The Entrepreneurial Spirit From Schumpeter To Steve Jobs

The Entrepreneurial Spirit From Schumpeter To Steve Jobs

A quick "gift" to our friends joining us, before a longer piece tomorrow from my "Nietzschebuch". Cheers!

As we have seen in our interventions on "the Science of Choice", the attempt to define a methodology and a domain for an "economic science" foundered on the inability of neoclassical theoreticians (which includes Keynesians, given that they share most of the fundamental assumptions of neoclassical theory) to avoid the mathematical formalism or self-referentiality or circuitousness - in short, the tautology - of their approach to economic reality. Given that for the neoclassics the economy is a complex web of "exchanges" by "individuals" in a "free market", it soon becomes "immaterial" what the "content" of the "exchanges" might be. Even the notion of "marginal utility" - and consequently of the "utility" that stands behind it - becomes "inscrutable" and purely "metaphysical".

Classical Political Economy, from Adam Smith onwards to JS Mill, had sought to identify and measure "the substance" of economic activity - an objective "wealth" or "value" that depended on the "material resources" that went into pro-ducing goods and services. What the Neoclassical Revolution achieved was to stand this "objectivism" on its head and completely to turn it into a thoroughgoing "subjectivism". The impossibility to determine "objectively" the nature of wealth and to "quantify" it, meant that market prices were left as the only "indicators" of the "utility" of economic activity. At the same time, this seemed to remove (as we argued at the beginning) the very "corpus", the aim, goal and substance of economic activity - its "purpose". Worse still, such a theory of generalised exchange - formally theorised by Walras - failed to explain the phenomenon of "growth" - of the increase in "value" of economic pro-duction - and indeed of the existence of "money" which, understood as a pure "means of exchange", could not be incorporated in neoclassical theory as a "store of value".

It is from these theoretical premises that Joseph Schumpeter attempts to tackle the evolutionary "dynamic" features and properties of the capitalist economy. For heuristic purposes, economic analysis(of any economy) represents a "circular flow" that can be "analysed" anatomically or physiologically, like the circulation of the blood; but such analysiscannot "explain" or account for the "evolution" of the economy, its "development", its "trans-formation". Like the neoclassicals, Schumpeter does not even tackle the problem of "value": he relies on the theories of his Viennese teacher Bohm-Bawerk who explains "interest" in terms of the "renunciation" of immediate consumption by savers in favour of investors and consumers who therefore pay "interest" in natura based on the greater productivity of "roundabout" methods of production.

Like Bohm-Bawerk, Schumpeter interprets the operation of the "circular flow" in these terms of simple "utility" - the "renunciation of immediate consumption". But, he wistfully observes, this still does not explain how the capitalist economy "progresses" from one stage of development to another, and how it seems to do so in "cycles" that contain a fairly predictable sequence of booms and busts, of expansion and "crisis" and then recession or depression. Schumpeter needs a way to escape from the "circularity", from the self-referentiality, the sterile, "static" formalism of neoclassical theory so as to be able to account - just like Karl Marx - for the "dynamism" of the capitalist economy. Marx, of course, had attributed this "dynamism" to the growing capitalist exploitation of workers' labour-power. For Schumpeter instead, whose intellectual upbringing did not admit of "metaphysical" concepts such as "value" and "exploitation", the dynamism of the capitalist economy had to come from a "creative" force, a "spirit", an "individuality" that capitalism produced or engendered, that was internal to its operari, that could even be likened to a "mechanism", but not to a "system" - indeed, one that was the very antithesis of "systems", of "circularity", of "static". He found it in the figure of the captain of industry, in the entrepreneur.

It is easy to criticise, even to deride, the blithe "voluntarism" of Schumpeter's Innovationsprozess - so much does it reek of mysticism, so alike is it to a "deus ex machina", literally! And yet...

And yet it can be conceded that a residuum of truth remains in Schumpeter's adventurous schema of the Unternehmergeist - of the flamboyant condottiere, the genius that innovates guides and inspires. And this residuum or kernel of truth lies precisely in the fact that, as we have argued in the preceding interventions, capitalism remains a system of "political command over living labour": it relies therefore, whether in reality or even only mythically, on the "leadership" of captains of industry, of entrepreneurs who can come out of the capitalist "machine" or "system" and infuse it with the spark of vitality, of innovation and dynamism and...."growth". That is why those who had announced the demise of the entrepreneur in capitalist society were "greatly exaggerating". Capitalism thrives on conflict, on antagonism. And conflict and antagonism produce, alas, deified heroes!

From Schumpeter to Steve Jobs - Studies on the Significance of the Entrepreneurial Spirit

Let us take up the thread from where we left it. We wish to inquire into and enquire over the nature and causes of entrepreneurship. We saw that Schumpeter, approaching the problem from Neoclassical perspectives (and we are examining the Neoclassical Revolution together with its "strategic" origins in a separate work that is part ofKrisis), can view the source of economic "evolution-development-growth" (this is the meaning of the complex German word he uses - Entwicklung) in the "trans-formation mechanism" (Veranderungsmechanismus) that is "intrinsic" to the capitalist economy and that he claims to have discovered. This "mechanism" has at its base "the capitalist", who is simply the financier (banks) who "aggregates" the collective savings of the economy of the "circular flow" (Kreis-lauf). The "capitalist" here plays a purely "instrumental" function: he simply gathers what "savers" have made available to "borrowers" by way of "renouncing" the immediate consumption of their "endowments" and by so doing have earned the right to charge "interest" on the resources that they have lent. According to Bohm-Bawerk, the right to this "interest" arises from the fact that economic pro-duction of goods and services depends on the "roundaboutness" of technologies. Technologies improve the "productivity" of human labour. But they can be used only if we "defer" the consumption of goods and services that are "readily available". Thus, the more "roundabout" - the more "technological" - is the process of production, the more "productive" it becomes. And as a result, those who "renounce immediate consumption", the "savers", make possible the greater "productivity" of human tools and resources, so that they can charge "interest" over the use of this "capital" from those who wish to apply it for more immediate consumption.

Schumpeter accepts this basic framework derived from the novel "neoclassical revolution" of marginal utility analysis (Gossen, Menger, Jevons). But this framework assumes that the same "technologies" of production are utilised at all stages. What it leaves out is the possible "mechanism" by means of which "new" technologies are developed. The entrepreneur is the social agent that plays the all-important role of introducing "innovation" in the technologies of production - and the higher "product" that comes out as a result is the "profit" that the entrepreneur derives from the application of the savers' "capital". (In our review of the Krugman-Eggertsson paper, you will see that the capitalist is the "patient" investor and the entrepreneur is the "impatient" one who borrows capital for profitable use.) This schema essentially reverses the roles of "entrepreneur" and "capitalist" in Richard Cantillon's original treatment so popular with Schumpeter and the Austrian School. For Cantillon, the entrepreneurial profit is merely a "deduction" from "interest" that the "entrepreneur" charges to the capitalist for taking goods to the market. For Cantillon, the entrepreneur is a mere merchant, and his "profits" are a mere charge that contribute nothing to the calculation of "interest".

For Schumpeter, instead, it is the "capitalist" (the lender) who is the "facilitator", the mere go-between, the "rentier". The real protagonist instead, the social agent or figure who pushes the capitalist economy from one stage of development to another and creates "growth" in the economy is the "entrepreneur" - and it is the "entrepreneurial spirit" that constitutes thedifferentia specifica(as Schumpeter calls it) of capitalism from previous forms of production.

This institutional differentiation of the entrepreneur who trans-forms capitalist industry through "innovation" that is "creative" and that, therefore, is also "destructive" of previous methods of production and technologies as well as "products" - this distinction between the "creative-destructive", "dynamic"captain of industry- the entrepreneur, the leader - and the "rentier capitalist" who is the passive and "static" figure - this distinction between the "static" economy of the "circular flow" run by finance capital and the "dynamic-innovative" leadership provided by the entrepreneur closely resembles the distinction drawn by Max Weber between the process of "secularisation" and "rationalisation" of bourgeois capitalist society leading to its "massification" with the rise of mass "democratic socialist" parties and the consequent "bureaucratisation" of Western societies through the rise of Welfare States, on the one hand, and the growing concentration ofpolitical leadership(leitender Geist) in the hands of "charismatic" figures (from Napoleon to Bismarck) in whose hands political power is confided. There is an obvious Cartesian dualism here between Body and Mind, Nature and Spirit, Mechanism and Soul.

Schumpeter clearly adopts Weber's schema of capitalist "secularisation" and "bureaucratisation" reflected in the "static" anatomical structure of the "circular flow" of the economy, and the "leadership", the "guidance", the "transformative and innovative" Spirit provided by the political leader and by the entrepreneur. It is certainly very strange that Max Weber never inquired into the origins of "the entrepreneurial spirit" - which is instead the focus of Schumpeter's entire theory of capitalist development. The reason for that lies in the fact that Weber did devote his most famous monograph onThe Protestant Ethic and the Spirit of Capitalismto the impact of religious faith on the rise of capitalism as a mode of production that "secularised" modern societies and their political systems. But Weber failed to identify a "specifically bourgeois", a specifically "capitalist" spirit different from the "work ethic" inspired by Christian asceticism. Quite by contrast, Schumpeter did exactly that. But even so, he failed to identify the central feature of "entrepreneurship". This major failure will be the subject of a fresh intervention in the near future.

From Schumpeter to Steve Jobs - The Endurance of the Entrepreneurial Spirit

This is a continuation of our study of Schumpeter's Concept of Innovation.We saw in our major piece on Nietzsche, Schumpeter, Menger (just search this site using facility provided) how Schumpeter mis-interprets Webers concept of rationalisation, mis-taking it for scientization as against normative conduct. Schumpeters aim in the Theorie der wirtschaftlichen Entwicklung is to discover scientifically what he calls the trans-formation mechanism (Veranderungs-mechanismus) of the capitalist economy that allows it to change form, to grow from its static equilibrium to a new, dif-ferent equilibrium that is reached dynamically not through external or exogenous shocks but through internal forces. Indeed, Schumpeter discovers that what is specific to the capitalist economy is precisely this ability to trans-form itself, to be the opposite of static, the opposite of in equilibrium, but rather to be in a constant state of trans-formation, of dynamism, of change and therefore not-equilibrium to be, in short, in a state of constant crisis. The capitalist economy destroys itself by re-creating itself, by re-novating itself, by in-novating and it is this process of innovation (Innovationsprozess) and of creative destruction (schopferische Zerstorung) that characterises capitalist development and growth.No Statik, then; but constant Dynamik. The capitalist economy can never be described adequately through a static model or a circular flow: it does not have a precise and unique form, because it is in a constant state of trans-formation, of crisis! The capitalist economy thrives on crisis, on creative destruction. Its growth can never be understood as a steady-state (as in the Cobb-Douglas function) but only as trans-crescence, as permanent revolution (Schumpeter knew his Trotszky very well!). And what Schumpeter describes is exactly this transformation mechanism whereby the specific difference of capitalism from other modes of production is that it frees the entrepreneur, both in terms of availability of financial resources and in terms of availability of material and human resources, into constantly revolutionising the process of industrial production and therefore (!) that of consumption!NOTE! Schumpeter does not say that capitalism is trans-formed by the freedom of consumer choice (as all the idiotic hagiographers of a Steve Jobs would have us believe ultimately, that is, he knew what we wanted but did not know we wanted it!). Quite the opposite! Schumpeter sees from the very start that it is not the consumer who decides in capitalist society: it is instead the entrepreneur, the captain of industry. So this is the peculiarity of capitalism: - the existence and empowerment of the entrepreneurial Spirit (Unternehmer-geist).But here the central difficulty of Schumpeters entire schema comes to light: for the problem is that he has not and cannot explain how what is an entrepreneurial spirit can ever be reconciled with what Schumpeter had meant to identify scientifically, that is to say, the mechanism (!) of trans-formation of capitalist industry. The inconsistency here is as clear as it is insuperable: it is simply a contra-diction to argue that the specific difference of capitalism is the scientific-mechanistic combination of certain institutional features a mechanism of transformation and an innovation process - that enable the emergence of an entrepreneurial spirit. No matter how much or how long we look for spirit in a mechanism or in scientific processes, we shall quite simply never find it!! Here Schumpeters misinterpretation of Weber is absolutely striking: by interpreting Webers Rationalisierung (the secularisation and bureaucratisation of social life under capitalism) as the replacement of faith and values with objective science, Schumpeter has entirely forgotten that Weber had always understood capitalism as a Spirit (the spirit of capitalism) and that its organisation of society was entirely political and subject to leadership spirit (leitender Geist) in all spheres of social life, and predominantly in Politics and in Science (the subject of his famous lectures on Politics as Vocation and Science as Vocation).This entirely political basis of Webers interpretation of capitalist society and the rise of the bourgeoisie wholly and totally eludes and escapes Schumpeter! His own later prognostication of the eventual obsolescence of the entrepreneur and consequent atrophy and decline of capitalism is founded on this fundamental misconception of the motor of capitalist industry (the antagonism of the wage relation) and his substitution of it with a voluntaristic entrepreneurial spirit that in fact already! had been supplanted by the rise of what he himself called trustified capitalism in the Second Industrial Revolution of the 1870s whose crisis he had also correctly identified! Schumpeter correctly and sharply identifies the critical trans-crescence of capitalist industry and society: he correctly and adroitly intuits the social expression of the entrepreneurial Spirit as a Will to Conquer (in the Theorie).But Schumpeter never (!) understood the true social significance, impact and social origins of the entrepreneurial spirit which derives its true impetus and strength from the Will to Conquer of the bourgeoisie to command the living labour of workers, and whose real necessity is provided precisely by the impact of this antagonism on the profitability of capitalist investment or enterprise!This is a point offundamental importance. Following the recent demise of Apple CEO Steve Jobs, many commentators and analysts have remarked on the incorrectness of Schumpeters prediction about the obsolescence and disappearance of the capitalist entrepreneur. If by this we understand that the entrepreneur as Schumpeter understood it as a free-wheeling adventurer or genius capable of trans-forming capitalist industry single-handedly by the sheer might of his innovative genius then we can safely say that such an entrepreneur, such a captain of industry has never existed. But if instead by entrepreneur we understand a figure or personality that embodies the will to power of the bourgeoisie to exert and enforce its command over living labour, then clearly the capitalist entrepreneur will live for as long as capitalism is alive! Let us explain why.The whole point to capital is to realise a profit. But the notion of profit is meaningless and without content unless this profit can be re-invested to command fresh living labour for fresh and expanded profitable production. In other words, the sole aim of capital is to accumulate social resources that can be applied to command more living labour that is formally free that is to say, that is exchanged with its own dead objectified labour! Clearly therefore capitalist industry is a system for securing the subjugation of living labour to dead labour by means of the money wage.What this entails is that the capitalist has two ways to realise more profit from capitalist production: - either to intensify the exploitation of living labour (absolute exploitation), or else to introduce new machinery for the exploitation of living labour (relative exploitation). The fact that this second method, that we call relative exploitation, involves also the production of new products does not detract from the reality that it is the capitalist (the entrepreneur) whose Will to Power is projected in the new technologies and the new products. Nor does it negate the fact that these new technologies and products must not emancipate workers to such an extent that they no longer feel compelled to sell their living labour to the capitalist in exchange for their own objectified labour in the form of the money wage!In effect, therefore, Schumpeter was wrong to view the (capitalist) entrepreneur as an economic agent distinct from the capitalist (by which he meant the financier) in this romanticised, idealistic and voluntarist manner wholly unrealistic and inconsistent with his own aim to discover the trans-formation mechanism of capitalist industry and society.Quite clearly, by predicting the obsolescence of the entrepreneurial spirit and therefore as a consequence ! the atrophy and demise of capitalism, Schumpeter was putting the cart before the horse, that is to say, he was confusing the cause with the effect!Because it is capitalist industry that requires the command over living labourpersonified by the capitalist entrepreneur, rather than the capitalist entrepreneur whoas entrepreneurconstitutes the essence of capitalism!

Differently put, we can say that it is not "the entrepreneur" that defines capitalism: rather, it is the wage relation, the essential social relation of production of capitalism, that cannot exist without the "entrepreneurial function" - without "the capitalist"! It is the need for the capitalist to realise a "profit" that forces him to become an "entrepreneur"; it is certainly not theneed to be "entrepreneurial" that turns a capitalist into an "entrepreneur"! Only the demise of capitalism will usher in the extinction of the entrepreneur - but as long as capitalism survives, so will the "entrepreneurial spirit"!