Abstract
The paper focuses attention on Schumpeter’s achievements in his classic contribution and how these relate to the contributions of other major authors. While deeply indebted to Marx’s vision of capitalism as a system incessantly in travail, Schumpeter was no ‘Marxist’. He shared Böhm’s view that profits are not due to ‘exploitation’, but thought that the latter’s attack on Marx was a failure. There are remarkable differences, but also similarities between the analyses of Schumpeter and Keynes. Marx, Schumpeter and Keynes rejected Say’s law and other basic ideas constituting the marginalist doctrine. They saw capitalism as a restless, crisis-prone system.
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Notes
In the following all translations from the first edition of Theorie and of sources of which no English version exists are mine.
Is the ‘market’ for economic ideas an efficient market in the sense that it eliminates whatever is wrong and worthless and preserves whatever is right and valuable? There can be little doubt that Schumpeter considered this particular market to be also prone to bubbles and thus comparable to some extent to financial markets.
Langlois (2002) and Knudsen and Swedberg (2009), among others, correctly maintain that there is no sharp break between Schumpeter’s analysis in Theorie and in Business Cycles as regards his concept of entrepreneurship. There is only a ‘single Schumpeter’, who, however, constantly refined and revised the building blocks of his analysis. The apparent changes in the latter must not blind us to the fact that it is characterised by a remarkable continuity both in vision and content.
To readers with no command of German the scope of these omissions was bound to be unclear. Becker and Knudsen (2002) deserve the credit for having overcome this lacuna.
The idea that interest is a deduction from profits was, of course, famously advocated in Adam Smith’s The Wealth of Nations, an oeuvre Schumpeter held in low esteem. Close scrutiny shows, however, that the analyses of the two economists share some common elements and that Schumpeter’s criticism of Smith is not always well founded. See on this Kurz (2008) and Kurz and Sturn (2012: part II, chapter 7).
Schumpeter’s rigid zero profits assumption regarding the circular flow implies that firms that do not imitate or innovate themselves will quickly risk being driven out of the market, because they will swiftly face losses and not just shrinking profit margins as, for example, in the classical economists’ approach to the theory of innovation and technical change; see Kurz (2008).
Such fictions were advocated not long ago by authors such as Robert E. Lucas and Ben Bernanke—before the world experienced a period of ‘great immoderation’.
It is perhaps interesting to note that with regard to the monetary and financial sector Adam Smith had already warned his readers that it need to be regulated because of the enormous damage it can cause (Smith 1976: II.ii.94; see Kurz and Sturn, Die größten Ökonomen: Adam Smith. Lucius and Lucius. Stuttgart, unpublished). Smith compared the invention of paper money to ‘technical progress’ and significantly spoke of the ‘Dædalian wings of paper money’ (Smith 1976: II.ii.86). Schumpeter and his colleague at the University of Bonn and friend Arthur Spiethoff were both convinced that the instability of the financial sector typically tends to prolong depressions (see Kurz, Joseph Schumpeter and Arthur Spiethoff, unpublished). Schumpeter (1912: 462) also opined that the system of providing credit to entrepreneurs in order to carry out new combinations can be changed without affecting the ‘essential features’ of capitalism. He was thus convinced that there were degrees of freedom as to the institutional organisation of the ‘head quarter of the capitalist economy’, and he indicated that it would be good, if the change were to be such that the sector’s destabilising role would be mitigated.
Contrast this with John Maynard Keynes’s jaundiced view of Marx.
Schumpeter’s essay reflects the influence of Marx’s Theories of Surplus Value, which had been edited and published for the first time by Karl Kautsky in 1905–1910, on virtually every page.
Adam Smith had already insisted that ‘universal competition ... forces every body to have recourse to [good management] for the sake of self-defence’ (1976: I.xi.b.5; emphasis added).
Smith stressed: ‘The difference of natural talents in different men is, in reality, much less than we are aware of; and ... is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters ... seems to arise not so much from nature, as from habit, custom, and education’ (1976: I.ii.4). Smith’s view gets some support, for example, from Howe (1999), who argues that geniuses do not form a breed apart but are first and foremost the result of a unique set of circumstances and opportunities.
There were, of course, notable exceptions to this, such as Alfred Marshall, who was well aware of capitalism’s evolutionary nature.
In this context it is perhaps worth recalling that according to some economic historians the usury rule helped to nourish a spirit of entrepreneurship by discriminating against certain legal forms in which financial transactions were clothed. In particular, instead of arranging for a loan the provider and user of a loan might form a partnership, which would put the burden of entrepreneurship also on the financier.
The concept has recently been revived in Martin Weitzman’s model of ‘recombinant growth’ (Weitzman 1998). In his paper Weitzman refers to Schumpeter (but not to Marx or Smith).
It is to be regretted that Rosenberg sidesteps the problem of distribution. Had he dealt with it, he would have conceded, I suspect, that there are fundamental differences between Schumpeter and Marx that defy any characterisation of the former as a Marxist.
Schumpeter called Eugen von Böhm-Bawerk the ‘bourgeois Marx’, a title he, Schumpeter, would have deserved as well. Interestingly, Böhm-Bawerk too put forward a definition of capitalism, which, by construction, was meant to be innocuous and devoid of any ideological contamination. He defined as ‘capitalist’ economic systems that use produced means of production, whereas systems that do not he called ‘non-capitalist’. In this way he implicitly, but deliberately, reduced the set of non-capitalist economies to the empty set. Hence both Böhm-Bawerk and Schumpeter defined capitalism in terms of characteristic features of the system that are entirely disconnected from the problem of income distribution.
19This interpretation is not faithful to what Smith had written. While Smith’s ‘projector’ is a relatively anaemic figure compared with Schumpeter’s energetic ‘entrepreneur’, Smith told a story that is remarkably similar to Schumpeter’s in the following respects: First, economic development and growth of income per capita is the result of ‘improvements’ carried out by ‘tenants’ in agriculture, ‘masters’ in industry and ‘merchants’ in commerce. Secondly, an important nonintended consequence of their self-seeking behaviour consists in rising standards of living of workers and landowners. Third, there are conflicts over the distribution of income both between and within ‘classes’, viz. the conflict between creditors (‘monied men’) and debtors over the rate of interest. (See Kurz and Sturn, Die größten Ökonomen: Adam Smith. Lucius and Lucius. Stuttgart, unpublished).
Schumpeter’s idea may be said to be foreshadowed in Richard Cantillon with his classification of entrepreneurs and workers on a fixed income. In Cantillon there is also no antagonism between the two, because workers on fixed incomes can very easily move to become entrepreneurs and vice versa.
Thus Schumpeter (1939: chapter XIV) explained the Great Depression as the result of the concurrence of troughs of three types of economic cycles: the so-called Kitchins, Juglars and Kondratieffs; see also Kurz (Joseph Schumpeter and Arthur Spiethoff, unpublished).
This does not mean, of course, that Marx’s suggested ‘transformation’ of labour values into prices of production can be sustained, as the debate about the transformation problem showed.
Recall Böhm-Bawerk’s concept of capitalism (see footnote 18).
Smithies (1951: 163) drew the attention to the fact that ‘Even in his memorial article [in the American Economic Review of 1946] Schumpeter did not credit Keynes with a single major improvement in the technique of economic analysis.’
I found no evidence in the writings of Keynes and Schumpeter in support of Smithies’ (1951: 164) claim that the two ‘admired abstinence and thrift’ and attributed to them a major role in the process of economic development.
In the 1960s the possibility that the capital-labour ratio of the economic system as a whole rises (falls) with a rise (fall) in the rate of interest (and a corresponding fall (rise) in the real wage rate) became known as capital reversing or reverse capital deepening; for a discussion of this phenomenon, see Kurz and Salvadori (1995: chapter 14). As Mas-Colell (1989) stressed, the relationship between the capital-labour ratio and the rate of interest can have almost any shape whatsoever.
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Versions of this paper have been presented at the annual conference of EAEPE in Vienna, 27–30 October 2011, at the Thailand Development Research Institute (TDRI) in Bangkok, 16 March 2012, at the conference ‘Macroeconomics and the History of Economic Thought’ in Stuttgart-Hohenheim, 13–15 April 2012, and at the XIVth conference of the Charles Gide Society on ‘Histoire de la macroéconomie’ in Nice, 7–9 June 2012. I am most grateful to the participants in these meetings for useful discussions and to Geoff Harcourt, John King, Antoin Murphy, Richard Nelson, Richard Sturn, an anonymous referee and the editor Uwe Cantner for valuable comments and observations on an earlier draft of this paper.
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Kurz, H.D. Schumpeter’s new combinations. J Evol Econ 22, 871–899 (2012). https://doi.org/10.1007/s00191-012-0295-z
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DOI: https://doi.org/10.1007/s00191-012-0295-z