeter;s

attempt to reconcile 7closed economic theory8 with 7open or historical innovation8. "ike

Lothbard# >oura is confusing 7sub5ectivity8 with 7history8#politicalantagonism and conflict with

existentialist7choice8# a congenital deficiencyhe inherits from "awson;s philo6?eideggerian

theses in1conomics and Cealitywhich he utilizes for his criti3ue of 'chumpeter. 4et the much

more interesting and important task is to understand why 'chumpeter was attempting# toparaphrase >oura;s title# 5ust such an impossible7integration of (closed7pure economic8+ theoryand (opensub5ective+ history;< =t serves little purpose to call somebody crazy for attempting the

impossible9 we should seek instead to understand what causes the madness. =ndeed# what makes

'chumpeter;s work so stimulating# provocative and certainly fruitful % 5ust like >a2 Weber;s % is

precisely his willingness to tackle this vital and fatal 7problematic8 of capitalist society in the most

fearless manner# and then being 3uite open about the theoretical contradictions that he might incur

% and that in any case are inevitable in all theoretical effortsar2 and even Weber# both of whom he was

trying to emulate.

,he 7integration of theory and history8 that we find in >ar2 and whose absence many critics decry in

'chumpeter pre6supposes the interpretation of 7choice8 or human agency as an e2pression of a

7convergence of human interests8 in the preservation of this very 7freedom8. !t the very least# this7freedom8 implies the 7unpredictability8 of human decisions /Weber would say# their

7irrationality80. 4et what is peculiar about the 7pure8 framework of analysis both in the 8tati)and

in the3ynami) is precisely the absence of such 7freedom8 in the sense that the 7freedom8 of

human choice or agency as an e2istential and ontological reality is limited and circumscribed

instead by the e3ual 7free6dom8 of each individual will# and is therefore turned into the

7necessity8 and 7co6ercion8 of human conflict /not con6vention or agreement09 the 7freedom8 of

economic theory is not a 7rationalist8 Freedom /the !ugustinian initiumor a common goal# the

inter esseof a common humanity# the free will of Western metaphysics and udaeo61hristian soul#or $lato;ssummum bonumor 'pinoza;s pantheism or the Leason of German =dealism0 but a

7rational8 free6dom# a 7room to manoeuvre8 /Weber;s1llenbongsraum0 or 7living space8 /the

inevitable conflict of the Euclidean# Galileo6-ewtonian mechanical scientific hypothesis of

?obbesian political theory0 dictated by self6preservation and self6interest. !s Weber argued# a

decision is 7free8 when it is 7rational8# not when it is 7irrational8# because in that case it has been

conditioned by factors beyond the control of the decision6maker.

,he analytical a2iomatic framework of e3uilibrium theory sets out the 7rational limits8 or 7domain8 of

human action that need to be applied in the 7space8 of social con6vention outside of which only


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the standpoint of indi!idual prices% +n the former case, e can spea0 of "equilibrium$4 but

in the latter case the notion of "equilibrium$ is completely irrele!ant because the circular

flo does not necessarily describe an economy in equilibrium but applies equally ell to one

in disequilibrium, that is, to one in hich mar0ets do not clear -for instance, an economy

ith chronic unemployment or underutili5ation of resources due to disequilibrium prices.'

But if this force or source of energy is to be wholly 73ualitative8 and 7transformational8 in a manner that isnot capable of being 73uantified8 or be made 7predictable8# if this force or source of energy is to

operate in 7spontaneous and discontinuous8 fashion# then it is absolutely obvious that this

economic 7transformation mechanism8 can only be a 7sub5ective8 or 7institutional8 factorar2 7to visualize clearlyentrepreneurialactivityas a distinct functionsui generis8Sa distinction

'chumpeter always underscoredSwas a crucial flaw in their analysis of capitalism'AA /From >c1raw;s =ntro toBus.1ycles9at fn.HK. 1heck B1 for 3uote.0

?ence# eitherwe have a 7static8 economic science of e3uilibrium that cannot e2plain how e3uilibrium is

attained and how it is lost % and that cannot e2plain the 7content8 of this 7e3uilibrium8 6 what it isthat is 7e3uilibrated8 at 7e3uilibrium8 6# in which case it can no longer be a 7science8 /again# see

Dobb cited above# ch.H.0 +r elsewe have a 7dynamic8 theory that is 7a purely economic theory of

economic change8 that# 5ust like e3uilibrium theory# cannot e2plain 73ualitative development8 ormutationand crisesbecause otherwisetheir 73ualitative8 and 7unpredictable8 and 7antagonistic8

character would completely nullify and invalidate any and all pretensions of this3ynami)to

aspire to the status of 7pure economic theory8 and indeed of 7economic science8< +n other ords,

Schumpeters insistence on this "di!ision of labour$ beteen Stati0 and (ynami0 has the

ineluctable effect that neither the one nor the other, neither equilibrium analysis nor

Schumpeters on "theory of economic de!elopment$, can be said to be founded on

satisfactory theoretical rounds because the first lea!es out the empirically e!ident "crises$

of the capitalist economy and society hile the second reduces these "crises$ to purely

"quantitati!e$ or "procedural$ terms that ma0e it indistinuishable from theformal and

calculable analysisof equilibrium theory, and therefore unable to account for crisesendoenously as as Schumpeters intent'

!lthough he rightly re5ects and refutes classical and neoclassical e3uilibrium theory to the e2tent that their

own a2iomatic assumption of e3uilibrium forces them to regard capitalist development as caused

by 7e2ogenous8 forces or shocks# and although he insists that capitalist growth is driven

essentially by 7incessantly endogenous8 factors and not by 7intermittent e2ogenous disturbances8

/8torungen0# 'chumpeter simultaneously commits the grave error of treating these 7endogenous

factors8 as being still reconducible to and consistent with an empirico6scientifically/erfahrungswissentschaftlich0 discoverable 7transformation

mechanism8/>eranderungsmechanismus0 despite the fact that they are clearly the products of an

7institutional framework8ar2 called the real

subsumption of human society by capitalist industry.

Three kinds of rationalities are possible, therefore. One is the empiricist rationality of scientific research, another is the teleological,

idealist rationality introduced by Hegel, and finally we have the Rationalisierung that Nietzsche expounds as the objectification of the Wille

zur Macht. How difficult and confusing it may be to separate the three is perfectly illustrated by the most philosophical economic theoretician

of the neoclassical and Austrian schools, Joseph Schumpeter, who combined a solid Machian background in the Vienna of Karl Renner with a

Nietzschean vision of reality filtered through Max Weber. Schumpeter begins Chapter Two of his Theoriewith this sweeping and suggestive

summation:

The social process which rationalizes our life and thought has led us away from the metaphysical treatment of social development and taught

us to see the possibility of an empirical treatment; but it has done its work so imperfectly that we must be careful in dealing with thephenomenon itself, still more with the concept with which we comprehend it, and most of all with the word by which we designate the concept

and whose associations may lead us astray in all manner of directions. Closely connected with the metaphysical preconception. is every

search for a meaning of history. The same is true of the postulate that a nation, a civilization, or even the whole of mankind must show some

kind of uniform unilinear development, as even such a matter-of-fact mind as Roscher assumed (p.57)

The footnote at rationalizes was expanded for the English translation and reads as follows:

This is used in Max Webers sense. As the reader will see, rational and empirical here mean, if not identical, yet cognate, things. They are

equally different from, and opposed to, metaphysical, which implies going beyond the reach of both reason and facts, beyond the realm,

that is, of science. With some it has become a habit to use the word rational in much the same sense as we do metaphysical. Hence some

warning against misunderstanding may not be out of place.

Evident here is the maladroit manner and dis-comfort (not aided, and perhaps exacerbated, by the disjoint prose) with which Schumpeterapproaches the question of the meaning of history. The Rationalisierung, which Schumpeter adopts from Weber, has made possible a

scientific empirical treatment of social development (Entwicklung), but has done so only imperfectly, not to such a degree that we are able

to free ourselves entirely of metaphysical concepts which is why we must be careful in dealing with the phenomenon [Entwicklung] itself.

Nevertheless, Schumpeter believes that it is possible to leave metaphysics behind and to focus on both reason and facts, and therefore on

the realm of science. In true Machian empiricist tradition, Schumpeter completely fails to see the point that Weber was making in adopting

the ante litteramNietzschean conception of Rationalisierung to which he gave the name. The social process which rationalizes is an

exquisitely Weberian expression: far from indicating that there is a rational science founded on reason and facts that can

epistemologically and uncritically be opposed to a non-scientifc idealistic and metaphysical rationalism, Weber is saying what Nietzsche

intended by the ex-ertion of the Will to Power as an ontological dimension of life and the world that imposes the rationalization of social

processes and development in such a manner that they can be subjected to mathesis, to scientific control! What Weber posits as a practice,

one that has clear Nietzschean onto-logical (philosophical) and onto-genetic (biological) origins, Schumpeter mistakes for an empirical and

objective process that is rational and factual at once forgetting thus the very basis of Nietzsches critique of Roscher and historicism, -

certainly not (!) because they are founded on metaphysics (!), but because they fail to question critically the necessarilymeta-physical

foundations of their value-systems, of their historical truth or meaning!

Far from positing a scientific-rational, ob-jective and empirical methodology from which Roscher and the German Historical School have

diverged with their philo-Hegelian rationalist teleology, Nietzsche is attacking the foundations of any scientific study of the social

process or social development that does not see it for what it is Rationalisierung, that is, rationalization of life and the world, the ex-

pression and mani-festation of the Wille zur Macht! By contrast, Schumpeter believes that the mere abandonment of any linearity in the

interpretation of history, of any progressus (as Nietzsche calls it), is sufficient to free his rational science from the pitfalls of

metaphysics!

This contrast between Nietzsches approach to the world of experience and perception and appearance as becoming, against the Machian

empiricist approach to scientific reality and fact and truth is quite revealing: both Nietzsche and Mach start from the opposition of

experience and perception to any meta-physical reality that may lie beyond the human perception of life and the world including, even

for Mach, the Newtonian conception of space and time! But, a most crucial distinction, whereas Mach still believes in the epistemological

reality of Newtonian physics and of the laws of science tout court, Nietzsche in extreme and radical contrast comes to question the very


44/87

scientificity of this science and of this reality, whether Newtonian or indeed Machian, questioning in the process even the Kantian

epistemological foundations of logico-mathematics! (We shall pay the closest attention to these matters which constitute the whole thrust and

import of our present work in Part Two of this study.)

Like Weber, Schumpeter believed that the mere fact that his is not Hegelian-Marxist rationalismis still sufficient to preserve the scientificit of his Veranderungsmechanismus!cf" fn"# of ch"# of

the Theorie)and to exorcise all metaphsics from his theor" $et, as %e have ampldemonstrated, it is precisel his uncritical belief in a rationalit freed of all values ormetaphsics that lands him straight into the cult of bourgeois-capitalist scientific progress &even to the point %here he confuses his o%n original critical concept of Entwicklung, ofdevelopment-through-crisis or trans-crescence, %ith the scientisticbourgeois-capitalist notionof evolution" 'ven assuming that a mechanism such as the Innovationsprozesscan beanimate or institutional !cf" (arl Schmitt in The Leviathan, ch"),and Weber*s living machine inParlament und Regierung+, still its value-neutral wert-frei scientificit !its Weberian purposive-instrumental weck- rationalit linking means %ith ends+ is thereb invalidated because !as LeoStrauss argued against Weber in !atural Right and "istor#+ supposedl rationalscientificmeanscan never be separated from supposedl irrationalethico-political choices" !.t times,Schumpeter almost seems to /ustif Langlois*s vulgar subsumption of the $nternehmer-%eisttoob/ective rationalit tout court, completel misconstruing thereb the essential, though invalid,Weberian distinction bet%een weck-and &ert-Rationalitatand thus reducing the 'ntrepreneurto a rational-scientific momentof capitalist industr as part of the Veranderungsmechanismus0See Langlois, .naltical Surve of the .ustrian School"

.s %e have sho%n, Schumpeter bears some responsibilit for the subse1uent bathetic abuse bhis epigones of the concept of evolution and rationali2ation as some kind of inevitable

progressusindependent of capitalist social relations of production"+ "ike Weber# however#

'chumpeter does not fall for the late6Lomantic fantasy of a pristine innocent era of7entrepreneurial capitalism8 being corrupted by a stagnant phase of 7monopoly8 or

7trustified8 capitalism. ?e does not share with the neo6antian 8ozialismusof his native

!ustria /from autsky through !dler to Bernstein0 the pathetic delusion that what is truly

wrong with capitalism is the abuse of market competition by 7rent6seeking8 monopoliesor oligopolies headed by the banks /Jinanz)apital0. $arado2ically# this monopolistic

abuse or e2cess is brought about by the very 7anarchy8 of capitalist market competitionar2ian

7criti3ue8. ,he 7reality8 described by >ar2 e2plodes the categories of political economy

% it abolishes them it does not simply 7correct8 them< ! good illustration is


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'chumpeter;s treatment of 7surplus value8 where he argues that 7in e3uilibrium8 the rate

of e2ploitation falls to zero due to capitalist competition for labour power. ,his is 3uite

appropriate. from the standpoint of equilibriumanalysis< But this is far from what>ar2 intended % because obviously a 7glut8 of capital for investment will push the rate of

profit to a point where capitalists have to look for alternative investments /different

industries or different markets# where investment is likely to be profitable0. therwisethere is a 7crisis8. 'chumpeter understands this# and he offers >ar2 this escape route that

he himself made central to 7Entwicklung8 /see the second part of 1'OD# discussion of

7oligopoly8 and 7innovation80. /Lecall also the description of MB1; as 7histoireraisonnee8# an attribute he applies to >ar2;s approach before claiming it for his

approach.0

But because he was committed to 7e3uilibrium analysis8 /end of ch &=0 'chump alwaysseemed to think more in terms of 7business cycles8 than in terms of 7risis8. ?ence#

7creative destruction8 is viewed not in the -ietzschean /perhaps 7antagonistic80 sense

described by 1acciari# but rather in a 7metaphysical8# 7continuous8 sense. 71ycles8 are

seen as continuous 7wave motions8 caused by 7innovation8 and not as 7violent tsunamis8occasioned by the antagonism intrinsic to the wage relation. /ne is reminded here of

oan Lobinson;s 7tran3uility8 or >arsilius;s 7tran3uillitas8 (the health of the 'tate# itselfthe product of 7a creative act performed by man8 e3uivalent to the Moptima dispositio; in

the Mcorpus naturale; (Gierke# M$ol.,h.of>!;# ppA*6+ % a condition that# if one pursues

the 7blood circulation8 analogy adopted by 'chump dovetails aptly with the concept ofMreislauf;. ,he regular 7circular flow8 represents the 7tran3uility8 of e3uilibrium

conditions until 7disturbances8 (&erstorungen+ or 7cardiac arrests8 occur.0

,he notion of MEntwicklung; denotes appropriately this 7evolutionaryJnatural8progression opposed to the 7revolutionary8 notion of Mrisis; which denotes

truncationJbreak and dis6continuity % though 'chump was still prompted by the crises of

HKIQ and HQP.

=t is sheer obfuscation for 'chump to lash the dead horse of eclecticism to bludgeon us

with his 7scientific economic analysis89 any form of 7analysis8 % historical or7economic8 6 involves intellectual 7discipline8. But discipline does not mean that we

adopt 7economistic8 analytical categories that radically distort the very 7nature and

content8 /MWesen und ?auptinhalt;# words 'chump would know0 of the historical

sub5ect6matter /the Greek Mamethodon hyle;# >azzarino0. -o 7discipline8 /why# even7natural sciences80 is entirely 7scientific8 in the sense that 'chump opines and peddles so

sneerily /cf 7>ar2 the teacher8 opening0. /,his is the basis of the G?' criti3ue

appropriated by 'chump critics from 'hoyoda to >oura % see below.0

,ake the 3uestion of 7value8 as an e2ample. 'chump /7> the Econ80 dismisses >ar2;s

7metaphysics8 /what of 7utility8 then:0 by peddling Bohm6Bawerk;s 7e2change value8argument. But if 7utilities8 are incommensurable# the e2change of commodities can be

fi2ed only at 7e3uilibrium8# that is# when all 7e2changes8 are done. !t that point the

7prices8 of individual commodities 7simultaneously8 and 7omnisciently8 e2changed /cf

?ayek;s criti3ue0 are only and can only be 7relative8 prices denominated by a


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As a result of failing to comprehend the entire historical problematic, Langlois also deeply

misconstrues Webers appreciation of the role of charisma (he should have spoken of

leitender Geist) in the process of Rationalisierung. Langlois believes that for Weber

bureaucratisation abolishes or defeats the leitender Geist, whereas in fact the latter is the

supreme expression of the power or effectualityof the former and vice versa, in the sense

that rationalisation itself may be interpreted as the expression of the Wille zur Macht. In theNietzschean paradigm, the two are complementary moments. Rationalisierung is the

expression of the will to power a particular form of expression, but a con-dition of it. (Of

course, the question one would pose to Cacciari is: - in what sense then does capitalism

differ from other poliico-economic systems? What is its differentia specifica, apart from being

yet another manifestation of Wille zur Macht? These problems are posed by the profound a-

historical and properly metaphysical provenance [cf Heideggerian historicity] of negatives

Denken.)

But back to Langlois:

,he seventh sense.

The theory of economic organization I just sketched offers a contingent explanation for the multi-unit

enterprise. But there are others who see managerial capitalism not as an adaptation to particular historical

circumstances but rather as a stage and perhaps even the final stage in a process of economic

rationalization. If contingent theories are the bailiwick of economics, then rationalization accounts are the

province of economic sociology.

!mong the most famous such accounts# of course# is that of >ar2. "enin;s version

of this we have already heard but perhaps the clearest e2position is that of Engels in the

!nti6Dhring /Engels H**# ===.A0. =n the view of />ar2 and0 Engels# the internal managerial

coordination of economic activity is always superior to market coordination for the simple reason that the former is rational

whereas the latter is anarchy. Capitalists themselves sought to combat the anarchy of the market by managerial

coordination within firms, the increasing organisation of production, upon a social basis, in every individual productive

establishment. Although this gambit had been successful in blowing away earlier market forms of organization, it was and

would continue to be unable to solve the problem of anarchy, since socialized production (producing for other people

rather than for oneself) is necessarily at odds with capitalism and the market; and there is an antagonism between the

organisation of production in the individual workshop#and the anarchy of production in society generally. This

antagonism would lead to deepening crises, the result of which would be the Darwinian consolidation of more and more

stages of production into fewer and fewer large organizations. Only when the proletariat takes over title to the means of

production, which capitalists will have conveniently centralized and organized for them, will this antagonism be resolved,

for only then will all of production be planned in the manner of6 HN 6

the firm. Anarchy in social production is replaced by systematic, definite organisation.23 This view is remarkable along anumber of dimensions, not merely for its historicism (Popper 1957) but for its commitment to a super-strong conception of

rationality and rationalization as involving conscious, deliberate planning of complex economic activity.

Another, equally famous, account of rationalization is that of Max Weber (1947). For Weber, rationalization is

the disenchantment of the world, that is, the disappearance of the supernatural and the metaphysical in favor of a hard-

headed concern with the here- and-now. In Webers schema, economic organization coheres through a system of

authority. The most basic, creative, and volatile form ischarismatic authority, as wielded by a religious prophet or mi litary

leader. But organization relying on personal authority has its limits, and increasing organizational complexity requires that


65/87

charismatic authority give way to an impersonal set of rules of conduct. Throughout most of history, this has meant

traditionalauthority# in which past practices provide the guide for action and traditional /supernatural0 beliefs provide their

justification. In the modern world indeed as a kind of definition of the modern world bureaucratic authorityhas come to

replace both charismatic and traditional authority. Bureaucratization involves the substitution of rules for personal

authority, the creation of abstract offices divorced from their individual holders, and the increasing preeminence of

specialized knowledge and spheres of competence (Weber 1947, pp. 330- 334). This process is rationalization in that

the rules and structure of organization justify themselves on mundane pragmatic grounds rather than in terms of extra-

natural systems of belief.

And it is in Webers theory of progressive rationalization that we can locate the accounts of both Schumpeter

and Chandler.A)

Loberts and 'tephenson /HI)# p. APn0 point out that the term 7organization of labor#8 in >ar2 andEngels# and in contemporary socialist writing generally# referred to complete central planning.

Webers version of rationalization, and thus the versions of Schumpeter and Chandler, are rather different from

that of Marx. I will sidestep the question of whether Weberian accounts are historicist, though I believe they ultimately are

not, and in any event they are surely less blatantly historicist than that of Marx. The more interesting issue is that

rationality and rationalization have different meanings in Weberian accounts. In Marx, economic society is (or could be or

will be) somehow held together by strong conscious rationality or else it is anarchy; in Weber and his fo llowers, it is held

together by a system of rules of conduct, at least in the cases of traditional and bureaucratic authority. Rationalization

consists not in the progressive replacement of unselfconscious processes of coordination by conscious rational ones but

rather in a progressive reexamination of, tinkering with, and improvement in the rules of conduct. (Note the obvious

affinities, at a general level at least, with the evolutionary capabilities view of economic organization: both are about the

way rules of behavior evolve.) In fact, this process might actually be better described as having to do with the empirical

than with the rational. At the beginning of Chapter 2 of the English translation of his,heory of Economic Development,

Schumpeter uses the word rationalize. In a footnote he explains:

This is used here in Max Weber's sense. As the reader will see, rational and empirical here mean, if not identical, yet

cognate, things. They are equally different from, and opposed to, metaphysical, which implies going beyond the reach of

both reason and facts, beyond the realm, that is, of science. With some it has become a habit to use the word rational

in much the same sense as we do metaphysical. Hence some warning against misunderstanding may not be out of

place. (Schumpeter 1934, p. 57n.)

=ndeed it may not. When we think of those for whom the term 7rational8 has become 7metaphysical#8 >ar2 stands inthe forefront. =t is hard to forget 'chumpeter;s marvelous characterization in 1apitalism# 'ocialism# and Democracy of

>ar2 as a /Weberian:0 prophet. 7bserve#8 writes Schumpeter, how supreme art here succeeds in weaving togetherthose extra-rational cravings which receding religion had left running about like masterless dogs, and the rationalistic andmaterialistic tendencies of the time,.A*

In Chandlers view, Webers two most important interpreters were Joseph Schumpeter and Talcott Parsons, both

of whom taught at Harvard. Schumpeter was Webers most noteworthy successor as an economic sociologist andhistorian (Chandler 1971 [1988, p. 304]).

6 H* 6

!gain# "anglois;s preoccupation to force the dichotomy of 7economic science8 versus7economic sociology8# and then of 7empirical8 versus 7rationalJ$opperian historicist8

accounts of 7rationalization8# results in a near6total misunderstanding of Weber;s entire

problematic. For one# Weber does not see the Mleitender Geist; /"anglois;s 7charisma80 as


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disappearing under the weight of 7rationalization8. n the contrary# this process is not

7separateJdivorced8 from the 7leitender Geist8 but forms a necessary precondition for the

e2ercise of that Wille zur >acht /nothing like % -ietzsche would say 7*QQQ feet above8 6the 7empiricist rationality8 "anglois envisagesar2 got this7prophecy8 /of Weberian

7rationalization8 and 7concentration80 rightachian0 and politico6philosophical /liberal0 bases on which it

was founded.

Wittgenstein would have described this framework as a 7language game8 with its

distinctive 7logical rules8 arising from its peculiar assumptions. But 'chump was well

aware of the limitations of 7the general logic of choice8# and especially of the M'tatik;analysis which did not capture the 7reality8# the 7friction8 of capitalism as a 7living8

entity e2isting in a historicalJsociological space and time# not a 7bloodless8# 7anatomical8

schema 7like a patient aetherised upon a table8# living in two timeless dimensions.

,he 7reality8 of capitalism is not that of 7the logic of choice8 or of 7economic analysis8#

which are 7rationalJlogical8 abstractions 7distilled from 7empirical8 reality. ,he

7abstractions8 are the 7methodology8 and the 7individualism8 is what constitutes the7empiricism8.

But once this 7framework8 is 7situatedJimplanted8 in the real dimensions of social

history# then the approach must change and become a 7histoire raisonnee8 /B1# pAAQ0wherein the MDynamik; can be described by an 7empiricalJscientific8

>eranderungsmechanismus9 but this 7transformational mechanism8 onlyconditionsJconfines 7materially8 and inducesJproducesJengenders practically the

7politicalJdecisiveJguiding8 or 7normative8 moment when 7values8 are turned into

7action8. ,hus# the 7process of =nnovation8 is 7guided8Jdeployed /Weber;s leitenderGeist0 by the nternehmergeist.

*eyond 5a(ermas: -lfred Sohn"Rethel on Intellectual and 9anualEa(our

As Marxists we were brought up to think that of all the contradictions inherent in capitalism

the one between the ever-increasing social dimension of social production and privateappropriation is the most fundamental. It expresses the historical trend of the capitalist modeof production and asserts its transient character. This teaching has gained enhancedrelevance in monopoly capitalism. With the introduction of flow production the socialdimension assumed a specific structural form of its own and henceforth increased in aconclusive manner reaching in our days the sie of the giant multi-national corporations!."This# discrepancy creates problems which tend to exceed the controlling power of privatecapital and re$uires supplementation by the social resources and power of the %tate& 'A.%ohn-(ethel& )I*M +,& pp./-01.

!s we saw in our earlier criti3ue of ?abermas# classical >ar2ism reprises the 7idealist ob5ectivism8 of ?egel by emphasizing the dialectical contradictionbetween

the 7instrumental8 development of theforces of productionand the 7interactive8 backwardness of e2isting capitalist social relations of production. =t is this contra6

diction between the 7ob5ective8 possibilities of human emancipation from capitalist 7appropriation of surplus value8 and the 7sub5ective8 or voluntaristimposition of

obsoletecapitalist social relations that# in the eyes of classical >ar2ism# determines the crisisof capitalism. 4et even the mere re6statement of this theory % that is#

the 7discrepancy8 between thepossibility of emancipationand the obsolescence of capitalist categories of private appropriation % evinces its implicit logical contra(

diction9 6 because it is impossible to see how the 7ob5ective8 development of 7forces8 of production can ever give rise to claims of 7emancipation8 that can clashagainst 7sub5ective8 legal and social relations< Emancipation is a political notion that is categorically different from the kind of 7social dimension of social

productionthat e2ceeds the controlling power of private capital8. ,he very fact that 7private capital8 has always e2erted a 7controlling power8 over social

production means that 7social production8 cannot be distinguished from the 7controlling power8 that 7private capita l8 e2erts over it< 1onse3uently# it is impossible to

distinguish# as 'ohn6Lethel attempts to do here# between the 7social dimension of social production8 and the 7private appropriation8 of production by capitalists % as

if the first could be ob'ectively determinedand the second were a meresub'ective appendage or appurtenance. @uite simply# 'ohn6Lethel fails to see % as did >ar2

who tended to relegate the 'tate to the sphere of 7superstructure8 % that capitalist society was never in a 7competitive8 stage that did not 7 require supplementation by

the social resources and power of the 8tate8 % for the simple reason that the political coercion of State institutions, in their !arious $tateformssince the rise of

capitalism, has been essential to the reproduction and e)pansion of the ae relation . ,o imagine that capitalism /the wage relation0 would have been possible

without the political violence of the collective capitalist# the 'tate6form# is to indulge in sheer fantasy.

,he >ar2ian distinction between baseandsuperstructuretherefore has no basis in reality because the wage relation# and not the commodity form or the law of value#

is what is at the centre of capitalist social relations of production# and what makes these irreducibly antagonistic. ,he reality of crisis is endemic to the capitalist

wage relation because the definition of capital is precisely the command of the capitalist by means of dead ob5ectified labor over living labor. =f we wish to


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understand what 7reification8 means we need not delve into the foggy notions of 7commodity fetishism8 or of 7crystallized labor time8# but rather peer into the

simple# naked violence that capitalists perpetrate against workers through the coercion of wage labor.

,he wage relation# which occupied at first only a limited sphere within post6feudal mercantilist societies# eventually became generalized to the e2tent that capital

became the predominant force until it

economic equilibrium and politics 1 - schumpeter's entwicklung

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