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Review of Political Economy,Volume 21, Number 1, 51 – 83, January 2009 Marx and Schumpeter: A Comparisonof their Theories of Development ERIC RAHIMUniversity of Strathclyde, Glasgow, Scotland This paper challenges Paul Samuelson’s claim that the development theories of Marx and Schumpeter have little in common. There are indeed broad similaritiesbetween the two theories, arising principally from Schumpeter’s use of Marx’s method(with some interesting modifications), which he calls the ‘economic interpretation ofhistory’. This discussion leads us to ask if we can incorporate into Marx’s method someof the insights suggested by Schumpeter’s modifications. We show that Marx’s methodis enriched by the insertion into it of an explicit, although limited, role of the individual(human agency). The paper then turns to the differences between the two theories,concerning the theory of value and the analysis of social classes. We find an unresolvedtension in Schumpeter’s system of thought, between his attempt to construct a model ofa dynamic, evolving economy on Marxian lines (albeit an alternative to Marx’s model),and his emphasis on the role of the individual, which he inserts into an essentiallystatic, Walrasian model.
In the ‘Preface’ to the Japanese edition of his Theory of Economic Development, Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 Schumpeter (1951, pp. 160 – 161) wrote: It was not clear to me at the outset what to the reader will perhaps be obvious atonce, namely, that the idea and the aim are exactly the same as the idea and aimwhich underlie the economic teachings of Karl Marx. In fact, what distinguisheshim from the economists of his own time and those who preceded him was pre-cisely a vision of economic evolution as a distinct process generated by theeconomic system itself. In every other respect he only used and adapted the con-cepts and propositions of Ricardian economics, but the concept of economicevolution which he put into an unessential Hegelian setting, is quite his own.
It is probably due to this fact that one generation of economists after anotherturns back to him again and again although they may find plenty to criticise him.
Correspondence Address: Eric Rahim, Department of Economics, University of Strathclyde,Sir William Duncan Building, 130 Rottenrow, Glasgow G4 0GE, Scotland. Email: ISSN 0953-8259 print/ISSN 1465-3982 online/09/010051– 33 # 2009 Taylor & Francis Paul Samuelson categorically rejected Schumpeter’s view regarding the similarities between the latter’s work and Marx’s. He wrote: I am of course aware that Schumpeter has in many places articulated words ofpraise and admiration for Karl Marx. But I and other of his students found thispuzzling since in neither his lectures nor his writings could we identify thereasons for this admiration. It would be an evasion for us to write it all off astypical Schumpeterian empty praise—as when he would introduce to Harvardaudiences with flowery compliments the Mises he looked down on and theHayek whom he considered overvalued. Somehow his respect for Marx wasmore long lasting and seemed genuinely sincere. Despite repeated investigationsI never could find the answer to the puzzle. Indeed in the end the evidentialrecord requires me to conclude that, even if under hypnosis Schumpeter wereto insist on the genuineness of his admiration for Marx, careful comparison ofhow the two writers would interpret dozens of different questions and processeswill reveal that Schumpeter’s answers are 180 degrees from Marx’s—and thedifferences are generally precisely those differences that neoclassical pedantshave with Marxian writers. Pragmatically what counts is not a scholar’s rhetoricbut rather his substantive hypotheses and descriptions. (Samuelson, 1993,pp. 250 – 251) This paper disputes Samuelson’s claim and argues that there are indeed broadsimilarities between the two theories, arising principally from Schumpeter’s useof Marx’s method.
The next section of the paper outlines those elements of Marx’s thought with which Schumpeter is in broad agreement and which, with some interesting modi-fications, he uses to underpin his own theory of social evolution. This set of ideasSchumpeter refers to as ‘the economic interpretation of history,’ a term he con-siders philosophically neutral (Schumpeter, 1954, p. 438). In Section 3, wediscuss aspects of Marx’s approach to historical development which, thoughcrucial for Marx’s analysis, have no place in the Schumpeterian system.1 Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 Section 4 outlines Schumpeter’s modifications of Marx’s method and the hypoth-esis that he puts in place of those aspects of Marx’s approach he rejects. Thefollowing four sections are devoted to a discussion of the theories of economicand social evolution of the two authors. Section 9 suggests that some of theinsights suggested by Schumpeter’s modifications of Marx’s method can be incor-porated in the latter. Section 10 discusses the nature of the gulf that divides Marxand Schumpeter and the unresolved tensions that exist in Schumpeter’s thought.
Some concluding remarks are offered in Section 11.
1The full range of Marx’s ideas on his materialist approach was christened by FrederickEngels as the ‘materialist conception of history,’ also as ‘historical materialism’. Hisformulations of the method can be found in The German Ideology (Marx & Engels,1845 – 1846), Marx’s December 1846 letter to P.V. Annenkov (Marx & Engels, 1958,Vol. 1), The Communist Manifesto (Marx & Engels, 1848), and the Preface to A Contri-bution to a Critique of Political Economy (Marx, 1859).
Comparing Marx and Schumpeter’s Theories of Development First, Marx sees society as an organism whose different parts complement eachother and perform life-preserving functions. No individual part of this structuralwhole, be it religion, family life, the educational system, scientific activity, etc,can be understood in isolation from other aspects of social life. In the economicsphere, the organic nature of society shows itself in the social division of labourand interdependence between different activities. We note that in a system thusvisualised, change in one part of the organism requires appropriate adaptationsin other parts of the system. The process of development thus becomes aprocess of adaptation of various parts of the organism to any ‘initial’ change inone or more parts.2 Second, Marx sees social phenomena as elements of a historical process in constant change. Engels was referring to this aspect of Marx’s vision when,acknowledging his and Marx’s debt to Hegel, he wrote that the great merit ofthe latter’s philosophy was that the natural, historical and spiritual aspects ofthe world were ‘represented as a process of constant transformation and aneffort was made to show the organic nature of the process’ (Engels, 1883,p. 132).3 Marx conceptualised this process as one in which society reproducesitself in time. Each generation inherits its physical capital, its stock of knowledge,value systems and culture from the preceding generation, acts on this inheritance,discards some elements of it, builds on others and passes it on to one that follows.
This is historical development or social evolution. Marx was expressing this ideawhen he wrote: ‘Men make their own history, but they do not make it just as theyplease; they do not make it under circumstances chosen by themselves, but undercircumstances directly encountered, given and transmitted from the past’ (Marx,1852a, p. 247).
Third, there is the assumption that social reality evolves through some ‘internal necessity,’ that there is some thing inherent in the social organism thatcauses it to undergo constant change on its own accord. In other words, no externalforce is needed to move it, as ‘the analogy of Newtonian mechanics suggests.’4 Weshould note that without this assumption that change is truly endogenous, historical Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 development will appear simply as the result of unpredictable exogenous influences 2According to Schumpeter (1950a, p. 109) all social phenomena need to be understood as‘adaptations to existing needs.’ 3Schumpeter (1954, pp. 435–437) also emphasises the historical nature of the socialprocess: the ‘social process is a unique process through time,’ and ‘incessant and irrevers-ible change [is] the most obvious characteristic of social phenomena.’ 4While discussing Hegel’s ‘evolutionism’, Schumpeter (1954, p. 437) writes: ‘the readerwill observe that of Hegel’s emanatist conception of evolution something remains, evenif we drop its metaphysical trappings, namely, the idea or perhaps discovery thatreality, as we know it from experience, may be in itself an evolutionary process, evol-ving from inherent necessity, instead of being a set of phenomena that seek definitestate or level, so that an extraneous fact—or at least a distinct factor—is necessaryin order to move them to another state or level as the analogy with Newtonian mech-anics suggests.’ and there would be no theory of development. With this assumption it becomesthe task of the theory of development to identify the inherent or endogenousforce that provides the source of change, and suggest the manner in whicheconomy and society internally adapt to initial changes. A corollary of this wayof looking at the social process is that any theory that conceptualises theeconomy in static terms will not be adequate for the task of studying ‘constantand irreversible’ change that arises from the very nature of the organism. An ana-lytic apparatus formulated specifically for the purpose of studying the economy asa process of change will be needed.
The basic idea underlying Marx’s materialist method was expressed by him in one of his Theses on Feuerbach (1845): ‘Social life is essentially practical. Allmysteries which mislead theory into mysticism find their rational solution inhuman practice and in the comprehension of this practice.’ The same thoughtwas reiterated many years later when Marx recalled the period when this ideawas first formulated. He wrote (Marx, 1859, p. 362) ‘My investigations led tothe result that legal relations as well as forms of state are to be grasped neitherfrom themselves nor from the so-called general development of the humanmind, but rather have their roots in the material conditions of life, the sum totalof which Hegel . . . combines under the name of “civil society”, that, however,the anatomy of the “civil society” is to be sought in political economy.’5 We have here the idea that society’s social structure and its general insti- tutional framework and cultural and value-systems are functions of existingmaterial conditions, at the core of which lies the structure of production or thetechnological-economic base. As he put it rather graphically in one of hisearlier expositions of this method (Marx, 1847, p. 166), the social structure andbeliefs and value-systems of the feudal economic and social organisation reston the foundation of the hand-mill type of technology, while the social structureand culture of the capitalist society (of his day) rest on methods of productionas embodied, for instance, in the steam-mill. The feudal social organisation andvalue-systems would be entirely incompatible with the kind of technology thatprovided the basis of the 19th century capitalist society, just as the later would Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 be inconceivable as resting on the hand-mill type of methods of production.
Thus, the hypothesis emphasises, in the first instance, the complementarity ororganic relation between methods of production, economic, legal and social insti-tutions, and the value-systems of society, and second, it assigns relative autonomy 5Schumpeter’s ‘materialist’ approach—the importance of the economic factor as the basisof our rational thought and logic—is discussed in chapter XI (‘The Civilisation of Capit-alism’) of Capitalism, Socialism, and Democracy (Schumpeter, 1950b). There he writes(pp. 122 – 123): ‘Now the rational attitude presumably forced itself on the human mindfrom economic necessity; it is the everyday economic task to which we owe our elemen-tary training in rational thought and behaviour—I have no hesitation in saying that all logicis derived from the pattern of the economic decision. . . . Once hammered in [in the sphereof production] the rational habit spreads under the pedagogic influence of favourableexperience to other spheres of life and there also opens eyes to that amazing thing—the Fact.’ Comparing Marx and Schumpeter’s Theories of Development to the economic and technological infrastructure of society. For Marx, this ideaprovides the key to understanding historical development or social evolution.
That is, changes in the nature of social organisation, social and cultural insti-tutions, the way we live, do philosophy, interpret religion, etc, are all functionof changes in economic conditions. The economy develops according to certain‘internal necessities,’ and changes in social, political and cultural conditions arethe ‘necessary’ adaptations to changes in forms of production and the economyin general. These adaptations or adjustments arise spontaneously, incrementallyand in response to needs created by changes in the organisation of production.
The cumulative effect of these changes in the long run is to alter the structureand nature of social organisation and with it our belief systems. There are twosub-hypotheses here: one relates to economic evolution and the other to socialevolution which is the necessary concomitant of the former.
To summarise: Marx’s materialist method is an approach to studying econ- omic and social development in which society is conceptualised as an organismin a process of constant change, that is self-evolving through the working ofsome endogenous force or necessity that is of essential economic character.
Schumpeter subscribed to this general viewpoint, which he considered as ideologi-cally neutral, as a working hypothesis for his own theory of social evolution (see,however, the discussion in Section 10 below).
3. Marx’s Theory of Social Classes and the Concept We turn now to the other aspect of Marx’s general materialist approach whichSchumpeter considers to be logically separable from the method outlined in thepreceding paragraphs and which, according to him, is ideologically inspired.
We may have some doubts about the philosophical neutrality of the ‘economicinterpretation of history,’ but there is no doubt that it is through this ‘additional’hypothesis that Marx’s political philosophy enters his general system of thought.
Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 Since it is at this point that Marx and Schumpeter (guided by ‘a very widedifference in general outlook,’ as Schumpeter puts it) go their separate ways,it is useful to note the nature of the hypothesis we are now considering. Thematerialist method outlined above tells us about the way that we conceptualisethe social process in general: we see it in organic terms, and undergoing constantchange driven by economic forces. But it postulates nothing about the natureof the society we are considering. For instance, it says nothing about whetherthe society is tribal or capitalistic; and if it is capitalistic, it says nothingabout whether this system is exploitative or welfare generating; it makes noassumption about the nature of the ‘inner necessities’ that cause the society tochange and develop. The materialist method is like a black box; the additionalhypothesis discussed in the present section is the content that Marx puts intothis box.
Marx’s additional hypothesis refers to his theory of social classes and the related concept of the mode of production. This hypothesis is the centrepieceof Marx’s thought; it gives unity to all his thinking on economic and social questions.6 It is this hypothesis that provides the basis of Marx’s theories of value,profit and accumulation and implements his conception of social evolution. Socialevolution is seen to take the form of a succession of modes of production, tran-sition between them being effected through class struggle.
Marx locates the existence of social classes in the sphere of production; in particular, in the ownership or control of the means of production. And therelationship between classes, one owning the means of production and the otherliving by its labour alone, becomes the focal point of social structure. Directinghis attention to any given situation of production methods and level of socialproduct, Marx argues that the relationship between the two classes must necess-arily be one of antagonism. This is the case because, given the level of socialproduct, more for one means less for the other.7 It is true that there are other ten-sions in society, for instance, between producer and producer who must competefor markets, between worker and worker who compete for jobs, between one reli-gious or ethnic group and another. However, Marx assumes that the commonalityof economic interests among property owners on the one hand and among thosewho live by work alone on the other will dominate over intra-class tensions.
Thus, class conflict becomes for Marx the central ‘contradiction’ in society, a‘contradiction’ that can only be resolved by a fundamental change in the classstructure of society or by a change in the mode of production. This standpointis underpinned by a further interpretation of the materialist method according towhich (as we saw earlier) society’s ideological superstructure is a function ofmaterial conditions of life. Conditions of production determine social structureand through it the whole march of cultural and political history. The idea isquite simple: a person’s economic life-situation determines his outlook on lifeand his way of understanding and interpreting economic and political issues ofthe day. It follows that members of a social class, having similar economicneeds and sharing essentially the same economic life-situation, will come toshare the same outlook on social questions.
Thus, given that there are two social classes, ranged on opposite sides of the production system and each with distinct economic interests, we should find, Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 broadly speaking, two competing world-views in society. One sanctions the pre-vailing property relations and power structure and declares the existing socialorder as just and immutable. This is the ideology of the ruling class. This ideology 6Schumpeter (1954, pp. 550–551) writes: ‘Two-class analysis is essential to the Marxistsystem. It unifies [Marx’s] sociology and economics by making the same class conceptfundamental to both. On the one hand, the social classes of sociology are ipso facto thecategories of economic theory; on the other hand, the categories of economic theory areipso facto the social classes. The importance of this feature becomes particularly clearwhen we observe its bearing upon class antagonism, which in this system is at the sametime an exclusively economic phenomenon and the all important fact about all pre-capitalist history.’ 7The assumption of a given level of output should be noted. Schumpeter has argued thathistorically, under capitalism, benefits arising from increases in productivity have typi-cally been shared with labour. It follows that the antagonism between capital andlabour has been kept within tolerable limits (Schumpeter, 1950b, Chapter V).
Comparing Marx and Schumpeter’s Theories of Development prevails because the dominant class has all the means to disseminate it. However,with the development of the economy the oppressed class gains in strength andclass-consciousness and eventually learns to articulate its own ideology and useit as a weapon in its struggle against the ruling class.
The other, related, aspect of Marx’s thinking on historical development is that the organic, self-evolving process takes the form of succession of modes ofproduction. A mode of production is a distinct type of economic and social organ-isation, its central features being the form in which property is held and the formthat relations between owners of property and direct producers take. Each mode ofproduction thus has its own unique value and belief systems. In his early writings(The Communist Manifesto, for instance), Marx identified three modes ofproduction that history had by then witnessed: the ‘ancient’, based on slavelabour, the feudal, characterised by labour’s bondage to land, and capitalism,with its juridically free labour and competitive labour market.
When a mode of production comes into existence it is progressive relative to the one it succeeds. Most of the barriers that the preceding mode had placed oneconomic progress are swept away, and new institutions develop to suit therequirements of economic development, which coincide with the needs of thenew ruling class. During this period of development, the ruling class performsnecessary social functions. There is progress toward greater rationality andhumanity, the exploitative character of the ruling class notwithstanding.
However, there comes a time when the process of institutional adaptation to changing economic and social needs begins to falter. Strains and tensions developin the system; there is a state of imbalance between the requirements of economicdevelopment on the one hand and the economic and legal institutions on the other.
As a result, an economic and social crisis ensues.
Two questions arise: how do we explain the maladjustment between the forces of production and the institutions appropriate to the conditions of pro-duction? And, how is the crisis resolved? In the early stages of developmentwithin the existing mode of production (as we have seen) appropriate institutionaladjustments were taking place to keep in step with progress in the forces of pro- Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 duction. It was so because these changes were in the interests of the propertiedruling class that had come to power with the emergence of the new mode of pro-duction. But now—and this is a crucial assumption for Marx’s theory of revolu-tion—economic development has reached a point where it requires changes thatthe dominant class is unable or unwilling to make. That is the case becausethese changes threaten the existing power structure of society. The class thathad formerly led the way in institutional change has now become conservative.
It is an essential part of Marx’s general approach that at some point in its lifethe mode of production undergoes a process of ossification. It fails to deliverprogress.
However, according to the hypothesis, this failure does not stop progress. The process of development, as it creates problems, also generates the forces that findsolutions to those problems. That is after all what it means to say that the processof development is endogenous in its nature. In fact, the old mode, in the course ofits development, has already created the forces that will take society forward.
These forces—essentially of a political nature—are represented by the oppressed class. In the course of development this class learns that within the existinginstitutional frame there is little scope for any improvement in its living con-ditions; it grows in class-consciousness and learns to articulate its own ideology.
Given the economic and social crisis that has gripped society, it can speak for theentire society. It is ready to seize political power. At the same time, the develop-ment within the old mode of production has also created all the material conditionsfor the new mode, which has been gradually evolving within the ‘womb’ of the oldmode. The development process in the old mode of production has thus createdboth the cultural and the physical infrastructure for the new order. The scene isthus set for the transition from the old to the new mode of production and for econ-omic and social progress to continue. This historical process—in which one modeof production, a more progressive one, succeeds another—continues until a class-less communist society is established. We will then have a new era in the historyof humankind.
To summarise: we have drawn a distinction between the general hypothesis of organic-evolutionary-materialist approach (the materialist method) in whicha social system creates the conditions of its own destruction as well as of re-construction (a process of ‘creative destruction’, as Schumpeter would later callit in its application to industrial and technological development) and the specificform in which this hypothesis is implemented, that is, the manner in which tran-sition between one mode of production and the next is effected. The latter requiresa specific conception of society and social classes. Both these ideas uniquelybelong to Marx. Schumpeter accepts the first aspect, the materialist method, inbroad terms, and implements it in a fundamentally different way.
4. Schumpeter’s Theory of Social Classes In this section we take up for discussion the stuff that Schumpeter himself puts intothe ‘black box’ referred to earlier—his own theory of social classes, and his modi-fications of the materialist method.8 The theory of social classes was presented by Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 Schumpeter in a highly systematic way in an article entitled ‘Social Classes in anEthnically Homogeneous Environment’ (1950a). But that is not the case with hismodifications of the materialist method. These we find in some of his discussionsof the actual historical processes, in particular of early European capitalist devel-opment (in addition to Schumpeter, 1950a, see also Schumpeter, 1946; andSchumpeter, 1954, Part II, chapters 2 and 3). I have found it convenient to high-light these ideas—interesting departures from, or modifications of, Marx’s way of 8A number of writers have suggested that Schumpeter’s views changed over time, in par-ticular with reference to the nature and role of the entrepreneur (see Prendergast, 2006;Becker & Knudsen, 2002; Shionoya, 1997; Swedberg, 1991). These changes, whatevertheir importance, do not affect the argument of this paper. I am inclined to agree withSamuelson (1951) and Stolper (1951) that despite some changes on particular issues,Schumpeter’s ‘view of things as a whole’ (as Stolper put it) did not undergo anychange; see footnote 29 below.
Comparing Marx and Schumpeter’s Theories of Development thinking—by outlining (with ‘desperate brevity’, as Schumpeter himself wouldhave said) the perspective from which he views early capitalist development.9 In Schumpeter’s theory the leading factors that account for the existence of social classes are the differences in aptitudes of individuals and the nature ofthe social functions that must be performed in any society. Schumpeter definesaptitudes in terms of qualities such as the general level of intelligence, capacityfor intellectual analysis, willpower, resoluteness, ability to command obedience,etc. This means that specific talents, such as those of opera singers, do not playany part in his theory of classes. He is interested in qualities that make forsocial leadership, a central idea in his schema, as we will see shortly.
The aptitude for leadership, like most aptitudes, is not confined to a select group in the population. Most of us have it in some degree—a schoolteacher,for example, could not function successfully without possessing it in somemeasure—though some have it more than others. However, what is confined toa relatively small part of the population is the aptitude for leadership for functionsof higher social value.
Now we consider the other important concept in this theory—social functions that the environment at any time makes ‘socially necessary.’ In any society of anysize and complexity, there exist a variety of social functions that need to be per-formed. These functions have different social values. For instance, in feudalsociety, the function of a warrior carries a much higher social value than that ofploughing the land; in capitalist society, a society whose primary orientation istowards economic activity, the introduction of new methods in the productionsystem is given a higher social value than the work of an unskilled labourer.
Although Schumpeter does not go into any detail on this point, we have here aclear idea of a hierarchy of social functions, with the class structure consistingof a hierarchy of families located according to the social value of the functionsthey perform. Since the functions they perform depend on their aptitudes,people who possess qualities of leadership to a higher degree will occupyplaces in the upper strata of society, and those whose aptitudes are limited inthis respect will find themselves in the lower layers of the social hierarchy. This Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 aspect of the theory is further discussed in Section 10 below.
Another important idea in the theory is that of social mobility—ascent into, and descent from, the upper strata of society. Social mobility is assumed to be afeature of all societies, particularly of capitalism. We may say, with some exag-geration, that all that a peasant in the Middle Ages needed in order to rise insocial hierarchy was the aptitude to distinguish himself on the battlefield (andof course to possess a horse and appropriate armour). With little or no exagger-ation it could be said of the early period of capitalist development that it waspeople with ‘extraordinary’ qualities of leadership—entrepreneurship—whorose from the lower strata of society to became pioneers of capitalism, that is,who became merchants, bankers and craft guild masters. Similarly, under 9In Section 9 below we shall see that some of the insights suggested by these modificationscan be incorporated into Marx’s materialist method without doing any violence to theessential features of this method.
developed capitalism the barrier to ascent into the business class set up by lack ofownership of means of production (emphasised by Marx) is scaled with the help ofbank credit (a feature so important in Schumpeter’s theory of economic develop-ment that it is included in his definition of capitalism; see Schumpeter, 1946).
Thus, class barriers are always in a state of flux. There are shifts of families within a class. These movements depend on the extent to which different familiescan solve the problems with which their environment confronts them. The qual-ities that enable a family to rise in its own class are the same that enable it toascend into the upper strata. We thus have a picture of constant upward and down-ward movement: families with ability moving up the social hierarchy, and thosewho have lost the quality of leadership of their forefathers descending into thelower strata of society. Although Schumpeter does not put it in these terms, wecan say that there is a long-term tendency in historical time toward a socially desir-able allocation of abilities and aptitudes across the variety of functions that thechanging environment creates. The upper strata of society are constantly replen-ished by new talent and, by the same logic, the lower strata are constantlydenuded of it.
So much for the theory of social classes. We will see presently how it informs Schumpeter’s theory of capitalist economic development. Now let us note someinteresting modifications to the materialist method as suggested by Schumpeter’sown use of it in interpreting early capitalist development.
For Schumpeter, economic development means capitalist development. The origins of capitalism (in the shape of capitalist enterprise) can be traced back to theclassical world, in fact further back to Hammurabi, if you like. There was then pro-duction on private account aimed at the market; there were merchants who tradedlocally and internationally, and there were bankers to whom producers had access.
Capitalist enterprise did not totally disappear in the Dark Ages. And feudalism, thewarrior society that emerged from the disorders of the time, contained within itpractically all the significant elements, either lingering from the Roman timesor recently formed, of capitalism. By the 11th century, alongside the evolutionof feudalism, a class of definite bourgeois character had made its appearance.
Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 By the beginning of the 13th century, when the feudal civilisation was reachingits zenith, the bourgeoisie as a class was already outgrowing the feudal insti-tutional framework. By 1500 many of the phenomena that we associate withmodern capitalism had made their appearance. The economy continued todevelop on capitalist lines, but the political frame of society remained stubbornlyaristocratic. The descendants of the old warrior class continued to be the pivot ofthe social system.
This symbiosis between two different ‘social systems’ (or two distinct social classes) received further support during the 16th century. This latter developmenthe attributes to incidental factors external to the logic of capitalism, in particular tothe flow into Europe from the New World of large quantities of gold, and thebreakdown of what he calls ‘medieval internationalism’, the dual power of theHoly Roman Empire and the Catholic Church (Schumpeter, 1954, pp. 144 –147) What emerged was the Nation State or Absolutism. This, according toSchumpeter, was feudalism run on capitalist lines. The King’s position remainedessentially feudal, but the state shaped economic policy to propel capitalist Comparing Marx and Schumpeter’s Theories of Development development, and the king and the aristocracy lived increasingly on the revenuegenerated by capitalist development. Over time, the descendants of the oldwarrior-aristocratic class metamorphosed into statesmen, administrators, diplo-mats and colonial officers. Having lost one social function (war or protection),they found another—public administration (Schumpeter, 1950b, p. 163). Thissymbiosis was the essence of the Nation State. And not only of that: this arrange-ment (England is the ‘classic’ case) lasted right into the 20th century.10 Two points are of particular interest here. First, in Schumpeter’s conception of economic history, capitalism as a mode of production, in its embryonic formpre-dates feudalism and its development is one of slow and continuous transform-ation. This means that theories that attempt to explain the origins or ‘rise’ of capit-alism in Europe by appealing to some special factor (such as the rise ofProtestantism in the 16th century) are explaining a problem that simply doesnot exist. The same criticism applies, to some extent, to Marx’s theory of ‘primi-tive accumulation’ that placed the evolution of capitalism in Europe from aroundthe last part of the 15th century. We note also that Schumpeter completelydispenses with the concept of the mode of production as used by Marx.
Second, Schumpeter makes an interesting modification of the materialist method: he introduces a disjunction between the economic base and the super-structure. We have seen that in Schumpeter’s interpretation of early capitalistdevelopment, although the economic base continues to become increasingly capi-talist, the political structure remains obstinately pre-capitalist. What is more, thepre-capitalist political structure endured into the post-Industrial Revolutionperiod, and survived right up to the end of the 19th century. It is a general positionof Schumpeter that elements of the superstructure are coins that do not melt easilyand that this historical lag between the economic base and the superstructure playsa fundamental part in the evolution of capitalism.
We will return to these questions in Section 9.
5. Marx on the Nature and Imperatives of Capitalism Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 A number of times in the course of our earlier discussion we had occasion to referto the ‘internal necessities’ that cause economic change to take place—an idea thatis essential to the systems of thought of both Marx and Schumpeter. It is now time 10This idea plays an important role in Schumpeter’s theory of social evolution discussed inSection 8 below. Marx also subscribed to the idea of a ‘symbiosis’ between the bourgeoisieand the landed aristocracy in England, although with a very different slant on the nature ofthe relationship. In an article entitled ‘Tories and Whigs’ published in the New York DailyTribune (Marx, 1852b) he referred to the Whigs as ‘the aristocratic representatives’ of thebourgeoisie. In an article written on ‘The British Constitution’ for the German newspaperNeue Oder-Zeitung (Marx, 1855), he argued that before the 1832 Reform Bill the bour-geoisie were the ruling class ‘in actual practice’ and the aristocracy formed the ‘officialgovernment.’ After the Reform Bill, the bourgeoisie were ‘on the whole acknowledgedalso politically as the ruling class,’ but only ‘on the condition that the entire system of gov-ernment in all its detail . . . remained safely in the hands of the landed aristocracy.’ to consider these ‘necessities.’ The task that Marx set himself in the writing of hisCapital was, in his own words, to discover the ‘laws of motion of capitalism.’ Sothe question to be discussed is: What are the ‘internal necessities’ that underliethese ‘laws’? These ‘necessities’ according to Marx arise from the very natureof capitalism, from its internal logic; they are objective in the sense that theyare independent of individual volition. It thus becomes crucially important tounderstand the manner in which Marx conceptualises capitalism.
In identifying the main features of capitalism, Marx used some of the ideas of his classical predecessors. Adam Smith, for instance, had conceptualised theemerging ‘commercial society’ of his time as one in which there are owners of‘stock’ (capital) who want to put ‘industrious’ people to work in order to makeprofit; and there is a class of people who, lacking their own means of subsistence,need a ‘master’ for whom they can work for a wage and thus make a living. AdamSmith had also drawn attention to another feature of modern capitalism—the prin-ciple of natural or perfect liberty. By this he meant the freedom of the capitalist tochoose his field of investment and the freedom of the worker to choose his occu-pation and employer. Marx’s definition of capitalism embodied all these three fea-tures. For Marx, capitalism is characterised by, first, the accumulation of capital inthe hands of a small class of profit-motivated people, second, the existence of alarge class of property-less people who are forced to sell their labour-power onthe market in order to survive and, third, competition in the sense of free mobilityof capital and labour in the economy.
We should add a further condition for the existence of capitalist production.
According to Marx, a necessary condition for capitalist production to come intoexistence is that the unit of production is large enough for it to practice divisionof labour and realise economies of scale. (For Marx, the production in the medie-val guild, though motivated by private profit, is not capitalistic, but the pin factoryof Adam Smith’s famous illustration is. The latter practises division of labour andenjoys economies of scale, the former does not.) In the absence of economies ofscale there could be no capitalist production, and there could be no capitalist class.
Such a world will be one of independent producers, not of a small class of Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 capitalists and property-less labour; in it every one will be able to set up hisown production. In such a world there will also be no possibility of the sustained,cumulative development that is an essential feature of capitalism.
By conceptualising capitalism in these terms and by focusing on the capitalist class rather than the individual capitalist Marx gives capital a very specificmeaning. Capital becomes a relation between two classes in the productiveprocess. It is a relationship of power—power based on the ownership of themeans of production by one class. Of course, capital goods come into the picture,but such goods are employed in every form of society. What is unique to capital-ism is that, unlike the tools of the guild master and the peasant, this capital isnot tied to any particular physical form or economic activity. It is somethinghomogeneous—changeable in its physical form, and moveable, footloose, as wewill say today. (Marx conceptualises labour in similar terms; see Section 10below.) It constantly seeks new avenues of investment and new markets; itseeks self-expansion. It enforces a particular kind of behaviour on the part ofthe individual capitalist. Unlike the capitalist of the orthodox economic theory Comparing Marx and Schumpeter’s Theories of Development who is essentially a consumer, who saves to consume another day, Marx’s capitalistis under a necessity to accumulate. This is so because, operating as he does in acompetitive market, he must constantly invest (and try to innovate) to defend hisbusiness position. Just as a knight of the Middle Ages lived by physical combatand war, the capitalist lives by accumulation. The inner necessity of capitalistdevelopment is located in the institutional frame of capitalism rather than in thevolition, and subjective preferences, of the individual capitalist.
Given this necessity, this is how Marx sees capitalism’s economic expan- sion.11 Early capitalist development from, say, 1500 to the middle of the 18thcentury (here, as elsewhere, England is the ‘classic’ case) laid the foundationfor the establishment of the modern power-driven industry, the emergence ofmachine building as a specialised activity, and the establishment of industry’scapacity to harness natural science to production. In this way, under modern capit-alism, rising productivity of resources (appropriated by the capitalist as surplusvalue) becomes the basis for accumulation and economic expansion. The scarcityof land presents no barriers to expansion, as it did in Ricardo’s model. The appli-cation of natural science to agricultural production holds the operation of the lawof diminishing returns in permanent abeyance. Thus, the system creates its ownmaterial resources for expansion. The supply of labour, with the skills requiredfor the process of development, also presents no barrier to expansion. Marxargues that normally employers will face an elastic supply of labour over time.
This is made possible by natural increases in population, the existence of tra-ditional economic activities that contain a large reservoir of underutilised orless productive labour on which modern industry can draw (without significantlyraising wages), and the increasing mechanisation of production that economiseson labour. Furthermore, technological development, being an evolutionaryprocess, itself creates the skills that its progress requires.
We have here Marx’s vision of capitalist development as a wholly endogen- ous process. Once the economy has made the critical breakthrough from crafttechnology of the feudal period to power-driven industry, and from the restrictiveframe of guild production to free competition, it becomes characterised by virtu- Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 ous circles of technical progress, high productivity and high rates of accumulation.
It comes to be characterised by self-generating and self-sustaining expansion, orwhat a later generation of development economists would refer to as theprocess of cumulative causation.
This completes our discussion of Marx’s theory of economic development. Thesecond part of Marx’s project consists of showing that economic change leadsto social changes, more specifically, that economic development will ultimatelyresult in the demise or breakdown of capitalism and the establishment of a socialist 11As in his conceptualisation of capitalism, here also Marx draws on the ideas suggestedby the classical economists, especially Adam Smith.
order.12 As the general features of this aspect of Marx’s thought—economicchange leading to social changes—were discussed earlier, here we can be brief.
The core of the argument in the present context is that, through the working ofits internal logic, capitalism will reach a stage in its economic development atwhich no further progress within its institutional frame will be possible. Butthis failure will not leave a void or result in chaos. Through its own logic itwould have, in the course of its development, completed all the essential require-ments for the successful establishment of its successor mode of production. Themethod of dealing with these issues followed from Marx’s general evolutionaryapproach, according to which the future is being formed in the womb of thepresent. This approach suggests that if we can understand the present (by under-standing the internal logic of the system) we can understand the direction thatdevelopment will take in the future. Thus, Marx sought to identify certain ten-dencies in contemporary capitalism that arise from its internal logic and toproject their working into the future. It is these tendencies that he referred to asthe ‘laws of motion’ of capitalism. (We will see presently, in Section 8, thatSchumpeter adopts a similar method in his analysis of capitalist evolution.)13 There are two strands in this discussion. The first, as already noted, relates to the idea that during the process of capitalist development preparation for the estab-lishment of socialism has been under way. The second addresses the question of theeventual disruption of capitalism. Thus, the ripening of the conditions for the socialmanagement of production under socialism and the process of disintegration ofcapitalism have been proceeding apace. We will start with the first strand.
First, it is a necessary condition for the establishment of a classless, socialist society that there should be abundance of material goods. According to Marx, youcannot create a classless society in a poor country; people will fight over scarcegoods with the result that classes (in one shape or another) and economic and 12This is true only in a general sense. It is widely agreed that Marx did not work out atheory of the ‘specifically economic breakdown’ of the capitalist system, nor of the tran- Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 sition to socialism (see, for instance, Sweezy, 1942, pp. 191 – 192). An added considerationmay be alluded to: a major tendency in capitalist development, dramatically highlighted inthe Communist Manifesto, is its expansionary character: it knows no national boundaries;it tends to become a world system. This means that in any discussion of the future of capit-alism, consideration must be given to its international character, something which Marxwas unable to do. The discussion here is aimed at no more than giving a general impressionof Marx’s thought on the subject.
13Schumpeter was fully aware of the limitations of this method: ‘Any prediction is extra-scientific prophesy that attempts to do more than to diagnose observable tendencies and tostate what the result would be if these tendencies should work themselves out according totheir logic. . . Factors external to the chosen range of observation may intervene to preventthat consummation; because with phenomena as far removed as social phenomena arefrom the comfortable situation that astronomers have the good fortune of facing, observa-ble tendencies, even if allowed to work themselves out, may be compatible with morethan one outcome, and because existing tendencies, battling with resistances, may failto work themselves out completely and may eventually “stick” at some half-way house’(Schumpeter, 1950b, p. 422).
Comparing Marx and Schumpeter’s Theories of Development political domination will re-emerge. Socialism can only be established whensociety has attained the potential to produce an abundance of material goods. Ithas been the historic function of capitalism to lay the basis for such capacity, atleast as a potentiality. This was in the course of being achieved through a longprocess of accumulation and by the harnessing of natural science to the needsof production.
Second, another necessary condition for socialism is that society’s productive resources are concentrated in large units. Social management of resources cannotbe effective when resources are dispersed in small parcels over a large geographi-cal area (as in a society of small peasant holdings). Capitalist development wasfulfilling this condition by achieving concentration of production in large units.
Third, concentration of productive resources in large units as well as the geo- graphical agglomeration of related industries (which necessarily accompanieseconomic development) means, of course, large geographical concentrations ofworkers. Concentration of large numbers of workers, broadly doing similartypes of work, sharing the same working conditions and the same problems, pro-vides the foundation for the formation of class-consciousness—consciousness ofthe identity of economic interests. (Because of their wide geographical dispersion,peasants are seldom able to achieve class-consciousness, despite the identity oftheir interests.) This leads to collective action to improve their working conditions.
Through these struggles workers come to see that their salvation lies only in theoverthrow of the existing system.14 Let us now, finally, try to convey some idea of Marx’s thinking on the ‘break- down’ of the capitalist system. As already noted, in this vital aspect of Marx’sproject his theory is far from complete. It is presented in the part of Capital(Volume II) that Marx left unfinished at his death.15 The following two paragraphsare intended only to give some indication of the complexity of Marx’s thinking onthe subject of economic crises.16 The principal contradiction in the capitalist system is between the society’s capacity to produce and the capacity to consume, the latter being limited by themaldistribution of the social product between profits and wages. This is the root Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 cause of the economic crises that characterise capitalist production. There are ten-dencies in the economy, in particular the tendency toward increasing mechanis-ation, that create the tendency towards chronic unemployment that keep wagesdown practically at the subsistence level. This restricts the consumption of 14Marx was aware of the increasing differentiation within the working class—somethingthat Schumpeter would later emphasise—but decided to treat it as merely a ‘counteractingfactor’, that is, a factor that is not strong enough to offset the main tendency.
15Marx’s ideas on economic crises are scattered throughout the three volumes of Capital,his Theories of Surplus Value and several other writings. Engels, who was left with the taskof editing the second and third volumes of Capital, observed in his preface to the secondvolume that Marx had left a ‘large number of versions, most of them incomplete.’ 16For a brief and non-technical introduction to the subject, see Rosa Luxemburg (1948,pp. 370 – 380); a more comprehensive discussion can be found in Sweezy (1942, PartThree).
workers who constitute the mass of the population. The restriction of the output ofconsumption goods industries means that the demand for capital goods will also berestricted. This means in turn that investment in capital goods industries will notexpand sufficiently to absorb the potential output of these industries. Thus, theconditions that keep wages, and therefore consumption, down set up the chronictendency for the failure of the system to realise its potential with respect to pro-duction. Hence, the economic crises that Marx claimed would get worse andworse with time. ‘The ultimate reason for all crises,’ he wrote (1894, p. 615),‘always remains the poverty and restricted consumption of the masses, in factof the drive of capitalist production to develop the productive forces as if onlythe absolute consumption capacity of society set a limit to them.’ However, this is not a problem that can be resolved by government policy, say, aimed at raising wages in order to boost consumption, because such apolicy will create other problems. In the second volume of Capital, Marx(1885, pp. 486 – 487) observes that it is a ‘pure tautology’ to say that crises arecaused by a lack of effective demand: If the attempt is made to give this tautology the semblance of greater profundity,by the statement that the working class receives too small a portion of itsproduct, and that the evil would be remedied if it received a bigger share, i.e.
if its wages rose, we need only note that crises are always preceded by aperiod in which wages generally rise, and the working class actually doesreceive a greater share in the part of the annual production destined forconsumption.
But this improved situation of the working class does not avert the crisis. In fact,the relative prosperity of workers is always a ‘harbinger of crises.’ 7. Schumpeter’s Theory of Economic Development We turn now to Schumpeter’s theory of economic evolution.17 Schumpeter takesas his starting point the Walrasian model of a stationary capitalist economy in Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 perfect equilibrium. He observes that in this model there are three ‘factors’,treated as data or parameters, through which change may be introduced into theeconomy. These are consumer tastes, quantities of factors of production, andmethods of production or technology. Schumpeter excludes from his ownmodel the first two as possible independent sources of change. Changes intastes seldom occur autonomously. In any case, given the level of consumerincomes and production methods (as assumed in Walras’s model), any changein consumer tastes will result in a reallocation of society’s existing resourcesrather than initiate a process of ‘incessant change.’ Changes in factors of production can be divided, broadly speaking, into changes in population and changes in the quantities of produced goods(i.e. capital goods). Schumpeter has little difficulty in dismissing the first as an 17Schumpeter’s theory of economic evolution was first presented in his Theory ofEconomic Development published in 1911.
Comparing Marx and Schumpeter’s Theories of Development independent factor in initiating economic change. He argues that there is nounique relation between an increase in population and, say, an increase inoutput per head: population changes may be associated with falling, constant orrising levels of productivity. Likewise, increases in produced goods if theyembody the same technology as that already in use—say, production of moreand more mail coaches—cannot initiate a process of incessant change. In otherwords, accumulation of capital by itself does not necessarily mean development.
This is how in Schumpeter’s model the entire burden of explaining economic development falls on autonomous changes in methods of production, a term thathe uses broadly to include not only changes in techniques narrowly defined, butalso new methods of business organisation, new products, discovery of newmaterials and markets. He calls these changes ‘Innovations’. The essence of theidea is that things are done differently from existing practice and, as a result,existing resources are put to better and more productive uses. We note thatsince innovations do not take place by themselves, they have to be introducedby someone, that ‘someone’ occupies the central place in Schumpeter’s theoryof development. He is the Entrepreneur.
Let us now see how entrepreneurial initiative generates economic develop- ment. We start with a competitive capitalist economy in the stationary state andimagine that an entrepreneur enters upon this scene with a plan to introduce aninnovation; say, a new technique to produce a particular product. We assumethat the innovation is a major one, like the railways or the computer, rather thana new kind of sandwich, and that it is financed by bank credit.
The success of the innovation will mean that the entrepreneur introducing it will have seized an advantage in terms of costs over his established rivals.
With the old price still prevailing he will enjoy ‘monopoly’ profits the size ofwhich will be determined by the difference between his costs and thosegenerally prevailing in the industry and the time it will take others to match hisefficiency. As the success of the new method is perceived, some of the establishedfirms will begin to imitate the new method and follow the path cleared by theleader; and as the success of the new method is more widely observed more Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 and more will follow suit. Eventually, all, or nearly all, of the producers willhave adopted the new technique. By then, the price of the product will havefallen to the average costs of production associated with the new method, andprofits will have been eliminated. This dynamic process is sometimes referredto as ‘Schumpeterian competition’.
We can now summarise some of the results of the changes brought about by the innovation in the industry where it was introduced. (a) Costs of producing theproduct in question have fallen and so has the price of the product; (b) the size ofthe market for the product in question should have increased (depending on itselasticity of demand) and, given the assumption of increasing returns to scale,we expect the typical size of the industrial unit to have increased; (c) most ofthe firms in the industry have earned profits, the size of profits of each firm depend-ing on the stage at which it adopted the new method; (d) those firms that wereunable to adjust to new conditions have been eliminated.
This is of course only a partial view of the process generated by the inno- vation in question (let us call it ‘primary’ innovation). It is partial because up to this point we have only considered the impact of the innovation on the industrywhere it was first introduced. Seeing beyond it, we observe that the success ofthe primary innovation will naturally have an influence on other industries.
There will obviously be a significant impact on the sectors that supply it withcapital goods and other inputs. This impact will, in the first instance, consist ofincreased demand for their products. And this in turn will increase the possibilitiesfor greater division of labour and general technical improvements in these sectorsof the economy. Downstream industries will also be expected to receive develop-mental impulses from the primary innovation. The new technology associatedwith the primary innovation (and the ‘secondary innovations’ that may have fol-lowed) might also have found uses in other sectors of the economy. The generalpoint here is that an important innovation in one sector of the economy givesrise to chain reactions and creates possibilities for development well beyond thefield of its original application.
This view of the process suggests clustering of innovations in a small number of related sectors. Innovations will also be clustered in time. It is at this point thatSchumpeter’s theory of development links up with his theory of the business cyclewhich, as we will see presently, is simply an aspect of the development process.
What we have been witnessing in the preceding paragraphs is an economicupswing or a period of prosperity initiated by the primary innovation. Thisphenomenon is explained by the fact that innovations and developments associ-ated with them come in a swarm-like movement. First comes the leader, the orig-inal innovator, who is followed by his imitators in the same industry; then, we seeentrepreneurs introducing secondary innovations in other parts of the economywho are then followed by their imitators, and so on. It is this herd-like stampedethat causes the upswing.
The period of prosperity necessarily comes to an end—because the upswing itself creates the conditions that retard its progress and bring abouta period of deflation—and is followed by a period of recession. A recession is areaction to an upswing; it is a time for adjustment after a period of technologicaland industrial upheaval; a time to absorb the results of the developments Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 initiated by the primary innovation. If there were no clustering of innovations,that is, if innovations were introduced independently of each other anddistributed randomly in time, then the changes associated with them would begradually and smoothly absorbed by the system. Or, if innovations were alwaysof the type represented by a new kind of sandwich, then too would newchanges be smoothly absorbed in the economy. Business cycles then would notexist, although there would still be good times and bad times for reasonsexternal to the economy. But when innovations are major in magnitude andare bunched in time then the changes initiated by the primary innovation cannotbe smoothly and gradually absorbed in the system. The absorption of a concen-tration of innovations and their consequences—restructuring of large parts ofthe economy, elimination of inefficient businesses, transfer of labour fromcontracting to expanding industries, liquidation of indebtedness incurred duringthe upswing through inflationary finance, and so on—requires a period of calm,which is provided by the recession. The trough of the recession representsthe economy’s new equilibrium. The re-establishment of equilibrium shows that Comparing Marx and Schumpeter’s Theories of Development the upheavals created by the introduction of the innovation eventually correctthemselves.18 The sequence of events from one position of equilibrium to the next, in historical time, constitutes the process of economic development. During thisinterval, the economy undergoes a number of important changes. Some of thesemay be noted. (a) Profits emerge as a result of entrepreneurial initiative and areunequally distributed among businesses; generally leaders earn more than the‘mere imitators’. (b) Labour productivity and the aggregate social productincrease. (c) The composition of the social product changes significantly. (d)Industry structure is transformed; it is characterised, among other things, by theemergence of new industries and increase in the size of the typical unit. (e) Thetechnology used in various sectors of the economy improves significantly. (f)There is an increase in the real incomes of consumers since all improvements inlabour productivity and cost reductions are passed into lower prices.
Finally, three important features of Schumpeter’s theory should be noted.
First, the process is characterised by discontinuity: although recession is a necess-ary reaction to the upswing, an upswing does not automatically follow a recession.
The next period of prosperity must ‘wait’ for a new act of business leadership, theintroduction of a major innovation. We will expect activity to resume, assumingthat the spirit of capitalist enterprise is alive. But since the introduction of inno-vation is a matter of individual volition, its timing cannot be predicted. Second,the existence of profits is explained in dynamic terms. They arise as a result ofan innovation and disappear as the adjustment process is completed (for a discus-sion of Schumpeter’s theory of profit, see Haberler, 1951). Third, an act ofprevious saving has not figured in the outline of the model presented above.
(Recall that the primary innovation was introduced with the help of bankcredit.) The essence of the development process lies in the diversion of existingresources from less to more productive uses. In fact, the phenomenon ofsavings is neither a necessary nor a sufficient condition for development. It isnot necessary because, as noted, existing resources are put to more productiveuses to achieve development; it is not sufficient because savings can be used Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 to invest in more and more mail coaches, in which case there would be nodevelopment.
8. Schumpeter on the Transition to Socialism Schumpeter said in several places that his prognosis—capitalism’s ‘march intosocialism’—was the same as Marx’s. But, given that Schumpeter’s ‘general 18We note the following points in passing. (a) The possibility of deficient aggregatedemand which concerned Marx and later Keynes so greatly has no place in Schumpeter’sexplanation of the business cycle. (b) Since the business cycle is part of the natural processof economic development there is no room here for government intervention to mitigatethe effects of recessions. (c) The recessions that we are talking about here are distinctfrom depressions of the type experienced during 1929 – 1933; the latter are pathologicalphenomena that have altogether different causes and may require intervention.
outlook’ and conception of capitalism are so different from those of Marx, itshould come as no surprise that the mechanism of evolution suggested by him,and the kind of socialism he envisaged, are very different from Marx’s. InSchumpeter’s schema there is no economic breakdown, no impoverishment ofthe masses and no class struggle. On the contrary, long-term economic expansionresults in the improvement in labour’s standard of living. This means thatSchumpeter’s mechanism of social evolution has to solve the apparent paradoxof capitalism’s economic success being associated with its political failure. Thecentral point here, as we will see, is that economic development under capitalismdestroys elements of the superstructure on which the continued existence of thebourgeoisie as a class depended.
It is important to note that, like Marx’s suggestions regarding the breakdown of capitalism, Schumpeter’s account of capitalist evolution is less a well devel-oped theory than a set of ideas pointing in a certain direction. Like Marx, heoffers his prognosis on the basis of certain observed tendencies and he recognisesthat the prognosis will be fulfilled only if these tendencies continue to work them-selves out as they are doing at present, and if no events external to the logic ofcapitalism interfere with their operation (Schumpeter, 1950b, p. 163; also fn. 13above).
Before dealing with Schumpeter’s leading ideas on the future of capitalism, it would be useful if we attempt briefly to convey what we take to be an important, ifnot the central, line in his thinking. To understand this we need to go back to theevolution of feudal society during the turmoil that followed the destruction of theRoman Empire. In those disorderly times the function with the highest social valuewas war. In this situation, men with a strong aptitude for leadership on the battle-field came to form the upper strata of society. Military leadership naturallyextended into political leadership, and the ‘mystic glory’ that attaches to thefigure of the warrior on horseback was naturally transferred to leadership in pol-itical and social life. As a result, it was natural that the class of warrior-aristocratsshould command general obedience of the mass of people and that the lattershould consider them as their natural superiors. This was the historical context Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 in which the culture of obedience was established. Once established, the traditionof obedience is passed from generation to generation and periodically renewed. Aswe shall see presently, what capitalist development does is first to weaken thebourgeoisie as a class and create a climate of opinion generally hostile to it(Schumpeter, 1950b, Part II, chapter XIII) and second, by exerting a rationalisinginfluence on life in general it erodes the willingness of the masses to submit totheir superiors, i.e. to those who perform social functions of higher value. Seenfrom the long-run historical perspective, socialism may be nothing more thansociety’s device to re-impose social discipline.19 Let us now briefly highlight some of the tendencies that, according to Schumpeter, are impelling capitalism towards socialism.
19The idea of social discipline held by Schumpeter is similar to Marx’s. But Marxattributes the inculcation of social discipline in the capitalism of his day to repressivemeasures taken by the state, particularly the poor laws and laws against vagabondage.
Comparing Marx and Schumpeter’s Theories of Development It is a natural consequence of capitalist development that the size of the typical enterprise should increase. Family-owned and family-managed industrialunits are displaced by the emergence of giant, bureaucratic corporations that arecharacterised by separation of ownership and management. Typically, such anenterprise is owned by a large number of shareholders and managed by salariedexecutives. In this situation, the management of the enterprise comes under thecontrol of committees or boards of directors, and scientific and technical researchcomes to be carried out by teams of experts. In this way progress becomes‘automatised’ and ‘institutionalised’ and the individual entrepreneur, who wasthe principal actor on the stage of economic development, loses his social func-tion. This has a profound effect on the bourgeoisie as a class.
We have seen that the entrepreneur need not be a member of the capitalist class; the doorway to the capitalist class is open to men of extraordinary ability.
It is this constant entry into the bourgeoisie of men possessing qualities ofleadership and willpower from other strata of society, and the exit of thosewho have lost the vigour of their forefathers, that gives the bourgeoisie its vitalityas a class. With the evolution of the family-owned and family-managed enterpriseinto the giant corporation, the bourgeoisie tends to lose its dynamism and thenits social function—a function that consisted of taking society forwardtechnologically and economically. A class that loses its social function tends todie, unless it is able to find another function. The social function is still there,but it is performed ‘collectively,’ by salaried executives rather than individualentrepreneurs.
This process has important consequences for the institutional frame of capit- alism. Here we will direct attention to only one of these, the weakening of the capi-talist motivation or the ‘evaporation of the substance of property.’ With thedecline of individualistic capitalism the personal and family motivation tends tofade away. The businessman develops the psychology of a salaried executive,who is with one firm today and with another tomorrow. He loses the long-termperspective and the sense of commitment and responsibility that goes with ‘full-blooded’ ownership. Under individualistic capitalism, with family-owned enter- Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 prises, the bourgeois would stand at the doorstep of his factory and defend itagainst attack. Would the salaried executive or the ‘absentee’ shareholder dothe same? Now the question is, whence comes the ‘attack’? (Schumpeter does not specify the form it may take.) As we have seen, the bourgeoisie has done itsduty by working people who have seen a secular rise in their standard of living.
And we know that trade unions generally are not socialist; they are primarily inter-ested in improving the working conditions of their members within the frameof capitalism (Schumpeter, 1950b, Part II, chapter V; Part V, chapter XXV).
So, why the attack and ‘march into socialism’? There is no single answer tothis question. For instance, Schumpeter (who was writing during the 1940s) con-sidered the possibility that a country might ‘sleepwalk’ into socialism through theestablishment of a welfare state. Or, the system may degenerate into some kind of‘labourism’, a situation in which the government primarily serves the interests ofthe working class. Other routes to ‘socialism’ are of course possible. But central toSchumpeter’s overall thought is the idea that the threat comes from ‘the masses’ (though not, as in Marx, from organised labour consciously and rationally attack-ing the capitalist citadel).
As noted earlier, the problem is one of social control. The social discipline that we observe under capitalism was inherited from the feudal period. Workingpeople transferred part of the respect they showed their feudal lords to theirnew masters. Life was made easier for the bourgeoisie in this respect because itcontinued to live, even under individualistic capitalism, in symbiosis with the des-cendents of the old warlords. The landed aristocracy that provided the politicalclass of social traditions continued to manage the machinery of the state whilethe bourgeoisie devoted all its energies to economic activity (Schumpeter,1950b, p. 302). It therefore continued to enjoy the benefits of the habits cultivatedin pre-capitalist times.
However, with continuing economic development the pre-capitalist structure and the mechanisms of social control that had provided the bourgeoisie with aprotective shield were gradually undermined. And with the erosion of thepre-capitalist superstructure, the bourgeoisie became defenceless against attack.
Two further questions need to be answered. First, why can the bourgeoisie, even in its weakened form, not renew the culture of obedience? The answer isquite simple: ‘the industrialist and the merchant, as far as they are entrepreneurs,also fulfil a function of leadership. But economic leadership of this type does notexpand, like the military lord’s leadership, into national leadership. On the con-trary, the ledger and cost calculation absorb and confine’ (Schumpeter, 1950b,p. 137). The capitalist’s pursuit of profit is a very different thing from thefeudal knight’s pursuit of the Holy Grail.
Second, capitalist development advances a rational approach to life and creates a critical frame of mind. So we are led to ask, why is the ruling classunable to argue the case for capitalism on its utilitarian credentials? Again,Schumpeter’s answer is simple. Political attack cannot be met by reason.
Reasoned argument may tear the rational garb of attack but it cannot reach theextra-rational impulse that drives it. In any case, in political matters the massesare generally incapable of seeing where their true interest lies. They see only Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 monopolistic practices, high profits and social inequality. To see the case for capit-alism they would need to see further than the short run, and that requires powers ofanalysis that are quite beyond them.20 9. Schumpeter’s Contribution to Marx’s Method So far, we have argued that the similarities and differences between Marx andSchumpeter can be explained by Schumpeter’s general acceptance of Marx’smaterialist method and his rejection of the second part of the general materialistconception that has to do with the content of Marx’s schema. In the present 20It is an important part of Schumpeter’s ‘general outlook’ that the rational thinking ofmuch of the population does not extend beyond their everyday concerns, that is, theyare unable to take a rational view on broader political and social issues. For a finelynuanced discussion of this point, see Schumpeter (1950b, pp. 144 – 145).
Comparing Marx and Schumpeter’s Theories of Development section we ask whether it is possible to incorporate some of Schumpeter’s insights,as suggested by his modifications of the materialist method, into Marx’s methodwithout compromising the latter’s integrity. Our answer will be in the affirmative.
In the section that follows we will indicate the philosophical and theoretical gulfthat divides the content of their theories.
We will focus on two qualifications that we consider of particular import- ance. The first qualification refers to the time lag between changes in conditionsof production and the adjustments in elements of the superstructure that follow.
As noted in Section 4, Schumpeter viewed culture and social attitudes as resistantto change, so that in any period we will find disjuncture, rather than correspon-dence, between the economic base and elements of the superstructure thatreflect an earlier mode of production. This means that actual behaviour maydepart from what we would expect it to be if we interpreted it in terms of the pre-vailing mode of production.21 Marx would have had no problem with the idea of the lag. As one respected commentator on the subject (Rosenberg, 2000, p. 5) has remarked, Marx was‘much too sophisticated a historian to believe that economic changes generated“appropriate” social changes instantaneously. Indeed, . . . Schumpeter himselfabsolves Marx of such possible naivete´, adding that Marx, although perhaps notfully appreciating the significance of lags, would not have taken the simplisticposition involved in denying them a role.’ Marx, we have seen (footnote 10above), took the view that the bourgeoisie continued to live in a state of symbiosiswith the landed aristocracy and that although the economy had become thoroughlycapitalistic, elements of pre-capitalist political structure persisted into the 19thcentury. In this context Marx has no dispute with the notion of a disjunctionbetween conditions of production and the political superstructure. The differencebetween his view and Schumpeter’s concern the nature of social classes and howthey collaborate. Further, it is clear that Marx would not have contested the viewthat certain feudal values persist in the age of capitalism; instead he would havechallenged Schumpeter’s claim that the bourgeoisie, by the nature of its socialfunction, is peace-loving and incapable of territorial aggression.
Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 We conclude that the Schumpeterian insight regarding the role that lags may play can be comfortably accommodated in Marx’s materialist method. It allowsfor a degree of interaction between conditions of production and the superstructurewithout compromising the essential features of the materialist method.
Schumpeter’s second qualification to Marx’s method refers to the role of the ‘individual’ in the social process. The nature of the problems posed in the present 21For example, in his theory of imperialism in the age of capitalism Schumpeter (1950a;see also 1950b, esp. p. 128) postulates that the bourgeoisie is inherently non-militaristic;capitalist imperialism is therefore atavistic. Militaristic behaviour under capitalism isexplained by attitudes and habits prevailing in pre-capitalist times when the lust forbattle was an essential part of feudal culture. Schumpeter argues further that with the con-tinuing development of capitalism, attitudes and behaviour associated with the feudalmode of production will be replaced by ideologies appropriate to the capitalist mode,and capitalist imperialism will eventually disappear.
case is rather different from the one just discussed. However, we can isolate someof Schumpeter’s insights from the rest of his thought on this question (that is, therole of the human agency that intervenes in the social process to seek an outcomedifferent from the one that would result in the absence of such intervention), andthese can be incorporated into Marx’s method without doing violence to its essen-tial character. As already indicated, there are other aspects of his thinking that arealien to Marx’s philosophic-theoretic standpoint; these are discussed in the sectionthat follows.
We noted in Section 5 that, in Marx’s treatment of the social process, the emphasis is entirely on the imperatives of the system. But when he neglects therole of the individual (or the subjective factor), say, in the accumulationprocess, it is obvious that he is not suggesting that the capitalist class acts collec-tively or in concert. If we start our consideration of the development process at onepoint in time (as Schumpeter does; see Section 7 above), one individual will beseen to take the lead and others will be seen to follow. The ‘leader’ will reapthe reward for being first in the field.22 But he pays no particular attention tothis leading role. Marx sees the introduction of innovations as a process inwhich the individual capitalist who, in a particular instance, takes the lead andintroduces a new method of production, is driven by the imperatives of thesystem. The leader is seen as part of the ongoing process; he uses the contributionsof others who came before him, and the capitalists who follow his lead, the so-called imitators, may play just as important a role when they disseminate thenew idea or modify it and put it to different uses (see Rosenberg, 2000, chapter4). This idea is extended to the historical process in general.
Schumpeter takes issue with this abstraction of the subjective factor from the social process. In the following passage he seems to be directly speaking toMarx: Manifestly, the captured surplus value does not invest itself but must be invested.
This means on the one hand that it must not be consumed by the capitalist, andon the other hand that the important point is how it is invested. Both factors lead Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 away from the idea of objective automatism to the field of behaviour andmotive—in other words from the social force to the individual—physical orfamily, from the objective to the subjective. It may be objected that the logicof the situation forces the individual to invest his profit, that individual motiv-ation is only a fleeting intermediate phase. This is true, as far as it goes, andmust be acknowledged by any reasonable person. Naturally the individualpsyche is no more than a product, an offshoot, a reflex, and a conductor ofthe inner necessities of any given situation. But the crucial factor is that thesocial logic or objective situation does not unequivocally determine howmuch profit shall be invested, and how it shall be invested, unless individual dis-position is taken into account. Yet when it is done, the logic is no longer inherentsolely in the system as distinct from the individuality of the industrialist himself.
(Schumpeter, 1950a, pp. 118 – 119; all emphasis in the original) 22Marx was fully aware of the process that we have referred to as Schumpeteriancompetition (see, for instance, Marx, 1867, p. 436).
Comparing Marx and Schumpeter’s Theories of Development It is important to emphasise that while making qualifications to the materialistmethod, Schumpeter does not depart from its general principles. The subjectivefactor is also a social fact. Its capabilities and ways of thinking are products ofthe social process. The individual can never stand outside this process. Thus,nearly twenty years after the work from which the passage quoted above istaken, he wrote: [M]ankind is not free to choose. This is not only because the mass of people arenot in a position to compare alternatives rationally and always accept what theyare being told. There is a much deeper reason for it. Things economic and socialmove by their own momentum and the ensuing situations compel individualsand groups to behave in certain ways whatever they may wish to do—notindeed by destroying their freedom of choice but by shaping the choosing men-talities and by narrowing the list of possibilities from which to choose. If this isthe quintessence of Marxism then we all of us have got to be Marxists.
(Schumpeter, 1950b, pp. 129 – 130) We can now see that the manner in which Schumpeter’s insights may be incorporated into the materialist method are suggested by Schumpeter himself.
First, for Schumpeter, the organic-evolutionary nature of the social process doesnot mean that one stage of this process contains within it all the necessary and suf-ficient conditions for the next stage in its complete shape and form. If that were thecase then there would be no role for the human agency in the social process and, tore-phrase the most famous of the Theses on Feuerbach, there would be no point forphilosophers to try to understand it. Schumpeter is suggesting that the historicalprocess normally confronts the subjective factor with a range of possibilities, arange limited by the material and social conditions inherited from the past.
Thus, for example, the entrepreneur who introduces the innovation has somechoice of what innovation to adopt and in what form to introduce it. But the pos-sibilities open to him are contained in the data of the stationary equilibrium fromwhich he starts. It is this range of possibilities created by the objective historicalprocess that provides the space for the human agency to intervene in the process.
Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 The exact form and shape of the process carries the imprint of the conscious inter-vention by the human agency.
Second, although the human agency is the product of the social process, its quality at any time is not uniquely given. In general, the quality of leadership,say, at the national level at any time is determined by the level of social and cul-tural development of society; but society’s ‘choice’ of the personnel that makes upthe leadership is not confined to one individual or group of individuals. The samesocial situation is capable of throwing up different calibres of decision-makingpersonnel. The individuality of the entrepreneur whose innovation initiates a par-ticular phase of the development process is not uniquely given. A person differentfrom the one who actually took the lead in a particular situation could have comeforward with an innovation of his own. The same, with appropriate modifications,can be said for the policies adopted at the national level. Hence, the response of anindustry or society to a given set of possibilities is also not uniquely determined.
A society’s response to the objective possibilities depends partly on who happensto occupy the position of leadership (see Schumpeter, 1950b, p. 399n).
These considerations are entirely consistent with Marx’s often-quoted statement that human beings make their own history, but within the limits deter-mined by the objective social process. The underlying forces, as suggested by thematerialist method, remain paramount and human agency is the product of thehistorical-social process. The latter determines the objective possibilities avail-able and the limits within which the subjective factor can intervene in the objec-tive process. At the same time, human agency is not an automaton; it has a degreeof freedom and responsibility.
10. ‘Wide Differences in General Outlook’ In the preceding section we were able to isolate those aspects of Schumpeter’sstandpoint on the role of the human agency that could be incorporated intoMarx’s method from those that related to the content of his theory and thatwere alien to Marx’s thought. We now turn to the latter aspects of Schumpeter’stheory.
These aspects of Schumpeter’s thought were noted in our discussion of his theory of social classes. In that theory, classes are formed on the basis of differ-ences between individuals—differences in their aptitudes and abilities thatenable them to perform the various social functions that are necessary in anylarge and complex society. Given their aptitudes and abilities, individuals orfamilies get distributed to various classes for which their abilities are most appro-priate. A crucially important aspect of this theory is that abilities are unevenly dis-tributed in society, and that the quality of leadership required for the performanceof functions of high social value is a rare ability.23 Hence, the prominence given tothe human agency in the shape of ‘exceptional men’ (they are always men!) of‘exceptional quality’ of leadership who possess the ‘will to conquer,’ to establisha ‘dynasty’—men who must be distinguished from the rest of the population.
Schumpeter distinguished these aspects of his ‘general outlook’ from that ofMarx. In the paragraphs that follow an attempt is made (again, ‘with desperatebrevity’) to explore the assumptions behind these differences and to bring out Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 the tension that exists between Schumpeter’s evolutionary approach (where thesimilarity with Marx lies) and his exaltation of the role of the individual (that isassociated with his general outlook or social philosophy and where his ‘widedifference’ with Marx is manifested). Since Schumpeter himself does not directlydwell on his own ‘general outlook,’ we will have to approach it dialectically, thatis, we see the viewpoint he rejects, and the perspective from which he attacks it.
Marx’s philosophical outlook was expressed in his Theses on Feuerbach and other writings of the 1840s. Relevant to our present discussion is his sixth ‘thesis’,which states: ‘The human being is not an abstraction dwelling within the individ-ual. In reality the human being is the ensemble of social relations.’ According toMarx a momentous change takes place in human history when social division of 23A noteworthy aspect of Schumpeter’s ‘general outlook’ is that abilities are inherited.
He considered Sir Francis Galton, the founder of the ‘science’ of eugenics, as one of ‘thethree greatest sociologists—the others two being Vico and Marx’ (Schumpeter, 1954, p. 791).
Comparing Marx and Schumpeter’s Theories of Development labour comes to be established. Now individuals produce not to satisfy their needsdirectly (as do independent producers in the absence of social division of labour),but by exchanging their products with those of others. From the observation thathuman beings are locked together in the process of production (and a network ofsocial relations corresponding to this process), Marx goes on to suggest that anindividual’s wealth now no longer consists in his own labour, but in the quantityof labour of others that his product can command; his labour now counts only as‘social labour.’ His labour is a fraction of the total social labour of society.
By adopting this viewpoint, Marx has made an assumption of the greatest importance for his system of thought: all human beings are seen as having poten-tially similar abilities. He sees labour in ‘abstract’ terms, as potentially homo-geneous; the differences or ‘concrete’ forms of labour we observe are sociallyacquired, through upbringing, education and training. This means that labourwith higher skills or abilities can be treated as a multiple of unskilled labourand therefore can analytically be reduced to it.24 According to Marx, this is the‘reality’ that lies behind the appearance of differences, say, between the skill ofthe shoemaker and that of the tailor. And if that is the case then behind the appear-ance of the shoemaker and the tailor exchanging their products is the hiddenreality of the two exchanging equivalent quantities of a ‘common substance,’social or homogeneous labour.
By eliminating concreteness of commodities (their physical characteristics), Marx has excluded use-value or utility from the laws of exchange. In other words,he has excluded the subjective factor from the determination of value, and rejectedthe use of what Schumpeter calls ‘methodological individualism’—the approachin which determination of economic phenomena, for instance, values andprices, surplus value and profits can be traced to individual decisions andchoices (Schumpeter, 1954, pp. 888 – 889). Two other points are worth noting.
The assumption that human beings can be treated as similar in their abilitiesand the neglect of the subjective factor are two aspects of the same Marxian(and classical) idea, and with the concreteness of commodities eliminated fromthe model, the focus turns on the social relations between commodity producers.25 Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 24For social labour Marx also used the term ‘abstract’ labour.’ For a discussion of theconcept of abstract labour, a critique of this concept, and two attempts to ‘convert’ con-crete or complex labour to simple or abstract labour, see, respectively, Hilferding(1949, pp. 123 – 148), Prendergast (1995), Blaug (1982), Rowthorn (1974) and Roncaglia(1974).
25The standpoint regarding homogeneous labour is adopted by all who subscribe to thelabour theory of value. Thus, Ricardo explicitly excluded from his model commoditiesthat are ‘scarce’ and whose value is determined by use-value alone. Ricardo defined com-modities or resources as ‘scarce’ when they are not reproducible by the economic system.
Examples of scarce resources or commodities are ‘Old Masters’ and land that produces apeculiar quality of wine. Labour skills are reproducible when they are acquired (not innate,in which case they would be categorised as ‘scarce’) (Ricardo, 1821, p. 12). AlthoughAdam Smith did not always adhere to the labour theory of value, he did find the notionof ‘abstract’ labour useful.
This raises an important question—a question Adam Smith had posed in the second chapter of the Wealth of Nations (Smith, 1776), which has the title ‘Of theprinciple which gives occasion to division of labour’. If people have similar abil-ities and skills why do they choose to specialise? If the shoemaker can produceshirts as well as the tailor does, why does the shoemaker not make his ownshirts? They should be able to satisfy their needs as independent producers aswas the case before social division of labour came to be established. Theanswer is that by specialising each producer becomes more efficient in hischosen trade. The underlying reason for specialisation is the phenomenon of econ-omies of scale. The economic basis for social cooperation, when people havepotentially similar abilities and skills, lies in the fact that it results in greater pro-ductivity.26 In this way of looking at things, the observed differences betweenpeople are the result of social division of labour, not the underlying cause of it.
In this Marxian and classical way of thinking the reproducibility of labour skills (and of resources in general), the evolution of the social division oflabour, and therefore economic development precede, and indeed give rise to,differences in skills or specialisation. Evolution creates the resources it needs.
That is the only way that it can be seen as self-generating.
This is the viewpoint that Schumpeter’s rejects, and he rejects it with his characteristic vehemence: he sees absolutely no merit in this approach(Schumpeter, 1954, pp. 588 –605). The attack on Marx’s ‘general outlook’ iscentred on the labour theory of value. The attack, on both Marx and Ricardo, is twopronged. The first prong is directed at the failure of the labour theory to holdoutside the special case in which all branches of production have identical capitalstructures. The problem has been widely discussed in the literature. We need saynothing more on this aspect of Schumpeter’s critique of the labour theory.27 The second line of attack is more fundamental in nature and also relevant to the present discussion. It is directed at the Ricardian-Marxian standpoint accord-ing to which, for the purpose of analysis, we can assume that observed differencesbetween different types of labour are acquired or reproducible rather than innateand given. To be sure, Schumpeter does not deny that many differences in labour Downloaded By: [Rahim, Eric] At: 16:55 18 December 2008 skills (as in shoemaking and tailoring) may be acquired and reproducible, but hetakes the view that the labour theory is fundamentally flawed because it is unableto take account of, or neglects by assumption, differences in abilities that arenatural and therefore not acquired. For this reason, and this reason alone, itmust be discarded as a ‘detour’ and an aberration from the historical path thatleads to the Walrasian theory of value. This latter theory, which (i) cruciallydepends on the assumption that resources with all their physical characteristics,including labour skills, are given; and (ii) traces the determination of all economic 26See Marx’s extensive discussion of the relation between social division of labour andproductivity in (Marx, 1867, chapter 14). Chapter 13 of Capital, Vol. I, devoted entirelyto discussion of economies of scale, is titled ‘Cooperation.’ 27For a discussion of Ricardo’s problem and his attempts to resolve it, see Sraffa (1951).
On Marx’s problem and his attempt to resolve it, see the non-technical discussion by Meek(1977, pp. 95 – 119).
Comparing Marx and Schumpeter’s Theories of Development phenomena to individuals’ subjective choices, according to Schumpeter, is theonly scientifically correct theory: it captures the ‘pure logic’ of the capitalisteconomy.


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