“The social process is really one indivisible whole” (Ch.

7)

Creative Destruction: Schumpeter’s Entwicklung and the Marxian Dialectic

There is however one thing of fundamental importance for the methodology of economics which he [Marx] actually
achieved. Economists always have either themselves done work in economic history or else used the historical work of
others. But the facts of economic history were assigned to a separate compartment. They entered theory, if at all,
merely in the role of illustrations, or possibly of verifications of results. They mixed with it only mechanically. Now
Marx’s mixture is a chemical one; that is to say, he introduced them into the very argument that produces the results.
He was the first economist of top rank to see and to teach systematically how economic theory may be turned into
historical analysis and how the historical narrative may be turned into histoire raisonnee. (CS&D, p.44)

The reason why Marx is able “to introduce the facts of economic history into the very argument that
produces the results” cannot be due to any “methodology of economics” because there is no such thing
as a “methodology of economics” just as there is no “methodology of science”. What
characterizes scientific studies is not an identifiable “methodology” but rather a human praxis
that first identifies a desirable outcome and then sets out to apply existing knowledge to achieve
it and, in the practical process of doing so, may or may not come out with that desirable outcome
or other serendipitous outcomes. Each particular scientific experiment is sui generis – it is an
“experience” - and there is no way of abstracting from individual experiments to a broader
“methodology” for the simple reason that no “method” will ever be capable of being scientifically
or logically connected to the predictable (rather than “causal”) relation that is ultimately found
between events.

[Gramsci on dialectics and evolution.]

(Vattimo, Intro a H, p25)

And the second question is, assuming, as Schumpeter allowed in his later work (“Business
Cycles”) that the process of “innovation” and “creative destruction” is indeed subsumed within the
large “monopolistic firm” rather than in the heroic figure of the individual “entrepreneur”, - allowing
all this, what is it then that “motivates” innovation and development? Why indeed do
“entrepreneurial individuals or firms” engage in this “innovative” process of “creative destruction”
except to maximize profits or market share or a mixture of both?

The third question, a corollary of the previous two, is the most important: - what does “profit”
mean within this process of “Entwicklung”? (Cf. Weber’s “rational organization of free labour
under the discipline of the factory”.)

In a future contribution we will look at the extreme lengths Schumpeter went (in the ‘Theory’ and
in ‘Business Cycles’) to dis-count the profit motive as the “driver” of “innovation” and capitalist
“development”. – Which is why he did not tackle the meaning and source of “profit”, relying surely
on Bohm-Bawerk’s theory of interest.

[S’s treatment of “endogeneity” of Innovation as a “mechanism of transformation” of the

“production function”. Rationalisierung/Vergesellschaftung.] This is the “experimental-
scientific” (erfahrungswissenschaftliche) empirical discovery Schumpeter makes. The
“mechanism” is “innersystematisch” (endogenous, as against the factors listed by JB
Clark – “Aber die restlichen zwei (Veranderung der Technik und der Organisation der
Produktion) bedurfen besonderer Analyse und rufen noch herfor andres als…”Storungen”
im Sinne der statischen Theorie” [92]).

Three kinds of “rationalities” are possible, therefore. One is the empiricist rationality of scientific research, another is the
“teleological”, “idealist” rationality introduced by Hegel, and finally we have the Rationalisierung that Nietzsche expounds as the
objectification of the Wille zur Macht. How difficult and confusing it may be to separate the three is perfectly illustrated by the most
“philosophical” economic theoretician of the neoclassical and Austrian schools, Joseph Schumpeter, who combined a solid Machian
background in the Vienna of Karl Renner with a Nietzschean vision of reality filtered through Max Weber. Schumpeter begins
Chapter Two of his Theorie with this sweeping and suggestive summation:

“The social process which rationalizes our life and thought has led us away from the metaphysical treatment of social development
and taught us to see the possibility of an empirical treatment; but it has done its work so imperfectly that we must be careful in
dealing with the phenomenon itself, still more with the concept with which we comprehend it, and most of all with the word by
which we designate the concept and whose associations may lead us astray in all manner of directions. Closely connected with the
metaphysical preconception…. is every search for a ‘meaning’ of history. The same is true of the postulate that a nation, a
civilization, or even the whole of mankind must show some kind of uniform unilinear development, as even such a matter-of-fact
mind as Roscher assumed…” (p.57)

The footnote at “rationalizes” was expanded for the English translation and reads as follows:

“This is used in Max Weber’s sense. As the reader will see, “rational” and “empirical” here mean, if not identical, yet cognate,
things. They are equally different from, and opposed to, “metaphysical”, which implies going beyond the reach of both “reason”
and “facts”, beyond the realm, that is, of science. With some it has become a habit to use the word “rational” in much the same
sense as we do “metaphysical”. Hence some warning against misunderstanding may not be out of place.”
Evident here is the maladroit manner and dis-comfort (not aided, and perhaps exacerbated, by the disjoint prose) with which
Schumpeter approaches the question of the “meaning” of history. The Rationalisierung, which Schumpeter adopts from Weber, has
made “possible” a scientific “empirical treatment” of “social development (Entwicklung)”, but has done so only “imperfectly”, not
to such a degree that we are able to free ourselves entirely of “metaphysical” concepts – which is why “we must be careful in
dealing with the phenomenon [Entwicklung] itself”. Nevertheless, Schumpeter believes that it is possible to leave “metaphysics”
behind and to focus on “both ‘reason’ and ‘facts’”, and therefore on the “realm of science”. In true Machian empiricist fashion,
Schumpeter completely fails to see the point that Weber was making in adopting the ante litteram Nietzschean conception of
Rationalisierung to which he gave the name. “The social process which rationalizes” is an exquisitely Weberian expression: far from
indicating that there is a “rational science” founded on “reason” and “facts” that can epistemologically and uncritically be opposed
to a non-scientifc idealistic and “metaphysical rationalism”, Weber is saying what Nietzsche intended by the ex-ertion of the Will to
Power as an ontological dimension of life and the world that “imposes” the “rationalization” of social processes and development in
such a manner that they can be subjected to mathesis, to “scientific control”! What Weber posits as a “practice”, one that has clear
Nietzschean onto-logical (philosophical) and onto-genetic (biological) origins, Schumpeter mistakes for an “empirical” and
“objective” process that is “rational” and “factual” at once – forgetting thus the very basis of Nietzsche’s critique of Roscher and
“historicism”, - certainly not (!) because they are founded on “metaphysics” (!), but because they fail to “question critically” the
necessarily meta-physical foundations of their “value-systems”, of their “historical truth” or “meaning”!

Far from positing a “scientific-rational”, “ob-jective” and “empirical” methodology from which Roscher and the German Historical
School have “diverged” with their philo-Hegelian “rationalist teleology”, Nietzsche and Weber were attacking the foundations of
any “scientific” study of “the social process” or “social development” that does not see it for what it is – Rationalisierung, that is,
“rationalization of life and the world”, the ex-pression and mani-festation of the Wille zur Macht! By contrast, Schumpeter believes
that the mere abandonment of any “linearity” in the interpretation of history, of any “progressus” (as Nietzsche called it), is
sufficient to “free” his “rational science” from the pitfalls of “metaphysics”!

This contrast between Nietzsche’s approach to the world of experience and perception and appearance as “becoming”, against the
Machian “empiricist” approach to “scientific reality and fact and truth” is quite revealing: both Nietzsche and Mach start from the
opposition of “experience” and “perception” to any “meta-physical reality” that may lie “beyond” the human perception of life and
the world – including, even for Mach, the Newtonian conception of space and time! But, a most crucial distinction, whereas Mach
still believes in the epistemological “reality” of Newtonian physics and of the “laws of science” tout court, Nietzsche in extreme and
radical contrast comes to question the very “scientificity” of this “science” and of this “reality”, whether Newtonian or indeed
Machian, questioning in the process even the Kantian epistemological foundations of logico-mathematics! (We shall pay the closest
attention to these matters – which constitute the whole thrust and import of our present work – in Part Two of this study.)

Like Weber, Schumpeter believed that the mere fact that his is not Hegelian-Marxist “rationalism”
is still sufficient to preserve the scientificity of his Veranderungsmechanismus (cf. fn.2 of ch.2 of
the Theorie) and to exorcise all “metaphysics” from his theory. Yet, as we have amply
demonstrated, it is precisely his uncritical belief in a “rationality” freed of all “values” or
“metaphysics” that lands him straight into the cult of bourgeois-capitalist scientific “progress” –
even to the point where he confuses his own original “critical” concept of Entwicklung, of
“development-through-crisis” or “trans-crescence”, with the scientistic bourgeois-capitalist notion
of “evolution”. Even assuming that a “mechanism” such as the Innovationsprozess can be
“animate” or institutional (cf. Carl Schmitt in The Leviathan, ch.3, and Weber’s “living machine” in
Parlament und Regierung), still its “value-neutral [wert-frei] scientificity” (its Weberian purposive-
instrumental [Zweck-] rationality linking means with ends) is thereby invalidated because (as Leo
Strauss argued against Weber in Natural Right and History) supposedly “rational scientific”
means can never be separated from supposedly “irrational ethico-political” choices. (At times,
Schumpeter almost seems to justify Langlois’s vulgar subsumption of the Unternehmer-Geist to
“objective rationality” tout court, completely misconstruing thereby the essential, though invalid,
Weberian distinction between Zweck- and Wert-Rationalitat and thus reducing the Entrepreneur
to a rational-scientific moment of capitalist industry as part of the Veranderungsmechanismus!
See Langlois, “Analytical Survey of the Austrian School”.

As we have shown, Schumpeter bears some responsibility for the subsequent bathetic abuse by
his epigones of the concept of “evolution” and “rationalization” as some kind of inevitable
progressus independent of capitalist social relations of production (cf. Nelson and Winter; but
contra see the work of Sylos-Labini). Like Weber, however, Schumpeter does not fall for the
late-Romantic fantasy of a pristine innocent era of “entrepreneurial capitalism” being
corrupted by a stagnant phase of “monopoly” or “trustified” capitalism. He does not share
with the neo-Kantian Sozialismus of his native Austria (from Kautsky through Adler to
Bernstein) the pathetic delusion that what is truly wrong with capitalism is the abuse of
market competition by “rent-seeking” monopolies or oligopolies headed by the banks
(Finanzkapital). Paradoxically, for the Sozialismus, this monopolistic abuse or excess is
brought about by the very “anarchy” of capitalist market competition! It is “the lack of
regulation” of production - its Planlosigkeit - that leads to the opportunistic concentration
of industry and finance in the hands of monopolies.

The objective, formal, logico-mathematical theorization of “empirical data”, then, quite simply
can never be reconciled logically or scientifically with the ultimate goals of human action. This
poses an evident problem for both Weber and Schumpeter, as much as it did for Marshall and
Mach: for the epistemological quandary of all “science” is to determine at what point sufficient
empirical evidence exists that can justify the theorization of the causal con-nection between
individual empirical observations or data. Indeed, even the selection of “data” is problematic, for
as Hayek pointed out (in Individualism and Economic Order), these “data” are not “given” at all!
The obtaining and selecting of “data” already involve a conscious “search” or “re-search” or
“inquiry” or “investigation” on the part of the “scientist” that pre-conditions the outcome or
results of this re-search!

Neoclassical Theory encapsulates the “purposive rationality” that Weber had already theorized as
opposed to the “value rationality” of human motivation: whereas the former is purely
instrumental in nature and serves only as a “Pure Logic of Choice” (Hayek) in that it prescribes
logico-mathematically and scientifically the selection of adequate means to stated goals, the latter
rationality is purely ethico-moral and teleological, it is a “rationalism”, and therefore “irrational”
in the sense that human motives and goals can never be given ultimate scientific or logico-
mathematical sanction, for the simple reason that they are based on subjective value judgements
impossible to formalize. Thus, Neoclassical Theory does not explain how and why an economy
arrives at equilibrium, but rather prescribes axiomatically the conditions that “must” obtain for
an economy to be in equilibrium.

Classical Political Economy, for its part, also allows for the “possibility”, though not the
“necessity”, of economic equilibrium by postulating a “substance” or “quantity” that determines
the “value” of goods exchanged in the market according to the amount of “labour” (in the
Smithian and Ricardian version) or of socially necessary labour time (in the Marxian version) that
goes into the production of commodities. The problem with this theory is that, if “the market” is
taken as the plausible “mechanism” through which commodities are exchanged, then only the
market mechanism can determine finally what amount of “labour” or “socially necessary labour
time” is actually contained in commodities – which brings us back to the purely Neoclassical
conception of the determination of value exclusively by empirically observable market prices!
(Again, on all this, see ch.1 in Dobb, “The Essential Elements for a Theory of Value”.)

Aware of these insurmountable difficulties, Schumpeter is then quite happy to fall back on the
“usefulness” or “reliability” of scientific theory. Economic science is not a logical or eternal set of
cor-relations between empirical data and observations; rather, it is a practical “box of tools”
which allow us to take pragmatic action on what we call “the economy” where the “economical”
represents a specific sphere of human action that can be isolated from other spheres of social
reality such as law, ethics, or politics. The above presentation shows how in effect
Schumpeter could “empirically” contest the scientific relevance of “equilibrium”, which
could only serve “didactic” or “heuristic” (Hayek in I&EO) purposes, and yet preserve his
faith in its “scientificity”.

Schumpeter wrongly believed this to be the approach that both Marx and Weber – the greatest
social theoreticians that preceded him – had adopted: - what he calls “histoire raisonnee”. Just as,
in Machism, reason cannot abstract totally from empirical evidence – as it always threatens to do
with “rationalisms” of the Hegelian and Marxian variety -, so rationality cannot abstract from
history – as it does in the “Statik” and “timeless” (Hayek) analysis of Walrasian general
equilibrium.

Even in his review of Bohm-Bawerk, Schump had stressed the “elegance” of his theory and its
empirical foundation. But Schump’s own philosophical attachment to “empiricism” - whilst it drove
him to confront the “reality” of crisis and cycle and development as “intrinsic” moments or aspects
of capitalism - was always going to relegate him to the sphere of mere observation and so
prevent him from understanding the reality BEHIND the empirical data. Indeed, the “subjectivism”
of the “Unternehmergeist”, Schump’s tribute to bourgeois “Individualitat”, could NOT be
reconciled with the ‘Rationalisierung’ propounded by Weber (as Schump wished at footnote 2 of
Ch.2 of ‘Theorie’) precisely because the “objective” “organizational” subsumption of the process
of “Innovation” relegated the “entrepreneur” to a mere “manager” and deprived the “captain of
industry” of its “Individualitat” within the process of “Innovation”.

It is the Rationalisierung that, far from killing off the necessity for leadership, in fact makes it
possible to the highest degree of command.
(Again the whole “science of management” and “theory of the organization” that recently received
great bourgeois approbation with the award of the Nobel Prize to Oliver Williamson, achieve
nothing more than TO MASK capitalist command behind “the theory of the firm” and “transaction
costs” and “contractual enforcement”- PURELY, again, TO DISGUISE the real nature of the
“political” antagonism within the capitalist firm as a structure of COMMAND, of force and violence,
in terms of “rational expectations” or “bounded rationality” – again within that ‘Rationalisierung’
indicated by Weber. The “limited rationality” of the firm – the “rationality” that de-limits its
“boundaries” [cf. R.Coase, “The Limits of the Firm”] and de-termines its “internal organization” – is
clearly an “instrumental rationality” that only serves to hide the overall function or agency of the
“firm” as a structure of command. EVEN the reduction of “profit maximization” for the purpose of
retaining “market share” can only be seen as an orientation toward the realization of profit and the
extraction of “value”.)

What is lacking in Schumpeter is the ability and willingness to admit, to acknowledge and
understand that the “entrepreneur” ALSO is “constrained” and “compelled” by the antagonism of
the social relations of production. What is lacking is the “motivation” as “will to power”, as the
need to command and control the process of pro-duction THROUGH and BY MEANS OF
“innovation”. The ‘COM-PULSION’ of the “entrepreneur” or “monopolistic firm” is the compulsion
of “profit-making” – THAT is the “battlefield”, the “system of forces” in which individual capitalists
must “com-pete” or fight. NOT for the sake of “competition” or “innovation” (as Schump always
attempts to argue – see esp. Ch. On ‘Capital’ in the Theorie), but rather TO RE-PRODUCE the
relations of production that have brought about the “domination” or “command” of the capitalist-
entrepreneur. So here the figure of the entrepreneur starts to e-merge in its TRUE
CHARACTER….as “Capitalist”!

But once the “motivation” of the entrepreneur is explained and com-prehended, what RESULTS
from it, its “out-come”, is NOT the “entrepreneurial” function but RATHER the “political” function of
“command” of the antagonism of the relations of production – and here we return to Weber’s
“leitender Geist” which is a much more consistent agency or figure AT THE END of the
‘Rationalisierung/Bureaucratisation’.

Schumpeter pays grateful tribute to Marx for being the only classical theoretician to identify the
“evolutionary” force of capitalism. But he could not espouse Marx’s “metaphysical” notions of
“value” or “socially necessary labour time”. The question then arose for Schumpeter: if “value” or
“utility”, which are either quantitative notions, or at least notions that must be quantified for
equilibrium analysis, and are thus not capable of explaining the evident “empirical phenomena” of
capitalist “crisis” and “development”, what other driving force or “agency” is there that is
“endogenous”, “intrinsic” to capitalism that determines and explains its historical behaviour? Here
Schumpeter realizes immediately that the one factor that can lead capitalism out of its “circular
flow”, the factor that leads to the formation of new “enterprises” and new “markets”, is the process
that “destroys” old “enterprises”, that “destroys” old “markets” and….”creates” new goods and
services, a process of “entrepreneurial Innovation” that gives new “enterprises” a “competitive
edge” and leads to the formation of new “firms” that rapidly “conquer” the “market” and by so
doing establish new “monopolies” able to absorb higher “profits” and, indeed, to create more
“profits” from new “markets” as these new firms “expand” the “needs” or “demand” of
“consumers”.

Schumpeter takes pains to explain (in “Business Cycles”) that it is not “consumer demand” that
drives “Innovation” because, if anything, this demand tends to be “conservative” and “retrograde”.
No, what must drive this demand is an “innovative”, “entrepreneurial spirit” (Unternehmergeist)
that drives the process of “technological innovation” in a dramatic dis-equilibrating, “crisis-
inducing” struggle of “creative destruction” (shopferische Zerstorung).

This is Schumpeter’s entrepreneurial Beruf, the equivalent of Weber’s leitender Geist (leadership
Spirit), what is necessary to transform the theoretical “static equilibrium” of neoclassical analysis
into the “dynamic”, “evolution/development” or Entwicklung of the ‘Theorie’.

Schumpeter’s Unternehmergeist, although on one hand it is not reducible to the “profit-motive” –

and in this regard Schumpeter’s attempt to divorce “capitalist/financier” from “entrepreneur” is
justified -, on the other hand it is also not reducible to the sheer “subjectivity” or Ichheit or
Individualitat of the Innovation! The mere spirit of innovation quite simply cannot replace the much
broader Wille zur Macht of Weber’s Politiker. By the time he published “Business Cycles”,
Schumpeter was forced to concede that even the “subjective”, “entrepreneurial….spirit” had
become totally integrated in the capitalist “machinery” of production.

It is noteworthy in this context that Weber did not add “the entrepreneur” to his Beruf studies, - not
because he had not inquired into “the spirit of capitalism”, but because the entrepreneur like the
scientist had to be subordinated to the wertfrei (value-free) nature of his pursuits, whereby
entrepreneurs became mere “managers” and the Wert, the Moral Value could only be understood
(Verstehen) as a much wider encompassing process of command or domination of the capitalist
over the living labour of workers.

Only at this “social-politico-economic” level can the role of the “entrepreneur” be understood as
leitender Geist, as Wille zur Macht! Schumpeter’s attempt to add and compare the Unternehmer
to the Weberian Politiker through the simple “work” of “Innovation” was doomed to fail from the
outset – precisely because capitalism is much more than a simple “formal” (almost
“artistic/spontaneous”) process of schopferische Zerstorung! (Cf. Lowith’s description of
Nietzsche’s Wille z. Macht as “creative destruction” p.294 in Von Hegel z. N)

But, as Cacciari genially points out, the moment of “trans-crescence” (noted belatedly by
Schumpeter in “Capitalism” – is the moment of Krisis at which the Kreislauf is interrupted and
“revolutionized” by the capitalist not as “entrepreneur” but rather as Politiker, which is precisely
where the capitalist enterprise meets and “needs” the political form of the State!
(Cf. Tronti’s “Stato e Rivoluzione in Inghilterra” where he emphasizes the “State-form” as
preceding the transition to capitalism – although this is done in too “voluntarist” a manner. Tronti’s
“voluntarism” implicit in the notion of “autonomia del politico” could have been avoided if he had
pursued the obvious “correspondence” of capitalist “industry” and “State-form”.)

So in essence, as Cacciari notes, Schumpeter adheres to the neoclassical notions of marginal

utility and “roundaboutness” as well as market competition and even “circular-flow equilibrium”.
But these notions, least of all “Innovation”, do not and cannot capture the “socialization”
(Vergesellschaflichung) of production and – together with the bureaucratization/rationalization –
the necessary role of “the State” as “collective capitalist”. This is a crucial factor that Marx himself
neglected, just as he overlooked “externalities” – that is, “use values” outside of the circulation of
capital. (Once more, Tronti’s “autonomia del politico” comes to mind.)

Cacciari fails to see the “positive” side of Schumpeter’s “entrepreneurial a c t” as against the
“negativity” of Bohm-Bawerk’s ‘Entsagung’ in “roundabout” production. But he sees genially the
essential: what Weber brought to light:

“Ecco perche’ Weber parla del Politiker, non dell’ Imprenditore. Egli non dimentica l’ Imprenditore:
ne aveva gia’ ricercato le origini. Ma, tra il 1905 e il 1918, il problema decisivo diviene la scelta
politica sulla forma e sui tempi del rapporto scienza-sviluppo, le istituzioni politiche atte a
assumere gli effetti dell’ innovazione. In realta’, nessun mercato puo’ piu’ funzionare in forma
schumpeteriana “pura”. In termini espliciti: nessun Imprenditore potrebbe piu’ esistere senza
Stato,” (Pens.Neg.eRaz., pp.158-9).

The Ghost in the Machine: Innovation as ‘Transformational Mechanism’:

Entrepreneurial Spirit as “Carrier” of Innovation

Schumpeter’s Entwicklungsproblem (or Development through Crisis)

As we have seen below, Schumpeter’s notion of “Innovation” contains an implicit critique of

Bohm-Bawerk’s and the “Austrian School’s” notion of “roundaboutness” and “interest” –
themselves based on Schopenhauer’s notion of 'Entsagung' (the 'Renunciation' or deferral of
consumption on the part of the capitalist) - as insufficient to explain the "evolution/development"
(Entwicklung) of the capitalist economy and also as an explanation of "profits" in capitalism for the
simple reason that their profoundly “negative” philosophical Weltanschauung failed to provide a
“mechanism of change/transformation” (Veranderungsmechanismus) of the economic system
and also could not provide a “positive” motivation (Motivation) for the pursuit of profits

(“Motivation is supplied by the prospect of profit in our sense which does not, be it remembered,
presuppose either an actual or an expected rise in prices and expenditure,” [BC 133].)

(S calls “entrepreneurial profit”:- “the premium put upon successful innovation” [BC,103-4]. But
the old Bohm-Bawerkian theory of interest is carried over: “For a positive premium to emerge, it is
necessary that at least some people should estimate a present dollar more highly than a future dollar.
This may result from many circumstances. A man may expect, for example, while being a student, to
have a larger income in the future than he has now, a government may similarly count on an increase
in its revenue, or it may find itself in an emergency—as may any private individual too, of course—or
all of us may systematically underestimate future wants as compared with present wants of the same
rank,” [BC 124].)

Horizontal vs. vertical theories of “growth/development”. Continuity vs. discontinuity. “Quantum

leap” vs. Newtonian view of equilibria. But “System” has “tendency to gravitate” toward
equilibrium as in Hobbes-Newton concepts of “gravity”, “force and energy”. (Adam Smith, for one,
bundled it together with “the division of labour” [S in ‘Theorie’ cites first part of ‘W.of N.’ where ‘Of
the Causes of Improvement of the Productive Powers of Labour’ deviates inconclusively into an
account of “productivity” and “specialization” or ‘the Division of Labour’]; and JB Clark listed a
number of “external data” that were clearly “exogenous” to the economy.

Cf. Loasby, E&E p.10: “The central issue of modern economics… is the co-ordination of
economic activities. The reason is… that individual self-sufficiency is not usually thought to be a
good idea. Adam Smith’s analysis of the causes of the wealth of nations begins with two
propositions: first, wealth depends fundamentally on productivity, and second, the principal cause
of increases in productivity is specialization”. Follows Smith’s discussion of “pin factory” – which
Hegel used to theorise the paradoxical pauperization brought about by ‘abstract labour’ -
Lowith’s Von H zu N, ch. On ‘labour in H’.).

Centrality of crises/cycles: the very essence, the differentia specifica of the capitalist economy is
precisely the “Veranderungsmechanismus” of this economy, the process of Innovation, of the
“never-equilibrated”, anti-circular shopferische Zerstorung (creative destruction), a “phenomenon”
as destructive as it is creative. Thus Schumpeter places Krisis and the domination of “crisis” at
the centre of the endogenous/’innersystematisch’/evolutionary but at the same time
“revolutionary”/crisis-inducing/creative-destructive and disruptive “economic development”
(wirtschaftliche Entwicklung).

[W]e must recognize that evolution is lopsided, discontinuous, disharmonious by nature—that the
disharmony is inherent in the very modus operandi of the factors of progress (BC 100)

(Note Weber’s discussion of “progress” in ‘Ethics’ essay in Shils, shortly before

‘Rationalisierung’.)

But the overall point was the one he made in his preface: cycles are of the essence in
capitalism; and it follows that depressions are an inescapable and even beneficial phase in its
evolution. In a letter to the prominent American scholar Paul Homan, Schumpeter
elaborated a bit: “For if one thinks of business cycles as the typical form of capitalistic
evolution and if one looks upon those long time movements, which are sometimes called
industrial revolutions, as one species of business cycles, it is but natural to link up with the
cyclical phenomenon practically the whole of the economics and sociology of capitalist
society.” (McCraw, n., p234)

(“The capitalist process not only destroys its own institutional framework but it also creates the
conditions for another. Destruction may not be the right word after all. Perhaps I should have
spoken of transformation,” [C,S&D, ch.12]) Hodgson traces phrase back to Sombart and zoology.
Lowith speaks of “creative-destructive” children’s play in ‘Zar.’ (see quotes) in ch on Nitzs.

[S’s treatment of “endogeneity” of Innovation as a “mechanism of transformation” of the

“production function”. Rationalisierung/Vergesellschaftung.] This is the “scientific/analytical”
empirical (erfahrungswissenschaftliche) discovery Schumpeter makes. The “mechanism” is
“innersystematisch” (endogenous, as against the factors listed by JB Clark – “Aber die restlichen
zwei (Veranderung der Technik und der Organisation der Produktion) bedurfen besonderer
Analyse und rufen noch herfor andres als…”Storungen” im Sinne der statischen Theorie” [92]).
This “trans-formational mechanism” is wert-frei, it is the datum of scientific enquiry/investigation
(Untersuchung). (S speaks of the “Autonomie des Welt der Wirtschatlichens” from other social
spheres [90].) Every Entw- leads to the next (98) in a “spontaneous but discontinuous” form (99).
“Diese spontanen und diskontinuierlichen Veranderungen der Bahnen des Kreislaufen und
Verschiebungen des Gleichgewichtszentrums treten in der Sphare des industriellen und
kommerziellen Lebens auf” (99).

The “transformation mechanism” must be “objective” and experimentally observable

(erfahrungswissentschaftlich), it must “work”. Its effectiveness will lie in explaining the
“development” of the capitalist economy, its “transformation” of the Kreislaufsbewegung, its
“displacement” of the “equilibrium centre”, the economy’s “centre of gravitation” of equilibrium
market prices.

(Quote from Japanese Preface to ‘Theorie’: “I was trying… to answer the question of how the
economic system generates the force which incessantly transforms it….a source of energy within
the economic system which would of itself disrupt any equilibrium that might be attained….[T]here
must be a purely economic theory of economic change [m.e.] which does not merely rely on
external factors propelling the economic system from one equilibrium to another,” in N.
Rosenberg, ‘Endogeneity’, p.7.)

[S’s treatment of “endogeneity” of Innovation as a “mechanism of transformation” of the

“production function”. Rationalisierung/Vergesellschaftung.] This is the “experimental-scientific”
(erfahrungswissenschaftliche) empirical discovery Schumpeter makes. The “mechanism” is
“innersystematisch” (endogenous, as against the factors listed by JB Clark – “Aber die restlichen
zwei (Veranderung der Technik und der Organisation der Produktion) bedurfen besonderer
Analyse und rufen noch herfor andres als…”Storungen” im Sinne der statischen Theorie” [92]).
This “trans-formational mechanism” is wert-frei, it is the datum of scientific enquiry/investigation
(Untersuchung). (S speaks of the “Autonomie des Welt der Wirtschatlichens” from other social
spheres [90].) Every Entw- leads to the next (98) in a “spontaneous but discontinuous” form (99).
“Diese spontanen und diskontinuierlichen Veranderungen der Bahnen des Kreislaufen und
Verschiebungen des Gleichgewichtszentrums treten in der Sphare des industriellen und
kommerziellen Lebens auf” (99).
Rationalisierung: (Important quote in Hodgson [‘Marsh., Sch.’] from BCyc, Vol1, p.220)

[S]chumpeter’s Weltanschauung is one in which science and technology, normally so far from the
world of phenomena examined by neo-classical economics of his own time, are in reality highly
endogenous to the capitalist world. This is so because they have become subject not only to the
gravitational pull of economic forces, but also to the “habits of mind” inculcated by the
rationalizing forces of the capitalist market place (S and the Endogeneity of Technology, p.12)

FROM McCRAW’s Intro to Bus.Cycles:

Theory is indispensable to understanding business cycles and capitalism itself. But detailed
historical analysis is no less so.

18 See, for example, “The Creative Response in Economic History,” Journal of Economic
History 7 (Nov. 1947): 149–59; “The Historical Approach to the Analysis of Business Cycles,”
in Universities–National Bureau Conference on Business Cycle Research, Conference on Business
Cycles (New York, 1949), 149–62; “Economic Theory and Entrepreneurial History,” in
Change and the Entrepreneur (Cambridge, Mass., 1949): 63–84; and History of Economic
Analysis (New York, 1954).
One of the most significant early signs of Schumpeter’s movement toward a greater appreciation
of history (and sociology) was his appreciative reconsideration of the leader of the
German Historical School. See Schumpeter, “Gustav v. Schmoller und die Probleme von
heute,” Schmollers Jahrbuch für Gesetzgebung, Verwaltung und Volkswirtschaft im
Deustchen Reich 50 (1926), vol. 1, 337–88. For a discussion of the importance of this piece,
see Richard Swedberg, Schumpeter: A Biography (Princeton, N.J., 1991), 82–89. On the
whole, however, Schumpeter’s turn toward history as represented in Business Cycles does
not signal a revival of the German Historical School. As is well known, Carl Menger and other
leaders of the heavily theoretical Austrian School in which Schumpeter had trained at the
University of Vienna engaged in a long and bitter Methodenstreit (struggle over methods)
with the German Historical School. Schumpeter lamented the Methodenstreit and respected
the Historical School; but he regarded it, on the whole, as handicapped in constructing the
kinds of comparative histories that would inform theory.

Schumpeter begins by setting forth a general theory of capitalist

evolution. In his model, recurring “Innovation” propels the economy,
which exists in a state of constant tumult. The “New Men,” or “Entrepreneurs,”
operating within “New Firms,” drive Innovation. (Like many other
writers of the time, Schumpeter capitalizes some of his key terms.) All
companies react “adaptively” to change, but creative “responses” come
only from innovative acts by Entrepreneurs. Innovation can take many
forms. As examples, Schumpeter mentions “the case of a new commodity,”
“a new form of organization such as a merger,” and “the opening
up of new markets.” Innovating firms do not arise evenly throughout
the economy. Instead, groups of innovators emerge during periods just
after an organizational or technological breakthrough in a particular
industry—either in that same industry or in others allied to it.19
Meanwhile, powerful elements of society resist all major innovations,
because they wreak havoc on existing arrangements. As a result,
“the history of capitalism is studded with violent bursts and catastrophes.”
The building of a railroad where none had existed, for example, “upsets
all conditions of location, all cost calculations, all production functions
within its radius of influence.” Innovation, then, is a very much a two-edged
sword.20
Of all economic systems, capitalism best enables people to create
ventures before they possess the necessary funds and other resources
to found an enterprise. For any given innovation, the Entrepreneur
“may, but need not, be the person who furnishes the capital.” In the
end, “it is leadership rather than ownership that matters.” The failure
of both the classical economists and Karl Marx “to visualize clearly entrepreneurial
activity as a distinct function sui generis”—a distinction
Schumpeter always underscored—was a crucial flaw in their analysis of capitalism. 22 (Check BC for
quote)

S found in “the Entrepreneur” (Unternehmer) an agency or “driver” or “carrier” (Trager) that could
act as the cause of this Veranderung (trans-formation) of the capitalist economy, which was
otherwise “destined/condemned” to remain enmeshed and languish in the “static” condition of
“stationary equilibrium”. In other words, the Unternehmergeist (entrepreneurial spirit) as the
source of Innovation was the “Dynamik” to rescue capitalism from its “equilibrium tendency”
(Gleichgewichtigtendenz) to fall back or regress toward a sterile “circular flow” (Kreislauf) and “to
leap forward”, not just through “incremental/quantitative” “growth” (Wachstum) but uniquely
through “revolutionary” “development” (Entwicklung).

Nevertheless, we have little difficulty in identifying entrepreneurship in the times of competitive

capitalism. The entrepreneur will there be found among the heads of firms, mostly among the
owners. Generally, he will be the founder of a firm and of an industrial family as well. In the
times of giant concerns the question is often as difficult to answer as, in the case of a modern
army, the question who is the leading man or who really won a given battle.(BC 101)

Having staked out the distinctive role of the Entrepreneur, Schumpeter

identifies entrepreneurial Profit as the prime motivator—“the
premium put upon successful innovation.” When other participants in
the same industry see the new level of Profit, they try to duplicate the
Innovation. In turn, the Entrepreneur tries to preserve his high Profit
for as long as possible—through further innovation, the use of patents,
secret processes, advertising, and “aggression directed against actual
and would-be competitors.” These are forms of what, three years later,
Schumpeter famously called “creative destruction” in Capitalism, Socialism
and Democracy.24

Let us visualize an entrepreneur who, in a perfect competitive society, carries out an

innovation which consists in producing a commodity already in common use at a total cost per
unit lower than that of any existing firm because his new method uses a smaller amount of some
or all factors per unit of product. In this case, he will buy the producers' goods he needs at the
prevailing prices which are adjusted to the conditions under which "old" firms work, and he will
sell his product at the prevailing price adjusted to the costs of those "old" firms. It follows that his
receipts will exceed his costs. The difference we shall call Entrepreneurs' Profit, or simply Profit.
It is the premium put upon successful innovation in capitalist society and is temporary by nature:
it will vanish in the subsequent process of competition and adaptation. There is no tendency
toward equalization of these temporary premia. Although we have thus deduced profit only for
one particular case of innovation and only for conditions of perfect competition, the argument can
readily be extended to cover all other cases and conditions. In any case, it is evident that, though
temporary, profit is a [Joseph Schumpeter, Business Cycles. (1939) 104]
net gain, i.e, that is not absorbed by the value of any cost factor through a process of Imputation.

Here S dramatically inverts the roles of capitalist and entrepreneur. In “static” analysis, the
capitalist derives the profit/interest from investment, whereas the entrepreneur simply makes a
“rent”. This is why the “static” analysis condemns capitalism to “stagnation” because its
“equilibrium” is the “gravitational centre” of an economy that can only “grow” exogenously
(aussersystematisch), either by “expanding” quantitatively or through external factors [new
markets, fresh resources, discoveries/inventions, change in consumer tastes]) but cannot
“evolve” or “develop” (endogenously or “spontaneously”/’innersystematisch’). Competition will
whittle “profits” down in the absence of Innovation and Development.

So steadfast was S in his distinction between the two states that he even distinguished between
"capitalists" (essentially 'rentiers', rent-seeking financiers – ‘Theorie’, p.98 where S describes how
the Unternehmer in “stationary analysis” [even in JB Clark’s “Dynamics”]was seen as “ein
entrepreneur faisant ni benefice ni perte, sein Einkommen ware nur Arbeitslohn) and
"entrepreneurs" as two separate functions in the Veranderungsmechanismus of capitalism – thus
obviously inverting the roles from “static analysis”.

But in his new “dynamic” analysis, S places the entrepreneur at the heart of the capitalist system”.
Now it is the entrepreneur who becomes the central “driver” and “carrier” of the “transformation
mechanism” which, in turn, represents the “differentia specifica” of capitalism, what distinguishes
it from other economic systems. It is the entrepreneur who derives “profit” from Innovation
whereas the capitalist is relegated to the role of “financier” or “rentier” deriving a “rent” from
Innovation-induced, “creative-destructive”, “development”.

The ‘entrepreneurial Act’ or ‘decision’ (Entscheidung) is the culmination of the ‘wertfrei’

‘transformational’ but ‘mechanical’ (Veranderungsmechanismus) process of Innovation.
The Unternehmer “adopts… the existing, ‘given’ (Daten) “production functions” that are
themselves subsumed in the ‘neutral’ process of scientific-technological Rationalisierung.
But the “process (of Innovation)” must be distinguished from its “prime mover”, “source
and origin” (fons et origo)….because ‘Innovation’ itself in its “objective” manifestation, in
its “processuality”, becomes part of the Rationalisierung, is rapidly “absorbed” in it as are
the ‘entrepreneurial Profits’. What remains at the end of the Innovationsprozess is…what
started it – the Unternehmergeist!

These are two distinct (Hegelian/Marxist dialectical) ‘moments’ where the ‘subjectivity’ of
the ‘Innovator’ (the Entrepreneur) must not be ‘absorbed/extinguished’ in the
objective/inert ‘innovation’ (there is ‘innovation’ the object, and ‘Innovation’ the agency, the
‘entrepreneurial Act)!

Essential distinction: The Entrepreneur (not the Innovationsprozess!) trans-forms the

“tracks” or character of the Kreislaufbewegung, channeling them into the “new
combinations” of the “economic world” (Welt der Wirtschaftlichens) in “the industrial and
commercial sphere (99). It also “displaces” (Verschiebung) the old “equilibrium centre”
(Gleichgewichtszentrum) to a new level, to a new “gravitational centre”
(Gravitationszentrum). The Entrepreneur, his ‘Spirit’, are the Trager of Innovation, the
“agency”, the cause of it: Innovation is only the effect (Wirkungen) that leads to
“consequences” (Ruckwirkungen) that together constitute the “transformation
mechanism”. It is by con-fusing (‘fusing together’) these two ‘moments’ that economists
mis-takenly refer to “technological progress” (a linear process exogenous to the capitalist
economy typical of ‘Statik’ analysis) and neglect the “creatively-destructive” character
(now clearly… subjective-political). But we must again stress the ‘Nietzschean’ as against
‘Hegelian’ origin of this distinction: as Cacciari says, the ‘Spirit’ of the Entrepreneur is not
Hegel’s Geist, but rather Nietzsche’s Wille zur Macht at the culmination of the
Rationalisierung.

Indeed, in C,S&D, not only does S accept that “invention” has also become
subsumed/endogenous to capitalist Rationalisierung but also the Entrepreneur(!) need not
be a “person”! What, then, is the nature of the new “agency” if it is no longer the
Entrepreneur and his Individualitat?

The “scientificity” and “value neutrality” of the Innovationsprozess is also what makes
possible the distinction of the “autonomy”/separation of the Entrepreneur from the “profit
motive” – but ‘aporetically’, because now the profit Motivation has ‘worked’ its way from
the Krisis-inducing repercussions of “creative destruction” and technological trans-
formation, to the “antagonism” that these embody. In other words, the profit motive seeps
through to the “irreconcilability/antagonism” of the ‘inter-est’ of the Entrepreneur. At the
same time, it preserves the scientific-analytic “neutrality” and “usefulness” of the
Kreislauf/Gleichgewichtstendenz (market circular flow and equilibrium tendency of the
economy) that it severally “trans-forms” and “displaces”. Only this “tendency to
equilibrium” can “reconcile” (but only tendentially-scientifically-analytically) Innovation
with the “economic system”.

The “deepening” problematical/antagonistic link between Innovation and other economic agents
or society at large surfaces in Nathan Rosenberg’s insistence that “consumer tastes” be included
as an endogenous element of the Innovationsprozess. Does the Entrepreneur “give voice”
(democratically or how else?) to the “choices” of consumers? (Cf. S’s discussion of ‘prices’ as
“coefficients of choice” in ‘Essays on Innovation’.)

(Note here Weber’s own acceptance of this process in his political writings [Pol.Wr.- date?] and
the resulting “iron cage” (stahlhartes Gehause) of Rationalisierung/Beamtetum – which cor-
responds to Nietzsche’s own notion of “democratization/socialism” by the “multitude/herd”. Only
the “autonomy of the political” allows the leitender Geist to guide this “mechanism”. Weber notes
Marx’s “ideal-type” aporetic notions of “law of falling rate of profit” and other “laws of motion” with
the “political” establishment of socialism. Weber borrows Mises/Hayek “impossibility” of socialism
and notes “capitalistic” operation of Lenin’s Russia. See notes on Nietzsche below. [Keynes’s
work will move in similar directions – “falling marginal productivity of capital”.])

Just as Weber places his Politiker with his leitender Geist at the top of the
Rationalisierung/Beamtetum, so does S place the Unternehmer with his Unternehmergeist at the
origin of Entwicklung. But the “unbalanced”, “creatively-destructive” operation of the
Veranderungsmechanismus, of Innovation must not be “governed”. No reconciliation of the
Political with the Economic is possible here as was sought by both classical political economy
and neoclassical theory with their Automatik/Statik. Entwicklung is a “destiny” of the “market
economy” that must be left to its own devices. (See Hayek and the “liberalist” ethos.) The
“inevitability” of this process is the destiny of techne’, of technological progress – a term that S
places in inverted commas.

To the State is left the task to rationalize/reconcile the disruptive effects of Krisis – though not in a
Hegelian sense (“Freiheit des Willens”), but in a Nietzschean/Weberian (Wille zur Macht) sense.
But this is the ‘Problem’ that S fails to confront. This is the exact point where his Unternehmer
cannot replace/displace Weber’s Politiker.

Only Karl Marx…(It seems that in CS&D Sch. took a more sympathetic stance toward Marx’s
methodology, especially with regard to the mixed approach of economics and sociology [Colletti,
p.16] and ‘histoire raisonnee’ [p.48]. Note use of phrase “reasoned history” in BusCycles, Vol1,
p.220, defined as “conceptually clarified [history]”, quoted in Shionoya, “The Soul of the GHS”,
p.54, who also discusses “instrumentalism”.)
Need to remember that Sch’s published commentary on methodology may have been affected by
his preference to go to Harvard, a neoclassical faculty combating the widespread
“institutionalism” of most American faculties (again, Shionoya and Hodgson). Remember the
unpublished “Chapter 7” of ‘Theorie’! (Discussed in Hodgson.) Also Swedberg: “ Schumpeter
worked at this time at Harvard University and was presumably more sensitive to what mainstream
economics was doing,” (p.4, “Rebuilding Sch’s Theory” – discussion of differences bw. 1911 and
1934 translation, references to Ch.7). On Chapter Seven and links to Sombart and Nietzsche, see
Backhaus. Tronti (‘OeC, Poscritto’ links Weber and Nietzsche via Raymond Aron: “erede di
Machiavelli e… contemporaneo di Nietzsche”, p.281).

The “neutrality”/objectivity of this “mechanism” is what to Schumpeter’s eyes distinguishes the

“scientificity” of Entwicklung as against the “moral-institutional”, “ideal type” exposition in Marx.
What vitiates Marx’s method is the commixture of “economic analysis” and
“sociological/institutional” observation as well as dogmatic/moralizing “polemic” (S uses this word
in Theorie. He adds laconically that his analysis covers only a fraction – “Aber mein Bau deckt nur
einen kleinen Teil der Flache des seinen”, p.92. See discussion of preceding theories in
preceding pages of Theorie).

The aim of “economic analysis”, what allows it to acquire “scientific” status, is the fact that it can
develop a “box of tools” (Joan Robinson) that are “effective”, that…”work”. The aim of the
Untersuchungen (reminiscent of Frege’s ‘Logische Unt.’) is to discover analytical “tools” or
“mechanisms” that explain why and how the capitalist economy “develops”, that is “trans-forms”
its characteristics and “displaces” its “equilibrium centre (of gravity)” (Gravitationszentrum). This is
the aim of the new “Dynamik” theory as against the traditional “Statik” theory.

(Note discussion in Santo Mazzarino, Vol 3, p.253, discussion of ‘metabole’ and ‘stasis’ with the
first resembling Sch.’s ‘Kreislauf’/’Statik’ and the other the “civil war-insurrection” or ‘Krisis’ that
gives way to ‘Dynamik’ – this ‘transition’ due to ‘corruptio’, that is, decadence from an earlier
golden age or purity of the ‘body politic’, this time intended as ‘body economic’ by Schumpeter.
Hodgson [‘Marshall, Sch…’] traces ‘Dynamik’ past Mill to the sphere of zoology [qv] which again
echoes ‘metabole’ and ‘stasis’ [stagnation in economics, which may deteriorate into crisis] and
‘crisis’, all medical terms. Note also J Robinson’s “tranquility”, a clean steal from Marsilius of
Padua [Defensor Pacis] where the healthy body politic is in ‘optima dispositio’.

Mazzarino notes the absence of the concept of ‘revolutio’ in Ancient historiography. So does
Arendt in On Revolution. But his discussion of the Late Empire historians and their awareness of
the “death” of states is instructive. This is the original sin of Sch.’s “analysis” that it purports “to
distil” the “tools” of scientific analysis so that Economics is seen ‘sub specie aeternitatis’ – which
is aporetic with his ‘Dynamik’ approach [cf Moura]. It is conclusive/determinant here that Sch.
changed his attitude to Marx in ‘CS&D’ to such an extent that he praised Marx’s unifying method
[“intierezza” in Colletti, p.17] whereby historical and economic facts are inextricably considered
resulting in an “histoire raisonnee” [quoted in Colletti, p.48] – a phrase Schump used for his BC,
p220. “Reasoned [conceptually clarified] history” is discussed in Shionoya [‘Soul of GHS’, p.54].
And note also Sch.’s later mollified attitude to Schmoller’s School. Swedberg and Hodgson and
Backhaus all suggest that Sch’s coveting of a Harvard chair forced or stayed his hand.)

Hayek acknowledges the eventual “exit” of Sch. from the Austrian School (Intro. to Sch’s
“MethInd’). And note diatribe with Schump toward end of “Use” (discussed in my “H’s Scientism”).

(On the “box of tools” (Robinson), cf. E. Mach’s “La science peut etre consideree comme une
sorte de collection d’instruments nous permettant de completer par la pensee des faits…ou de
limiter le plus possible notre attente [Kirchoff’s ‘description’]…Les faits ne sont pas forces de
suivre nos pensees…” (pp.376-7) – here Machian subjectivism gives the game away in that it
cannot understand science as a positive process of discovery, as an enterprise but only as a
“negative” process. Innovation is epistemologically aporetic for Mach. His “negative” procedure is
homologated in Walras, Pareto and Hayek.)

We should note here, as in ‘Hayek and Scientism’, that game theory is a splendid illustration of
this Machian “negative” approach in that it is a ‘Pure Logic of Choice’: it serves “to eliminate”
alternative choices so that the mere ‘mathematical schema’ of an immutable reality based on
“self-interested in-dividuals” [even psycho-logically] remains. Hayek seeks to hide the “brutality” of
the “in-dividual” and to base his “scientific/subjectivist” approach behind the “spontaneity of
choice”. In CouRevSc [fn.64] he is at pains to distinguish “individual” from “in-dividuum” in that the
former is the active “spontaneous” subject that animates Mises’ “praxeology” - Except to the
extent that Mises had an ‘a-prioristic’ bent refuted by Hayek in “Econ&Know” in favour of a
“tatonnement” approach to prices (see Langlois’s ‘Analytical Review’).

But this fails miserably – Mandeville, on whom Hayek relies, would have laughed contemptuously
at this “evolutionary” approach, “rejoicing” and invoking Hobbes:- for even altruism is “the price
Flattery pays to Pride” [Kaye Intro to ‘Fable’] and the only “impulse/conatus” is self-preservation,
the only spark of “Reason” left in the Heideggerian “homo est brutum bestiale” written at the end
of metaphysics [quoted in Cacciari, p.49]. It is the ‘Destruktion’ of the Arendtian/Augustinian ‘Volo
ut sis’ [Arendt, Vol 2, p.290] - [“nessuna simpatia”, says Cacciari, ibid.] – indeed, an “im-possible”
concept in this perspective, as is Spinoza’s conatus leading with Euclidean rigour to “amor
intellectualis Dei”.) – Perhaps all this should be discussed separately.

Recall in this regard Sch’s comments on “disutility of labor” and Jevons in ‘History’. Also the
‘Euclidean’ echo in Walras’s ‘Elements’ – and Sch’s attitude to Walras. This is
inconsistent/aporetic with the notion of ‘Entwicklung’ and the ‘zoological’ origins of “shopferische
Zerstorung” (Hodgson) which goes back to Sombart and the GHS. Again, the
“anatomical/physiological” analysis of the ‘Statik’ contrasts with the “evolutionary” one of the
‘Dynamik’ where the first can be related to Graeco-Roman “cyclical” historiography (Kreislauf)
guided by Tyche/Fortuna whereas the Judaeo-Christian eschatological/linear approach to time is
guided by ‘Pronoia’ or ‘Providence’ (from Smith to Hegel/Marx or indeed Comte/StSimon).

Once “equilibrium” is seen as purely a “formal” game-theoretical framework, then Sch has to
introduce a Veranderungsmechanismus as the motor/carrier (Trager) and an Unternehmergeist
as the ‘Geist/Wille zur Macht’ of the ‘Entwicklung’. Sch can perceive that “praxeology” will not do
because ‘Individualitat’/spontaneity is inadequate to give the “historical” dimension to economic
analysis. Hegel and Nietzsche (Husserl even) and Weber are combined but in a Machian
framework (‘Wir – die Zeichen’).

Gadamer in ‘WuM’ traces the iter intellectualis of “historicism” and even discusses the notions of
‘bios’ and ‘zoon’ in the “romantic hermeneutics” of Dilthey. Gadamer’s enthusiastic adoption of
Heideggerian ‘facticity’ and other themes is unconvincing to say the least. Nothing is added by
substituting the “Spirit of all time” with the “Spirit of the Time” (Zeitgeist – cf Lowith) except
confusion and caprice (the ‘amethodon hyle’ [materia selva in Mazzarino] and above all an
abstrusion/reification from the ‘conatus/eros’ that is the “driver” (Freudian ‘Trieb’) of human
existence visible – oh how pathetically - in Heidegger’s bathetic excursus on “the darkening of the
world” in the ‘Einfuhrung’, maladroitly championed by Cacciari (of all people!). (Note also
Heidegger’s specious quotes of Nietzsche on the vapidity of ‘Sein’ just before this ‘extra-
vagance’, calculated to lump him with the “forgetfulness of Sein”.)

Methodological Individualism

This goes back to Bohm-Bawerk and underlines the “psychological” basis of “the pure
theory of capital” where “roundaboutness” is the central concept. Given the
“individualistic” basis of the theory, the distinction between consumer and intermediate
goods will play a crucial role in the “signaling” role of the price mechanism – something
the classics and Keynes would not countenance.

(“Distilling” in isolation from “other realities” – Schump and “histoire raisonnee” and
“Marxist religion”. Refer to beginning of ‘Theorie’ where S insists on “social process” as
“a single stream from which economic facts have to be distilled”.)
In “CS&D”, Schump ridicules Marxists’ objection to his dissection of sociological and
other elements (recall Lukacs’s insistence on the “totality” – an anti-Kantian notion
against the antinomies) to isolate his economic analysis. This last, of course, is what is
useful for Schump: it is a tool taken out of Ricardo’s hardware store. There is no mention
of Hegel; and therefore no attempt to place Marx in the proper practical and theoretical
context - because this is where, despite the limitations of Das Kapital, the whole notion of
“value” (and indeed all “economic” categories such as “market, price, competition”)
come under “critical” scrutiny – a point the “Machian” Schumpeter would probably fail
to grasp, but a trope in which the “Nietzschean/Weberian” Schump was quite immersed.
It is this apparent dichotomy in Schump’s opus that we wish to understand.

For we know that Schump remained a smug exponent (or a propagandist, his tone in
CS&D seldom rises above the perspicacity of a Hollywood sitcom scriptwriter –
“vulgar!” Cacciari would exclaim) for “methodological individualism” – and here the
antithetic nature of the definition becomes apparent, and even dramatic in Hayek’s
“Scientism” discussion. – Because it is hard to imagine that “individualism” could
become…. “methodological” to the point of allowing a “pure logic of choice”. The
attempt at ‘verstehen’ is quite worthwhile ‘fur uns’ because it may lend clues about the
“ideological” uses of bourgeois “science” which themselves help us comprehend our own
critique as praxis.

In reality, what has taken place is that “economic science” has pushed social reality into a
straitjacket, a dangerous one for its self-understanding, from which there is no escape.
Only by seeing it piecemeal can the “inexorability” of its “distilling” or “method” elude
us; but it becomes obvious once we comprehend its “self-referentiality”, its being a
“closed system” (Loasby, Langlois, Moura) that does not arise “empirically” out of
observed facts, but rather hypostatizes those facts into rules for a “science of choice” that
in reality offers no choice outside of its axiomatic assumptions. So much so, indeed, that
Mises and co as well as Schump (but only up to a point, as we shall see) find it well-nigh
impossible to conceive of capitalist social relations of production outside of their
“praxeological” constructs!

Schump’s pages on “Marx the economist” and on “Marx the teacher” in “CS&D” are
illustrative of his inability to distinguish conceptually “economics” from the Marxian
“critique”. The “reality” described by Marx explodes the categories of political economy
– it abolishes them; it does not simply “correct” them! A good illustration is
Schumpeter’s treatment of “surplus value” where he argues that “in equilibrium” the rate
of exploitation falls to zero due to capitalist competition for labour power. This is quite
appropriate…. from the standpoint of equilibrium analysis! But this is far from what
Marx intended – because obviously a “glut” of capital for investment will push the rate of
profit to a point where capitalists have to look for alternative investments (different
industries or different markets, where investment is likely to be profitable). Otherwise
there is a “crisis”. Schumpeter understands this, and he offers Marx this escape route that
he himself made central to “Entwicklung” (see the second part of CS&D, discussion of
“oligopoly” and “innovation”). (Recall also the description of ‘BC’ as “histoire
raisonnee”, an attribute he applies to Marx’s approach before claiming it for his
approach.)

But because he was committed to “equilibrium analysis” (end of ch VI) Schump always
seemed to think more in terms of “business cycles” than in terms of “Krisis”. Hence,
“creative destruction” is viewed not in the Nietzschean (perhaps “antagonistic”) sense
described by Cacciari, but rather in a “metaphysical”, “continuous” sense. “Cycles” are
seen as continuous “wave motions” caused by “innovation” and not as “violent tsunamis”
occasioned by the antagonism intrinsic to the wage relation. (One is reminded here of
Joan Robinson’s “tranquility” or Marsilius’s “tranquillitas” [the health of the State, itself
the product of “a creative act performed by man” equivalent to the ‘optima dispositio’ in
the ‘corpus naturale’ [Gierke, ‘Pol.Th.ofMA’, pp26-9] – a condition that, if one pursues
the “blood circulation” analogy adopted by Schump dovetails aptly with the concept of
‘Kreislauf’. The regular “circular flow” represents the “tranquility” of equilibrium
conditions until “disturbances” [Verstorungen] or “cardiac arrests” occur.)

The notion of ‘Entwicklung’ denotes appropriately this “evolutionary/natural”

progression opposed to the “revolutionary” notion of ‘Krisis’ which denotes
truncation/break and dis-continuity – though Schump was still prompted by the crises of
1870 and 1905.

It is sheer obfuscation for Schump to lash the dead horse of eclecticism to bludgeon us
with his “scientific economic analysis”: any form of “analysis” – historical or
“economic” - involves intellectual “discipline”. But discipline does not mean that we
adopt “economistic” analytical categories that radically distort the very “nature and
content” (‘Wesen und Hauptinhalt’, words Schump would know) of the historical
subject-matter (the Greek ‘amethodon hyle’, Mazzarino). No “discipline” (why, even
“natural sciences”) is entirely “scientific” in the sense that Schump opines and peddles so
sneerily (cf “Marx the teacher” opening). (This is the basis of the GHS critique
appropriated by Schump critics from Shoyoda to Moura – see below.)

Take the question of “value” as an example. Schump (“M the Econ”) dismisses Marx’s
“metaphysics” (what of “utility” then?) by peddling Bohm-Bawerk’s “exchange value”
argument. But if “utilities” are incommensurable, the exchange of commodities can be
fixed only at “equilibrium”, that is, when all “exchanges” are done. At that point the
“prices” of individual commodities “simultaneously” and “omnisciently” exchanged (cf
Hayek’s critique) are only and can only be “relative” prices denominated by a
“numeraire”, a single commodity. But this is most emphatically not what happens in
reality. In actual fact commodities are exchanged far away from any position of
“equilibrium”. In that case, owners of commodities must have some idea of the “value”
of what they are trading, not in terms of “exchange values” or “relative prices”, but rather
in terms of “absolute (“metaphysical”!) value” measured in monetary terms!

So long as “money” itself is a commodity, the tendency is to think of “value” as a

“substance”, a substratum or common “physical” characteristic shared by commodities.
The confutation of this “materialist” view of “value” that B-B and Schump operate
through the critique of “socially necessary labour time” then easily allows them to
dismiss “value” as a “metaphysical” notion – precisely because it is manifestly not
“physical” in that sense as “measure”. But once “money” becomes “fiat money”, the
reality of the “political” character of “value” finally surfaces – it is “manifested” by the
antagonistic development of capitalism itself, just as “social capital” and “the world
market” are (Schump accepts the predictive merit of Marxian analysis here – CS&D,
p.48, 56).

By contrast, “general equilibrium” does not “allow” money – indeed, its “language
game” cannot “conceive” of it, because the “language universe” of “money” belongs to a
“different” reality, the one introduced by Marx, one that far more accurately describes the
“reality” of capitalism. It is amazing that Schump does not see the “tautologous” nature
of this framework despite Hayek’s exposition of it and his own awareness of how easily
it becomes a mental habit (with regard to the Marxist theory of “imperialism”, for
instance, at p.52, which he dismisses with facile disingenuousness - “big business does
not decide foreign policy” – gosh!).

The practical social results of the “equilibrium” analysis, whether classical or

neoclassical, can be catastrophic, as this extract from Polanyi’s “Great Transformation”
illustrates:
Our thesis is that the idea of a self-adjusting market implied a stark utopia. Such an institution
could not exist for any length of time without annihilating the human and natural substance of
society; it would have physically destroyed man and transformed his surroundings into a
wilderness. Inevitably, society took measures to protect itself, but whatever measures it took
impaired the self-regulation of the market, disorganized industrial life, and thus endangered
society in yet another way. It was this dilemma which forced the development of the market
system into a definite groove and finally disrupted the social organization based upon it.
Such an explanation of one of the deepest crises in man's history must appear all too simple.
Nothing could seem more inept than the attempt to reduce a civilization, its substance and
ethos,
to a hard and fast number of institutions; to select one of them as fundamental and proceed to
argue the inevitable self-destruction of civilization on account of some technical quality of its
economic organization. Civilizations, like life itself, spring from the interaction of a great
number of independent factors which are not, as a rule, reducible to circumscribed institutions.
To trace the institutional mechanism of the downfall of a civilization may well appear as a
hopeless endeavor.
Yet it is this we are undertaking. In doing so we are consciously adjusting our aim to the
extreme singularity of the subject matter. For the civilization of the nineteenth century was
unique precisely in that it centered on a definite institutional mechanism. (pp.7-8).

(See also Cacciari’s comments re the equiparation of the market-equilibrium paradigm to

a “physical law” [‘Dialettica’, p.33]. To this, of course, we should marry DeCecco’s
brilliant historico-analytical description of the international monetary system in “Money
and Empire, 1870-1914”.)

Langlois and Rationalisierung

See also my ‘Philosophical Antecedents of the SoE’ for a related discussion of Lowith
and Lachmann.
Langlois (“The Dynamics”) refers to Schumpeter’s famous footnote on Weber (Ch.2 of
‘Theorie’) to stress his “empiricist” interpretation of “Rationalisierung” as against the
Cartesian-Marxian-Husserlian “deductivist” one {I have developed a library on the
Mach-Husserl and logical empiricist/phenomenology divide – cf the Husserl-Schlick
controversy}:

“At the beginning of Chapter 2 of the English translation of his Theory of Economic Development,
Schumpeter uses the word “rationalize.” In a footnote he explains.
This is used here in Max Weber's sense. As the reader will see, “rational” and “empirical” here
mean, if not identical, yet cognate, things. They are equally different from, and opposed to,
“metaphysical,” which implies going beyond the reach of both “reason” and “facts,” beyond the
realm, that is, of science. With some it has become a habit to use the word “rational” in much the
same sense as we do “metaphysical.” Hence some warning against misunderstanding may not be
out of place. (Schumpeter 1934, p. 57n.)” (p.16).

This would seem to cohere with the “evolutionary/scientific” and

empiricist origins of Schump’s “Theory”. Schump is pitting Weber’s
“rationalisation” not against “rationality” but against “rationalism” – to
which, with the exception perhaps of “value”, Marx does not succumb. Yet
Langlois deeply misunderstands Schumpeter who is certainly not placing
Weber in contrast with Marx. Indeed, both Marx and Weber would have
seen “rationalisation” as the outgrowth of capitalist “rationality”: for both,
the former is a “political/strategic” development, though they have
antagonistic assessments – Marx emphasising the “domination” and Weber
the (wertfrei sociological) “secular/rational” aspect. The reason for the
misreading is that Langlois quotes Lenin in a “social-democratic” sense
whereby capitalism is criticised for its anarchy of production. This is
certainly how Weber saw the problem, which is why for him “social
democracy” was part of the Parliamentarisierung, that is, the joint result
of “rationalisation” and “democratisation”.

Again, Langlois has no idea of the kind of “antagonism” that Marx had in
mind – which cannot be reduced to “rationalism” or “metaphysics”; nor
does he have a clear picture of the “Nietzschean” implications of
“rationalisation”, which Schump clearly understood. It is worthwhile
quoting this misconception in full because it connects the problems of
innovation-concentration (Schumpeter), concentration-market-size-
structure of the firm (Coase and Williamson, perhaps Hayek), and
rationalisation-bureaucratisation as forms of domination (Weber).

As a result of failing to comprehend the entire historical problematic,

Langlois also deeply misconstrues Weber’s appreciation of the role of
“charisma” (he should have spoken of ‘leitender Geist’) in the process of
Rationalisierung. Langlois believes that for Weber bureaucratisation
abolishes or defeats the leitender Geist, whereas in fact the latter is the
supreme expression of the power or effectuality of the former – and vice
versa, in the sense that “rationalisation” itself may be interpreted as the
expression of the Wille zur Macht. In the Nietzschean paradigm, the two
are complementary moments. Rationalisierung is the expression of the will
to power – a particular “form” of expression, but a con-dition of it. (Of
course, the question one would pose to Cacciari is: - in what sense then
does capitalism differ from other poliico-economic systems? What is its
differentia specifica, apart from being yet another manifestation of Wille
zur Macht? These problems are posed by the profound a-historical and
properly “metaphysical” provenance [cf Heideggerian ‘historicity’] of
negatives Denken.)

But back to Langlois:

The seventh sense.

The theory of economic organization I just sketched offers a contingent explanation for
the multi-unit enterprise. But there are others who see managerial capitalism not as an
adaptation to particular historical circumstances but rather as a stage – and perhaps
even the final stage – in a process of economic rationalization. If contingent theories
are the bailwick of economics, then rationalization accounts are the province of
economic sociology.
Among the most famous such accounts, of course, is that of Marx. Lenin’s version
of this we have already heard; but perhaps the clearest exposition is that of Engels in
the
Anti-Dühring (Engels 1966, III.2). In the view of (Marx and) Engels, the internal
managerial
coordination of economic activity is always superior to market coordination for the simple reason
that the former is rational whereas the latter is anarchy. Capitalists themselves sought to combat
the anarchy of the market by managerial coordination within firms, “the increasing organisation of
production, upon a social basis, in every individual productive establishment.” Although this
gambit had been successful in blowing away earlier market forms of organization, it was and
would continue to be unable to solve the problem of anarchy, since “socialized production”
(producing for other people rather than for oneself) is necessarily at odds with capitalism and the
market; and there is an “antagonism between the organisation of production in the individual
workshop, and the anarchy of production in society generally.” This antagonism would lead to
deepening crises, the result of which would be the Darwinian consolidation of more and more
stages of production into fewer and fewer large organizations. Only when the proletariat takes
over title to the means of production, which capitalists will have conveniently centralized and
organized for them, will this antagonism be resolved, for only then will all of production be
planned in the manner of
- 14 -

the firm. “Anarchy in social production is replaced by systematic, definite organisation.”23 This
view is remarkable along a number of dimensions, not merely for its historicism (Popper 1957) but
for its commitment to a super-strong conception of rationality and rationalization as involving
conscious, deliberate planning of complex economic activity.
 Another, equally famous, account of rationalization is that of Max Weber (1947). For
Weber, rationalization is “the disenchantment of the world,” that is, the disappearance of the
supernatural and the metaphysical in favor of a hard-headed concern with the here- and-now. In
Weber’s schema, economic organization coheres through a system of authority. The most basic,
creative, and volatile form is charismatic authority, as wielded by a religious prophet or military
leader. But organization relying on personal authority has its limits, and increasing organizational
complexity requires that charismatic authority give way to an impersonal set of rules of conduct.
Throughout most of history, this has meant traditional authority, in which past practices provide the
guide for action and traditional (supernatural) beliefs provide their justification. In the modern world –
indeed as a kind of definition of the modern world – bureaucratic authority has come to replace both
charismatic and traditional authority. Bureaucratization involves the substitution of rules for
personal authority, the creation of abstract offices divorced from their individual holders, and the
increasing preeminence of specialized knowledge and spheres of competence (Weber 1947, pp.
330- 334). This process is “rationalization” in that the rules and structure of organization justify
themselves on mundane pragmatic grounds rather than in terms of extra-natural systems of
belief.
And it is in Weber’s theory of progressive rationalization that we can locate the accounts
of both Schumpeter and Chandler.
23
Roberts and Stephenson (1973, p. 25n) point out that the term “organization of labor,” in Marx and
Engels, and in contemporary socialist writing generally, referred to complete central planning.

Weber’s version of rationalization, and thus the versions of Schumpeter and Chandler, are
rather different from that of Marx. I will sidestep the question of whether Weberian accounts are
historicist, though I believe they ultimately are not, and in any event they are surely less blatantly
historicist than that of Marx. The more interesting issue is that rationality and rationalization have
different meanings in Weberian accounts. In Marx, economic society is (or could be or will be)
somehow held together by strong conscious rationality – or else it is anarchy; in Weber and his
followers, it is held together by a system of rules of conduct, at least in the cases of traditional
and bureaucratic authority. Rationalization consists not in the progressive replacement of
unselfconscious processes of coordination by conscious “rational” ones but rather in a
progressive reexamination of, tinkering with, and improvement in the rules of conduct. (Note the
obvious affinities, at a general level at least, with the evolutionary capabilities view of economic
organization: both are about the way rules of behavior evolve.) In fact, this process might actually
be better described as having to do with the empirical than with the rational. At the beginning of
Chapter 2 of the English translation of his Theory of Economic Development, Schumpeter uses the
word “rationalize.” In a footnote he explains:

This is used here in Max Weber's sense. As the reader will see, “rational” and “empirical” here
mean, if not identical, yet cognate, things. They are equally different from, and opposed to,
“metaphysical,” which implies going beyond the reach of both “reason” and “facts,” beyond the
realm, that is, of science. With some it has become a habit to use the word “rational” in much the
same sense as we do “metaphysical.” Hence some warning against misunderstanding may not be
out of place. (Schumpeter 1934, p. 57n.)
Indeed it may not. When we think of those for whom the term “rational” has become
“metaphysical,” Marx stands in the forefront. It is hard to forget Schumpeter’s marvelous
characterization in Capitalism, Socialism, and Democracy of Marx as a (Weberian?) prophet.
“Observe,” writes Schumpeter, “how supreme art here succeeds in weaving together those extra-
rational cravings which receding religion had left running about like masterless dogs, and the
rationalistic and materialistic tendencies of the time,….”
26

In Chandler’s view, “Weber’s two most important interpreters were Joseph Schumpeter and
Talcott Parsons, both of whom taught at Harvard. Schumpeter was Weber’s most
noteworthy successor as an economic sociologist and historian” (Chandler 1971 [1988, p.
304]).
- 16 -

Again, Langlois’s preoccupation to force the dichotomy of “economic science” versus

“economic sociology”, and then of “empirical” versus “rational/Popperian historicist”
accounts of “rationalization”, results in a near-total misunderstanding of Weber’s entire
problematic. For one, Weber does not see the ‘leitender Geist’ (Langlois’s “charisma”) as
disappearing under the weight of “rationalization”. On the contrary, this process is not
“separate/divorced” from the “leitender Geist” but forms a necessary precondition for the
exercise of that Wille zur Macht (nothing like – Nietzsche would say “6000 feet above” -
the “empiricist rationality” Langlois envisages!). The Unternehmer himself (though a
lame version of Weber’s ‘Politiker’, not included in his “triptych” despite the search for
his origins in “Die Protestantische Ethik”) was intended by Schumpeter to be the very
apex of “the will to conquer” - a heroic ‘Act’ that transforms and transports (carries –
through the Veranderungsmechanismus) the entire capitalist system.

For another, Weber perceived the challenge that Lenin (one of those “metaphysical”
Marxists!) posed to capitalism in that it “circumvented” his entire project of
“Parliamentarisierung/Demokratisierung” in terms of the leap undertaken by the
Bolsheviks in seizing the machinery of state in Russia (again, Cacciari). This suggests
that both Lenin and Marx were aware of the link between (capitalist) “rationality” and
“rationalization” that Weber describes. And Schump knew that they knew because he is
the first to admit that, if nothing else, Marx got this “prophecy” (of Weberian
“rationalization” and “concentration”) right!

At no stage did either Weber or Schumpeter dismiss Marxism as an “impossible dream or

prophecy”, as Cartesian deductivism or as Popperian “historicism”, as does Langlois!
Rather, they were aware of the threat it posed as an alternative political and philosophical
movement, though perhaps not with the outcome envisaged by Marxists. Indeed, the
whole point to Schump’s ‘CS&D’ is that capitalism will succumb to “socialism” – which
shows he was aware of the real practical challenge posed by Marxian analysis, and never
reduced it to a mere “rationalist metaphysical” chimera.

Langlois, like Hayek, confuses Marxian “rationality” with (Cartesian) “rationalism” –

something Schump evidently refrains from doing. The difference is that Langlois is
anxious to present capitalism as a result of “natural/spontaneous”, “empirical”
development (in the Hayek/Burke tradition), whereas Weber and Schumpeter were far
more conscious of the “Nietzschean” implications of the “dynamic” aspects of capitalism
(though Schump disguised these aspects of the question, as we know, partly for
professional reasons and partly due to atavistic “methodological” hankering after
equilibrium and Machian “empiricist” analysis).

This entire ‘Dynamik’ – Schump’s Nietzschean/Weberian leap away from ‘Statik’ -

escapes and eludes Langlois who is blissfully ignorant of it. His interpretation of Schump
is very much in line with orthodox equilibrium and even “praxeological” analysis: as a
result, he fails to capture the “innovative” (!) essence of Schump’s “Theory”. (See also
Michaelides and Milos paper in CJE on “Schump and the GHS”, a prosaic but
informative effort.) Indeed, his interpretation would leave Schump open to the very
empiricist hypostatization of “rationality”, and hence its descent into “rationalism”, that
the GHS was already moving against the Austrian School (see Roscher below).

(Langlois’s excellent review of this problematic inside the Austrian School [‘Know.&Ration.inAS –
an Analytical Survey’, 1985] reveals his attempt to re-frame uncritically Schump’s “open-ended”
approach” – which he also attributes to Hayek and prefers under “the thinnest of disguises” [p40] to
the “closed theories [models]” [p2] of their predecessors – within the formal “analytical” [in the title!]
epistemological horizon of “empirical economic science” – proof once more of the inability of the
entire “Austrian” tradition and even its critics [cf Shackle] to com-prehend the profoundly
“transvaluational” Nietzschean/Weberian stance.)

Yet it is precisely this “interest” that neither Schumpeter and still less his Austrian School of
Economics avatars, Menger and Bohm-Bawerk, were prepared to avow – because to do so would
have meant laying bare the claim to social power by the nascent Austro-German bourgeoisie
against the rapidly politicized urban proletariat led by the Social Democratic and Communist
Parties of Central Europe. It is not a simple co-incidence, then, that Schumpeter should draw a
link between Marx and the German Historical Schools in a footnote (number 34) at the very end
of the passage we just cited. It is a footnote that alludes once more to the famous Methodenstreit
between two diametrically opposed methodological approaches to the study of human society.

At the heart of the Methodenstreit between the German Historical School – composed first of the
School of Law with de Savigny and then the School of Economics with Roscher, Knies and
Schmoller – and the Philosophical School, represented ultimately by the Austrian School of
Neoclassical Economics from Menger to Schumpeter himself, - at the heart of this “struggle over
method” were the two sides of Hegel’s even more famous dictum (from the Philosophy of Right):
“Whatever is real is rational and whatever is rational is real”. The German Historical Schools (of
History and later of Economics) held fast to the first part of this dictum: - that only what is “real”,
what has stood the test of time in terms of the institutions and customs and laws that a society
has inherited is also “rational” precisely by virtue of their having survived through the
vicissitudes of history. (A similar argument, albeit in British empiricist vein, may be found in
Edmund Burke’s Reflections on the Revolution in France.)

Clearly, such a stance could not be supported by the opposing “Philosophical School” that later
turned into the Austrian School of Economics, originating like all of Neoclassical economics from
“engineering circles” close to academic institutions, that represented the worldview of a rising
and assertive mittle-europaeisch Burgertum. For this rising bourgeoisie the traditions, laws, customs
and institutions of the past, far from being “rational”, were only despicable atavistic obstacles in
the way of the “freedom” of enterprise and commerce, and most heinously they stood in the way
of the “freeing” of the working population from all those nauseating “feudal” social bonds and
relics that impeded “free wage labour” from adding to the power of the bourgeoisie and of its
Staatsmacht. For this “Philosophical School” it was the second part of Hegel’s dictum that was
true: “Whatever is rational” – and that alone! – “is real”. But this “reality” does not represent for
the Austrian School a neo-Kantian Sein (‘Is’): what is “rational” and scientific is not necessarily
“real” in the sense that it is what actually exists! Nor is it a Sollen (‘Ought’) in the sense that it is
morally superior to tradition. Rather, for the Austrian School of Economics this is a Mussen (a
‘Must’) in the sense that “what is rational must become real” only because it enables the capitalist
class to quantify and measure social resources in relation to money wages so as to perpetuate its
social power over living labour. Right from its origins, the essence of bourgeois economic
analysis is the foundation of “a bag of tools”, a panel of instruments, that can ensure the “exact
calculation” (exakte Kalkulation, cf. Weber, Vorbermerkungen) of the social antagonism between
capitalists and workers in the form of money capital on one side and money wages on the other.

Schumpeter’s Economic Doctrine and Method, ch. 4, is quite explicit about the politically strategic role for the Western
bourgeoisie of the nascent economics profession, from the Verein fur Sozialpolitik in Germany (run ironically by the
intellectual leader of the “Older” Historical School in Germany, Gustav Schmoller [!]) to the American Economics
Association. This shows how in effect, as Schumpeter acknowledges [see esp. pp.170ff], the opposing sides of the
Methodenstreit were substantially more cohesive for bourgeois industrial goals than the intellectual squabbles among
its partisans would lead us to believe.

Plausible Capitalism – Schumpeter’s “Negatives Denken”

Once Schump turns to orthodox neoclassical analysis we see the devastating effect to
which his “Entwicklung” approach leads and we gain an insight into his true feelings
about orthodox economic theory. Schump’s critique is vehement and unforgiving as it is
thorough and, again, devastating. – Starting with equilibrium. For not only is capitalism
never in “equilibrium”: its entire nature is incompatible with that neo-classical notion.
For here Schump takes an axe not just to Walrasian, but also to Smithian economic
theory.

Here Schump is alerting us to the kind of “rationalist/empiricist” approach that “reduces”

complex social relations to mathematical formulae, as the GHS had warned:

“Without a sense for the practical, and without ideas of an elevated nature, a person may, indeed, be a
man of erudition - he cannot be a historian. As the proverb says, the forest cannot be seen, for the
trees. That this noble study may bear its best and most useful fruit; that is, that it should preserve us
against ambitious formulas and destructive chimeras, we must pursue another way.
Contempt for the past is associated with a passion for reform. Men think of destroying that which
should only be transformed. They condemn everything that has been, unconditionally, and launch out
towards a new future. The suffering which has been gone through irritates and troubles
the mind. The work of pulling down is so easy, it is supposed that the work of building up is equally
so. Hence systems rise, as if the world were to begin anew. The pride of liberty and of human action
becomes the principle of science; and, like all new principles, it pretends to exclusive and absolute
dominion. Rationalism governs ; abstract philosophy
6 PRELIMINARY ESSAY
ignores the traditions and the requirements of the life of nations; and finds now in it, as in
geometry, nothing but principles and deductions,” (Wolowsky, ‘Hist.Meth in Pol Econ’, in
Roscher, “Pol Econ”, pp5-6, my emphasis).

If the GHS hits the spot of exuberant neoclassical and “praxeological” theories, it loses
totally for its “ineffectual” Ohnmacht, all in the name of humanistic “freedom”
(Wolowsky cites “the achievements of the human mind”, p2 and quotes from Terence).
For Schump, what is paramount is “the appropriate level of concreteness” – that is the
level at which the “scientific/logical language game” – the methodology - veers onto “the
gravel road” that gives the analytical-theoretical apparatus the requisite “traction” or
“friction” (cf ‘Trager’ for the ‘Mechanismus’) that makes its application
“effectual/effective” (whether in “individualism” or “collectivism”).

The formal apparatus can only describe or “point”. But the “effectuality” of the apparatus
is the expression of a Wille zur Macht that ex-presses not the “freedom” of the will but its
“voler-potere” or will to power, its “con-dition/compulsion” – not an abstract or pure
will, but one that “operates” in an objective “historico-political” dimension. This
Nietzschean/Weberian “width” (spessore) or dimension is what both the GHS and critics
of Schump have neglected, to the detriment of their “reading” of his
‘Entwicklungstheorie’.

“Creative destruction” – the Nietzschean phrase for “Innovation” - is the very essence of
capitalism. This realization upsets and overthrows most economic theories, not qua
theories, but as realistic or truthful accounts of capitalist reality, from equilibrium to
competition [p84, 104] and monopoly [p103] to profit maximization and efficiency
(pp105-6). Ultimately, even the notion of “utility” itself is consigned by Schump to the
dustbin of “non-observable psychic magnitudes” - that is, “metaphysics” (p77, fn2). This
is not to say that certain categories are not “ideal” descriptions of competitive behaviour:
but in reality there are many other pragmatic/strategic considerations concerning the real
political “power” interests of enterprise that form part of and dominate “the logic of
competition” (p77, fn2). Most significant is Schump’s notion that even a “monopoly” is
under “competitive” pressures given the “reality” of capitalism outside of its formal
(language-game) “logic”.

Bluntly put, and this comes out in the discussion of “Creative Destruction”, in truly
Nietzschean-Weberian fashion Schump is throwing out the “rationality” of economic
theory (“this boils down to a definition of rational action and can hence… [apply equally
to] a socialist society”, ibid.) and opting for the “Machtpolitik” of capitalist relations of
production, that is the strategic and, we would say, antagonistic aspects of it – which are
essential to its comprehension. The reality of capitalism is not the “rules of the market”
which represent a formal description of its language game. The behaviour and
motivations of economic actors cannot be comprehended by existing economic theories
whose “rationality” would apply as much to capitalism as to socialism. This applies also
to “dynamic theory” which merely applies mechanical mathematical methods to
equilibrium analysis but does not take conscience of the specific “disturbances”
(Verstorungen – our “friction”, which “economic analysis” as a “language game” cannot
com-prehend, or understands only as “disturbances”/”externalities”) inherent to “the
process of creative destruction which we have taken to be the essence of capitalism”
(p104, fn24).

“Rationality” (the general logic of choice) is therefore not “rationalization” either.

Indeed, the latter, though induced/produced by the former, may well run counter to it and,
in the case of capitalism, it does to the extent that the ‘Kreislauf’ does not and cannot
com-prehend capitalist ‘Entwicklung’ (p82, 84 [“perennial gale of cd”]):
“Now a theoretical construction that neglects this essential element of the case [the transience of
industrial institutions, {p85} neglects all that is most typically capitalist about it; even if correct in
logic as well as in fact, it is like Hamlet without the Danish prince,” (p86).

Let us pause on the momentous implications of what Schump is saying here. Like
Wittgenstein, Schumpeter is saying that “economic analysis” is like a perfectly
frictionless floor: it is impossible to walk on it. However valid the Kreislauf might be “to
analyse” reality, like a frictionless floor that gives us a dimension, the actual real
operation of capitalism takes place in a given real social and historical context that is full
of “frictions”: It is this real context that we must “walk on” if we are to gain any
“traction” or “understanding/com-prehension” of its real operation! And this is where
Marx’s theory comes into its own. What Schumpeter leaves out of the “real analysis” or
“Entwicklung”, however, is the real grit that makes our analytical “walk” possible: - the
antagonism of the wage relation!

Schump’s discussion (pp123 ff) of “rationalization”, on one hand, and “rationality” or

“logic” of capitalism as the “spirit” or mental attitude (forma mentis) on the other, -
which, when applied even in Marxist theory engenders the former - shows once and for
all just how far off the mark Langlois is in his “empiricist” distinction of the two. The
“rationality” that leads to “rationalization” is the same for Marx, Lenin and Schumpeter.
If anything, the Leninist version is even worse than the Weberian because, far from being
“metaphysical”, it would “rationally” transform the whole of society into a “rationalized”
factory! (The socialist hell is preferable to the capitalist because in the former they
occasionally run out of sulphur!)

(Schump’s drawing of the link between capitalism, rationalization and democracy is

evident on pp296-7. It is interesting how he links two different economic modes with the
“political organization” that best suits them – evincing once more the all-important
“nexus” between production and politics without attributing to “the self-regulating
market” the “spontaneous order” that the Austrians always did, in various guises. The
entire part on Socialist Parties displays considerable historical acumen, weaving political
and ideological factors with more fundamental and structural developments. Again we
find a ‘Weberian’ accent here as well as Sombartian. In particular, his steadfast
assessment of the “in-actuality” of the Russian Revolution, with its attendant
consequences and ridicule of Lenin’s “intellectual” role [pp328ff], puts him squarely in
the Marxian fold and shows how perceptively he discriminates between the two meanings
of “rationality” [Cartesian and Weberian]. Once more, this shows how futile and
irrelevant the ‘Methodenstreit’ was when one considers the overwhelming ‘similarities’
of the Austrian and German Schools! [See Cacciari in ‘PNeR’.])

“The result of the capitalist process” (125) was to produce both the forma mentis, the
“mental attitude” (the scientific élan – “rationality”) and “the men and the means” (125)
that have led to “rationalization”. This, Langlois does not understand because he is so
keen to present “economic science and sociology” as “empiricist” alternatives to Marxist
“rationalist metaphysics” – a vulgar dichotomy Schump is not willing to draw; so much
so that he is prepared to drop the “individualist”/empiricist element and adopt what
Langlois would call the “rational” (but he means “Marxist/rationalistic”) standpoint in
terms of the “historical conditions” (our “friction” or Schump’s “disturbances”) limiting
human choice (p130): “If this is the quintessence of Marxism then we all of us have got
to be Marxists”!

What mainstream interpreters of Schump’s “Entwicklung” (from Langlois and Chandler to

Swedberg and Moura and Shionoya, and so on) fail to grasp is the Nietzschean/Weberian dimension
of his work: “economic analysis” is part of the “functional/instrumental” language game which is
shaped and “guided” (Weberian ‘leitender Geist’) by “the will to conquer” of his Unternehmergeist.
This is the “theoretical synthesis” that these mainstream interpreters have totally missed and that
forms the basis of their dichotomies between “formal” economic analysis or science (‘theory’) and
descriptive economic sociology or “history”. What they ignore totally is the negatives Denken from its
“logical-scientific” basis (from Schopenhauer to Mach through to Wittgenstein) to its
“existential”/historicist or “politico-philosophical” extrapolation (Nietzsche to Weber and
Heidegger).

What we are tracing here is how one delimits/confines but also induces/produces the other.

When Schump turns to the reality of capitalism, he covers first “Monopolistic Practices”
(theory discussed on p104). But then he turns to the factors, whether internal or external,
that engendered the great expansion of capitalist industry between 1870 and 1914. And
here Schump comes to a truly revealing assessment of the role of technology (innovation
as well as invention) in the capitalist process, allowing that both are part and parcel of
that entrepreneurial process. Thus he includes “invention” as well, something he had
excluded in “Business Cycles” and “Theory”. (See pp109-10 which are of the utmost
importance.)

So here is the pivot of Schump’s theory – “innovation” and we must go and explore its
implications. (It seems to me that Negri [‘Operai e Stato’] does this to some extent.)

Wittgensteinian Complications – “Transplantation Problem” (p169) (we may call

this “referentiality” or “concreteness” problem).
The chapters devoted to the reasons for the likely demise of capitalism are instructive and
follow in large part the Marxian prediction particularly about the “socialization” or
“planning” of large capitalist enterprise and industry. The reflections on “entrepreneurial
spirit” are illuminating. But above all there are arguments that resemble, if only
cognately, Marx’s argument in the ‘Grundrisse’ regarding capital as a “barrier” to capital
in that the “motivational” element clashes with the “institutional” developments as a
result of “rationalization/democratization” or (combined) “socialization”.

Schump at first seems to ignore that (even after we have dismissed Mises’s
“impossibility” theorem [p173] or Hayek/Robbins’s “impracticability” objections [p185])
his “coefficients of transformation” involve precisely the kind of “reification” (in terms
of coercion involved in “socially necessary labour time” or “maximization of output”)
that we reject. Small wonder that the socialist “economy” and the “commercial” one end
up looking very similar! True, any defined output involves the engineering calculation of
inputs (materials, equipment and technologies). But these can be set or fixed at well
within the production capabilities of a socialist society without any need “to maximize
output” so that, for all purposes, the “coefficients of transformation” become neatly
irrelevant. Schump is always waylaid by the notion of “scarcity”.

At p.189 (et ff) Schump allows that the concept of “economic efficiency” or even
“productive efficiency” is difficult to define. At p186 he avers that capitalist
concentration paves the way to a “planned/socialist” economy. Are they the same? No,
because, again, “social capital” involves its own “planning”.

Schump alludes to “the bloodless concept of perfect competition”. Again, a reference to the Kreislauf
which, in its ‘Statik’ form is “bloodless” because it is a product of “the general logic of choice”, which
is “frictionless” and therefore “unreal/unhistorical”.

Again we refer to Wittgenstein’s notion that it is im-possible to walk on a perfectly smooth pavement
because it is frictionless. Walking requires “friction”, the friction of “reality” – which the “logic of
choice” cannot fathom. Schump is aware of these difficulties – he refers to dangers of
“transplantation” (p169) - see his effort “to define” socialist equivalents for “wages”, “profit”,
“rent”, “incomes”, “market”, “competition”, “productive or economic efficiency” – at pp181-2. Cf
discussion of “price” in fn on p169. This may help us show that he is aware of the limitations of “the
general logic of choice” or of the Kreislauf not just as “analytical/predictive” but also as
“political/philosophical” or “normative” categories.

The discussion of “the general logic of choice” and Abba Lerner’s (see also Oskar
Lange’s contribution) “marginal costs” is on p176. The beginning of the chapter on “The
Socialist Blueprint” has references to Mises, Hayek/Robbins and Barone – object of
Hayek’s diatribe with Schump in ‘Use’ about the possibility of socialism. (For this and
following parags, see paragraphs on Hayek’s Neo-Darwinism’ in my ‘Hayek-Robbins’.)
The concluding comments to the historical sketch of socialist parties (c. p375) pointedly
illustrates notion of socialism as “planification”, that is, the elimination of crises and
business cycles. Discussion of the US economy, planning and government deficits from
p395. Review “The March to Socialism”, final chapter appended post bellum.

Hayek and Schump seem to converge on one point: the start of CS&D where Schump
chides Marx for leaving out “intelligence” or factors other than “violent expropriation”
from “ursprungliche Akkumulation” – going so far as to deride “Moses and the
Prophets!”. And the convergence is marked in recent ‘philo-Austrian’ and “new
institutional” approaches. An entire cohort of myrmidons has risen since (aided by the
likes of Kirzner, Shackle and now Metcalfe and Loasby) to champion the “cognitive
evolutionary” theory of the firm and enterprise, including the “intelligence” of
entrepreneurs! No prizes for guessing our attitude to this nonsense, more useful to
evaluate the “ideological/strategic” orientation of bourgeois thought in rationalizing
“accumulation” under the guise of “enterprise” than in any “scientific/theoretical” merit
whatsoever.

Of course, the riposte to Schump’s ruse is that “intelligence” ea ipsa has nothing to do
with “accumulation” because the latter concept entails ab initio the ‘Trennung’
(privatization of social labour) that, socially if not ethically, is quite independent of and
prior to the concept of “private property”. Tersely put, intelligence is “irrelevant” to the
concept of “accumulation”. (Cf Locke in my ‘Civil Society’.)

Conclusion

Schump was always attempting to winnow the “rational empiricist core” described by
him as “economic analysis” or “the general logic of choice” from the more
“historical/sociological” elements of social reality and, more importantly, from the
“prophetic/teleological/rationalist” or other “ideological” ones that he denounced in
Marxism, for instance (here he might have relied heavily on Pareto, whose work he knew
well). With Hayek, we have seen how this “methodological individualism” functioned
and the epistemological (Machian) and politico-philosophical (liberal) bases on which it
was founded.

Wittgenstein would have described this framework as a “language game” with its
distinctive “logical rules” arising from its peculiar assumptions. But Schump was well
aware of the limitations of “the general logic of choice”, and especially of the ‘Statik’
analysis which did not capture the “reality”, the “friction” of capitalism as a “living”
entity existing in a historical/sociological space and time, not a “bloodless”, “anatomical”
schema “like a patient aetherised upon a table”, living in two timeless dimensions.

The “reality” of capitalism is not that of “the logic of choice” or of “economic analysis”,
which are “rational/logical” abstractions “distilled from “empirical” reality. The
“abstractions” are the “methodology” and the “individualism” is what constitutes the
“empiricism”.

But once this “framework” is “situated/implanted” in the real dimensions of social

history, then the approach must change and become a “histoire raisonnee” (BC, p220)
wherein the ‘Dynamik’ can be described by an “empirical/scientific”
Veranderungsmechanismus: but this “transformational mechanism” only
conditions/confines “materially” and induces/produces/engenders practically the
“political/decisive/guiding” or “normative” moment when “values” are turned into
“action”. Thus, the “process of Innovation” is “guided”/deployed (Weber’s leitender
Geist) by the Unternehmergeist.