Schumpeter's Capitalism, Socialism and Democracy

A Twenty-First Century Agenda

Leonardo Burlamaqui, Rainer Kattel, Leonardo Burlamaqui, Rainer Kattel

• Publisher: Routledge
• Year: 2018
• eBook ISBN: 9781317209768
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

2017 marked the seventy-fifth anniversary of Schumpeter's Capitalism, Socialism and Democracy, a work acknowledged as one of the most insightful books written in the twentieth century. It retains a contemporary quality, and still invites criticisms, new interpretations, and extensions and across disciplines.

This book, in addition to re-examining Schumpeter's seminal work and undertaking a twenty-first-century update of its main themes, brings together leading social scientists to provide contemporary amendments, extensions – or eventually refutations – of key elements of Schumpeter's vision and thesis. Issues covered include a new take on creative destruction, the contours of a theory of innovative enterprise, finance and financialisation, a critique of the secular stagnation thesis, Schumpeter's contributions to a theory of the entrepreneurial state, his conception of socialism and its current relevance for understanding the 'China model' as well as a rekindling of his democracy thesis for our times.

Bringing together leading international contributors, this book provides fresh perspectives on ideas that continue to be hugely relevant to contemporary social sciences and a guide for understanding the current tensions among capitalism, the state and democracy. These chapters will be of interest to economists, social scientists and anyone with an interest in modern capitalism.

1 Introduction – Capitalism, Socialism and Democracy at 75

New interpretations and new dimensions

Leonardo Burlamaqui and Rainer Kattel

The year 2017 marked the seventy-fifth anniversary of Schumpeter’s Capitalism, Socialism and Democracy (CSD), a work acknowledged as one of the most insightful books in the social sciences written in the twentieth century. It has been widely discussed since its publication and deserved a special celebration volume when it reached 40 (Heertje 1981). From our perspective, far from being a ‘collection of essays’ in economics, sociology and politics, CSD is in fact an attempt to capture the essential dimensions of capitalism’s dynamics, and its potential future, from a multidisciplinary perspective; an analytical framework that remains essential for understanding capitalist economic and social dynamics, democratic politics and development trajectories today. The contemporary relevance of CSD, its freshness and scope allow, and ask for, new interpretations, extensions and criticisms, which is what makes it worthwhile, almost mandatory in fact, to dedicate a volume to its diamond anniversary.

However, in contrast with most previous CSD-related discussions, including most in Heertje’s edited collection, our aim in this volume is less about revisiting and scrutinising the book per se and more concerned with accessing Schumpeter’s core theory and theses, and providing contemporary extensions, reinterpretations or eventually refutations of his arguments. In short: this is not a book about another book, but is rather a set of reflections on the contemporary relevance and, largely, forgotten broadness and scope of Schumpeter’s agenda. The boldness of CSD, announced by its title, consists in linking politics and social structures to the economy, instead of simply discussing economic evolution per se. The task Schumpeter embraces is rather to connect economic transformation with institutional, political and cultural changes, as well. In this lies, perhaps, the most fundamental relevance of CSD for today. In times when many governments and international organisations are seeking ways how to make innovation and institutional reform serve wider societal challenges – the challenges coming from the impact of industry 4.0, AI or climate change – CSD offers, we suggest, the most provoking framework for a comprehensive understanding not only of the ‘economics of innovation’, but also of its ‘politics’, of its impacts on the social strata, interest groups and corporations that gain, but also the ones that suffer, from fast-paced structural transformation and how they react to it (Taylor 2016 and Juma 2016 explore this avenue in more detail).

Indeed, in CSD Schumpeter presents an analytical framework for thinking about how capitalism evolves – as a system of creative destruction but also as an institutional web and a cultural phenomenon – and suggests tools for how both corporations and the state could manage it.¹ Furthermore, while most economists, both orthodox and heterodox, see market failures as the vantage point to analyze policy tools for speeding innovations and managing welfare measures in general (see key statements in Arrow 1962 and Nelson 1959), in CSD Schumpeter presents the foundations of a creative-destruction paradigm for understanding how the system evolves and a market-shaping institutional framework for business organisations and the state to manage its evolution (Burlamaqui 2006; Mazzucato 2017).

Let us pause here and give the reader a more concrete taste of what she will find in the contributions to the volume. The book is divided into two parts: new interpretations and new dimensions. The first is basically concerned with ‘updating’ Schumpeter’s analysis, mostly by criticising and rekindling it, while the second is more focused on recovering and expanding his agenda. Obviously, this is not an ‘iron-caged’ division. There are overlaps, but we think that it provides some clarity to the reader in following the chapters’ sequence.

In the first part, the common point to underline is the, somewhat overlooked, theme of the feasibility of merging evolution with equilibrium, or ‘Schumpeter’s basic ambition’ in Andersen’s terms (2009, Chapter 1). This is the subject of Louçã’s contribution to the volume, but it is also prominent in both Burlamaqui and Callegari’s discussions: the question of why Schumpeter did not reject the Walrasian paradigm he could not properly use or link rigorously with either development or cycles. Callegari stresses this eloquently by pointing out that ‘[t]he adoption of the Walrasian equilibrium as a theoretical closure allows Schumpeter to build a model, but the resulting conflicts in underlying assumptions lead to severe inconsistency (Chapter 4 in this volume).

In Chapter 2, Burlamaqui scrutinises these theoretical inconsistencies of Schumpeter’s two major works on development, the Theory of Economic Development (TED) and Business Cycles (BC), highlights their conceptual innovations and indicates how the inconsistencies are finally resolved in CSD by dropping equilibrium and espousing creative destruction. He claims that CSD marks a radical rupture in Schumpeter’s theorising about capitalist dynamics. Until then, economic cycles were for Schumpeter the key organising framework within which economic evolution was conceived. Schumpeter’s theory of cycles, both the Theory of Economic Development (TED) and Business Cycles (BC), begins and ends in equilibrium. In fact, Andersen (2009, 2–3) argues that ‘Schumpeter’s basic ambition was to complement equilibrium economics with an evolutionary economics that analyses capitalist economic evolution.’

Burlamaqui takes issue with that interpretation stressing rupture, not continuity, between CSD and Schumpeter’s two previous works on development. He shows that in CSD, especially from Chapter 7 on, a new paradigm takes shape. Competition by means of innovation – Schumpeterian competition as we know it today – replaces cycles as the core for understanding capitalism’s evolution. Furthermore, both equilibrium and perfect competition are completely dismissed and considered incompatible with change. Creative destruction is born.² In the following three chapters, Schumpeter advances the sketch of a theory of corporate capitalism operating under oligopolistic, but dynamic, competition, which is conducive to increased innovations and fast-paced technological progress. In that sense, CSD provides us with an entirely new paradigm to analyse and to theorise about capitalism. The ‘creative-destruction paradigm’, as Burlamaqui terms it, is the outcome – a new but at the same time also somewhat surprisingly underdeveloped paradigm. The radical nature of this new departure was scarcely noticed (Nathan Rosenberg, 1994, being a laudable exception to the rule).

Burlamaqui closes the chapter indicating that, to date, there is no comprehensive account of Schumpeter’s creative-destruction paradigm understood as a theory of capitalist dynamics as a whole. The need for a fresh look is crystal clear here and this is a theme in need of further research and elaboration. His contribution is an attempt to lead the way as to how this should be done.

In the following chapter, Louçã addresses the same issue, the paradoxical nature of Schumpeter’s work, but does it on a much bigger scale than Burlamaqui. For Louçã the equilibrium versus evolution ‘anomaly’ was the most serious, since it concerned the backbone of Schumpeter’s approach and analysis of capitalism. But it was hardly the only one permeating his thinking. To substantiate his claim, Louçã offers the reader a tour de force in reviewing a large chunk of Schumpeter’s writings, where he highlights a whole set of ambiguities in the author’s intellectual and political trajectory.

First, there is Schumpeter’s approach to liberal democracy, which he did not particularly like, but was not ready to openly dismiss. Democracy, for Schumpeter, Louçã explains, is a powerful method of social organisation and decision, and a legitimate one, but it is companionable with the imposition of terror on some minorities (or majorities, as it comes), since it is a method, and a vulnerable one, not an end in itself. In Schumpeter’s approach, the jury is still out on the efficacy of the method (see also Medearis’ contribution in this volume).

Second, the conflict between his political and economic evaluations of authoritarian regimes, which emerged in the 1930s, especially the Nazi regime, is also noticeable. While condemning the Nazi political extremism and social perversity, Schumpeter praised its industrial rationalisation policies and its role as an entrepreneur.³

Third, there are Schumpeter’s attitudes towards anti-Semitism, which again he condemned but also displayed mixed feelings about on a case-by-case basis. His pronouncements on the Marschak and Samuelson episodes alluded to by Louçã testify to that.

Fourth, his recognition that the big bureaucratised corporations with retained earnings and R&D departments were much better at endogenising innovation, even ‘automatising’ them, collides with his regret that this same trace would render the ‘heroic entrepreneur’ obsolete.

Fifth, there is Schumpeter’s odd relationship to what should be the ‘gold standard’ for economics; he retains physics, but, at the same time, flirts with zoology, organic analogies and – at the very end of his career – economic and business history (his ‘final thesis’). Louçã aptly summarises the point by indicating that ‘in the general epistemological stance, Schumpeter certainly praised the authority and clarity of physics; but when concrete economic concepts were at stake, he denied any significant influence from physics.’ Furthermore, Louçã does not see CSD as a coherent work, and much less as offering a new paradigm for economic analysis. In this he diverges from Burlamaqui’s interpretation in the previous chapter.

Louçã closes his chapter in a truly ‘Schumpeterian fashion’, offering the reader two different – and almost opposing – paths to follow. On one hand, he states that ‘it is possible to conclude that Schumpeter defined the social process as an intrinsic dynamic disturbance of equilibrium through the creation of novelty – the innovative mutation – and this was precisely what defined his evolutionary framework.’ This is clearly a statement underlying the confusing nature of Schumpeter’s legacy and of the potential risks of its adoption as a source of inspiration or as a theoretical guideline. On the other hand, Louçã’s closing paragraph openly praises the author:

Schumpeter is one of the most modern of all economists because he felt, studied and discussed contradictions and tensions in the evolution of the developed economies. In that sense, Allen is right again: he had a paradoxical life and career, produced paradoxical ideas and books, had a career of failure which was, as a whole, a great success.

What seems to be uncontroversial is the need for additional thinking and research on those issues, given the fact that, as Burlamaqui suggests in his first contribution,

[e]quilibrium-based thinking remains, despite its distance from any kind of empirical grounding, a powerful iron cage that traps whoever gets into it. Easy to get in, extremely difficult to get out. In that sense, economic theory constitutes a very strange case of applied social science, where the mostly revered analytical tool [equilibrium, or in modern parlance, DSGE models] is in fact a rather poor lens for understanding the way the real economy works and evolves.

(Chapter 2 in this volume, note 2)

In this regard, one should not expect much help from the vast majority of contemporary ‘neo-Schumpeterians’. Their research agenda ended up shrinking Schumpeter’s analysis to the sector level in order to discuss the relationship between market structures, technical change, firm organisation and innovation.⁴ They provided us with fine case studies of industries, sectors and technological trajectories, but ended up trapped in a model-building competition with the mainstream that largely ignored the broadness of Schumpeter’s original approach as well as his agenda. The result was, in Callegari’s felicitous phrase, ‘a Schumpeterian-neoclassical synthesis’.

Additionally, there is the need to explore more thoroughly the intertwining dimensions of economic evolution and social/institutional change. Callegari takes up this task in his chapter in the book. His main assertion is that CSD makes essentially two major contributions: the first to the analytical structure, by modifying a crucial element of the methodological approach, and the second in terms of theoretical propositions, by extending the contents of the theory itself to the conditions of trustified capitalism.

The first consists in the expansion of the concept of regime, an exogenous set of institutional rules, in the more general idea of order, including the socio-political conditions required for its preservation.

The second points to the broader implications of expanding the concept of entrepreneurship. In CSD, Callegari submits, Schumpeter suggests that the entrepreneurial function should be expanded to include the mechanism of conversion of profits into rents, thus giving rise, through a retained stream of income collected via innovation diffusion, trade secrets and intellectual property protection, to the oligopolistic firm. This brings in a complex mix of economic, social and political results that deserves attention: ‘when the entrepreneur is characterised as a dynamic rent-seeker, each business cycle will lead to a progressive concentration of the productive sector’ (Callegari, Chapter 4 in this volume). Furthermore, when entrepreneurs and rent-seekers inhabit the same individual, organisation or social strata, both economics and politics tend to become much harder to decipher. Top technological performers can also be tax-avoiding experts and lobbyists advocating for strong rent-seeking based intellectual property regimes.⁵ The cases of Apple, Google and the ‘new digital monopolies’ in particular, and the financial...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Dedication
• Table of Contents
• List of figures
• List of tables
• About the contributors
• 1 Introduction – Capitalism, Socialism and Democracy at 75: new interpretations and new dimensions
• PART I: New interpretations
• PART II: New dimensions
• Index