The Economics of Joseph Schumpeter
Seligman, Ben B.
When an economic theory successfully fuses into one vast system the ideas that an economy continuously reproduces itself without altering levels of production or consumption patterns, that...
...Thus, the very success of capitalist enterprise paradoxically impairs the status of the class primarily associated with it...
...This desire to discover the meaning of an opponent's question was extraordinary in a field where the most innocent inquiry could elicit an hour-long exposition of some personal belief...
...He visualized a liberal-socialist system with central responsibility and the use of a free price mechanism...
...382 • DISSENT • Autumn 1954 VI By contrast, Schumpeter was allergic to any doctrine that suggested the feasibility of policy participation by the economist...
...III It almost appears that Schumpeter would agree with Marx: capitalism, in the long run, tends to stumble over its own inner contradictions...
...Schumpeter placed little stock in Marx's political aims, his Hegelian metaphysics or his materialistic sociology...
...It was perhaps this similarity in vision that made Marx so attractive to him...
...bureau and committee work now displace individual action...
...Devoid of the passion that possessed Marx, unable to construct a seemingly simple system as did Keynes, Schumpeter hid his virtues, such as they were, in niceties of logical distinctions and in a phraseology so complex that it might have been lifted from his native German...
...Moreover, Marxists have failed to integrate adequately their theory of imperialism with their general doctrine, he says: the heyday of imperialism came during capitalism's youth...
...In fact, some economists have been able to make this theory so neutral that it can be used, they aver, for a socialist as well as a capitalist society...
...Special situations, such as speculative or prestige markets, were excluded...
...Walras here made an important distinction between factors and the services they render: what is significant is the stream of services productive factors can offer...
...At Harvard he would sometimes describe himself as the last representative of true Aufumn 1954 • DISSENT • 383 European culture...
...While he had an extraordinary grasp of the methods, views and limitations of virtually all theories, his expressed preference was for those that sought an everlasting universality...
...But there was always implicit in this structure the notion of marginal utility, which never quite avoided the accusation of making economic man a dextrous balancer of pleasures and pains...
...It is the outstanding landmark on the road that economics travels toward the status of a rigorous or exact science and, though outmoded by now, still stands at the back of much of the best theoretical work of our time...
...By the time he was 30, he had written a short history of economics which was to be expanded decades later into the posthumous and fantastically huge magnum opus, the History of Economic Analysis.* Yet he remained basically a kind of old-fashioned economist, for he rejected the more recent developments in monopolistic competition and Keynesian doctrine...
...In other words, the economy requires the external force of an innovating break in order to achieve significant changes...
...His system of economic equilibrium, uniting as it does the quality of revolutionary creativeness with the quality of classic synthesis, is the only work by an economist that will stand comparison with the achievements of theoretical physics...
...While it is weighted down by class ideology, influenced by heated value judgments, overladen with questionable sociology, Marxian economics possesses an undeniable methodological meaning which demands that in telligence be brought to bear on it...
...Capitalism, he averred, should be an exciting, glamorous adventure...
...Furthermore, said Marx, the centralization of capital, facilitated by the growth of corporations, leads to a rationalization of productive processes...
...Each method has a specific application: the historical method might be appropriate for an examination of economic organization, while price theory might demand abstraction and model building...
...What Walras did was to throw light on the nature of economic relationships with one basic principle—economic equilibrium...
...the economic order eventually fails to evoke the loyalty and emotional response required to sustain it...
...The discussion of Keynes, for example, is sketchy, being no more than notes, while American Institutionalism (Veblen) is entirely lacking...
...In this respect he differed from Schumpeter, who, as we have already noted, believed Marx a great thinker, as indeed he was...
...Yet, declares Schumpeter, this superb engine will fall apart...
...But these are similarities in detail only, for one thing that Schumpeter surely did not savor was the change in the whole apparatus of organizational and political control that stemmed from Marx's theory...
...Given, therefore, the ideological biases, there was no reason to condemn a man's intellectual output simply because one disagreed with him...
...However, as has been demonstrated by others, Schumpeter's own theory suffered from certain weaknesses that might have been overcome with a touch of Keynesianism...
...What complicated the problem for Marx was the recognition of the divergence of prices from values...
...As a theorist, Schumpeter exhibited a generosity that was unusual...
...Nevertheless, Marx was four-square in the Classical tradition: in an early work, Economic Doctrine and Method, Schumpeter makes clear that the scientific core of Marxism is traceable to Ricardo and his forebears...
...It is anti-heroic, basically pacifist and apt to insist on the application of private morals to international relations...
...What Keynes had attempted was to give the British liberal tradition a new political economy...
...The entire conetruction here is a dubious one and Schumpeter's refutation unconvincing...
...It will be recalled, however, that Schumpeter derived the motive power for his dynamic changes from the breakthrough in the circular flow that an innovator achieves...
...The sharp reaction this incurred, together with what he thought to be an appalling increase in government intervention in economic affairs, impelled him to turn to purely "scientific" interests...
...He has a cohesive theory of the origin, functioning and decline of capitalism out of which is built an imposing set of hypotheses on business cycles, money, interest and prices...
...By this he meant a "preanalytic cognitive act" that supplied the raw material for scientific investigation...
...nor should the individual fix the social conditions in which he functions, nor should he profit from them...
...The late English economist had had, of course, a fantastic success: his great work, General Theory of Employment, Interest and Money, set the tone of public discussion on economic matters for almost two decades and, perhaps even more important, it reflected the temper of his time in a way that Schumpeter could never approach, if he had wanted to...
...Marx's recognition that capitalism is not and cannot be stationary, that it is altered continually by internal forces, came close to his own system, Schumpeter felt...
...He supported cooperatives...
...Walras, however, was not a successful theorist in the same sense that, say, Keynes was...
...Once this proposition is grasped, there is no need to resort to a study of motives or mainsprings of human behavior...
...Thus, Schumpeter does not quite succeed in making economic development completely dependent on elements internal to the economy itself...
...So-called old firms which have survived the rigors of economic change have been able to do so, says Schumpeter, because they were fundamentally transformed under the impact of innovation: they no longer are able to display the attributes of conservatism...
...Yet because Marx based himself on Ricardian value theory, he failed to break out of the intellectual limits of the time, says Schumpeter...
...Ideologies, he then said, stem from the same source as "vision," and while progress might be slowed by ideology, it would be impossible without it...
...Capitalism, Socialism and Democracy, Chapter V. 374 • DISSENT • Autumn 1954 in unrest...
...New ways of making things, which is what the production function really means, do not take place in old businesses...
...This is what Schumpeter called the process of "creative destruction...
...Any economist who wishes to study Marx at all must resign himself to reading carefully the whole of the three volumes . . . and the Theorien uber den Mehrwert...
...370 • DISSENT • Autumn 1954 The type of theory with which Schumpeter was concerned deals with the behavior of single business units in an environment over which they exercise but little control...
...This was done with the theory of surplus value, one of the most facile and for that reason powerful inventions of economic discourse...
...But towards the end of such a prosperous period the entire economy becomes upset and further gains become uncertain...
...But the innovator, securing new credit from the banking system, is able to divert factors of production from existing channels, thus initiating a dynamic phase...
...According to Schumpeter, the major criterion for Autumn 1954 • DISSENT • 373 an economy's success is its ability to expand production: capitalism, he argues, has unquestionably measured up to this index.* While innovation may cause a painful disarrangement of previous economic relationships, in the long run it results in social gain...
...During the last few years of his life, he turned away from political events: he had believed Germany not unjustified in seeking to rectify the injustices of Versailles...
...He did not receive the immediate acclaim that comes to those able to touch a responsive public Schumpeter touches briefly on the Imperialism phase of Marxist doctrine in his Capitalism, Socialism and Democracy...
...Both encountered the same difficulties with the theory, difficulties that led Schumpeter to pronounce it not merely wrong, but dead and buried...
...He also describes him as a prophet, sociologist and teacher.* The point is that despite the special Marxian bias there is an interest in economic problems in their own terms: there is a primary concern, says Schumpeter, with "sharpening the tools of analysis proffered by the science of [the] day, with straightening out logical difficulties and with building...
...Errors and miscalculations force some firms into bankruptcy...
...Schumpeter was in reality an intellectual descendent of the Austrian school of economics and it was unavoidable that in his historical and sociological views he should assume what was essentially the attitude of the Middle European intelligentsia...
...Set in this context, large-scale industry, often criticized as monopolistic, has a special function to perform...
...378 • DISSENT • Autumn 1954 chord...
...376 • DISSENT • Autumn 1954 Both Marx and Schumpeter recognized the increasing obsolescence of the entrepreneur...
...In the History, Schumpeter defends the Marxian system, despite alleged errors and inconsistencies, on the ground that it is analytical and logical, comprised as it is of statements of relations between social facts...
...Walras felt that while his general equilibrium theory set the conditions for maximizing utility, it was the task of applied economics to demonstrate that such a maximum could be attained on the one hand through private initiative and on the other through state regulation...
...What is important is to set forth clearly such value judgments as may be implied in particular doctrines...
...Not that Marx was unaware of the interdependence of economic factors: attention need only be called to his analysis of the way in which the organic composition of capital depends on the rate of surplus value...
...Walras' approach, however, abandoned the problem of price causation...
...By chance he attended a conference on taxation in Lausanne in 1860...
...The social atmosphere becomes hostile, so that people will refuse on principle to take account of the requirements of capitalist production and in this way seriously impede its effective functioning...
...Schumpeter's theories, however, were not an eclectic collection of conglomerate notions...
...Schumpeter thought Walras so important because he found exact forms for phenomena whose interdependence is attested to by actualities...
...As Schumpeter remarks: "His problem was precisely to show how . . . these absolute values, without being altered came to be shifted about in such ways that in the end commodities, while still retaining their values, were not sold at relative prices proportional to these values...
...This was due not only to the extremely involute presentation in which his doctrines were often couched but also to the obvious fact that in a time of crisis, the critique of policy is usually more attractive...
...But Keynes clearly showed that persistent deflation or inflation might be an unwelcome accompaniment of such equilibrium...
...he sought to employ not only theory and statistics, but historical, sociological and even psychological data...
...Keynes, he argued, had merely built a conceptual vehicle for an ideology which posited that the cause of capitalism's collapse was within itself...
...The system, furthermore, was a determinate one because the number of equations was equal to the number of unknowns...
...In fact, measurement of much economic data does not have to be superimposed as in physics for they "already present themselves to our observation as quantities made numerical by life itself...
...This is obviously important for any theory of economic development...
...This was due to the fact that Schumpeter visualized the History as one of analysis rather than of economic thought in general...
...Autumn 1954 • DISSENT • 379 Beyond the exchange of goods, there is the question of production...
...Throughout the History he shows a persistent preference for pure theory, the "positive" features of doctrinal history, rather than for the so-called "normative" propositions...
...This eventually became synonymous with exploitation...
...Essentially it is a matter of pricing the "factors of production...
...A good deal of this can be attributed to the incomplete state of the book...
...He was, essentially, a kind of 19th century rationalist reformer very close to the Fabian political approach...
...This was an achievement comparable to Marx's, who, perhaps wrong in his selection of tools, was still able to describe economic behavior with the grandeur that comes from the use of a single unifying conception.* Walras' general equilibrium theory was built up through a process of decreasing abstraction...
...Yet he admired England, for its aristocracy knew how to rule...
...384 • DISSENT • Autumn 1954...
...State regulation, therefore, was proper in the areas of money, education, justice (areas where the individual cannot properly estimate the utilities of services) , monopoly, railroads, and working conditions...
...In this sense, corporate growth might be interpreted as a stabilizing factor, a notion not unrelated to Schumpeter's defense of large-scale enterprise...
...This is, of course, little more than naivete...
...Granting that the economic system will be affected by wars, revolutions, crop variations and taxes, Schumpeter characterized these as "external" factors...
...The latter was a technological fact, while the former was an economic and sociological process...
...As a result, political affairs become the province of the upper strata of the bourgeoisie and former aristocrats...
...The inherent logic of capitalist development, according to Marxism, explains loans, tariffs and aggressive wars...
...People entering a competitive market with a good and an approximate idea of what they want to sell it for are met by others who are bound to make offers...
...it explains also his somewhat arrogant insistence that sociology is to be regarded as the proper occupation of a tired economist...
...and he achieved favorable results despite great difficulties...
...The causes of capitalism's breakdown, however, are not to be sought in the realm of economics, but rather in the habits of thought which comprise its cultural superstructure...
...The latter utilized class and accumulation theories to account for the complex maze of international economic relations and the resulting politics...
...Despite his predilection for the precise, he was something of a romantic among economists...
...Of all the social sciences, he argued, only economics comes close to the natural sciences and this only because it deals with phenomena capable of being "quantified...
...The people begin to turn away from capitalism, says Schumpeter, in spite of its effectiveness as a producing machine...
...However, it was Marx's emphasis on capitalist change that attracted Schumpeter...
...Innovation does not proceed smoothly: it comes in clusters and spasmodic movements...
...To refuse to acknowledge this is to dodge the task of evaluation...
...Why, then, is Schumpeter important not only as an economist but as a social scientist...
...Much of Schumpeter's ideas were fixed when he was still a young man...
...a theory that in nature and intent was truly scientific whatever its shortcomings may have been...
...In essence, this is the theory of how land, labor and capital are allocated to different needs...
...he emphasized, in the main, the dynamic aspects of economic problems...
...Innovation, Schumpeter insisted, was a matter of business behavior in that it turned existing productive forces to new uses...
...Although history supplies enough evidence to support the Marxist doctrine, Schumpeter argues that the historical facts in the matter have never been made clear...
...Schumpeter admitted that ideas often glorify the interests of the class which is in a position to assert itself...
...But he was essentially conservative: he rejected the Labor Party because it was a class party and he preferred to remain with the bourgeoisie...
...This displacement eliminates the small business man...
...He was able to use them because of his great knowledge of scientific method...
...In 1908, at the age of 25, he published a work on theoretical economics that touched on virtually all of the problems of the field and even suggested the solutions at which he would in later life arrive...
...Schumpeter, on the other hand, sought to discover how the various elements in an economic situation affected each other simultaneously and for this the more powerful tools of algebra and calculus were required...
...What ever inconsistencies there are in Marxian economics, are in details, not in vision...
...What Keynes did was to connect the supply of funds not only to conditions in the money market but to the level of savings as well...
...In this regard, Marx's theory seems a superior one, for by emphasizing the problems of accumulation of capital, the flow of economic resources through simple and extended reproduction, productivity and the tendency of the rate of profit to fall, he sought to demonstrate that what makes capitalism move are forces generated from within...
...Schumpeter's predilection for the general and abstract was itself an expression of inverted interest...
...Walrasian economics, in this sense, is like a huge research program which has not yet been able to supply all the answers...
...Their disappointments and dissatisfactions must be articulated by those alienated intellectuals who have acquired a vested interest n cf...
...All this, the inevitable outcome of the capitalist process, tends to convert the bourgeoisie into a superfluous class...
...Yet, while Schumpeter does a respectable job in refuting Marxian value theory in its own terms, he is not averse to employing a kind of ad hominem argument...
...It was clear that Innovation was not the same thing as Invention...
...It was the failure to realize this that led the Classicists astray, since associationist psychology, hedonism and comparisons of utility were all irrelevant to the basic technique of economic quantification...
...While there might not be any practical relevance in this, Schumpeter nevertheless felt that variations in static conditions could yield significant answers for some economic problems (tariffs and taxation) . Where changes were large and discontinuous, dynamic methods were called for...
...What mattered to him was the quality of a man's work and what Schumpeter liked to describe as "vision...
...At one point he says that the exploitation theory is a rationalization of ancient slogans expressing the resentment of the lower classes against the upper strata living on the fruits of their labor...
...Intellectuals sooner or later become detached from the dominant order...
...he studied, with a broadness of vision comparable only to Marx, the origin, functioning and decline of capitalism...
...Realizations no longer meet expectations...
...In fact, his style of thinking and background was typically French--Condillac, Turgot, Cournot, and his father, Auguste Walras, provided the intellectual framework for his main economic ideas...
...The editorial task was made more difficult by Schumpeter's habit of keeping early notes and later drafts together with more polished versions...
...Starting with static analysis as set forth in his doctrine of the circular flow, he noted how breaks in the flow, such as the introduction of new goods, new methods of production, opening 372 • DISSENT • Autumn 1954 of new industrial organizations, made the economy a dynamic one...
...Schumpeter's contention that Keynes' doctrine could lead to radicalism was unwarranted...
...His rejection of the Keynesian message was even sharper, stemming from a distaste for the implication that an economy could be tinkered with to make it work...
...V As much as Schumpeter admired Walras, so did he abhor Keynes...
...He did not deny their importance, but like Marx he wanted to discover the "internal" laws of capitalist motion...
...This was perhaps best exemplified in his analysis of the political role of the bourgeoisie, which he insisted was incapable of managing the long-run interests of society...
...Yet while capitalism has operated admirably, it cannot continue to do so, said Schumpeter...
...The connections he made there brought him a decade later a professorship at the University...
...This, thought Schumpeter, was the real core of economic method...
...Schumpeter first set forth a dynamic model in his Theory of Economic Development and later elaborated it in his book on cycles...
...When Schumpeter died in 1950 he had not completed any part in final form and his widow Elizabeth Boody Schumpeter, who edited the manuscript, had to put it together from material found in at least three different places...
...No method, insisted Schumpeter, possessed so general a validity that it could claim to be superior to all others...
...However, it is doubtful that this is a defensible approach, for it can be argued that the particular outlook of a theorist in the social sciences is bound to impart a special coloration even to the most formal parts of his system...
...Starting with a two-person, two-commodity barter situation, he made his model gradually more complex by introducing more commodities as well as the factors of capital and money...
...In multi-commodity exchange, where the price of each good is stated in terms of all the others, there will be for x goods x(x-1) prices and x (x-1) /2 markets...
...In the two-person case, Walras is able to obtain demand curves for each party from the supply curve of the other...
...Perhaps the major difference between Marx and Schumpeter might be described as follows: Marx always analyzed his economic factors in a successive chain of causation, calculating the relationships in an arithmetical manner and deducing thereby the information he wanted about the unknowns that interested him...
...He conceded that these experiments may not partake of the reality we know, but while they are arbitrary constructs, they are created with the facts in mind...
...The latter's applied economics could not be separated from the theoretical framework and this Schumpeter could not abide...
...In other words, price deviations did not alter values but only redistributed them...
...In the History he says: "So far as pure theory is concerned, Walras is in my opinion the greatest of all economists...
...However, the fact that Marx was able to distinguish between the quantity of labor and labor power, the ability to create embodied value (measured * cf...
...Although of middle-class origin, Schumpeter early adopted the tastes and habits of a Viennese aristocrat...
...On this basis he created an elaborate classification of resources which provided a comprehensive picture of the free enterprise system and its circular flow...
...Doubtlessly, he imbibed a good deal of this during his student days at Vienna, where he studied with von Wieser and Bohm-Bawerk, and assuredly must have had to demonstrate sharp wit in debates with Otto Bauer and Rudolf Hilferding...
...he was not a reformer...
...When an economic theory successfully fuses into one vast system the ideas that an economy continuously reproduces itself without altering levels of production or consumption patterns, that perfect balancing of economic forces is attainable, that the prime movers in economic development are adventurous entrepreneurs whose perpetual search for profit induces such change, and that capitalism will fail simply because it is too successful, there is little doubt that it can be described as an intriguing and even startling doctrine...
...Keynes was more like the Utilitarians who believed that the State had to establish rules for economic behavior, especially when things went awry...
...It is well to observe in these days, when Marx is so often dismissed as unworthy of scholarly attention, that Schumpeter advised: "There is no point whatever in perusing selected bits of Marx's writings or even in Autumn 1954 • DISSENT • 377 perusing the first volume of Das Kapital alone...
...The fact that Keynes' system avoided time sequences and dealt with short term problems led Schumpeter to describe it as a depression-ridden doctrine and lacking in the kind of generality that a good theory should have...
...At all times the analysis proceeds on the basis of perfect competition...
...While he acknowledged the remarkable precision with which Marx formulated the economic interpretation of history, Schumpeter felt that it inhibited the construction of more generalized theories...
...Technically, innovation sets up a "production function" which is always associated with the rise of a new business leadership...
...We must put our trust," said Schumpeter in the opening pages of his Business Cycles, "in bold and unsafe mental experiments or else give up all hope...
...As one industrial leader overcomes technological and financial impediments and opens a new path to profit, others follow with a rush...
...He thought Marxism erroneous and was puzzled that it could exert an enduring influence on men's minds...
...a born analyst, a man who felt impelled to do analytic work, whether he wanted to or not...
...This was the system constructed by one of the great economists of our time, Joseph A. Schumpeter, who was professor at Harvard from 1927 until his death in 1950...
...The romance of earlier commercial adventures is wearing away...
...However, Schumpeter emphasized only the demand side and said little about the supply of loanable funds...
...In Keynesian doctrine it was not necessary to look for noneconomic causes...
...Thus, at the very inception of social inquiry, at the point where facts are put together for the purpose of drawing generalizations, "normative" propositions are involved...
...He could not give his readers what they wanted...
...Marx, in his chapter on credit, points out that the functioning capitalist is transformed by the spread of corporate organization into an administrator of other people's money, while the owner is transformed into a mere lender of capital...
...he derived these forms from each other...
...Ever willing to listen to his adversary, Schumpeter was never satisfied until he viewed reality from the standpoint of the other...
...Marx sought to prove that exploitation was inherent in the logic of capitalism and that no single industrialist could be assessed with personal responsibility for what the system did...
...This was a perception into economic problems that would enable one to ask really meaningful questions...
...Autumn 1954 • DISSENT • 381 Keynes, like most Englishmen, looked upon theory as a program of action...
...not only the modern mechanized plant and the volume of output that pours from it, not only modern technology and economic organization, but all the features and achievements of modern civilization...
...Press: New York, 1954...
...A depression ensues in which everyone waits for new facts to be discovered before economic calculations can once more be balanced...
...It would, for example, be very helpful if the hedonistic presuppositions of much contemporary theory, especially in that branch described as "welfare" economics, were admitted beforehand...
...Walras observed that free competition in the labor market resulted in inordinately long hours: therefore, government regulation in this area was essential to health...
...There is implicit in this approach a belief that scientific knowledge is possible in the social sciences independent of value judgments...
...But the great mass of people are unable to express their loss of faith...
...He was repelled by much of Alfred Marshall's writing because of the tone of Victorian morality he sensed in it...
...But today progress has been mechanized, and the function of the entrepreneur, to apply new innovations, has atrophied and is being reduced to mere routine...
...These were the forces that made for "development...
...the very nature of economic calculation impels the business man to clear thinking...
...Not that he was uncritical: there seems little left of the technical aspects of the Marxian structure after he gets through with it, especially in the History...
...Schumpeter's discussion of Walras, like much else in the History, has a rugged quality which at times becomes disturbing...
...Then he analyzes the factors behind each demand curve by inquiring into the conditions necessary for maximizing satisfactions...
...Since capitalism can operate well, the explanation of its final collapse is in the destructive action of non-economic minded individuals...
...Above all else, says Schumpeter, Marx was a very learned and extremely capable economist...
...These, he thought, were the important things—changes in taste, in ways of making things and in methods of supplying goods...
...He wanted to know what elements there were within the economy that impelled shifts in activity...
...Economists no longer had to search for the source of value: they now had a formal theory of interdependence in which economic relations were stated in the neutral language of functional equations...
...Marx wrestled with every fact and argument that came his way, often to be unnecessarily diverted from his main point, but he was, says Schumpeter...
...Overproduced and given no financial stake in capitalism, they are driven to stimulating, verbalizing and organizing discontent in a system that fails to provide them with a satisfying role...
...Yet both, he pointed out, "often converge and become indistinguishable...
...Despite the fact that he acknowledged the importance of advertising and product differentiation, his own doctrinal system was based essentially on "pure" competition...
...Schumpeter also cautioned that careful preparation was required for Marx: understanding him demanded a knowledge of the economics of his time and especially of Ricardo.* IV Schumpeter's great intellectual hero was Leon Walras...
...It was precisely this that Schumpeter rejected in Keynes...
...Oxford Univ...
...Yet, in the main, he held to the causal technique and this placed him at a decided analytical disadvantage, for it was difficult to express clearly in this way the mutually interdependent character of eco nomic relationships...
...and business men followed the flag, not the other way around...
...In an early work, Das Wesen and der Hauptinhalt der Theoretischen Nationalokonomie, Schumpeter insisted that economic analysis could be freed of hedonism and that theory should not be used to rationalize the existing pattern of income distribution...
...Nor was Schumpeter ever willing to accept the idea that oversaving and overinvestment might become chronic...
...Facts do not order themselves without concepts, and the latter, insofar as they are the expression of our interest in the world about us, are essentially value judgments...
...One thing is certain: the increasing neutrality and formal rigidity removed such economic theory from the realm of political applicability...
...In other words, Schumpeter was interested in efforts to describe and explain economic facts and in attempts to provide logical tools for doing so...
...In his advocacy of the use of mathematics he did not preclude an appeal to historical evidence...
...This may very well result in a theory that does not match the truth...
...In 1950, the last year of his life, he conceded that mathematical models in business cycle studies had not been as fruitful as he had hoped and that as between the theoretical, statistical and historical methods, the Autumn 1954 • DISSENT • 371 third was the most important...
...Insofar as this is true, it has its usefulness...
...Innovation is, of course, a broad social process in which many individuals take part, making change a pervasive aspect of the economy...
...This was the case with the Walrasian system, whose author was something of a socialist...
...Schumpeter, who did not understand Keynes' "enlightened conservatism," thought that a legislature, in order to serve the masses, would only introduce basically anti-capitalist measures, whereas the solution of capitalism's ailments lay rather in a continuation of the past rate of increase in total output...
...Actually, what Walras did was to look at old reality in a new way, but it was a long time before the profession would give him any honors...
...he did it in a new field without the accumulated experience of prior work...
...His own essay on the subject, The Sociology of Imperialism, he considered among the most important he had written...
...It is not merely that he advanced a striking and forceful theory of economic development: he achieved at many points a remarkable integration of theory and history...
...It was thus a monetary phenomenon linked to innovation and in this sense bore certain similarities to Keynesian doctrine...
...His own ideas were based on a kind of prime-mover notion: once capitalism started it should be permitted to keep going under its own sealed-in, self-lubricating power...
...Both Ricardo and Marx argued that the value of a commodity is proportional to the quantity of labor embodied in it (with Marx it was socially necessary labor) and both measured this by resorting to labor time as a standard...
...So far as he was concerned, Walrasian equilibrium was attainable at the end of every cycle...
...For this, theoretical economics is the required tool...
...he was concerned, despite the details of economic analysis, with the overall functioning of the capitalist economy, a problem that most academic economists preferred not to discuss...
...As might be expected, his thesis on imperialism diverged sharply from that propounded by Marxists...
...While Schumpeter acknowledged mathematics as an important tool in economics, it could never, he felt, replace the exercise of intuitive insight...
...For an interesting debate on the question see Social Research, June and December, 1952...
...Such intuition led to the art of building useful abstractions, an art in which Ricardo, Marx and Walras were supreme...
...Rigid prices, limited output and patent control have in actuality kept capitalism on an even keel, thus serving as a desirable counterbalance to innovation...
...11 Schumpeter's theory of economic change exhibits a kind of internal drive that has nothing to do with either a great man or devil theory of history...
...This, perhaps more than anything else, demonstrates the weakness of his sociological apparatus...
...Schumpeter's interest theory, for example, which postulated the occurrence of this form of income only in a dynamic society, was related to the possibility of profit in new ventures...
...Capitalist thought, he said, was initially rational and logical...
...The similarity here is too striking to go unobserved...
...History of Economic Analysis...
...Schumpeter's long and detailed discussion omits, interestingly enough, Walras' theory of applied and social economics...
...There are adjustments, of both the sharp and rolling variety, with concomitant destruction of values...
...Thus, the prices are eventually stated in terms of some common standard, an accounting unit, which Walras called the numeraire...
...Within this methodological framework, equilibrium theory became for Schumpeter a static system in which the long-run effects of small and continuous changes in basic data were observed...
...private property and freedom of contract become archaic legal instruments...
...In the area of social economics, which studied the principles of income and property distribution, there should be "equality of conditions, inequality of positions...
...Yet in his own vast research, he seldom failed to employ all three...
...The individual business man may have undertaken risks for the anticipated return, but he was also motivated by the implicit challenge to his industrial and commercial ability...
...The entire structure, however, seemed to possess but dubious practicality, dealing as it did with idealized cases...
...millions of absentee stockholders take the place of active participants in the capitalist process...
...In actuality, said Schumpeter, capitalists tend to be anti-imperialist and quite rational about business problems, while imperialism is wrapped in nationalist sentiment...
...Moreover, it provided the social arena for a new bourgeoisie which produced, on the basis of a strong, powerful and Puritanical individualism...
...Policy questions, to which legislators might address themselves, were excluded from major consideration...
...Schumpeter always denied that savings could be functionally related to income: in fact, he argued that persons in the upper income brackets save less, relatively and often absolutely, than lower income groups and that the bulk of savings is done with some investment goal in mind...
...He who doubts this has only to read the introductory chapters of the History, where Schumpeter demonstrates a grasp of the philosophical and sociological interrelations in economics which is indeed rare...
...In the circular flow stage, which is a static one, all the factors of production and all the consuming power required for normal circulation are present...
...He was concerned only with the so-called scientific aspects of economic thinking...
...Despite the great attraction that Schumpeter exerted as a teacher and theorist, there are really no Schumpeterian followers as there are Marxists or Keynesians...
...1260 pp...
...17.50...
...tion of the Marxian system is breathtaking...
...Walras, himself the son of a noted economist, was trained as an engineer and for a while worked as a free lance journalist advocating typically French middle class ideas on social reform...
...This results in the rule that for the maximum satisfaction of each party it is required that the ratio of the marginal utility of each commodity must be equal to the ratio of their prices...
...But measurement and statistics are not sufficient for comprehending the relationships between economic facts...
...This implied that for "pure" theory, it would be necessary to reject all political, philosophical and ethical considerations...
...This was a particularly important point to stress, for, more and more, economists at the turn of the century were either consciously or unconsciously employing marginal utility and productivity theory to justify this as the best of all possible economies...
...Value judgments cannot be discarded, but they must be meaningful for the particular society which any theory purports to describe...
...They should be related to the interests of groups in that society and should be expressed in terms of current social and economic change...
...As a starting point it provides for the clear formulation of all possible premises and the inclusion of all important elements...
...In equilibrium, the prices of two goods in terms of each other must equal the ratios of their prices in terms of any third good...
...That is, the community should not fix the individual's position in economic society nor should it profit from it...
...While elaborate in design and execution—it weaves together many threads in economic theory, philosophy, sociology, history, money, business cycles and public finance—there are numerous gaps in it...
...Despite his proposals for government participation in the economy, he opposed collectivism in any form...
...Capitalism in its early stages was essentially an adventure...
...It was, in the main, the traditional body of thought and he sought to reformulate it in terms of general equilibrium, an approach that emphasized simultaneity and interdependence...
...He sought to be so "scientific" that he ran the risk, in an era when politics and economics were once again being fused, of finding himself without an audience...
...Marx's greatness as an economist, admits Schumpeter, stems from his realization that capitalism could Snot be attacked with merely ethical slogans...
...If not, then buying and selling will continue until this state is reached...
...In his presidential address at the American Economic Association in 1948, Schumpeter set forth an opposite view, feeling that there was no escaping ideological influence...
...Such an analysis does not begin to measure up to the incisiveness of the Keynesian theory...
...Walras is saying the same thing with greater precision...
...Although an avowed conservative, he did not hesitate to recognize Marx as a brilliant economist...
...Schumpeter, on the other hand was wary of such approaches...
...Capitalism, Socialism and Democracy, Part I. Autumn 1954 • DISSENT • 375 by the quantity of labor that goes into the goods a worker consumes, including the goods and services used up in rearing and training) represented a marked and even ingenious analytical advance over Ricardo...
...For this purpose mathematics proved an invaluable asset...
...class conflict was lessened by imperialism...
...All this appears very technical, but it simply comes down to a refined and precise statement that supply and demand determine price...
...It was evident that the last was the most significant, for nowhere else did innovation exert greater force...
...Somewhere along the line a balance will be struck...
...But at times he felt that it might be possible to recognize ideological influences and that a detached intelligence could "enjoy 380 • DISSENT • Autumn 1954 the privilege of being exempt.* Some doctrines, then, can develop a quality of universality that makes them adaptable to varying social atmospheres...
...The alienation of the intellectual and the obsolescence of a class did not count as significant factors: capitalism stumbled over its own feet...
...Whatever one may have to say about its details, the very concep...
...Nevertheless, this enabled capitalism to produce increasingly greater quantities of goods...
...This gives to economic theory its system and rigor, while at the same time it is shaped by the phenomena it purports to study...
...Any connection between price and value now seemed irrelevant...
...As Schumpeter says, Walras tried to show that while in actuality traders in a market may not be the lightning calculators the theory seemingly suggests they are, they nevertheless do empirically arrive at roughly the same thing...
...Economic change is brought about by "innovation," a catch-all word for the breaks in the circular flow...
Vol. 1 • September 1954 • No. 4
