Schumpeter: Radical Economist

Herewith a first try should be done to cite, sum up and probably even conclude and imply about recent texts I read.

Orientation

This is about a presentation held by Nathan Rosenberg on Schumpeter (JAS). His main message is that JAS in many ways was “the most radical scholar in the discipline of economics in the 20th century” (p. 41). Rosenberg interprets and sums up JAS’ view and underpins his examination with a lot of quotes – mainly from the two seminal works “Theory of Economic Development” (TED, 1911) and “Capitalism, Socialism and Democracy” (CSD, 1942). Rosenberg puts the presentation into six sections in which he lays out different aspects of JAS’ radicality.

This examination of Rosenberg is a great start into this blog I believe, because it touches the most of what JAS characterizes (and a lot of his better known quotes) – whose spirit TES shares.

Rosenbergs presentation was held at a congress of the International Schumpetarian Society 1992. Together with other presentations from different economists, Y. Shionoya & M. Perlman put the presentations together into a book called “Schumpeter in the History of Ideas”. So this is just one contribution of Rosenberg of about six which are as well critizing. Just after the presentation of Rosenberg e.g., Lawrence Moss comments that Rosenberg overstates Schumpeters originality, etc.

Emphasis (bold) are added. Italics are Schumpeters’/Rosenbergs’. If not noted differently, page indications refer to Rosenbergs text.

Examination

1. Radical in What Sense?

Rosenberg: “The reason I propose to call Schumpeter a radical is that he urged the rejection of the most central and precious tenets of neoclassical theory” (p. 41). Rosenberg goes on saying, that little of the neoclassical economics of the 30s & 40s survived JAS’ critics and thus implies that JAS was very successful in that task. But Rosenberg claims JAS wasn’t only a “radical antineoclassicist” (p. 47) but also because he came up with very genuine thoughts about how society (economy) work.

Other than that he points out that JAS “in his social and political views, [. . .] was anything but radical” (p. 41). This heavily reminds me of Kenneth Galbraith’s statement about JAS being “the most sophisticated conservative of the century” (cited in McCraw, 2009, p. 502).

2. “Stationary Capitalism is a Contradiction in terms”

Rosenberg starts with the most prominent and early idea of JAS of “creative destruction” in capitalist systems.  He points out that the main aspect of interest if one analyzes capitalism is change how the economic system generates it and even more: “as a result of the working out of purely endogenous forces”. (p. 42). This means Schumpeter early on (in TES 1911) refused the idea of outside shocks which hit a otherwise stable economy in equilibria. Whereas change in neoclassical models only finds it’s place in getting back to the equilibria after a random outside (exogenous) shock, JAS has a total other take on this. According to JAS it’s exactly the nature of capitalism that it “disrupt[s] any equilibrium that might be attained” (p. 42). Rosenberg goes on (p. 43) talking about the relationship to Walras as the founder of these static models which describe an economy as merely reproducing (and note: thus with zero interest rate) or one shot resource allocation games. In short and in the words of JAS: “whereas a stationary feudal economy, would still be a feudal economy and a stationary socialist economy would still be a socialist economy, stationary capitalism is a contradiction in terms” (p. 43)

Rosenberg states that JAS (ironically I might add) used Walras and the equilibrium analysis exactly to demonstrate “how capitalist economies would behave if they were deprived of their essential feature: that is, innovative activities” (p. 43). This now opens a fresh insight in the role of the (typically so beloved) perfect competition in economics. JAS takes another ironical skit stating about competition: “[. . .] the question whether it would or would not tend to maximize production in a perfectly equilibrated stationary condition of the economic process is [. . .] almost, though not quite, irrelevant” (p. 43). This of course is exactly how economists usually base their judgement upon (and give policy advice) – even today – about market power (perfect competition up to monopolies). JAS thinks, non-perfect competition and it’s function can only be understood if change is included in the examination. But Rosenberg also points to a possible difference in the question posted between Schumpeter (especially the later one of 1942) compared to Equilibrium analysis economics. The latter misses the “essential feature of modern capitalism” thus focusing “upon adjustment mechanisms that are only on peripheral, and not central, to the logic of capitalist organization and incentives” (p. 44). Rosenberg closes in even stronger words: “[. . .] a theoretical approach that neglects persistent disequilibrium, instability, and growth is an approach that deals with processes that are, at best, phenomena of secondary importance, or only mere epiphenomena” (p. 44).

3. Implications on the Primacy of Innovation

From the last chapter one can put the different view of JAS like this: “The dynamic forces that are inherent in the capitalist structure lead Schumpeter to treat capitalism as a system whose essential feature is an evolutionary process and not the mechanisms that force the systems to revert to an equilibrium after some external force has produced small departures from that equilibrium” (Rosenberg, 1994, p. 45). Rosenberg goes on, illuminating how Schumpeter hence viewed monopolies as not as dangerous as the usual economics. The crucial question cannot be “how capitalism administers existing structures, [. . .] but how it creates and destroys them” (p. 46). Rosenberg then pushes further and stipulates that JAS wasn’t against competition and pro-monopolies as one could (and usually does, see e.g. Aghion-Howitt endogenous growth models) conclude. Instead JAS saw this capitalist system equipped with genuine, radical competition (in the sense that no monopoly is forever) as no other system ever before (socialism, feudalism). JAS judgment thus is rather humble towards capitalism with all it’s (material) achievements in perspective. Hence he concludes “in this respect, perfect competition is not only impossible but inferior, and has no title to being set up as a model of ideal efficiency (p. 47).

4. Rationalization & Economization of Life

This is the far most interesting section of Rosenbergs presentation. “Analytically brilliant, breathtaking in its sweet, and historically substantially correct” are Rosenbergs (p. 49) words about how JAS thought of rationality. He doesn’t mean it in the sense of economic models but as a logic people started to apply to the world (and how it works). The more prominent related term is economization. This topic reminds me a lot of Georg Simmels very deep thoughts in the “Philosophie des Geldes” (1908), which I believe must have been well known to JAS even though he rarely cited him (more on another blog post maybe). I first found it with Schumpeter in his farewell address in Bonn 1932. This thoughts also have recently (2011) become addressed in David Roses’ seminal work “The Moral Foundation of Economic Behavior“. It’s here where I believe the fertile bridge to finally discover the ties in between morality and economics lies.

This section is difficult to summarize, as it usually takes a lot of introduction to catch the arguments. However I shall give it a try.

Rosenberg describes (p. 47 – 49) how the economic cost-benefit rationality (utilitarian logic?) actually is an evolutionary process. It compromises ever more part of the (social) life as the capitalist process evolves. The problem only is, that capitalist itself relies upon a non-rational base! This is exactly why JAS also in CSD comes to the conclusion that capitalism eventually as to self-destruct. Two consequences come out of this historical expansion of rationality: The first is better known. JAS assumes that the irrational moment of the entrepreneur, his social leadership position will eventually be replaced by bureaucrats or team leaders. They non-passionately “turn out what is required” (p. 50). The “disruptive process” is getting chained by the belief that it is possible to plan and automate it. Consequently the entrepreneurial function dies out. I didn’t know yet though, that Schumpeter wrote about the second consequence (p. 49). I interpret like todays new institutional economics does (see Rose): The more rational we think about each other the more difficult it’ll be to commit each other as we loose trust in others. A rational man does not let himself bind by word. Thus the economic system gets jeopardized by widespread opportunism out of lost trustworthiness of the actors. This, according to JAS, is toxic to the function of all institutions.

Later Rosenberg will show how JAS even spread his examinations about this process to the academics, calling it the “growth of a rational science” (S. 53).

5. Tastes (and thus Demand) isn’t Exogenous

In this section Rosenberg writes that the idea of change radically undermines the usual idea in economics to use the consumers preferences („tastes“) as a given. Capitalism is about the „supply“-side (which means the entrepreneur in the view of JAS) creating tastes and needs in customers. But this means more than just the attack on the „commitments of the exogeneity of consumer preferences“ (p. 51). JAS allows tastes to change – or even more, says they will. I remember myself that once a professor in my lectures compared this as to „opening the pandoras box“ in economics. Consequently economists learn to stop think there. They say because it’s difficult to technically model it, if you leave that assumption away – but it bears also the other side: Of course it’s not only a purely technical argument. It also is a subtle attack on the ideology of the free, self-guided individual, „the associated virtues of consumer sovereignty“ (p. 51) which is delicate itself and rarely discussed.
Rosenberg writes quite some pages about that attack of JAS as why exogeneity of consumer preferences is flawed. Then he goes on to say how JAS rather describes change out of given social structures. And this change is basically driven by a unfolding of the rational logic which in the process gets applied to ever more parts of our (social) life. Rosenberg shows Schumpeters quote about how rational thinking was introduced into an area – the hospital. To organize hospitals in order to efficiently fight tuberculousis etc. is an expression of „the capitalist rationality“ which „supplied the habits of mind that evolved methods used in these hospitals“ according to JAS (p. 53). Cancer is fought in a business like spirit. „Schumpeter insists that both sciene and technology, normally so far from the world of phenomena examined by neolassical economics, are, in reality, highly endogenous to the economic world, subject to the gravitational pull of economic forces“ (p. 54) Rosenberg writes. He continues with a smaller detour about JAS’ relation to Marx to conclude: „Did Schumpeter, then believe, along with Marx, in the economic interpretation of history? I suggest he did [. . .]. Almost all of his own writing fits conveniently into that interpretation“ (p.54). Rosenberg quotes JAS’ two „propositions“ of the economic interpretation which JAS in a understating way qualifies 1954 as „invaluable working hypotheses:

  1. The forms or conditions of production are the fundamental determinants of social structures, which, in turn, breed attitudes, actions, and civilization.
  2. The forms of production themselves have a logic of their own; that is to say, they change according to necessities inherent in them so as to produce their successors merely by their own working.

The embeddedness of economics into the whole social sphere gets fully clear.

Also in this section, Rosenberg points out the difference in invention and innovation and how throughout time Schumpeter changed his view on them. First (1911, TED) JAS thought about invention as exogenous and the innovation process as endogenous which he later (1942, CSD) both judged as endogenous. Why he did so, remains vague in Rosenbergs explications.

6. Economic Phenomena must be studied in Historical Context

Not really surprisingly comes the last section, where JAS’ thoughts about the historical side of economics are presented. In Rosenbergs words „he clearly was strongly comitted to the view that economic phenomena, in order to be meaningfully examined, must be studied in a historical context“ (p. 55). And of course since this is rarely what modern economists learn, Rosenberg cites the popular quote of JAS from 1942. There JAS says, that absent from statistics (math) and theory, economic history is the most important one and if he were to choose today to enroll in a single program at the university he’d choose economic history. More interestingly JAS brings up three arguments for this:

  1. The subject matter of economics is essentially a unique process in historic time.
  2. The historical report cannot be purely economic but must inevitably reflect also ‚institutional facts’ that are not purely economic; therefore it affords the best method for understanding how economic and non-economic facts are related to one another and how the various social sciences should be related to one another
  3. It is, I believe, the fact that most of the fundamental errors currently committed in economic analysis are due to a lack of historical experience more often than any other shortcoming of the economist’s equipment…“

References

McCraw, T. K. (2009). Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Harvard: University Press.

Rose, D. (2011). The Moral Foundation of Economic Behavior. Oxford: University.

Rosenberg, N. (1994). Joseph Schumpeter: Radical Economist. In Shionoya, Y. & Perlman, M. (Eds.), Schumpeter in the History of Ideas (pp. 41-57). University of Michigan Press.

 

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2 thoughts on “Schumpeter: Radical Economist

  1. […] logic which unleashes in our minds and slowly but surely captures all of life’s spheres. Joseph Schumpeter already understood that when he addressed it on his farewell speech at the university of Bonn (1952[1932)]. A masterpiece […]

  2. […] Ad last quote: Sounds earily similar to Schumpeter’s finding of capitalism is always on the verge of coming back in a stationary stage if rationalisation [economisation / commodification] moves to fast or if it get’s corrupted and neo-feudalised as a consequence. […]

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