A SCHUMPETERIAN CRITIQUE ON CAPITALISM 2014

A SCHUMPTERIAN CRITIQUE OFCAPITALISM 2014

*RICK MARSH

ABSTRACT

Competitive capitalism, twenty-first century style, is witnessing mature economies power into an extraordinary periodof fecundity, growth and accumulation. Entrepreneurship and innovation, the crucible of capitalism, are ushering in a new era. The information revolution is behind this mushrooming of organizational capitalism. The constant evolution of this new technology and best practice management are perceived to be delivering immense productivity gains. For Joseph A. Schumpeter, all would be bromidic sermons.

As Millmow (1991: vii) asserts, Schumpeter would have interpreted new technology and corporate structural change as yet another manifestation of the “perennial gale of creative destruction.” Mainstream economics, struggling to deal with these new developments have embraced endogenous growth theory.Much of it is a direct steal from Schumpeter. Sixty years on, the enigmatic aspects of Schumpeter’s economics and career have largely been unravelled, thanks to the availability of archival material and newly-established facts about his views on capitalism. In this paper I will suggest that Schumpeter’s notion of capitalism is far more subtle and complex one than his detractors have recognized. A more balanced overview is now possible of Schumpeter’s intellectual interests and long-term account of capitalism.

Key words: Capitalism, Innovation, Entrepreneurship, Creative Destruction, Classical School, German Historical School, Austrian School, Max Weber, Charismatic Leadership.

PREFACE

PART ONE: BOHEMIANISM – 1883 to 1926: INNOVATION and ECONOMICS

Joseph Alois Schumpeter (8th February 1883 to 8th January 1950) was an Austrian-American economist and political scientist. Hewas morphed from a classroom economics lecturer to one of the greatest economists in the annals of economic history. As Millmow (1991) points out, the Austrian economist had developed a broad conception of economics long before it became fashionable. Nonetheless, as is the intrusive fashion these days, McCraw’s (2007) account of Schumpeter is a compelling, chronologically-ordered balance,

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Schumpeter Rick Marsh

between the curricula economist and political scientist. He popularized the term “creative destruction” in economics (Andersen, 2007).

This paper, by necessity has two protagonists: Schumpeter and the phenomenon of capitalist innovation. Schumpeter’s work was so cogent that contemporary thought about capitalism is, by and large his, specifically his emphasis on innovation, entrepreneurship, and business strategy. Schumpeter was an eminence grise on capitalism what neuroscientist Sigmund Freudwas to the mind: someone whose ideas have become so ubiquitousand ingrained that we cannot splinter his original thoughts from our own. In this paper, my objective is to present an overview of his life and work, so that a more balanced assessment of Schumpeter’s intellectual interests is now possible. At the same time, I hope to present a more accurate measure of the man and his influence.

This paper is not concerned with Joseph Schumpeter’s economic thinking, narrowly construed. The paper begins with an account

of his early turbulent life and his fetishism to understandingcapitalism, including its yeasty mix of economics, social, cultural, and political elements. Schumpeter penetrated the cloak of reticence about capitalism by defying one of the strongest intellectual trends of his time, and of course, oursas well; the trend toward narrow specialization (McCraw, 2007).

One of the great ironies in the history of economic thought isthat Schumpeter who first introduced mathematical economics toAmerican universities, since he was convinced that this was the path to theoretical rigour. However, Schumpeter realized he needed to focus not only on economic theory alone. It was imperative to add extra strings to his bow and he immersed himself in psychology, law, business sociology, and history. Professionally, Schumpeter realized capitalism is more than aneconomic system. Like Keynes, he made himself more than an economist. His prestige among colleagues was lukewarm. It is said that Schumpeter’s opinions were outdated and not in synchwith the then-fashionable Keynesianism. This period of his life was characterized by hard work but little recognition of his core ideas.

Schumpeter is on record claiming to have set himself three goals in his life: to be the greatest economist in the world; to be the best horseman in Austria; and the greatest lover in Vienna (Viksnins, n.d; McCraw, 2007). It was true that the manwas no shrinking violet but the ambition was equally matched by ability. During his otherwise continuous intellectual odyssey professionally, Schumpeter began to develop an interest in the business cycle within the broader context of economic change. In 1928, he wrote an article where capitalismhad a “tendency towards self-destructing from incoherent causes or towards outgrowing its own frame” (Farrell, 1994: 4248).

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This was because the entrepreneur was disappearing, replaced by a salariat. At Harvard, Schumpeter was so driven from a heavy load of teaching, he became a virtual recluse. He had to. Two of the masterpieces he subsequently penned each took five to ten years of serious work. Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process (Schumpeter, 1939), followed by the polemical text Capitalism, Socialism and Democracy (Schumpeter, 1942), his magnum opus, were cake-walks by comparison. Like Keynes, Schumpeter was a veritable work machine, but he neither had the former’s faculty for penmanship nor his statesmanship. Capitalism, Socialism and Democracy (1942) was the product of forty years reflection on socialism.Like Karl Marx who he much admired, Schumpeter saw economics as the locomotive of history. Moreover, the economic structureleft its imprint upon society. In a celebrated section of the book Schumpeter pondered whether capitalism would survive. He attacked the long-held notion that the competitive market was the key to capitalism’s success. Monopoly, he insisted, is a force for good because it engenders innovation. It is in this sense, as Schumpeter (1942: 157) put it, “A monopoly position is no cushion to sleep on.”

Thus, the pleasure Schumpeter took in solving so many riddles on issues concerning capitalism often bordered on exultation. In the following sections, I try to convey the reasons why.

SCHUMPETER: WHO HE WAS AND WHAT HE DID

Schumpeter was born in Tresf, Habsburg Moravia (now the Czech Republic, but formerly part of Austria-Hungary) in 1883 to Catholic ethnic German parents. His parents owned a factory but tragedy struck the family in 1897 when Joseph’s father died in an apparent hunting accident (McCraw, 2007). The largestone house where Joseph was born still adorns the town’s mainstreet, pointed out with pride by the staff of the tourist

bureau. The information distributed describes Schumpeter as “one of the most important economists of the twentieth century; first Austrian minister of finance; professor at Harvard University;” and “creator of the Japanese economic miracle.” The word “creator” as McCraw (2007) tells us is too strong, of course. But the Japanese achievement did proceed onSchumpeter’s principles of entrepreneurship, credit, and creative destruction. To this day, he remains better known in Europe and Japan than in the United States (Schumpeter, 1942: 83). Many great thinkers have written about mother-son relationships, over the millennia. Young Joseph and his widowed mother, Johanna remained extraordinarily close. Her love for Joseph was agape and eros. As McCraw (2007) claims, for instance, she became a kind of a stage mother, forever seeking larger venues in which Joseph might display his abilities. In the broad sense of the word

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“entrepreneur.” After Johanna remarried, she moved the family to Vienna, a city with a population of two million. It was here that Joseph was enrolled in a prestigious school. The Theresianum was one of the best and most demanding schools of its kind anywhere. Joseph was also stepping into a patrician social world. The Theresianum required far more rigorous work than most high schools do today. Like aristocratic British academies at the time, it offered courses in maths, science, history, and literature, and relied on the ancient classics ( Swedberg, 1991a). The Theresianum, just like Keynes’s Eton in London, a sense of imperial responsibilities pervaded the school’s curriculum and social structure. This was true not only of the Thereseianum but also of the University of Vienna,where Schumpeter next enrolled. A first-class university,

Vienna was the Austrian version of Oxford and Cambridge in theUnited Kingdom.

For a diligent student like Schumpeter, an education at the Theresianum followed by a degree at the University of Vienna conferred priceless intellectual assets. He and his peers weretrained to emulate the abstract thinking of the ancient Greeksand Romans. They learned to speak extemporaneously on a broad range of topics. Both of these Vienna institutions emphasized what today would be called “networking” (McCraw, 2007). Many students saw themselves as members of a select group preparingfor imperial duty. In the Habsburg Empire, university studentsenjoyed the privilege of reduced military obligations, and many knew that after graduation they would try out for higher civil service. But social connections remained crucial. As Johnson (1972: 66-69) tells us, Schumpeter was to discover that he too needed noble patronage. As Johnson (1972) recounts, Johanna pushed Joseph very hard. She introduced him into the highest circles she could reach, and he was glad enough to play the role of upper-class gentleman.

In a monstrous double blow, Schumpeter lost his mother, Johanna shortly followed by the death of his wife in childbirth. This was to be the most quiescent time of his lifeand was profoundly affected by these tragedies. Swedberg (1991a) movingly recounts from Schumpeter’s diary entries thisbleak period in his subject’s life. Schumpeter confessed to his friends that he could no longer concentrate or create as of old; all of his subsequent works, of course, belie this. But they were written by a melancholy man who never fully recovered and would often, in a spiritual daze, invoke divine assistance from his departed wife and mother.

It is in this sense, as Paul Samuelson (1977: 48-49) explains wherever he found himself, Schumpeter never felt that he quitebelonged. Many years later, as a student of Schumpeter, Samuelson saw “insecurity in his nature, perhaps typical of a precocious only child.” And, of course, for Schumpeter with

the disappearance of the ordered Viennese society of his youth, “he became completely qualified to play the important sociological role of the alienated stranger.”

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Over the years, Schumpeter reinvented himself many times, building on what his mother had begun. He was well suited to grasp the mindset of the entrepreneur. As McCraw (2007) claims, for instance Schumpeter’s own tenacity, opportunism, and flexibility, he learned to excel in diverse circumstances;much like successful economic players in the capitalist system. During his schooling in Vienna, he was twice-transplanted heir of Moravian entrepreneurs whose forebears had lived for four centuries in a small remote town. Once uprooted from that town, Schumpeter had only his abilities andhis mother’s compelling love to guide him. For the rest of hislife he displayed considerable sangfroid in his decision-making, and he lived strictly by his wits and talent, like a trapeze artist performing without a net.

By the time he enrolled at the University of Vienna, he made up his mind to become a celebrity himself, like the new breed of musicians and artists he was watching and reading about. AsSamuelson (1977: 48-49) states in respect to this issue, exactly how Schumpeter might do this was far from clear, sincehe had little or no talent as an artist. Moreover, as Samuelson (1977: 48-49) recounts, within a few years the answer began to take shape with his vision of how capitalism was changing the world. It is in this sense, says Samuelson (1977: 48-49) that Schumpeter would become an intellectual artist, recognized as best in his class; the Michelangelo of economics, or the even more versatile Leonardo da Vinci of social science. As Schumpeter’s student Paul Samuelson later

recounts, the more matured young economist “strove to be number one, and number one forever.’’ (pp 48-49). Schumpeter’sambition began in his late teens, in the techno-romantic, celebrity-soaked culture of Vienna. The following section is an account of Schumpeter’s time at the University of Vienna from 1901 to 1906 where he read economics.

READING ECONOMICS

Schumpeter attended the remodelled University of Vienna from 1901 to 1906. No city could have suited the youthful intellectual’s ambitions more than Vienna. This university wasbilled as one of the Ivy League institutions in Europe. Founded in the fourteenth century and rebuilt in 1884 in the Italian Renaissance style, its planners thought appropriate for a great centre of learning (Liberty Fund Inc. 2007; McCraw, 2007). Schumpeter enrolled in law under the Austrian capital theorist Eugen von Bohm-Bawerk. In the custom of other European universities, Vienna’s economics professors were partof the Faculty of Law. Schumpeter’s degree, which was conferred in 1906, was therefore not in economics but in civiland Roman law. This mode of training deepened his sense of politics and history. Some years later, Schumpeter briefly practiced as a lawyer, and that experience broadened his senseof the way business actually works (Schumpeter, 1951: 148).

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The University of Vienna was one of the top four universities in the world to study economics, and it did not take Schumpeter long that he had a special gift for this degree. Heilbroner (1992) traces the time Schumpeter spent at the University of Vienna and recounts that after Adam Smith’s The Wealth of Nations (1776) was published, the study of economics began to accelerate. As McCraw (2007) observes, throughout the

nineteenth century, political economists wrote about government issues, the welfare of society, and the nature of its institutions. McCraw (2007) tells us how economists then began to argue for or against socialism, and free trade versusprotectionism. This emphasis on current controversies continued even after economics became an established academic profession during the 1880s. As Heilbroner (1992) claims, for instance, concern with public policy at the University of Vienna prevailed much less than it did elsewhere. In Vienna, members of the “Austrian School” were trying to make the discipline more rigorous by reducing its fetishism on political issues.

During Schumpeter’s study for his PhD, the work of Karl Marx and his apostles hovered throughout the halls of the University of Vienna. Marx’s philosophy was known to all even though it prevailed almost nowhere. The young Schumpeter was brought up in the Continental school of rigorous neo-classicalor Walrasian economics (Leon Walras 1834-1910, French economist). He set out to become Austria’s youngest professor of economics. He achieved this despite Alfred Marshall, doyen of neo-classical theorists who in contrast to his cosseting ofKeynes, advised him against a career in economics Millmow, 1991). Au contraire, Marx was to have a potent influence on Schumpeter. Marx emphasized the dynamics of capitalism; its constant changing nature whose only music was uproar. As McCraw (2007) argues, that was Marx’s greatest contribution but Schumpeter, nonetheless, was fixated about the potential outcomes of capitalism. In this sense, as McCraw (2007) argues, the predictions by Marx concerning the dictatorship ofthe proletariat and the withering away of the state, never came to pass. Even so, Marxism exerted on more orthodox theories.

When Schumpeter entered the University of Vienna, there was a phantasmagoria of swiftly evolving economic schools of thought. Essentially, there were three leading methods for thestudy of economics. The first episteme approach, the Classical

School was orchestrated by Adam Smith and further developed byDavid Ricardo. Schumpeter found much to admire in the Classical School. Although Schumpeter did not regard Adam Smith as very original, he declared his magnum opus, The Wealth ofNations the most compelling of all academic texts that had beenproduced to that day (McCraw, 2007). Smith’s long stint as an academic professor served him well, and no economic metaphor has ever surpassed the “invisible hand.” This was Smith’s bon mot of saying that millions of simultaneous decisions by individual customers automatically serve “the public interest.”

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Moreover, Smith posited in The Wealth of Nations against governmental interference in the marketplace; and for the heavily regulated national economies of 1776, this was the correct message (Heilbroner, 1953).

The second leading method to economics, notably the German Historical School, also had a profound impact on Schumpeter’s thinking (Schumpeter, 1954). The gist of this method comprisedmainly of writing detailed histories of various industries andinstitutions. Schumpeter and his peers of the Historical School emphasized the role economists should take in the making of public policy. The leading light in the school was Gustav von Schmoller whose fabled capacity for work strategic planning, and organizing ability impressed all of the leading academic economists. Schmoller founded a journal to serve as an outlet for research papers and a series of historical books. Schumpeter himself was a keen historian but he had a significant issue with Schmoller’s school. As Schumpeter (1954) recounts, it short-changed economic theory. For instance, Schumpeter tells us there were no general hypotheses

and propositions formed which needed to be tested, and then kept, adjusted, or discarded. To Schumpeter’s dismay, the reluctance of the Historical School’s members to do this meantthat they were sometimes engaging in trivial tasks.

One of the greatest figures in all of social science emerged in part from the German Historical School. This was Max Weber (1818-1883), the author of The Protestant Ethic and the Spirit of Capitalism (1905). Hodgson’s (2001) depiction of Weber was his preparedness to theorize. Although Weber was a sociologist andnot an economist, Schumpeter briefly worked with him but did not become embroiled in the bitter dispute over methods between the German Historical School and the Austrian School of economists, led by Schumpeter’s colleagues in Vienna (McCraw, 2007).

The third leading approach to economics was the Austrian School, and the analysis of capitalism by Karl Marx. The chiefprogenitors of the new thinking were Leon Walras from France, Englishman W. Stanley Jevons (1835-1882), and the Austrian Carl Menger (1840-1921). McCraw (2007) emphasized, as did Millmow (1991), that in the end, it was not the classical economists who developed the most thorough analysis of capitalism. The key figure was Schumpeter himself. McCraw (2007) and Swedberg (1991a) note how Schumpeter soaked up all the leading approaches and rooted his own theories in the overriding view that capitalism is more than just an economic system. Indeed Schumpeter managed to synthesize broad lessons from disciplines, such as history, culture, and sociology intoa broad, coherent, fully-fledged theory of capitalism. Notwithstanding his own analysis, it took Schumpeter a long time to complete the task and in the meantime, he pursued his objective of achieving what McCraw (2007) termed “exact economics.”

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McCraw (2007) points how Schumpeter was fortunate to get in onthe ground of the new doctrine of marginalism. Menger, Jevons and Walras, the pioneers of marginalism, had researched the variegated shifts in international commodity trading and rapidchanges in share prices on the stock exchange. All three economists were close contemporaries of United States entrepreneurs, such as J. D. Rockefeller, Andrew Carnegie, andJ. P. Morgan. As Schumpeter (1944) later recounts, theory grows out of the observation of business practice. Setting consumer prices and industrial production schedules under the influence of marginal costs constituted an intellectual revolution (McCraw, 2007). To that end, Schumpeter prosecuted it directly addressed economic change which was the very essence of capitalism. Moreover, he noted business thinking had been reoriented toward a future and reaped vastly expandedoutputs of industrial production. Schumpeter argues this new rapprochement meant that consumers could purchase new items more cheaply, their living standards could improve markedly tothe point that they were out of proportion to their accumulated wealth. Indeed that is precisely what occurred in advance capitalist economies during Schumpeter’s lifetime (McCraw, 2007; Swedberg, 1991a).

When Schumpeter finished his PhD in 1906, only a few universities existed in the Habsburg Empire, and tenured professorships in the field of economics were hard to come by.Initially, He did not want to commence the long and rigorous “habilitation,” a post-doctorate qualification that was mandatory for a position as a professor. The habilitation was equivalent to a modern PhD and required the submission of a substantial dissertation for examination by senior professors.Schumpeter baulked at this undertaking and knew that being an intellectual prodigy did not, by itself, suffice for the kind of prosperous and exciting he crave for (Swedberg, 1991a).

With his future in limbo, rethought his future as an economistand decided to pen a prodigious dissertation of over 600 pages. He published it in 1908 under the title, The Nature and

Content of Theoretical Economics which he dedicated to his mother Johanna. Arguably, this opus was up with there the very best pieces of work produce by Schumpeter. When he returned to Vienna, the book became the centrepiece of his habilitation and the Faculty of Law had no trouble approving it (McCraw, 2007).

In 1909, Schumpeter became professor of economics at the University of Czernowitz. In 1911, he joined the University ofGraz where he remained until World War 1. He briefly served asthe Austrian Minister of Finance, with some success, and in 1920, he was president of the private Biedermann Bank for a term of four years. The late 1920s and early 1930s were hectictimes in Schumpeter’s professional life. He then accepted an appointment to lecture at the University of Bonn.

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After a brief period, he moved to the US in 1932. By then, he had lectured at Harvard but soon began what would become extensive efforts to assist central European economist peers displaced by Narzism (McCraw, 2007: 231-232; 337-343).

During his Harvard years Schumpeter was considered a memorablecharacter, erudite and even somewhat of a braggart as a lecturer. He had a legendary work ethic with extra teaching loads, as well as for taking a personal interest in his students, and organizing private seminars and discussion groups. In addition, Schumpeter accepted the role of faculty advisor of the Graduate Economics Club (Keynes, 1920: 11-12; McCraw, 2007: 210-217). Even so, some of his colleagues believed his views were outdated and not in tune with the then-fashionable Keynesianism; others resented his criticisms,

more so due to their failure to offer an assistant professorship to Schumpeter’s former student, Paul Samuelson. As McCraw (2007: 237-278; 306-311) recounts, his fellow economists recanted when they thought him likely to accept a position at Yale University. This period of Schumpeter’s life was characterized by arduous work but comparatively little recognition of his massive two-volume book Business Cycles. As McCraw (2007: 347) tells us, Schumpeter persevered, and in 1942 published what became the most popular of his oeuvre of works, Capitalism, Socialism and Democracy. This text was reprinted many times and in multiple languages in the following decades,as well as cited thousands of times.

In the following section, I present a broad outline of Schumpeter’s theory on capitalism and his association with MaxWeber. I will then outline Schumpeter’s account of the demise of capitalism.

CAPITALISM

Questions about capitalism: what it is, how and why it worked well in some countries and not in others, are among the most important that people and governments have faced. One can recall the turbulent transition from the last decade of the twentieth century to the initial one of the twenty-first: the abrupt collapse of communism, for over seventy years a seriouschallenger to capitalism; the riotous prosperity of the 1990s,when high-flying corporate executives became folk heroes; the ensuing epidemic of corporate venality, which ravaged shareholders and employees and disgraced capitalism itself. Then there was the 9/11 and global terrorism, portending warfare in Iraq and Afghanistan which lasted a decade, and theinexorable and spectacular economic growth in China, which combined a new capitalist economic system with an old communist political regime.

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In this sense, McCraw (2007) prosecutes that some of the clearest clues to these issues can be sheeted home to Schumpeter. He assessed capitalism as an expression of innovation, human drama, and sheer havoc; all going at once McCraw (2007: 6). Schumpeter read capitalism as most of the community experience it, that is, consumer wants and desires aroused by a barrage of advertising. Some goals would be achieved, destroyed, adjusted and achieved once more as peopletry once more to attain their nirvana. Schumpeter was determined to analyse and explain capitalist innovation to hisfellow economists, as well as the general community. McCraw (2007) recounts from the cogent biography about the Austrian economist’s and his work, a reader can grasp the basic precepts of the capitalist machine. Schumpeter’s (1942: 137) depiction of capitalism is that the subject is momentous, and the full social mechanism somewhat intricate. Again, more directly, Schumpeter (1946: 801) observes:

A society is called capitalist if it entrusts its economic process to the guidance of the private

businessman. This may be said to imply, first, private ownership of non-personal means of

production…..second, production for private account, that is, production by private initiative

for private profit.

The third element is also crucial; it is the creation of credit. Rather, says Schumpeter (1946), the core ethos of capitalism looks constantly ahead and relies on credit in launching new ventures. In this, as Schumpeter (1942) argues, the entrepreneur is the pivot on which everything turns. They are agents of innovation and creation destruction. Moreover, the entrepreneur’s new projects are the wellsprings of new

jobs and higher incomes. Conversely, there are problematic aspects. The new entrepreneur may discard older ones aside, effectively harpooning careers and their accumulated wealth. Some people, even in richer economies may never reach entrepreneurial status. There is the possibility some will notsecure employment in successful organizations. And at some point, a large number of businesses will not make it with catastrophic consequences for employers and employees.

The most problematic aspect of capitalism, according to Schumpeter (1942), is that human relationships are reduced to crass calculations of personal costs and benefits. To that end, capitalism elevates material values over spiritual ones; despoils the environment, and exploits the foulest aspects of human nature. On a more optimistic note, Schumpeter (1942) posits if capitalism were to be brought into balance with nobler human purposes, it becomes the equivalent of Churchill’s famous definition of democracy: the worst possiblesystem except for all the others. Aside from the flaws, capitalism has fostered scientific and medical advancements toelevate humanity out of a Hobbesian state of nature, where life is solitary, poor, brutish, and finite.

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Against this critique, Friedman (2005) adopts a somewhat different stance by claiming many people of Schumpeter’s generation may have raised the bar too high expecting immediate results from capitalism. Ingrained with the nineteenth’s century’s faith that democracy and technology would bring secure peace and prosperity, they observed in the twentieth century some unexpected events, notably wars, depressions, totalitarianism, and genocide.

The epoch of World War 1 smothered their spirit. Then the Great Depression of the 1930s fractured their belief in democracy and capitalism. As McCraw (2007) explains, the Depression and the events leading up to the Second World War confirmed the fragility and weakness of markets and the superiority of socialism. On a more upbeat note, Friedman (2005) argues Schumpeter had no illusions about capitalism andno doubt about his own verdict. In short, Schumpeter believed capitalism’s economic bounties enhanced the life of the average person which in the long-term offset its negative effects. Here is a question: What was the bankruptcy of an entrepreneur, or the retrenchment of a few thousand craftsmen,compared to the greater autonomy and comfort of millions of people with opportunities to acquire new and inexpensive goods.

Schumpeter’s Capitalism, Socialism and Democracy unlike the relative failure of Business Cycles, radiates a text of profound erudition. It ranges through world history and literature all the way from ancient Greece and Rome to the time of its publication, Schumpeter started the book as a series of essays, in part to a response to the popularity of Marxist thinking during the 1930s. Schumpeter conveys how capitalism shapes not only the economic life of communities but also their intellectual, social, and political cultures (McCraw, 2007). It remains one of the most perceptive analyses of capitalism ever written. McCraw (2007) argues that the book ispowerful in its dealing of big business, and Schumpeter could not have written it without having done so much research for Business Cycles. Although Business Cycles did not quite live up to expectations, Schumpeter did not want swamp the reader with a paean to capitalism.

In the Marxian system, capitalist society contains only two classes: capitalists, who own and control the means of production, and proletarians, who do not. Schumpeter’s response is that workers are not all alike, and that in the modern era “supernormal intelligence and energy” have enabled

large numbers of proletarians to establish businesses and become capitalists themselves (Schumpeter, 1942: 318). Schumpeter (1942) illustrates how mistaken was Marx the economist. Among his many errors, Marx insisted that as capitalism matured, employees’ share of society’s total incomewould gradually diminish. Moreover, their misery would continue, and finally they would revolt and capture the means of production from the capitalists.

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Notwithstanding the faults Schumpeter found with Marx, he genuinely acknowledged the scope of his influence in setting the agenda of public discourse. It was, in this sense, easy tosee why Marx the so-called prophet and Marx the teacher had become so trendy during the 1930s. As Schumpeter (1942: 48) recounts, Marx enabled the common folk to “no longer feel out of it in the great affairs of life; all at once they see through the pompous marionettes of politics and business. Despite its irrelevance to perfect competition he continues, big business capitalism has confirmed its superiority, in the long-term, at expanding total output and improving living standards (Schumpeter 1942: 189). On the question of monopoly,Schumpeter (1942: 93-100) provides a sustained attack on many Americans’ mistaken idea that monopoly and big business are the same thing. It was perverse, Schumpeter argues, that so many people in the United States had confused monopoly with big business and made the latter into a whipping boy. He notedthat the country was the seedbed of giant organizations. America had an enormous internal market and with its entrepreneurial culture, it remained the home of about half ofthe world’s largest organizations.

Schumpeter identifies capitalist entrepreneurship with technological progress itself. He claims that they were essentially one and the same thing, the first being “the propelling force” of the second (Schumpeter, 1942: 101-102). He then concludes this part of discussion of capitalism as he puts it:

I am not going to argue that that achievement and that promise are in themselves sufficient

to support an argument for allowing the capitalist process to work on and, as it might easily

be put, to lift poverty from the shoulders from mankind……I am goingto argue, that on the

strength of that performance, that the capitalist intermezzo is going to be prolonged. In fact,

I am now going to draw the exactly opposite inference (1942: 129-130).

As time passed, however, the economic juggernaut of capitalismbegan to subvert most of the underpinnings of feudal society, notably knightly service, the craft guild, the village, the manor. As Schumpeter (1942: 129, 139) recounts, in the place of the old webs of reciprocal responsibilities, such as lord and knight, landowner and peasant, patron and artisan, capitalism substituted impersonal efficiency and opportunity. Moreover, he argues people were no longer part of an organic social system. The case for capitalism, according to Schumpeter (1942: 145-147), “must rest on long-run considerations.” That is, it is highly unlikely for people, and even intellectuals, to ignore what appear to be unreasonable “profits and inefficiencies.” Thus, people will have problems in viewing long-range trends in which capitalismis benefiting society as a whole. Among economic systems, Schumpeter posits capitalism “creates, educates and subsidizesa vested interest in social unrest.”

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In addition, he argues capitalism underwrites the education ofa class of hostile intellectuals who have no “direct responsibility for practical affairs” and little experience inmanaging anything. More broadly, economic efficiency is only one of numerous human objectives, and not necessarily the mostimportant to every person. Hence the future of capitalism cannot be assured on the basis of its superior economic performance alone (Schumpeter, 1942: 129-130).

The following section is a juxtaposition of Schumpeter’s theory of entrepreneurship and Weber’s views of charismatic leadership with the concept of entrepreneurship.

SCHUMPETER AND WEBER

The broad outlines of Schumpeter’s theory of entrepreneurship are of Weberian provenance (Langlois, 1996 cited in Csontos, 1993). As Langlois (1996) posits, Schumpeter’s schema is an application of Weber’s social theory to the problem of economic growth. Moreover, Schumpeter’s innovation is to associate Weber’s category of charismatic leadership with the concept of entrepreneurship. As it is for Weber, capitalist development is for Schumpeter a march from traditional behaviour to rational behaviour. In “the circular flow of economic life,” Schumpeter’s version of equilibrium in early capitalism, behaviour is rational only within the bounds of traditional or habitual behaviour (Langlois, 1996: 3).

Consider Schumpeter’s (1934: 80) account of economic growth on early capitalism:

The assumption that conduct is prompt and rational is in all cases a fiction…..It is not then true

that habit or custom or non-economic ways of thinking cause a hopeless difference between the

individuals of different classes, times, or cultures, and that,for example, the “economics of the

stock exchange” would be inapplicable say to the peasants of to-day or the craftsman of The Middle

Ages. On the contrary, the same theoretical picture in its broadest contour lines fits the individuals

of quite different cultures, whatever their degree of intelligence……..

As Langlois (1996) argues, this picture of economic behaviour as guided by routines is the inspiration for much of the association of Schumpeter with modern evolutionary economics. In this sense, economic growth can occur only when the circular flow is upset, which requires the entrepreneur. Since, in early capitalism, at least, rational action can onlytake place within the bounds of evolved behaviour; it must be a matter of intuition by the entrepreneur. According to Langlois (1996), Max Weber is essentially concerned with the religious leader or prophet, and to a lesser extent with military and political leadership; Schumpeter borrows heavily from that analysis in his characterization of the

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entrepreneur. Here we begin to see the outlines of Schumpeterian “personal capitalism,” in its pure form, which is the antithesis of bureaucratic organization. The following is Weber’s (1947: 360-361) précis of the organization of charisma:

The corporate group which is subject to charismatic authority is based on an emotional form

of communal relationship……There is no such thing as a definite sphere of authority and

of competence. There are no established administrative organs. There is no system of formal

rules, of abstract legal principles, and hence no process of judicial oriented to them….The genuine

prophet, like the genuine military leader and every true leader in this sense, preaches, creates, or

demands new obligations……….

Under the right institutional setting, bourgeois capitalism, charismatic leadership arises, in the form of the entrepreneur, to break the crust of convention and to create new wealth by ”lead[ing] the means of production into new channels” (Langlois, 1996, cited in Schumpeter 1934: 89).

As Langlois (1996) recounts, progressive rationalization affects the entire economic society. The entrepreneur is both the agent and the victim of this transformation and prepares the field for rational authority. This is at the heart of Schumpeter’s thesis, namely once all the hard work has been done, charismatic leadership is no longer necessary. The entrepreneurial role is then taken up by large bureaucratic firms, organized along rational lines, who can engineer changewithout need for charisma. At first glance, Schumpeter’s briefin favour of large organizations seems consistent with Weber, who praised the efficiency of rational bureaucracy. Nonetheless, Weber’s paean did not portray bureaucracy as innovative. He posited that it is precise and reliable, but not necessarily dynamic.

Interestingly, it is far from clear that Schumpeter would havebeen on Weber’s side in this matter. Like Weber and Marx, whomhe both admired, Schumpeter saw economics as the locomotive ofhistory. Moreover, the economic structure left its imprint upon society. In a celebrated part of Capitalism, Socialism and Democracy (1942), Schumpeter pondered whether capitalism could survive. He attacked the long-held notion that the competitivemarket was the key to capitalism’s success. Monopoly, he insisted, is a force for good because it engenders innovation.As he recounts, “a monopoly position is no cushion to sleep on.” (p. 157).

In his magnum opus of 1942, Schumpeter often pondered whether capitalism could survive. In the final section of this paper, I provide an account why the capitalist society seemed to be tottering on the edge of a disaster.

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SCHUMPETER AND THE DECLINE OF CAPITALISM

McCraw (2007) points to Schumpeter’s argument about the socialdecline of capitalism might be interpreted as a cry from the heart of a brilliant, but chronically depressed European elitist, who had witnessed one disaster after another during the bloody first half of the twentieth century. From Schumpeter’s standpoint, even in the United States of his own time, a unique opportunity for the development of an advanced capitalist society seemed to be tottering on the edge of a precipice. This was due to the Great Depression, the ascendance of fascism and communism in Europe, and World War 2was on the horizon. Notwithstanding Schumpeter’s state of mind, the intellectual climate of the 1930s was almost surely hostile to capitalism than during any other decade in Americanhistory. As Schumpeter (1942: 331) recounts, no real threat tocapitalism had appeared in the United States because “the scheme of values that arose from the national task of developing the economic possibilities drew most of the brains into business and impressed the businessman’s attitudes upon the soul of the nation.”

Nonetheless, Schumpeter (1942: 331) observes that the insipidness of American presidents in the late nineteenth century corroborates his point. From 1865 and 1901, lamentablepoliticians, such as Rutherford Hayes and Chester Arthur occupied the White House. Whilst the leaderships of Andrew Carnegie and John D Rockefeller were prophets of

entrepreneurial leadership, subsequent presidents left their indelible footprints on American history. As Schumpeter notes,by the end of the 1940s the era of “drawing all the brains into business” had long passed.

Schumpeter’s most popular book in English is arguably Capitalism,Socialism and Democracy. This text opens with a treatment of Karl Marx. While he is sympathetic to Marx’s theory that capitalismwill collapse and be replaced by socialism, Schumpeter (1942) concludes that this will not come about in the way Marx predicted. While Marx knew that capitalism would be overthrownby a proletarian violent revolution, which historically occurred in the least capitalist economic countries. Schumpeter instead believed that the capitalist system would collapse as a result of an internal conflict that bolstered hostilities among themselves. To describe it, he borrowed the phrase “creative destruction,” and made it famous by using it to describe a process in which old ways of doing things are endogenously destroyed and replaced by new ways.

Schumpeter’s (1942) theory posits that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social milieu needed to allow entrepreneurship to thrive to a point where it would notprosper in advanced capitalism. Eventually, it would be replaced by a new model of labour management. Schumpeter (1942) points out that the intellectuals, whose very profession relies on antagonism toward the capitalist structure, are certainly

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inclined to have a negative outlook toward it even while relying upon it for prestige. Schumpeter (1942) noted there will not be a revolution, but instead a trend in parliaments

to elect social democratic parties of one stripe or another. Moreover, Schumpeter (1942) suggested the collapse of the system from within will proceed if democratic majorities vote for restrictions upon entrepreneurship that will burden and destroy the capitalist structure. In this sense, Schumpeter (Schumpeter) emphasized non-political, processes in society, notably liberal capitalism, was evolving due to the growth of employees’ self-management, industrial democracy and regulatory institutions.

Throughout his book, Schumpeter (1942) constantly emphasized his analysis of trends and not engaging himself in political advocacy. In his vision, the intellectual class will play an important role in capitalism’s evolution. He points to the term “intellectuals” as a class of individuals who are well-placed to develop critiques of societal matters for which theyare not directly responsible, but are equipped and able to stand up for the interests in greater need. One of the great advantages of capitalism, which Schumpeter (1942) prosecutes, is the comparison with pre-capitalist periods, when education was a privilege of the few, more and more people sought highereducation. Conversely, the availability of fulfilling employment is, however, limited, and this void coupled with the experience of unemployment, produces discontentment. To that end, he argues the intellectual class is then able to organize protest and develop critical ideas.

CONCLUSION

When Schumpeter died in 1950, many of his friends believed that he had worked himself to death. The purpose of this article is to provide an understanding of Schumpeter’s views on capitalism, namely its strengths and weaknesses, its social, cultural, economic, and personal aspects. For the bestpart of five decades, never letting up, Schumpeter pursued allof these aspects of capitalism.

Schumpeter’s signature legacy is his insight that innovation in the guise of creative destruction is the catalyst not only of capitalism but of material progress in general. Schumpeter believed almost every organization, every business, regardlessof how strong they appear to be at a given point, usually fail; and almost always because they failed to innovate. During much of Schumpeter’s life, two issues loomed especiallylarge: the question of money and the business cycle. Money management has undergone enormous changes that started during his lifetime. For instance, the cumulative effects of these changes, coupled with the rise of globalization and computer technology, have been spectacular. Schumpeter, Keynes, nor any other economist of their generation anticipated currency movements of such speed.

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Nonetheless, this pattern of continuous change fits perfectly into Schumpeter’s general theory on innovation and credit creation as the touchstones of capitalism. Turning to the issue of the business cycle, this was still crucial but it became less conspicuous than it was during Schumpeter’s era. By way of example, the rise of mixed economies has propped up the purchasing power of individuals and institutions throughout the industrialized world. The modern economy is arguably the chief legacy of Keynesianism (Swedberg, 1991b). Whether or not it represents “capitalism in the oxygen tent” or a natural outgrowth of higher affluence is of no real concern, according to Schumpeter. The point is that the mixed economy has tended to flatten the business cycle (Swedberg, 1991b: 425-426).

The profundity of Schumpeter’s pioneering work on entrepreneurship and innovation acquired a cogently new interest in the United States in the late 1980s and 1990s. The

spectacular run-up of securities markets piqued a sharp new interest in the anatomy of capitalism. In this setting, scholars and commentators began vetting his writings in answers to their own questions or priceless maps for new avenues of research. In 1983, the one hundredth anniversary ofthe birth of both Schumpeter and Keynes, Drucker (1983: 124) proclaimed that it was Schumpeter, not Keynes, who provided the best guide to the rapid economic changes engulfing the world.

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BIBLIOGRAPHY

Anderson, E. S. (1977). “Review of Schumpeter: A Biography.” Journal of Economic Literature, www.business.edu.evolution/esapapers/esa90-93.

Brown, D. et al. (1934). The Economics of the Recovery Program, McGraw-Hill: New Jersey.

Drucker, P. F. (1983). “Schumpeter and Keynes,” Forbes, May 23,p. 124.

Farrell, C. (1994). “America’s New Growth Economy,” Business Week, May 16, pp.42.

Friedman, B. M. (2005). The Moral Consequences of Economic Growth, Knopf: New York.

Heilbroner, R. L. (1992). The History of Economic Analysis, 6th edition, Simon and Schuster: New York.

Heilbroner, R. L. (1953). The Worldy Philosophers: The Lives, Times andIdeas of the Great Thinkers, Simon and Schuster: New York.

Hodgson, G. M. (2001). How Economics Forgot History: The Problem of Historical Specificity in Social Science, Routledge: London.

http://www.business.edu.evolution/esapapers/esa90-93

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BIBLIOGRAPHY

Johnson, W. M. (1972). The Austrian Mind: An Intellectual and Social History 1848-1938, University of California Press, Berkeley, pp. 66-69.

Keynes, J. M. (1920). The Economic Consequences of the Peace, Harcourt, Brace and Howe: New York, pp. 11-12.

Langlois, R. (1996). Schumpeter and Capitalism, University of Connecticut DigitalCommons@UConn, Economic Working Papers. 3rd January.

Liberty Fund Inc. (2007). “Joseph Alois Schumpeter: Biography,” (www.econlib.rg/library/Enc/bios/Schumpeter.html).

McCraw, T. K. (2007). Prophet of Innovation: Joseph Schumpeter and Creative Destruction, The Belknap Press of Harvard University Press: Cambridge, MA.

Millmow, A. (1991). Review, Joseph A. Schumpeter: His Life and Work. Richard Swedberg (editor). Polity Press, pp.vii.

Samuelson, P. (1977). “Schumpeter as a Teacher and Economist Theorist, In: Harris J. (ed.), Schumpeter Social Scientist, Scribner: New Jersey, pp.48-49.

Schumpeter, J. A. (1954). The History of Economic Analysis, Oxford University Press: New York.

Schumpeter, J. A. (1951). “Eugen von Bohm-Bawers,” In: Ten Great Economists from Marx to Keynes, Oxford University Press: New York. Trans. Herbert and Zassenhaus, p. 148.

Schumpeter, J. A. (1946). “Capitalism,” Encyclopaedia Britannica, V1: New York, p.801.

Schumpeter, J. A. (1944). Professor Schumpeter, Austrian Minister, Now Teaching Economic Theory {Interview}: Harvard Crimson, 11th April, pp.1-4.

Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy, Harper and Row: New York, p.83.

Schumpeter, J. A. (1939). Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, Harvard University Press:Cambridge, MA.j

Schumpeter, J. A. (1934). The Theory of Economic Development, Harvard University Press: Cambridge, MA.

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BIBLIOGRAPHY

Swedberg, R. (1991a). Joseph A. Schumpeter: His Life and His Work, Polity Press: Princeton University Press: New Jersey, pp.113-117.

Swedberg, R. (1991b). (ed.) “Comments on a Plan for the Study of Entrepreneurship,” In: Joseph A. Schumpeter: The Economics of Capitalism, Princeton University Press: Princeton, New Jersey, pp.425-426.

Viksnins, G. (nd). Economic Systems in Historical Perspective :www.books.google.com/booksGeoregtownUniversity.

Weber, M. (1947). The Theory of Social and Economic Organization, Trans. A. M. Henderson and Talcott Parsons, Editor: Talcott Parsons. Oxford University Press: New York.

http://www.books.google.com/booksGeoregtownUniversity

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BIOGRAPHICAL NOTE

*RICK MARSH MCom (Hons), MHRM, GradCertHRM, (Charles Sturt), FAIM is a Golden Key International Honour Society Scholar. His research traverses Evolutionary Management; Human Resource Management; Strategic HRM; High Commitment Management within the Hospital Sector; The 19th and 20th Century History of Management Thought,including F.W. Taylor, Elton Mayo, Mary Parker Follett, Charles Barnard; and Institutional Theory in Management/Organization Studies. Contact details: [email protected]

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A SCHUMPETERIAN CRITIQUE ON CAPITALISM 2014

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