------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (August 2005)
David Reisman, _Schumpeter's Market: Enterprise and Evolution_.
Cheltenham, UK: Edward Elgar, 2004. vii + 294 pp. $120 (hardcover),
ISBN: 1-84376-164-5.
Reviewed for EH.NET by Frederic Sautet, Mercatus Center, George Mason
University.
Over the last two decades, Joseph Schumpeter's work has experienced a
resurgence of interest. Not only are Schumpeterian models of economic
growth now explored by many academics (e.g. the works of Richard
Lipsey and Kenneth Carlaw), but also some economists are starting to
realize that the multi-disciplinary approach to economics, as
Schumpeter practiced it, may be more fruitful than it was once
thought.
In the last decade or so, several biographies and intellectual
histories of Schumpeter have been published (e.g. the works of
Richard Swedberg and Yuichi Shionoya), along with many articles on
his life and work. David Reisman's book, _Schumpeter's Market_, is a
welcome addition to this growing field of research on Schumpeter's
work and his influence in modern day economics.
Reisman's book is an intellectual history of the work of Schumpeter
with a special focus on "three irreducible constructs": market,
enterprise and evolution. Reisman's impressive knowledge of
Schumpeter's intellectual output enables him to trace the evolution
of Schumpeter's life-long themes. It is not an easy task to present a
picture of Schumpeter's vision, as there are many tensions and
complexities in his intellectual history. While Reisman provides the
reader with ample details about Schumpeter's work, the book misses an
overall explanation of the tensions and complexities of his work.
After a short introduction, Reisman presents, in chapter 2, what he
calls Schumpeter's vision. This vision is two-fold. On the one hand,
it is made of a substrate: the capitalist system based on free
exchange and the existence of markets. On the other hand, it is made
of culture, ideas, values, polity and what makes the civilization of
capitalism. One cannot study one without the other, and the task at
hand for the economist, as Schumpeter saw it, is to understand how
the two interact. This is what makes Schumpeter's vision appealing:
economics to be well practiced must reinvent itself and grow beyond
its boundaries.
Reisman explains that Schumpeter, while against socialism and the
socialists, never claimed to have any solution to the practical
problems of the world. Schumpeter was a historical determinist who,
like Marx and Engels before him, thought that socialism was
inevitable. As Schumpeter put it: "There is inherent in the
capitalist system a tendency toward self-destruction" (p. 189). This,
along with the theme of capitalism and innovation, was the most
recurrent idea in Schumpeter's work. In Reisman's words: "Capitalism
was under threat in 1950 as it had been under threat in 1918.
Schumpeter throughout the whole of his academic career was predicting
the end" (p. 208).
Paradoxically perhaps, Marx and Schumpeter had much in common
agreeing on historical analysis and on the direction the world would
take in the decades to come. However, Schumpeter did not follow Marx
on the economics, as it was clear in his mind that the capitalist
system worked better than Marx thought. To Schumpeter, the market was
not subject to the various problems enumerated by Marx (e.g. the
falling rate of profit). But, the tension was there: while Schumpeter
defended capitalism against Marx, he also explained that it contained
the seeds of its own destruction.
Chapter 3 presents the fundamental issues that Schumpeter discussed
throughout his life. Schumpeter held that a pre-analytic vision was
necessary for any science to take place. (This idea is crucial to the
explanation of entrepreneurial activity as Kirzner has argued in his
work: entrepreneurs do not grope at random, they act on some sort of
a pre-scientific hunch.)
Reisman explains that Schumpeter also had a love affair with Walras,
whom he considered as the greatest theoretician of economics. However
(and paradoxically), Schumpeter saw comparative statics � la Walras
as a world away from actual situations in which change was without
end.
Finally, economic sociology and economic history are two other fields
that Schumpeter avidly explored. He saw the first one as the study of
institutions, structured relationships, conventions, etc and the
second one as necessary to understand causation and mechanisms in the
present world.
Chapter 4 considers capitalism in Schumpeter's writings as well as
the role of entrepreneurship (and innovation, which he saw as
identical). The essence of capitalism is creative destruction and the
entrepreneur is its source. Entrepreneurship is the essential engine
which propels the world; it is what makes economic _evolution_
possible. Schumpeter, explains Reisman, identifies the entrepreneur
as the agent of change in the social system. However, the main
function of entrepreneurship is to put into practice, not to create
from nothing. The entrepreneur innovates, which consists in getting
things done. This relates to a very important distinction in
Schumpeter's work: invention may lead to innovation but the latter
doesn't necessarily proceed from the former.
In Chapter 5 Reisman presents Schumpeter's view of the role of the
large corporation. While Schumpeter defends the dynamic of market
capitalism, he also argues that capitalism is inexorably evolving
towards corporate capitalism, which will ultimately lead to its
demise. Big corporations will sooner or later be stifled by their
bureaucratic structures, which will tend to suppress inner
entrepreneurial activity. Schumpeter also believed that the large
corporation is a powerful engine of technological advance. In other
words, market structure (i.e. oligopoly or monopoly) does make a
difference to innovation. Reisman is quick to point out that this
hypothesis (i.e. monopoly leads to innovation) has not been proven.
Scherer for instance conducted a number of studies to find a
relationship between firm size and productive research and
development but couldn't find any. However, Schumpeter also argued
that innovation leads firms to be monopolists, at least for a while,
and thus market structure is both a cause and a consequence of
innovation. What Schumpeter, in his vision of the role of the big
corporation, seems to overlook is the innovative role of the small
firm. Reisman justly argues, in a very Hayekian fashion, that the
small firm has local knowledge and is often at the origin of major
innovative changes (e.g. Apple Computer and Xerox Corporation).
The sociology of capitalism is the subject of chapter 6. First,
Reisman shows Schumpeter's interest for social class analysis. While
agreeing with Marx that class conflict deserves attention, Schumpeter
also makes the point that the social mobility found in the capitalist
system reduces the scope for class conflict. Clearly capitalist
entrepreneurs need proletarians and vice versa.
Second, Schumpeter, arguing against Marxism and Leninism, contends
that capitalism is not the cause of aggression, militarism and
conquest. Imperialism in Schumpeter's view is a survival from the
pre-capitalist age of economic evolution. Aggression is not part of
the system of exchange of market capitalism but a left-over from the
tribal past.
Finally, Reisman goes over the motives for entrepreneurial activity.
Clearly, entrepreneurs, in Schumpeter's work, are motivated by
pecuniary success. However, this is not the only motive, the
entrepreneur also has the will to conquer, the impulse to fight and
the desire to compete for the sake of it. Schumpeter's sociology of
entrepreneurship, remarks Reisman, is in some ways similar to that of
Veblen. Although the entrepreneur may want to succeed to afford
conspicuous consumption, he may also have other final motives in
mind, such as showing his intrinsic value as a superior man to
others. Schumpeter sees the desire of a better future for one's own
family as running deep in homo economicus, and this may be the most
important entrepreneurial motive. A discussion of the role of profit
(in relationship to entrepreneurship) in a disequilibrium situation
is missing here -- especially as Schumpeter's cycle theory assumes
entrepreneurship in a world without profit.
Chapters 7, 8 and 9 discuss the issue of socialism at greater length.
While Schumpeter goes out of his way to defend capitalism, he also
argues in favor of historical determinism: socialism will inexorably
win the final battle. Big business bureaucracy is here to stay and
the evolution from corporation to state will take place. Corporate
capitalism develops and will become the dominant mode of
organization. The paradox that Schumpeter tries to unveil is that
"capitalism fails because it succeeds" (p. 132). Entrepreneurs are
ousted and the bourgeoisie is expropriated. Schumpeter does not think
that there could be a "third way" between capitalism and socialism.
Capitalism bears the seeds of its own destruction and thus the only
way in the end will be socialism.
There are problems with Schumpeter's view of course. For instance,
Reisman mentions that even Galbraith thought that Schumpeter had
failed to grasp the differences between business bureaucracies and
state bureaucracies. Moreover, Schumpeter seemed to have been
influenced by the work of Berle and Means on ownership and control in
the corporation and dismisses completely the role private ownership
plays in maintaining competition alive through the capture of
profits. It is not true that big corporations are kept out of the
gale of creative destruction. Reisman explains that the small-firm
sector is always a potential danger for any firm in the market. But
he fails to mention the crucial work of Henri Manne, which addressed
the issues raised by Berle and Means on the one hand, and Schumpeter
on the other regarding the future of the joint-stock corporation.
Schumpeter would have retorted that it is not only the economic
deficiencies of capitalism that will bring its own end; it is also
because of the superiority of socialism. Socialism has a comparative
advantage in the area of productive efficiency. Schumpeter seems to
subscribe to the view that capitalism implies "anarchy of
production," a problem that socialism through careful planning can
take care of.
As Reisman points out, Schumpeter does not seem to grasp the
informational challenge to obtain productive efficiency. He ignored
the arguments put forward by Mises and Hayek in the socialist
calculation debate and focused exclusively on the ideas of Barone,
Lange, and Lerner on market socialism. Schumpeter's socialism is
based on the Ministry (i.e. the central planning board) deciding the
quantity supplied. Reisman notes that Schumpeter never explains where
this mysterious supply comes from. Moreover, Schumpeter seems to
underestimate the latitude politicians and civil servants would have
to impose their choices instead of some supply that would maximize
social utility. There is no political economy of socialism in
Schumpeter's view.
Here, Reisman underemphasizes the importance of the socialist
economic calculation debate in the 1930s. In Mises' view, no economic
calculation by the central planning board is possible in the absence
of individual property rights on the means of production. The problem
of market socialism is not the result to be obtained (i.e. minimizing
average cost and equalizing marginal cost to price) but the idea that
the results could be obtained outside the market system. No economist
interested in the debate would have ignored Mises's and Hayek's
position. The fact that Schumpeter ignored it is very strange to say
the least and deserves an explanation, which is missing in Reisman's
book.
At the end of the day, explains Schumpeter, socialism offers a "new
cultural world." What eventually drives people to socialism is its
appeal as a social system: people will stand for the equality
socialism will provide, while they will turn down the values of
capitalism. Capitalism is dependent on cultural continuity for its
success, but this is also its main vulnerability.
Chapters 10 and 11 dig more deeply into the mechanisms that transform
capitalism and lead to a socialist commonwealth. Schumpeter thought
that the weakening of the aristocracy in Europe would lead to a
decline in the ethos of self-discipline and leadership. In destroying
its own feudal roots, capitalism undermined itself. Moreover, it led
to the rise of a new intellectual class living off the production of
capitalists and entrepreneurs. This was the result of too much
education and inevitably led to over-qualified people with low-paying
jobs. Those who chose to become intellectuals became naturally
hostile to capitalism.
The decline of the family and family values reduced the time-horizon
of businessmen and their will to fight the rise of the bureaucracy.
More importantly perhaps, Schumpeter warns of the danger of increased
taxation, public expenditure, and government regulation, as it
creates unintended consequences that will call for more taxation and
spending.
When one looks at the whole picture: the fall of the aristocracy, the
rise of the intelligentsia, the emergence of the big corporation, and
the lack of cultural appeal of capitalism for the masses; the future
is very gloomy. Reisman correctly points out that Schumpeter failed
to see the robustness of the capitalist system, and the extent to
which opinion leaders and intellectuals are dependent on democracy
for their own survival. Even at the height of the 1930s when half of
Europe was turning away from democratic and liberal principles, the
masses of Western Europe and North America were not inspired by the
totalitarian Russian revolution. Reisman has a point, but he
underestimates the threat lobby groups may represent for the future
of the liberal democratic order. He should have discussed here the
rent-seeking society argument developed by the Virginia public choice
school and by Mancur Olson in his work on the logic of collective
action. In some ways, Schumpeter could be considered as a forerunner
of the public choice literature.
Reisman also argues against Schumpeter (and Mises for that matter)
that the middle of the road is possible, as the last fifty years have
shown. Social democracy is an alternative to socialism: "Fettered
capitalism functions adequately even if not reasonably well" (p.
218). It remains to be seen whether the social problems (such as high
unemployment, soon-to-be bankrupt public retirement schemes, etc)
that plague many Western European countries are part of what Reisman
calls a "well functioning economy." The answer is rather that both
Schumpeter and Mises were right: there is no middle of the road
policy in the long run. The difference between these two authors is
that Mises (and Hayek as well as many other Austrian economists)
never thought that _pure_ capitalism inexorably degenerated into
socialism.
The last two Chapters (12 and 13) focus essentially on the economics
of Schumpeter and his theories of growth and cycles. Schumpeter stood
firmly against the rising tide of Keynesianism. Investment will never
be deficient because creative destruction will always be at work.
Laissez-faire meant that entrepreneurial forces would always be
unleashed for the betterment of the masses. Reisman provides this
very interesting quote from Schumpeter written at the height of the
Great Depression in Europe in 1931: "The capitalist system as such
needs neither regulation nor planning, in a depression or outside of
a depression, in order to function. ... It operates on its own, and
with results unprecedented in economic history. The logical solution
for a series of serious shortcomings would not be an increase but a
reduction in State intervention" (p. 234).
Schumpeter criticized Keynes' _General Theory_ for not being general
at all but entirely specific (to a situation of crisis such as the
Great Depression). However, by the time he published _Capitalism,
Socialism and Democracy_ in 1942, Keynesian principles had already
swept the department of economics at Harvard.
Reisman notes that in the 1930s Schumpeter held the view that the way
out of a crisis is through less government (as in the quote above).
However, Schumpeter also promoted emergency spending as a possible
solution to very serious crisis (and remember that he did not want to
take policy positions). Schumpeter added a section to the second
edition of _Capitalism, Socialism and Democracy_ in 1946, in which he
made that point. "Schumpeter late in life," Reisman explains,
"appears to have developed a tendency towards Keynesianism" (p. 237).
Schumpeter's cycle theory is well known. It starts in a situation of
equilibrium. The basic idea is that some firm innovates, and this
disrupts the equilibrium in place. Because of its success and the
monopoly rents it derives, the firm's activities attract other firms,
which all engage in the same activity. The important detail is that
entrepreneurial activity is entirely financed by bank credit, which
fosters the boom. At some stage, there is over-supply of output. This
triggers a fall in prices in order to liquidate the stocks and this
leads to the bust. In Schumpeter's view, it is the innovators
demanding money who create the cycle and not the loose bank rules. In
this sense, cycles are inherently part of capitalism.
There are many problems with Schumpeter's cycle theory. As Reisman
points out, Schumpeter blamed the entrepreneur rather than the
banking system because he did not believe that bank credit could
cause disruptions between the monetary and the real spheres. Some
economists criticized him for holding this view because the cycle has
to have a pure monetary component. Schumpeter does not explain why
there is a clustering of entrepreneurial errors. Austrian economists
such as Mises and Rothbard have based their theory of the business
cycle on the clustering of entrepreneurial errors induced by bank
credit. This clustering cannot be the result of general
entrepreneurial activity, as it is inconsistent with the nature of
entrepreneurship; it must be the result of false price signals that
entrepreneurs follow. Reisman should have explored this avenue in
greater detail, as it is the most powerful criticism of Schumpeter's
cycle theory.
Schumpeter's cycle theory is also a theory of innovation. It begins
in a Walrasian general equilibrium with a zero interest rate (no time
preference), no savings, and given consumer values and tastes. In
such an environment, the only possible source of change is technology
via entrepreneurship. Schumpeter has been hailed for his insights
into economic development when his main contribution was simply to
imagine a way out of the Walrasian box of his own making. In the
absence of profits in equilibrium, it is difficult to understand how
any entrepreneurship could take place. Moreover, in the absence of
savings, capitalists cannot finance entrepreneurial activity and thus
one has to resort to pure bank credit. What Schumpeter demonstrated
as being inherent to capitalism was a feature of his own model. There
again, Reisman neglects to explore this crucial problem of
Schumpeter's theory.
This book will be a reference to economists interested in the
complexities of Schumpeter's work, especially in so far as markets,
firms and evolution are concerned. Overall however, the organization
of the chapters is somewhat confusing: there are repetitions of the
same themes in different places for no obvious reason (e.g. the
issues of aristocracy and intelligentsia are introduced and discussed
in various chapters). A different arrangement of the chapters may
have facilitated the reading of the book. This being said, it does
reflect the complexity of the evolution of Schumpeter's thought.
Moreover, one has to wait for the conclusion to obtain an overview of
the tensions and contradictions of Schumpeter's work. A chapter
summarizing Schumpeter's views and the complexity of his thought is
missing. An explanation of the major tension of his career
(identified in chapter 2) is needed somewhere towards the end (the
idea of the inevitable coming of socialism while capitalism is the
superior social system). Instead Reisman provides pieces throughout
the book without recapitulating.
Schumpeter had a vision of economics and social science that was more
encompassing than most others in his days. Reisman -- who is
Professor of Economics at the Nanyang Technological University,
Singapore and Professor Emeritus of Economics at the University of
Surrey, UK -- does a good job at presenting the complexity of
Schumpeter's thought, but he leaves the reader somewhat alone to
figure out the reason why Schumpeter's vision never entirely
succeeded.
Frederic Sautet is a Senior Research Fellow at the Mercatus Center at
George Mason University. His publications include _An Entrepreneurial
Theory of the Firm_ published by Routledge in 2000. He is also the
editor of the Mercatus Policy Series.
Copyright (c) 2005 by EH.Net. All rights reserved. This work may be
copied for non-profit educational uses if proper credit is given to
the author and the list. For other permission, please contact the
EH.Net Administrator ([log in to unmask]; Telephone: 513-529-2229).
Published by EH.Net (August 2005). All EH.Net reviews are archived at
http://www.eh.net/BookReview.
-------------- FOOTER TO EH.NET BOOK REVIEW --------------
EH.Net-Review mailing list
[log in to unmask]
http://eh.net/mailman/listinfo/eh.net-review
|
