WEBVTT NOTE Entreprenuership, Economic Evolution, and the End of Capitalism 1 00:00:00.000 --> 00:00:06.640 Well, thank you everyone for coming and thank you to Lew Rockwell and the Mises Institute for the opportunity to give this paper. 2 00:00:06.640 --> 00:00:18.120 I should apologize in advance, I had to cut a good deal out of this paper to make it work for this presentation, so if it appears a little disjointed, that's the reason. 3 00:00:18.120 --> 00:00:24.320 Joseph Schumpeter has the unenviable distinction of being one of the most oft quoted, yet least understood economists in history. 4 00:00:24.320 --> 00:00:35.320 This is due in part to his ambiguous position between the Austrian economists and the various schools of neoclassicism, an ambiguity most evident when examining his extraordinary yet sometimes neglected work, Capitalism, Socialism and Democracy. 5 00:00:35.320 --> 00:00:43.320 Although there are many gems of economic insight in this book, the central thesis around which they are constructed is often dismissed as simply false. 6 00:00:43.320 --> 00:00:52.320 In a nutshell, this thesis is that capitalism's inherent strengths ultimately lead first to its decline and then to its collapse and replacement by socialism. 7 00:00:52.320 --> 00:00:58.320 The purpose of this paper, then, is to reconsider this thesis and attempt both to criticize and to update it. 8 00:00:58.320 --> 00:01:04.320 To that end, I first examine Schumpeter's theory of the entrepreneur, which provides much of the groundwork for his theory of capitalism. 9 00:01:04.320 --> 00:01:11.320 It is in his flawed conception of the entrepreneur wherein the seeds of his later thesis in regard to capitalist evolution are sown. 10 00:01:11.320 --> 00:01:16.320 However, by repairing Schumpeter's concept of the entrepreneur, i.e. by making it more Misesian, 11 00:01:16.320 --> 00:01:21.320 we may follow his line of reasoning and arrive at a thesis which is both more stable theoretically 12 00:01:21.320 --> 00:01:23.760 and, I think, more familiar to Misesians. 13 00:01:23.760 --> 00:01:26.720 In place of the claim that capitalism's inherent strengths will destroy it, 14 00:01:26.720 --> 00:01:30.080 we instead hope to show that capitalism will only bring about its own demise 15 00:01:30.080 --> 00:01:32.960 given the presence of a system of economic intervention, 16 00:01:32.960 --> 00:01:37.440 that is, given the partial subversion of the capitalist system. 17 00:01:37.440 --> 00:01:39.400 Let us turn to the thesis itself. 18 00:01:39.400 --> 00:01:44.520 Schumpeter's theory is first and foremost a theory of social change, or what he would call economic sociology. 19 00:01:44.520 --> 00:01:47.440 Schumpeter sums up his argument as follows, 20 00:01:47.440 --> 00:02:17.440 The actual and prospective performance of the capitalist system is such as to negative the idea of its breaking down under the weight of economic failure, but its very success undermines the social institutions which protect it and inevitably creates conditions in which will not be able to live and would strongly point to socialism as the heir apparent. End quote. More explicitly, capitalism is perceived as an essentially dynamic mechanism for economic change in society and perpetual change is in some sense capitalism's defining characteristic. The ceaseless process of change with its corresponding introduction 21 00:02:17.440 --> 00:02:29.440 and its necessary elimination of the old methods eventually produces a system of values in society which undermine the values of capitalism and thus lead to its replacement by a socialist system. 22 00:02:29.440 --> 00:02:41.440 Economically, capitalism eliminates the entrepreneurial function aided by the anti-capitalist sentiments of the intellectual class and transforms it into what is essentially a static state of affairs, once susceptible to socialist management. 23 00:02:41.440 --> 00:03:11.440 In short, quote, there will be nothing left for the entrepreneurs to do. Profits, and along with profits, the rate of interest would converge towards zero. The bourgeois strata that live on profits and interest would tend to disappear. The management of industry and trade would become a matter of current administration, and the personnel would unavoidably acquire the characteristics of a bureaucracy. Socialism of a very sober type would almost automatically come into being, end quote. To examine the possible merits of this thesis, we must first evaluate the Schumpeterian entrepreneur, because it is his fate that ultimately determines 24 00:03:11.440 --> 00:03:13.440 and the Fate of the Capitalist System. 25 00:03:13.440 --> 00:03:17.440 Schumpeter's contributions to the theory of the entrepreneur are among the most important of his career 26 00:03:17.440 --> 00:03:23.440 and serve both directly and indirectly as the foundation for much of his argument regarding capitalist evolution. 27 00:03:23.440 --> 00:03:26.440 Here, however, we will only discuss some of the major points. 28 00:03:26.440 --> 00:03:30.440 Schumpeterian entrepreneurship is most clearly described in his theory of economic development, 29 00:03:30.440 --> 00:03:34.440 where among other things he introduces his famous concept of creative destruction. 30 00:03:34.440 --> 00:03:38.440 There are, however, certain problems with this theory of the entrepreneur that require emphasis. 31 00:03:38.440 --> 00:03:42.560 As an aside, we should note that in this theory of entrepreneurship, the imprint of von Wieser 32 00:03:42.560 --> 00:03:48.360 is unmistakable, which in itself serves as a clue to the theories of Al-Razi and shortcomings. 33 00:03:48.360 --> 00:03:52.200 As mentioned above, for Schumpeter, the entrepreneur plays the most important role in capitalist 34 00:03:52.200 --> 00:03:57.200 society because he introduces change, which is the fundamental fact of capitalist life. 35 00:03:57.200 --> 00:04:01.840 When the entrepreneurial function becomes unnecessary then, or somehow altogether eliminated, 36 00:04:01.840 --> 00:04:06.000 it follows that the mechanism of change must grind to a halt and a period of economic stagnation 37 00:04:06.000 --> 00:04:07.000 be introduced. 38 00:04:07.000 --> 00:04:18.000 As Schumpeter puts it, quote, economically and sociologically, directly and indirectly, the bourgeoisie therefore depends on the entrepreneur, and as a class, lives and will die with him, end quote. 39 00:04:18.000 --> 00:04:25.000 This claim is true as far as it goes. What matters for us, though, is the claim that the capitalist system itself will produce this result. 40 00:04:25.000 --> 00:04:35.000 What then is the entrepreneurial function according to Schumpeter? As Kirzner observes, for Schumpeter, entrepreneurship is reserved for the brilliant, imaginative, daring, resourceful innovator. 41 00:04:35.000 --> 00:04:39.000 For Schumpeter, the entrepreneur is the driving force of all economic transformation under capitalism. 42 00:04:39.000 --> 00:04:44.000 He does this by carrying out new combinations, by which is meant that he introduces innovation, 43 00:04:44.000 --> 00:04:47.000 be it a new invention or merely a new production process. 44 00:04:47.000 --> 00:04:52.000 It is also important to note that the entrepreneur acts in isolation from the means of production in this model. 45 00:04:52.000 --> 00:04:55.000 That is, he does not direct production but enjoys a somewhat passive role. 46 00:04:55.000 --> 00:05:00.000 Once the innovation is introduced, for the entrepreneur, the work is essentially complete. 47 00:05:00.000 --> 00:05:08.000 We can already see in the above that the entrepreneurial function is at the very least rather narrowly defined, a fact that even Schumpeter acknowledges. 48 00:05:08.000 --> 00:05:15.000 The final cornerstone of Schumpeter's entrepreneurial theory that we will address is closely related to his general equilibrium concept. 49 00:05:15.000 --> 00:05:21.000 Schumpeter argued for a circular flow concept of the economic process, essentially a variation of Volrasian general equilibrium. 50 00:05:21.000 --> 00:05:26.000 Change is only introduced to the model through the entrepreneurs, who launch various economic innovations 51 00:05:26.000 --> 00:05:30.000 which they finance exclusively through credit created especially for the entrepreneurs by banks. 52 00:05:30.000 --> 00:05:35.000 Once introduced, innovations inspire imitations and competitions between the alternatives 53 00:05:35.000 --> 00:05:39.000 bids the rate of profit down to zero. Thus entrepreneurial profit tends towards zero 54 00:05:39.000 --> 00:05:43.000 and is zero in the long run. Eventually, the economy adjusts to this 55 00:05:43.000 --> 00:05:47.000 disequilibrating innovation and returns to another Volrazian equilibrium state. 56 00:05:47.000 --> 00:05:51.000 This is all opposed of course to the thinking of Boehm-Bawerk or Mises 57 00:05:51.000 --> 00:05:54.000 who hold that new sustainable investments must come from past saving. 58 00:05:54.000 --> 00:05:57.000 Contrary to this position, Schumpeter argues that, quote, 59 00:05:57.000 --> 00:06:00.000 the entrepreneur does not save in order to obtain the means which he needs, 60 00:06:00.000 --> 00:06:04.000 nor does he accumulate any goods before he begins to produce, end quote. 61 00:06:04.000 --> 00:06:07.000 He merely plays a sort of game with credit created upon his request. 62 00:06:07.000 --> 00:06:10.000 Quote, the entrepreneur is never the risk bearer. 63 00:06:10.000 --> 00:06:13.000 The one who gives credit comes to grief if the undertaking fails. 64 00:06:13.000 --> 00:06:16.000 For although any property possessed by the entrepreneur may be liable, 65 00:06:16.000 --> 00:06:19.000 yet such possession of wealth is not essential, even though advantageous. 66 00:06:19.000 --> 00:06:22.000 Risk-taking is in no case an element of the entrepreneurial function. 67 00:06:22.000 --> 00:06:33.360 The Above highlights the central problem with this theory, to which we now turn. 68 00:06:33.360 --> 00:06:36.440 The problem in question is the assertion that the entrepreneur does not bear uncertainty 69 00:06:36.440 --> 00:06:38.040 in the marketplace. 70 00:06:38.040 --> 00:06:41.560 Without uncertainty, we can perhaps explain entrepreneurial success, but we cannot explain 71 00:06:41.560 --> 00:06:43.080 entrepreneurial loss. 72 00:06:43.080 --> 00:06:46.800 Or more correctly, this theory is simply not interested in trying to explain it. 73 00:06:46.800 --> 00:06:50.440 Accordingly, one-half of the entrepreneur's economic function disappears from the analysis. 74 00:06:50.440 --> 00:06:55.360 In this case, it is simply ruled out by this somewhat pedantic focus on successful innovations. 75 00:06:55.360 --> 00:07:00.080 What is more, we lose sight of a fundamental economic problem, the social function of bankruptcy. 76 00:07:00.080 --> 00:07:04.040 Without an explicit acknowledgement that entrepreneurs bear uncertainty and the corresponding realization 77 00:07:04.040 --> 00:07:08.240 that entrepreneurs can easily fail in their endeavors and thus squander society's resources, 78 00:07:08.240 --> 00:07:12.720 it is relatively easy to accept a static circular flow model of the economic affairs, one that 79 00:07:12.720 --> 00:07:15.400 is susceptible to socialist economic planning. 80 00:07:15.400 --> 00:07:18.700 As we will see, much of Schumpeter's argument rests upon this point. 81 00:07:18.700 --> 00:07:25.120 Our analysis of some of the problems of the Schumpeterian entrepreneur leads nicely into 82 00:07:25.120 --> 00:07:29.020 an examination of his theory of capitalist evolution, which is in many ways an extension 83 00:07:29.020 --> 00:07:32.700 of his theory of entrepreneurship. There are three major arguments upon which Schumpeter's 84 00:07:32.700 --> 00:07:37.140 thesis turns. First, the obsolescence and disappearance of the entrepreneurs, second, 85 00:07:37.140 --> 00:07:41.220 the bureaucratization of firms, and third, the destruction of certain social protections 86 00:07:41.220 --> 00:07:45.660 of capitalism. We will deal with these in turn, starting with the disappearance of the 87 00:07:45.660 --> 00:07:51.580 According to Schumpeter, the elimination of the entrepreneurs occurs due to the bureaucratization 88 00:07:51.580 --> 00:07:55.940 of the entrepreneurial process, that is, the method through which innovation itself is 89 00:07:55.940 --> 00:07:57.820 reduced to routine. 90 00:07:57.820 --> 00:08:01.500 Schumpeter is actually quite vague on the issue of how this process is to take place, 91 00:08:01.500 --> 00:08:05.100 but we can make an educated guess and assume that he simply means that innovation will 92 00:08:05.100 --> 00:08:09.460 eventually become such a trivial task in the economy that it may easily be orchestrated 93 00:08:09.460 --> 00:08:11.660 by a bureaucratic planner. 94 00:08:11.660 --> 00:08:15.860 The first question we must ask then is, can progress, that is, economic adjustments to 95 00:08:15.860 --> 00:08:19.820 the future, be made a matter of routine in a capitalist economy? 96 00:08:19.820 --> 00:08:22.580 The short answer is, no, they cannot. 97 00:08:22.580 --> 00:08:25.700 The problem with this argument is closely related to the problem of uncertainty alluded 98 00:08:25.700 --> 00:08:26.700 to above. 99 00:08:26.700 --> 00:08:30.540 As Mises points out, quote, every action is embedded in the flux of time and therefore 100 00:08:30.540 --> 00:08:33.260 involves a speculation, end quote. 101 00:08:33.260 --> 00:08:36.620 All plans are subject to error on the part of actors, and entrepreneurial forecasts are 102 00:08:36.620 --> 00:08:37.620 no exception. 103 00:08:37.620 --> 00:08:45.120 A successful bureaucratization, however, would require a consistently accurate forecast as to what innovations will be required at particular times and places. 104 00:08:45.120 --> 00:08:51.120 However, it is precisely the presence of uncertainty that makes continued success so difficult for entrepreneurs. 105 00:08:51.120 --> 00:08:54.120 Rothbard sums this point up nicely, quote, 106 00:08:54.120 --> 00:09:03.120 Inventions, innovations, technological developments, by their very nature, by definition, cannot be predicted in advance, and therefore cannot be centrally and bureaucratically planned. 107 00:09:03.120 --> 00:09:07.120 Not only does no one know what will be invented when, no one knows who will do the inventing. 108 00:09:07.120 --> 00:09:14.120 Bureaucracy, incompetent enough to plan a stationary system, is vastly more incompetent at planning a progressive one." 109 00:09:14.120 --> 00:09:23.120 In addition, Professor Holzman makes an important epistemological point in this regard when he observes that we can never really know how many entrepreneurial opportunities actually exist, 110 00:09:23.120 --> 00:09:26.120 or, for that matter, how many fail to be created. 111 00:09:26.120 --> 00:09:29.120 This is not to say that correct anticipations of consumer wants cannot occur, 112 00:09:29.120 --> 00:09:35.120 or that it is impossible to plan for future production based upon as yet unrealized patterns of preference. 113 00:09:35.120 --> 00:09:39.120 All we mean is simply that any such plans are tentative and subject to error. 114 00:09:39.120 --> 00:09:44.120 But to make progress a matter of routine would require constant accuracy and entrepreneurial forecasting, 115 00:09:44.120 --> 00:09:47.120 something that is assumed by Schumpeter's entrepreneurial theory, 116 00:09:47.120 --> 00:09:52.120 but which, viewed in the light of praxeology and the constant threat of error in human action, is an impossibility. 117 00:09:52.120 --> 00:10:04.120 In dealing with the uncertain future, acting man cannot plan in any way beyond what is meant by the ordinary uses of that term. That is, man cannot do better than to act proposively in the face of uncertainty. 118 00:10:04.120 --> 00:10:08.120 Continuing on this line of argument, Schumpeter goes on to claim that, 119 00:10:22.120 --> 00:10:24.840 in Predictable Ways." 120 00:10:24.840 --> 00:10:27.800 What he misses, of course, with this argument is that it is not merely the 121 00:10:27.800 --> 00:10:31.800 creation of particular goods or processes that matters for the entrepreneur. 122 00:10:31.800 --> 00:10:35.040 It is not the knowledge and employment of new methods per se, which are economically 123 00:10:35.040 --> 00:10:38.360 relevant, or for that matter, how these processes are first discovered. 124 00:10:38.360 --> 00:10:41.360 What matters is only whether the product can be sold on the market at prices that 125 00:10:41.360 --> 00:10:42.680 exceed costs. 126 00:10:42.680 --> 00:10:46.040 By emphasizing only successful entrepreneurs, Schumpeter loses sight of 127 00:10:46.040 --> 00:10:49.880 failed endeavors, and this focuses on physical products and processes and the 128 00:10:49.880 --> 00:10:53.800 and the psychological traits of the entrepreneur rather than the important problem of uncertainty 129 00:10:53.800 --> 00:10:55.800 bearing. 130 00:10:55.800 --> 00:10:59.280 The second major claim in Schumpeter's argument is that as capitalist society evolves, firms 131 00:10:59.280 --> 00:11:03.240 tend to bureaucratize themselves, leading away from the competitive capitalism into 132 00:11:03.240 --> 00:11:07.940 the sort of planned progress mentioned above. Schumpeter believed that capitalism eventually 133 00:11:07.940 --> 00:11:12.000 enters a period characterized by the absence of entrepreneurial control over resources, 134 00:11:12.000 --> 00:11:16.540 or in other words, the transformation of business into bureaucratized firms run by committees 135 00:11:16.540 --> 00:11:20.860 and Managers who Engage Exclusively in Administrative Work. 136 00:11:20.860 --> 00:11:24.420 This leads innovation also to become less personal and more bureaucratic. 137 00:11:24.420 --> 00:11:27.660 Entrepreneurial endeavor loses its dangers and tends to be carried out as a matter of 138 00:11:27.660 --> 00:11:30.980 course on the advice of specialists. 139 00:11:30.980 --> 00:11:34.100 The problem with the above assertion is that in the capitalist system firms are bound by 140 00:11:34.100 --> 00:11:36.420 the forces of economic calculation. 141 00:11:36.420 --> 00:11:40.020 Any move away from calculation results in the rapid disappearance of capital values 142 00:11:40.020 --> 00:11:42.220 and the eventual bankruptcy of the firm. 143 00:11:42.220 --> 00:11:46.300 As Dr. Klein has pointed out, calculation limits both the size of firms and their internal 144 00:11:46.300 --> 00:11:50.400 Management Policies. However, calculation only performs this function when consumer 145 00:11:50.400 --> 00:11:54.160 sovereignty is allowed due influence on the price system, for it is from consumers that 146 00:11:54.160 --> 00:11:58.420 capital receives its value. Calculation cannot serve its purpose where consumers' values 147 00:11:58.420 --> 00:12:02.260 are not permitted to determine the price of capital on the market. But for now, we need 148 00:12:02.260 --> 00:12:06.320 only note that the level of bureaucratization in market firms tends to an optimum through 149 00:12:06.320 --> 00:12:10.640 calculation and cannot grow to the point where calculation may be simply disregarded, precisely 150 00:12:10.640 --> 00:12:18.600 It is not surprising that Schumpeter would have failed to take proper account of the 151 00:12:18.600 --> 00:12:22.640 role of calculation. In dealing with calculation in regard to socialism, he displays a somewhat 152 00:12:22.640 --> 00:12:27.280 superficial understanding of the arguments of Mises, focusing instead on the mathematical 153 00:12:27.280 --> 00:12:32.200 approach to economic equilibrium solutions. Schumpeter's position appears to stem from 154 00:12:32.200 --> 00:12:36.480 his undue emphasis on circular flow equilibrium. It is very easy to imagine the planning of 155 00:12:36.480 --> 00:13:06.480 The Third and final reason for the decay of capitalism has to do with the erosion of certain social protections which society affords the capitalist system, the most important of which is of course the institution of private property. Capitalism, asserts Schumpeter, attacks all social practices and institutions by the very nature of its incessant process of creative destruction. 156 00:13:06.480 --> 00:13:10.480 will turn upon itself, will attack its own institutions. 157 00:13:10.480 --> 00:13:16.480 Specifically, Schumpeter argues, as many Austrians do, that capitalism rationalizes society's economic conduct. 158 00:13:16.480 --> 00:13:21.480 Capitalist practice turns the unit of money into a tool of rational cost-profit calculations. 159 00:13:21.480 --> 00:13:25.480 Calculation, then, is the tool used to analyze the viability of alternative methods 160 00:13:25.480 --> 00:13:28.480 of the production and distribution of goods in society. 161 00:13:28.480 --> 00:13:33.480 According to Schumpeter, this analysis in turn leads to the spread of a critical attitude in society 162 00:13:33.480 --> 00:13:36.480 that seeks to rationalize all social institutions. 163 00:13:36.480 --> 00:13:40.480 It is this attitude that eventually turns against the basic values of a capitalist society, 164 00:13:40.480 --> 00:13:42.480 the foremost of which is private property. 165 00:13:42.480 --> 00:13:46.480 The implication is that property is just as easy an institution to discard 166 00:13:46.480 --> 00:13:51.480 as any of those institutions which capitalism has rendered obsolete in the past. 167 00:13:51.480 --> 00:13:56.480 However, Schumpeter failed to recognize that ownership is an essential component of the calculation process 168 00:13:56.480 --> 00:13:58.480 and cannot proceed without it. 169 00:13:58.480 --> 00:14:02.480 This is the fundamental point regarding the impossibility of socialist calculation. 170 00:14:02.480 --> 00:14:11.480 As just mentioned, this point eluded Schumpeter, leading him to a flawed theory of calculation, one that led him falsely to believe in the possibility of a calculating socialist economy. 171 00:14:11.480 --> 00:14:28.480 His obsession with the transition between different states of Volrasy and equilibrium forced him to concentrate on the disequilibrating action of his always successful entrepreneur and the shift between different production functions instead of the role of the money unit and ownership for appraisement and calculation. 172 00:14:28.480 --> 00:14:40.480 Had he realized this rule of property, however, he would have been forced to admit the impossibility of capitalism rationalizing itself away in this manner, because the process would require the institution of property to contradict its own economic function. 173 00:14:40.480 --> 00:14:46.480 Given then that none of Schumpeter's arguments withstand economic criticism, we must now discover if we can salvage anything from the argument. 174 00:14:46.480 --> 00:14:56.480 We have seen that Schumpeter's theory of entrepreneurship is lacking, and that if we view his theory of capitalism in light of a more correct theory of entrepreneurship, we come to the conclusion that his argument is fatally flawed. 175 00:14:56.480 --> 00:15:26.480 However, what if we replace the capitalist system in Schumpeter's argument with a system of economic interventionism? Under these conditions, I believe we can breathe new life into the argument. By inserting a Misesian entrepreneur, one who bears market uncertainty into Schumpeter's system, we develop something of a parallel to Mises' argument that interventionism leads to socialism. From the first, our conclusion should be somewhat obvious. In the interventionist economy, state controls over the marketplace can guarantee all of Schumpeter's conditions for the decline of capitalism, albeit in a manner slightly different than that which he perceived. 176 00:15:26.480 --> 00:15:29.720 Here's Schumpeter's three major arguments, beginning with the possibility of eliminating 177 00:15:29.720 --> 00:15:33.120 the entrepreneurial function from society. 178 00:15:33.120 --> 00:15:36.240 If we acknowledge that state intervention by necessity redistributes wealth and distorts 179 00:15:36.240 --> 00:15:40.400 the market structure in certain identifiable ways, no matter which particular sort of intervention 180 00:15:40.400 --> 00:15:44.200 we focus on, whether price controls, patent privileges, etc., the general principle of 181 00:15:44.200 --> 00:15:48.920 economic development remains the same. 182 00:15:48.920 --> 00:15:53.080 And I see my time is up, so I'm going to actually have to cut out the last major section of 183 00:15:53.080 --> 00:16:23.080 What emerges from this alternative understanding of Schumpeter's thesis should be neither surprising nor entirely original. Had Schumpeter had a more complete theory of the entrepreneur, he would have, I believe, formulated a theory with a more Misesian tone. Ultimately, the idea that when economic freedom is infringed upon, that social change would be both dramatic and deep-seated is a commonplace, and perhaps even a basic assumption in most Austrian writing. But it is in some sense a new entry in the thought of Joseph Schumpeter. 184 00:16:23.080 --> 00:16:26.760 to answer to Schumpeter's thesis, but as Schumpeter himself would say, 185 00:16:26.760 --> 00:16:29.240 history sometimes indulges in jokes 186 00:16:29.240 --> 00:16:32.240 of questionable taste.