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Schumpeter and the meanings of rationality

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Abstract

This paper discusses various meanings of rationality distinguished by Schumpeter – as well as related concepts like rationalization – and connects them with widely remarked tensions or dilemmas in The Theory of Economic Development and other substantive works. The well-known contrast between Schumpeter’s commitment to equilibrium economics and his heterodox, evolutionary vision is analyzed on the basis of the notions of ‘rationality of the observer’ and ‘rationality in the observed’, developed in his article on The Meaning of Rationality in the Social Sciences. Schumpeter’s thesis of the obsolescence of the entrepreneurial function – already present in The Theory of Economic Development – is also scrutinized, by investigating the coherence between his conceptions of rationality and of rationalization. This topic is, in turn, connected with Schumpeter’s assessment of the socialist calculation debate.

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Notes

  1. Translations from Schumpeter’s German works are my own, unless a translation is indicated in the bibliography.

  2. In other words, Schumpeter’s vision is evolutionary in Witt’s (2004) interpretation of the term, where evolution is the self-transformation of a system over time, encompassing the emergence and the dissemination of novelty. It is not evolutionary in the much more specific Darwinian sense. For critiques of Darwinism in economics, see e.g., Cordes (2006) and Vromen (2008). On the details of Schumpeter’s evolutionary viewpoint, see Andersen (2009; 2011).

  3. The differences, notably concerning the picture of the entrepreneur, between the original German edition of the Theory (Schumpeter 1911/12) and the 1926 edition, on which the English translation (Schumpeter 1934a) is based, have been influentially emphasized by Becker and Knudsen (2002; 2003). The radical distinction between leaders and the rest, present in 1911/12, is downplayed in later works. (See Schumpeter 1934a, pp. 81–82, n. 2.) In either case, however, the entrepreneur is not viewed as the cause of innovation, for entrepreneurial action depends on its institutional context. (See e.g., De Vecchi 1995; Arena and Dangel-Hagnauer 2002; Festré and Nasica 2009.) Here I consider only Schumpeter’s revised picture of entrepreneurship.

  4. For a fuller analysis of these problems and their implications, see Graça Moura (2015).

  5. As is well known, the recognition that the standpoint from which policies are devised is relative and socially conditioned leads to the Schumpeterian concept of ideology. Ideology is linked by Schumpeter to the notion of vision and, therefore, present from the outset in the scientific process. (See Schumpeter 1949; Schumpeter 1954, pp. 34 ff..)

  6. The violation of these rules is characteristic of ‘imperialism’, which Schumpeter regards as a remnant of a previous Zeitgeist. This atavistic disposition may, however, be revived in particular circumstances. As Schumpeter puts it in a frequently quoted passage from The Sociology of Imperialisms:

    [T]here has come into being a close alliance between high finance and the cartel magnates, often going as far as personal identity. Although the relation between capitalists and entrepreneurs is one of the typical and fundamental conflicts of the capitalist economy, monopoly capitalism has virtually fused the big banks and cartels into one. Leading bankers are often leaders of the national economy. Here capitalism has found a central organ that supplants its automatism by conscious decisions … [T]he situation … is really untenable both politically and economically … [W]e have here, within a social group that carries great political weight, a strong, undeniable, economic interest in such things as protective tariffs, cartels, monopoly prices, forced exports (dumping), an aggressive economic policy, an aggressive foreign policy generally, and war, including wars of expansion with a typically imperialist character. (Schumpeter 1919, pp. 200–202)

  7. For a recent example of this claim, see Freeman (2014, pp. 675–676), who writes that, in common with all Austrians, Schumpeter wants to show that intervention is (always) misguided and attempts to provide ‘a comprehensive response to both arguments for intervention: the humanistic argument that we should mitigate suffering; and the scientific argument that if we don’t do something, things will get worse. Schumpeter can respond that the pain of depression is necessary.’

  8. Writing earlier about problems presented by depressions, Schumpeter observes that relief is ‘[n]ot only imperative on moral and social grounds, but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental causes’ (Schumpeter 1934b, p. 115), and that ‘futile as it is to hope for miraculous cures, it is exactly as wrong to believe that the evils of depression are all of them inevitable and that the only sound policy consists in doing nothing’ (p. 117). He approves of expenditure ‘which will blot out the worst things without injury to the economic organism’, provided that it is followed by sound fiscal habits. He argues, however, that – because sound recovery must ‘come of itself’ – there is ‘a presumption against remedial measures which work through money and credit’, as such measures are ‘particularly apt to keep up, and add to, maladjustment, and to produce additional trouble in the future’ (p. 117). He also notes that, throughout history, regulation of financial practices has on balance been justified (p. 116).

  9. In other words, in this framework choice turns out to be incompatible with explanation: ‘To the extent that variables are endogenized – choice is explained – “society’s” freedom of choice is seen as illusory. Freedom appears to consist not in power of choice, but (pace Hegel) in recognition of necessity’ (Reder 1982, quoted in Lawson 1997, p. 10). For elaborations, see Lawson (1994).

  10. In a sense akin to that of a logical rule, or perhaps even an ethical imperative, Schumpeter (1991, p. 322) now writes.

  11. Schumpeter comments on this error throughout his paper (see e.g., Schumpeter 1991, p. 326), which ends with an incisive digression on the uses and abuses of rationality in the history of thought, covering the Physiocrats, English utilitarianism, Marx (with a discussion on ideologies as rationalizations), Marshall, Wicksell, and Pareto (pp. 331 ff.). His overall assessment is that the overestimation of subjective rationality can often be corrected by a more careful formulation.

  12. Schumpeter (1991, p. 325) writes that Weber illustrates the risks in question when he denies rationality to the ancient Chinese, notably because shortcomings of the bureaucracy in responding to catastrophic floods led to tighter examinations in classical literature.

  13. This particular limitation is retrieved in the article’s mischievous conclusion, where Schumpeter (1991, pp. 336–337) concedes that conflicting ends in human action cannot be rationally combined and that life is ontologically irrational.

  14. Among the most startling, at least prima facie, is a note where Schumpeter revises his meaning of subjective rationality. ‘I suspect’, he submits,

    that part of the opposition my theory of subjective rationality met in our group, especially from Professor Parsons, is due to my infelicitous terminology. Perhaps I should speak of personal rationality – meaning thereby rationality residing in a man rather than in a pattern – and I should not have used the word “conscious” since automatization of often repeated actions will make forms of behavior subconscious which are, nevertheless, included in my conscious rationality: If a mathematician solves a differential equation in the best known manner he is being “consciously rational” in my sense even if, in a particularly simple case, he writes down the solution quite mechanically. (Schumpeter1991, p. 337, n. 4)

  15. By its nature, then, pure theory cannot solve policy problems. (See Schumpeter 1908, pp. 574 ff..) Those who resort to pure theory to address political questions are likened to Icarus; those who misuse it to make political points are said to be its worst enemies (p. 575). The latter observation foreshadows Schumpeter’s concept of the ‘Ricardian vice’ (Schumpeter 1954, p. 473).

  16. Schumpeter’s ontologically grounded conception of rationality of the observed, largely implicit in The Meaning of Rationality in the Social Sciences, is hardly peripheral not just in Schumpeter’s economic writings but also in sociological works such as Schumpeter (1919) and Schumpeter (1927). On the basis of the latter works, it is possible to relate this conception of rationality to his notion of ‘economic sociology’ as a theory of institutions and their evolution, encompassing various types of action, routinized as well as innovative, which cannot be understood independently of the rule-structured setting in which they take place and which, in turn, collectively mould this institutional setting. (See e.g., Arena and Dangel-Hagnauer 2002; Festré and Garrouste 2008; Festré and Nasica 2009.) The present paper is compatible with the perspective of these authors, except when they appear to imply, in line with Shionoya (1997), that Schumpeter’s institutionalist viewpoint is coherent with his equilibrium framework.

  17. This paragraph and the next retrieve my argument in Graça Moura (2015, pp. 1137–1138).

  18. Rationalization, then, is a process previous to, although it is accelerated by, capitalism. The brief account of rationalization provided here is based on Capitalism, Socialism and Democracy only. (See also e.g., Lakomski 2002, pp. 152 ff..) Schumpeter also writes on this topic elsewhere (e.g., Schumpeter 1919, pp. 189 ff.; 1920/21, pp. 462 ff.), analyzing other dimensions of this process.

  19. Schumpeter refers in this connection to Weber as well as to Emil Lederer. (See e.g., Schumpeter 1920/21, p. 469; 1934a, p. 57, n. 1; see also De Vecchi 1995, pp. 164–165.) For a general account of the connections between Schumpeter and Weber – including, e.g., the similarities between Das Wesen… and Weber’s methodological appraisal of pure theory in economics – see Osterhammel (1987).

  20. For a similar but more detailed critique of Schumpeter’s argument, see Keizer (1997). For a critical overview of the socialist calculation debate, see Lavoie (1985).

  21. He already specifies this in an earlier article on socialism, Sozialistische Möglichkeiten von heute (Schumpeter 1920/21, p. 458), which is not written from a pure theory perspective. As Keizer (1997, pp. 81–83) shows, Schumpeter’s (1942, 1954) analysis of the economics of socialism involves a shift between general equilibrium and partial equilibrium arguments, as he also takes account of Oskar Lange’s partly decentralized model of socialism.

  22. This issue is too vast to treat here. Schumpeter states that socialism will ‘slow down economic development, but therein lies in part precisely its sense: that it will free human life and the best of human energy from economic concerns’ (Schumpeter 1920/21, p. 494). This would not constitute an unacceptable performance, though. The possible failure of socialism – whose blueprint is said to be ‘drawn at a higher level of rationality’ than capitalism (Schumpeter 1942, p. 196) – has to do, for instance, with the fact that the bureaucratic machine smothers initiative. Schumpeter also believes that the prevalence of ‘idyllic’ views of socialism is likely to lead to failure, perhaps insidiously masquerading as a success (p. 218).

  23. Within Austrian economics, however, this problem is clearly perceived. See e.g., Boehm (1990, pp. 229–230) or Kirzner (1999, p. 8), who quotes an earlier statement of his to the effect that Schumpeter’s exposition is ‘likely to generate the utterly mistaken view that the state of equilibrium can establish itself without any social device to deploy and marshall the scattered pieces of information which are the only sources of such a state.’

  24. Kirzner (1999) takes a different view. He proposes that Schumpeterian entrepreneurship is not necessarily inconsistent with, and indeed that much of it can ultimately be subsumed within, his own view of the ‘coordinative tendencies set in motion by (successful) entrepreneurship’ (p. 13).

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Acknowledgments

This research has been financed by Portuguese Public Funds through FCT (Fundação para a Ciência e a Tecnologia) in the framework of the project UID/ECO/04105/2013.

I am grateful to Diogo Lourenço, Nuno Ornelas Martins and two anonymous referees for their comments. I thank Agnès Festré for her patience and encouragement.

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  1. Faculdade de Economia da Universidade do Porto (FEP-UP) and CEF.UP, Universidade do Porto, Rua Dr. Roberto Frias, 4200-464, Porto, Portugal

    Mário Graça Moura

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Graça Moura, M. Schumpeter and the meanings of rationality. J Evol Econ 27, 115–138 (2017). https://doi.org/10.1007/s00191-015-0429-1

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