Capitalism, Equilibrium and History: A Theoretical and Practical Analysis of Schumpeters

Methodology and Innovationsprozess

Thus, development and equilibrium in the sense that we have given these terms are therefore opposites, the
one excludes the other. Neither is the static economy being characterized by a static equilibrium,
nor is the dynamic economy characterized by a dynamic equilibrium; an equilibrium can only
exist at all in the one sense mentioned before. The equilibrium of the economy is essentially a static
one.`19[Theorie, ch.7]
With this we really get closer to reality. In particular, we win a clearer insight into that peculiar jumble of
conditioning and freedom, which economic life shows us. The static circular fow and the static
phenomena of adaptation are dominated by a logic of things, while it is completely irrelevant for
the general problem of freedom of will, nevertheless in practice - with fxed given social
relationships - it leaves as good as no manoeuvering room for individual freedom of will. This can
be demonstrated and yet it was always a point of criticism, since the free creative work of the
individual was so obviously visible. We know now that the latter observation is correct. Yet, this
observation does not contradict the theorems of statics. We can precisely describe the place and
function of this creative work. Of course, in development the logic of things is not missing; and
just as one cannot demonstrate with the static conception the case for philosophical determinism,
one cannot maintain the case against it with the dynamic conception. But despite this we have
shown that an element is present in the economy, which cannot be explained by objective
conditions and we have put it in a precise relationship to those objective conditions.23
(Theorie,1912, ch.7)
Damit kommen wir der Wirklichkeit tatsachlich naher. Besonders gewinnen wir einen klarern Einblick in
das eigenturmliche Gemisch von Bedingtheit und Freiheit das uns das Wirtschaftsleben zeigt. Der
statische Kreislauf und die statischen Anpassungserscheinungen sind von einer Logik der Dinge
beherrscht, die fur das Problem der Willensfreiheit zwar ganz irrelevant ist, aber praktisch bei fest
gegebenen sozialen Verhaltnissen so gut wie keinen Spielraum fur individuelle Willkur lasst. Das
ist nachweisbar und war doch stets ein Stein der Antstosses, das man das individuelle freie
Schafen ganz deutlich am werken sah. Wir wissen nun dass der letztre Beobachtung richtig ist und
[36] den Theoremen der Statik nicht wiederspricht, wir vermogen prazise Platz und Funktion
dieses Schafens anzugeben. Naturlich fehlt auch in der Entwicklung die Logik der Dinge nicht;
und ebensowenig man mit der statischen Aufassung etwas fur philosophischen Determinismus
beweisen kann, kann man mit der dynamischen etwas gegen ihr ausrichten. Aber dennoch haben
wir ein durch sachlichen Bedingungen nicht erklarbares Element in der Wirtschftlichen
nachgewiesen und mit diesen sachlichen Bedingungen in eine prazise Beziehung gebracht. (From
G. Backhaus)
A. Equilibrium and History: Conceptual and Political Aspects of Bourgeois Economic Theory
Classical and Neoclassical Political Economy from Adam Smith to Leon Walras is founded on the
axiomatic static equilibrium of the marketplace economic system. Yet this clashes most
violently with the empirically evident instability of the capitalist economy and its equally
violent convulsions and, worse still, its transformations intended not just in the sense of
quantitative growth (Wachstum) but actual qualitative evolution (Entwicklung), with its meta-
morphoses and mutations, with its trans-crescence and crises. The static-stationary,
axiomatic-analytical, anatomical and objective schema of bourgeois equilibrium economic
theory is evidently and empirically shattered then by the dynamic-historical, metabolic
and subjective unfolding or evolution of its real operation. The end of history that the
bourgeoisie always desperately seeks has been greatly exaggerated yet again. The
question here is: can history be reduced to science? And then again, is it indeed science or
logic that is opposed to history in the bourgeois interpretation of economic systems?
The con-fusion of science and logic in the sphere of economic analysis was evident already in
Adam Smiths theorization of market capitalism. Smiths invisible hand was a
necessary Eskamotage or deus absconditus (hidden god) because the circularity of his
reasoning reduced science to logic - to a tautology in fact: prices are determined by value
which is determined by the quantity of labour, whose price is determined by the market
which determines prices. The problem lies in the defnition of market: if indeed the
market is made up of entirely self-interested atomistic individuals, then it is impossible
to see how such in-dividuals could ever reach the agreement that is indispensable to
determine prices! In other words, the rules of market competition have to be set or
agreed upon by market agents even before market competition takes place. But this is
impossible by defnition, because any restriction on the self-interest of market agents
turns the entire exercise into a meaningless and purposeless tautology!
G. Myrdal insightfully seized on this point, in The Political Element in the Development of Economic Theory. Myrdal,
however, like all economics theoreticians after him, totally failed to see the purpose or political element
behind the tautologous schema of equilibrium theory a political element that was to be the very ob!ect of
his study"

Thus, just like equilibrium analysis, Smiths theorization of market capitalism left no space at all
for the co-ordination of the actions of what are axiomatically atomic in-dividual market
agents which is why, just as Leibniz needed a divine pre-established harmony to co-
ordinate his windowless monads, so did Smith need his invisible hand to co-ordinate
the actions of his windowless, monadic market agents. General equilibrium analysis,
too, will later dispense with this requirement, without thereby resolving it, by postulating
the syn-chronicity of all actions in market exchange. But the formal equivalence of all
axiomatic market agents in both theories means that they are left without a purpose
once the frozen state of equilibrium is reached. In other words, equilibrium is a state of
complete in-action, given that at equilibrium market agents no longer have any need or
space to change their decisions. At equilibrium there is and there can be no market.
#rrow and $ahn were demonstrably right to insist, pace %awson in &he 'onfused (tate of )quilibrium #nalysis, that
#dam (mith is the father of equilibrium analysis *in General Competitive Analysis+. &he fact that, as %awson
argues, (mith constructed his theory from historical and sociological observations does not cure its
closedness or tautological nature. $ypocrisy was written all over the author of The Theory of Moral
Sentiments something that Mandeville delighted in e,posing- his penchant for sociological observation,
based mostly on #dam .erguson/s An Essay on Civil Society, only served to disguise the aporetic and
apologetic character of his economic theory. 0ncidentally, %awson/s definition of a closed system as one
that can be reduced to the proposition whenever ,, then y is manifestly wrong because this kind of
proposition is essential to the testing of scientific hypotheses in both natural and social science 1one need
only read any book on the philosophy of science to understand this point2. 3uite contrary to %awson/s
contention, a closed system must be of the type whenever ,, then y, where , is a function of y- it is the
classic circulus vitiosus or tautology, 4 nothing more nothing less.
The problem with equilibrium analysis is that it reduces economic science to logic literally,
to ana-lysis (retrospective examination or autopsy or anatomy), that is to say, to the formal
mathematical equivalence of all its elements, which leads to the meaningless paralysis of
tautology. The essential aim of any economic theory worthy of the name must be to
explain how economic actions can be co-ordinated and to point to the what, the
thing, the common substance or value that allows this co-ordination to take place.
Co-ordination is not meant here as static exchange and is not meant to be confned to
quantitative values. If we read Walrasian equilibrium, which is made up of a series of
simultaneous equations, as a simple functional plan or classifcation of an economy, then
it is not tautological but purely classifcatory or illustrative. If instead it is intended to
show how a real economy functions, that is to say, how the independent decisions of
individual market agents can be co-ordinated by the market, then it is entirely
tautological because, as Hayek showed, its conclusions are implicit in its assumptions.
#s 0 have suggested elsewhere in this volume,5 the tautological method which is appropriate and indispensable for the
analysis of individual action seems in this instance to have been illegitimately e,tended to problems in which
we have to deal with a social process in which the decisions of many individuals influence one another and
necessarily succeed one another in time. &he economic calculus 1or the Pure Logic of Choice2 which deals
with the first kind of problem consists of an apparatus of classification of possible human attitudes and
provides us with a technique for describing the interrelations of the different parts of a single plan. Its
conclusions are implicit in its assumptions the desires and the !no"ledge of the facts# "hich are assumed to
$e simultaneously present to a single mind# determine a uni%ue solution& The relations discussed in this type
of analysis are logical relations# concerned solely "ith the conclusions "hich follo" for the mind of the
planning individual from the given premises& 1Individualism and Economic 'rder, p.67.2
Even so, Hayeks analysis of general equilibrium is still incorrect because for a single mind
Walrasian equilibrium is merely classifcatory but not tautological. Even for a single
mind no decisions can be made in equilibrium analysis because simultaneous equations
involve a semaphoric, logical re-classifcation of information that is independent of
time as a concept. Walrasian equilibrium is tautological only if it pretends to explain, as
it does, how many minds can co-ordinate their economic decisions. Where a single
mind is concerned, however, equilibrium theory does not involve a single plan or any
plan at all (!) because that would imply the possibility of decision! But the point to a
classifcatory or semaphoric (or functional or illustrative or anatomical) schema is
that no decision is involved because there is and there can be no time involved in
such an ana-lytical sketch or blueprint or map. A map is timeless: it is not a
plan in the sense of a sequence of decisions!
But Hayek and all equilibrium theoreticians after him, have shifted the subject-matter, the
ground, the sub-stance, the substratum and quidditas, the whatness of economics from
prices and quantities, which involve those material human interests that are and must
be the indispensable foundation of all theories that even pretend to be economic, to the
mere semaphoric world of information and co-ordination! In the words of Brian
Loasby,
The co-ordination of economic activities, of course, is what economics is
overwhelmingly about, (Equilibrium and Evolution, p.9).
The problem with this is that economics can never be reduced to a simple matter of co-
ordination because it must always explain the real material object of co-ordination,
what makes it economic co-ordination! And the economic here stands for pro-duction,
the actual creation of goods and services which ultimately involve human living labour
and therefore social relations of production that relate to the interaction of human beings
amongst themselves as well as with their living environment!
Hayek correctly captures the point that Walrasian equilibrium cannot co-ordinate a market in
which diferent individuals decide; the market action of that single mind would still
depend on the decisions of at least one other single mind to make an economic
decision. For the single mind to make an economic decision and to evade tautology, it
needs to be confronted with the independent plan of another mind, which is what
general equilibrium is constitutionally incapable of doing because its conclusions are
[logico-mathematically] implicit in its assumptions and no time can logico-conceptually
be present! This explains the retreat of equilibrium theoreticians like Frank Hahn from
the sphere of prices and quantities of real goods and services performed by human
living labour to the semaphoric or semiotic sphere of ideas and actions. For Hahn,
an economy is in equilibrium when it generates messages which do not cause
[its agents to change the theories which they hold or the policies which
they pursue, (quoted in !oasby, op.cit. at pp."#-$).
But here the legerdemain, the subtle trick that Hahn has performed becomes absolutely evident
because Hahn has not specifed a decision but rather an in-decision, a not-changing of
theories and policies! In other words, not only does equilibrium now exclude even the
most phantomatic exchange of goods and services, which require human living labour,
but it even requires the ultimate in-action and in-decision: equilibrium fnally assumes the
stagnant and stationary position not just of tautology but of the most unthinkable rigor
mortis sheer death! For the modern bourgeoisie and its idiotic charlatans, economic
equilibrium is the most perfect Nirvana in which absolutely Nothing happens!

To be perfectly histrionically brutal, recent equilibrium theory has surged to the intellectual status
of a Seinfeld episode that is, a comedy series about nothing in which absolutely
nothing happens! Indeed, once economic theory has become so detached from any real
material human activity of production in which human beings interact not only with one
another but also with their environment, bourgeois economic theory can easily conceive
of an economic system in perfect equilibrium, perfectly co-ordinated, that has
completely destroyed its living environment! This insidious danger was already implicit
in Adam Smiths theorization of the wealth of nations as a perfect logico-mathematical
exchange that because of its very perfection no longer had anything to do with
wealth itself! Not until Alec Pigou theorized the problem of externalities (in The
Economics of Welfare) did this aspect of capitalist production enter the sphere of bourgeois
economic analysis, and then only as externality, that is, as something external to the
presumed purity of the capitalist economic system. Contrary to the stooges of
equilibrium analysis, Pigou never forgot that "[e]conomic welfare...is the subject-matter of
economic science," (bid., p.9).

Up until Adam Smith set out to formalize the operation or functioning of the market,
economics had not existed as a science separate from theories of society or indeed of
the body politic. Yet in this very separation of economic science from other aspects of
social life and from its history lies the fatal faw of this science, because once its
methodology leads it to exclude non-economic social forces as exogenous factors or as
externalities, then it becomes a closed system of pure logico-mathematical formulae
in which economic facts are completely deprived of all sociological and environmental
content. Consequently, economic science is incapable of explaining historical change,
including the transformation of economic reality itself, totally extruding thus the very
positive empirical experience on which so-called economic science is supposedly
founded.
0n his review of 'omte and Mach, in (no"ledge and )uman Interests, 8urgen $abermas emphasises one aspect of
positivism as his crucial ob!ection to it 4 namely, that positivism as a philosophy of science is incapable of
understanding and e,plaining the historical evolution of science itself. 9e partly agree with $abermas:
but this can only serve as an internal critique of positivism in terms of its internal consistency, whereas as
we will discuss more fully below this type of criticism of positivist methods entirely misses the point about
their e,ternal real practical political effectuality" 0n short, $abermas criticizes positivism in the name of
science, when in fact bourgeois science is a real political practice that cannot be contradicted in purely
scientific terms" (cience simply does not have the politically4independent epistemological status that
$abermas/s neo4;antism assigns to it as Ma, 9eber showed conclusively, although only obliquely 1cf.
(cience as <ocation2.
Put in simpler terms, science must be the combination of theory and facts: theory without facts is
empty, and facts without theory are blind. But the facts that economic science
pretends to theorise are the very violent reality that the capitalist bourgeoisie has already
imposed on human society! Bourgeois economic science therefore pretends merely to
observe empirically its misdeeds or facts, and then to dress them up as human
nature that gives rise to natural human rights. This miserable combination of scientifc
positivism and ethical jusnaturalism is the very essence of bourgeois economic science!
At the hands of positivism and empiricism, the Statik of equilibrium theory contradicts the
Dynamik of capitalist reality: hence, equilibrium expels history, stasis stymies metabole,
necessity chains freedom. How then to reconcile these irreconcilable opposites? How to
evade and escape these antinomies and apories?
Schumpeter ofers a preliminary way out:
%ut despite this we have shown that [a sub&ective element is present in the
economy, which cannot be e'plained by ob&ective conditions, and we have
put it in a precise relationship to those ob&ective conditions.
The task of science, then, is not to jettison logic; it is rather to marry logic with nomothetic
observations about the operation of the social process and then place these objective
conditions.in a precise relationship with the equally necessary idiographic leadership
role of human agency. There is no paradox here: the subjective element that leads or
initiates the transformation of the economic system must act within the boundaries of
the objective conditions specifed by logic and science: this necessity is what gives the
phenomenon of capitalist trans-formation its mechanical or procedural character: it is the
trans-formation mechanism (Veranderungs-mechanismus) that is the engine or source of
energy (dynamis) of the Innovations-prozess. The freedom of the leader or of the
entrepreneur who leads this mechanism and this process is not an abstract concept:
individual freedom operates within the objective conditions imposed by the free-doms
of every other individual agent involved in economic activity. The subjective trans-
formation of the capitalist economic system takes place within the boundaries and limits
imposed by the specifc historical institutional framework of this economic system.
This cardinal quasi-Euclidean axiom of the absolute atomicity or in-dividuality and self-seeking self-
interest of human beings is the most indispensable postulate of all bourgeois social, economic and
political theories. Fittingly, it was the English translator of Euclids Elements, Thomas
Hobbes, who frst devised this worldview. In this worldview, there is no space for
common human interests (inter esse, common being): the syllogistic conclusion is that
freedom can be defned and exist not as a common human goal but only as free-dom,
that is to say, as an equilibrium of opposing, conficting and irreconcilable individual
wills. This equilibrium, the equilibrium of Greek stasis or civil war (bellum civium), can be
overcome by political convention (totalitarian, democratic or elitarian) only because the
atomized human individuals postulated in Hobbess theory know that the only outcome
of such static equilibrium, of this stasis, will be the war of all against all (bellum omnium
contra omnes) that will lead fatally (fate here turns into death) to the extinction of
humanity. Even in its free-dom - indeed, as Weber had shown, especially in its free-
dom human action and leadership will obey that conditioning constituted by the
dira necessitas (the dire necessity), the extrema ratio of self-preservation. The ultimate
foundation of mechanical rationality both for the Hobbesian political system and for its
neoclassical progeny in equilibrium theory is quite simply self-preservation, the dire
necessity of surviving in the state of nature where homo homini lupus, man is a wolf to
man. Free-dom consists not in acting irrationally but in acting rationally: in short, that
decision is free that is taken rationally, by respecting the precise relationship between
subjectively intended ideal goals and the objective con-ditions, the available means, for
the implementation of those goals starting from the axiomatic postulate of the
irreconcilable self-interests of individual human beings.
This is how Hobbes managed for the rising capitalist bourgeoisie an epistemological feat that has
not been equaled since he wrote: - he managed, that is, to combine the positivist scientifc
hypothesis of Galileo-Newtonian mechanics with the jusnaturalist political convention of
innate human rights, and thereby to erect bourgeois political practice on efectual
scientifc grounds. Hobbes begins with the positivist scientifc hypothesis of the universal
confict between human beings taken as wholly egoistic atomic individuals, and from
there he develops rationally - with the rationality of the laws of mechanics - the
jusnaturalist political convention (common-wealth) that will make social life possible
based on the natural rights of these conficting individuals. (This astute twining of
positivist authoritarianism and jusnaturalist contractualism is masterfully unjumbled by
N. Bobbio in Da Hobbes a Marx.)
In order to erect his political theory, Hobbes starts from the Euclidean axiom that each human
being represents a point or body entirely unconnected to other human points or
bodies and entirely self-interested or, mechanically put, having its own momentum or
appetitus or conatus which Hobbes calls Power. From this axiom he deduces that
the original, most natural state of human beings, the state of nature or status naturae,
is a state of civil war (bellum civium) or the war of all against all (bellum omnium contra
omnes). This clash of wills or appetites, this war of all against all, can lead logically
only to a deterministic mechanical equilibrium in which there is no room for manoeuvre for
the individual freedom of the will (Schumpeter quoted above) because each individual will
is bound by the wills and boundless appetites of other wills, or else to the assured self-
destruction of human beings. This is Hobbess scientifc hypothesis taken directly out of
Galileo-Newtonian mechanics.
The way out of equilibrium or stasis is provided by the ultima ratio, the absolutely indispensable
right to and need for self-preservation, which leads these atomic self-interested
individuals to reach freely a political con-vention, an agreement or social contract that
can avert mutually assured destruction. Here the positive empirical evidence of a society
that the bourgeoisie has reduced coercively to little more than a moral jungle from which
all notion of natural law has been expunged meets with and satisfes the jusnaturalist
(natural-law) requirement that individuals must agree freely and rationally to a political
regime that will protect them from civil war. Hobbes acknowledges that what coerces
individuals to accept this bourgeois political regime based on the laws of the
marketplace is the metus mortis, the fear of death at the hands of any other individual.
And given that each individual is axiomatically defned as being equal in the ability to
harm another in the state of nature, then it follows axiomatically that each individual
decides freely (by political convention, otherwise known as social contract) and rationally
(by scientifc hypothesis, following the defnition of in-dividuals in confict) to erect a
common wealth or State or status civilis that will protect them from certain death.
The central feature of capitalism is that the bourgeoisie has tried as far as is humanly possible
without tearing asunder the very fabric of human society to reduce this society to the
state of absolute possessive individualism. That is why all accounts of bourgeois economic
theory must start with the axiomatic postulate of this possessive individualism. Hobbes
did not neglect to include in the possessive part the ability of individuals to buy or sell
their own power, meaning both their physical possessions and their labour-power, in
exchange for physical possessions. In the Leviathan, he describes the value or worth or
price of a man as so much as would be given for the use of his power. Clearly, Hobbes had
already an embryonic notion of what Marx would theorize later as labour-power, the
commodifed form of living labour in capitalist industry.
As Loasby has very perceptively pointed out (in Equilibrium and Evolution), the complete
decentralization of economic decisions that is implicit in Hobbesian political theory and
then in Walrasian equilibrium economic theory makes the co-ordination of economic
decisions a matter of life and death. This is indeed another factor that makes the
Hobbesian-Walrasian schema or blueprint absolutely axiomatic for the analysis of
capitalism. But this interdependence of human economic action is still subordinated to
the axiomatic primacy of individual self-interest; consequently, it cannot form part of
equilibrium theory except as a Hobbesian ultima ratio or dira necessitas ob metum mortis,
dire necessity in fear of death, as we explained above.
&he locus classicus of possessive individualism is '= Macpherson/s towering study by that name. #lchian4>emsetz,
to give yet another e,ample of the rampant stupidity of ?obel @rize laureates in economics, quite incorrectly
select a negative definition of capitalism the a$sence of government in the economic process 4 and
completely leave out the individual-
The mar( of a capitalistic society is that resources are owned and allocated by such
non-governmental organi)ations as *rms, households, and mar(ets. [+irst sentence of
,-roduction, .nformation /osts and 0conomic 1rgani)ation2.
&his is quite clearly nonsense because, in practice and in reality, governments have historically played a crucial role in
the ownership and allocation of *social+ resources: and in bourgeois economic theory, it is individuals, not
firms and households, that must a*iomatically take precedence over firms and households and markets"
0t is possible, of course, that by markets #lchian4>emsetz mean the economic e,change of atomistic
individuals. >emsetz in any case will later take a fresh look at competition as perfect decentralization,
which requires the postulate of possessive individualism 1cf. above all his .reedom and 'oercion and
.allacies in the )conomic >octrine of ),ternalities2.
#lthough our treatment of $obbes/s political theory is perhaps more systematic than $annah #rendt/s, we simply could
not resist drawing on her devastating prose and quote in full what is truly one of the most moving and
inspiring passages in her entire work which stands as a lasting indictment not only of the capitalist
bourgeoisie but also of its venal intellectual apologists, among whom we count first and foremost
professional economists-
.t is signi*cant that modern believers in power are in complete accord
with the philosophy of the only great thin(er who ever attempted to derive
public good from private interest and who, for the sa(e of private good,
conceived and outlined a /ommonwealth whose basis and ultimate end is
accumulation of power. 3obbes, indeed, is the only great philosopher to
whom the bourgeoisie can rightly and e'clusively lay claim, even if his principles
were not recogni)ed by the bourgeois class for a long time. 3obbes4s
Leviathan 5564 e'posed the only political theory according to which the state
is based not on some (ind of constituting law7whether divine law, the law
of nature, or the law of social contract7which determines the rights and
wrongs of the individual4s interest with respect to public a8airs, but on the
individual interests themselves, so that 9the private interest is the same with
the publique.9 545
There is hardly a single bourgeois moral standard which has not been anticipated
by the unequaled magnifcence of Hobbes's logic. 3e gives an
almost complete picture, not of :an but of the bourgeois man, an analysis
which in three hundred years has neither been outdated nor e'celled. "Reason
... is nothing but Reckoning"; "a free Subject a free !ill . . .
"are# words . . . without meaning; that is to sa$ %bsurd." ; being without
reason, without the capacity for truth, and without free will7that is,
without the capacity for responsibility7man is essentiall$ a function of
societ$ and judged therefore according to his "&alue or worth ... his
price; that is to sa$ so much as would be gi&en for the use of his power."
This price is constantly evaluated and re-evaluated by society, the 9esteem of
others,9 depending upon the law of supply and demand.
'ower according to Hobbes is the accumulated control that permits the
indi&idual to f( prices and regulate suppl$ and demand in such a wa$ that
the$ contribute to his own ad&antage. The individual will consider his advantage
in complete isolation, from the point of view of an absolute minority,
so to spea(< he will then reali)e that he can pursue and achieve his
interest only with the help of some (ind of ma&ority. )herefore if man is
actuall$ dri&en b$ nothing but his indi&idual interests desire for power must
be the fundamental passion of man. .t regulates the relations between individual
and society, and all other ambitions as well, for riches, (nowledge,
and honor follow from it.
"$= .:-0>.;!.?:
3obbcs points out that in the struggle for power, as in their native capacities
for power, all men are equal; for the equality of men is based on the
fact that each has by nature enough power to kill another. @ea(ness can be
compensated for by guile. )heir equalit$ as potential murderers places all
men in the same insecurit$ from which arises the need for a state. The
raison d'etre of the state is the need for some security of the individual, who
feels himself menaced by all his fellow-men.
["$AB.Hobbes was the true though ne&er full$ recogni*ed philosopher of the
bourgeoisie because he reali*ed that acquisition of wealth concei&ed as a
ne&er+ending process can be guaranteed onl$ b$ the sei*ure of political power
for the accumulating process must sooner or later force open all e'isting
territorial limits. He foresaw that a societ$ which had entered the path of
ne&er+ending acquisition had to engineer a d$namic political organi*ation
capable of a corresponding ne&er+ending process of power generation,.
+or a /ommonwealth based on the accumulated and monopoli)ed power
of all its individual members necessarily leaves each person powerless, deprived
of his natural and human capacities. .t leaves him degraded into a
cog in the power-accumulating machine, free to console himself with sublime
thoughts about the ultimate destin$ of this machine which itself is
constructed in such a wa$ that it can de&our the globe simpl$ b$ following
its own inherent law.
Make no mistake: the Hobbesian-Weberian mechanical science we mean here is not an objective
science, - for as Nietzsche demonstrated, there is and there can be no such thing! The
science we intend here is a political practice based on the infexible application of axiomatic rules
to human society by a historically specifc social class the capitalist bourgeoisie. The
bourgeoisie would be blind deaf and mute without this infexible science, which is why it
has erected the most fabled monuments to it. This science consists for the bourgeoisie in
placing political decisions in a precise relationship to the existing relations of power in
society that it has imposed to its own advantage so as to be able to reproduce them
according to its own axiomatic postulates or schema. And then, of course, in presenting
these political decisions as that peculiar jumble of conditioning and freedom, which economic
life shows us, which is how Schumpeter defnes economic science.
The question now is: what is this precise relationship.of conditioning and freedom, and how can it
escape its evident apories and become efectual? It simply will not do, it entirely misses the
point, to conclude that Schumpeter has failed in his attempt to integrate theory and
history and to reconcile freedom and necessity (this is Mouras claim in his
homonymous essay based on Lawsons epistemology): - because the crucial point, the key
to the enigma, is to understand this precise relationship [of the free creative work of the
individual] to objective conditions: that is the task and also the limit of science.
From the outset, Schumpeters aim is not so much to fnd out empirically the mechanism that
impels the capitalist economy to change and mutate spasmodically; rather, his aim is to
discover the conceptual requirements for the practical implementation of the axiomatic
postulates of Neoclassical equilibrium analysis on which the very idea of a bourgeois civil
society and of its economic system are founded. The mechanism is capable of being
embodied by an institutional framework in which decisions are made within the limits
and boundaries set by the axiomatic schema of the bourgeois system of social power so as
to put it in motion or energize (the literal meaning of dynamis in Greek) it. In other
words, the subjective, historical force or source of energy of the bourgeois social system
must be placed in a precise relationship to the objective conditions or boundaries or
strictures that are necessary for the expanded reproduction of human society in a
bourgeois form. Schumpeters aim then is to fnd out the reason why capitalist society
cannot stand still. This reason cannot be solely the result of experience because human
experience could lead to uncertain outcomes. Instead, whilst it cannot be contrary to
empirical experience, this reason has to be deduced from the very conceptual framework
of a capitalist economy acquiring its own dynamic, from its axiomatic postulates coming
into being or ec-sisting. Schumpeters science must be, as he styles it, a histoire raisonnee
a marriage of equilibrium and history.
The axiomatic postulates - the reasoning schema of this history, the logical basis for its
scientifc hypothesis - are formalized in Neoclassical political economy, of which
Walrasian equilibrium theory is the most perfect expression. Now, a dynamic
equilibrium is impossible if by equilibrium we intend a predictable state, because then any
position of equilibrium is inescapable. It is possible to understand how an economy can
reach equilibrium, but it is unimaginable that it can ever move out of equilibrium without
the intervention of external or exogenous factors. As Schumpeter put it: An equilibrium
can only exist at all [as] a static one. A dynamic equilibrium is a contradiction in terms.
The ec-sistence of equilibrium is not at all a pure mathematical concept. The requirements for the
pure mathematical existence of economic equilibrium are entirely diferent from
those of its real, practical ec-sistence. And this is so not just from the standpoint of
practical experience itself, but indeed also and above all from the very conceptual
requirements or implications of the practical ec-sistence of a concept. On one side, we have
the formal conceptual elements of a concept; but on the other we have also the conceptual
implications of its coming-into-being, of the ec-sistence of the concept, of its extrinsication
or embodiment from ideal concept to conceptual reality! The two sets of conceptual
requirements are simply not the same. Yet, it is absolutely evident that the practical
requirements for the ec-sistence of a concept are just as much a part of its conceptual being
as are the purely formal logical requirements of the internal consistency of the concept!
But whereas the formal axiomatic defnition of a concept can only be self-referential and
closed, and therefore totalitarian or tautologous (cf. Hayek, Demsetz, Loasby,
Langlois), the conceptual requirements for the ec-sistence of the concept turn it into an
open concept because its practical implementation is subject to the minimal intuitive
requirements of empirical experience and observation. At that point, the concept may be
said to form a scientifc hypothesis and it may be said to be scientifc.
What turns Schumpeters science into bourgeois science is not this methodology but rather the
necessary practical implications of the axioms adopted by bourgeois Neoclassical
economic science, that is to say, the precise relationship between the axioms of the
theory and their practical implementation or ec-sistence. If then we wish to fnd out what
are the internal or endogenous factors that move the economy out of equilibrium we
must separate the logical concept of equilibrium from the dynamic concept, which includes
the practical implications of its real implementation. In this light, the concept of
equilibrium serves only a schematic heuristic purpose but it can never be said to refect the
reality of a capitalist economy. Science is the meeting point of schematic formalism and
empirical experience: the one cannot exclude the other, science must combine both. (To
paraphrase Kants famous dictum, intuition without concepts is blind, and concepts
without intuition are empty. Kants dictum is often misconstrued as: thoughts without
content are empty, intuition without concepts is blind. But by thoughts Kant
obviously means concepts, and by content he means intuition.) This is why a
conceptual analysis of equilibrium shows that it cannot exist except as a closed stationary
system, but also that it cannot ec-sist except as an open dynamic system.
Let us see how Schumpeter squares this circle. If we are successful in our attempt, we would have
made perhaps the greatest leap in critical social theory since Nietzsche aphoristically and
anti-systematically pointed the way to a solution of these apories, antinomies, enigmas
and conundrums of bourgeois thought.
B. The Extrinsication of the Mechanical Equilibrium Schema into Political Market Process:
Competition, Proft, Innovation
1. Equilibrium, Mechanics and Dynamics
9alras A would have said 1and, as a matter of fact, he did say it to me the only time that 0 had the opportunity to
converse with him2 that of course economic life is essentially passive and merely adapts itself to the natural and social
influences which may be acting on it, so that the theory of a stationary process constitutes really the "hole of
theoretical economics and that as economic theorists we cannot say much about the factors that account for historical
change, but must simply register them. A 0 felt very strongly that this was wrongA.
0 was tryingA. to answer the question of how the economic system generates the force which incessantly transforms
itA. a source of energy "ithin the economic system "hich "ould of itself disrupt any e%uili$rium that might $e
attainedA. If this is so# then there must $e a purely economic theory of economic change "hich does not merely rely on
e*ternal factors propelling the economic system from one e%uili$rium to another& It is such a theory that I have tried to
$uild +
0t was not clear to me at the outset what to the reader will perhaps be obvious at once, namely, that this idea and this
aim are e,actly the same as the idea and the aim which underlie the economic teaching of ;arl Mar,. 0n fact, what
distinguishes him from the economists of his own time and those who preceded him, was precisely a vision of
economic evolution as a distinct process generated by the economic system itself. 1(chumpeter B67CDB6E6, p. BFF2
1@reface to 8apanese edition of &heorie, quoted in ?. Gosenberg, H)ndogeneity/, p.C.2
The contradiction in Schumpeters well-known exposition of his theory of economic development
is absolutely evident: If indeed the economic system can be propelled from one equilibrium to
another, then for him the notion of economic equilibrium must be theoretically valid. Yet if
indeed there exists
,a distinct process generated by the economic system itselfB[through a force or
source of energy that incessantly transforms itB, which would of itself disrupt
any equilibrium that might be attained2,
then it is obvious that no such equilibrium exists or can exist, for the precise reason that the
economic system is at all times incessantly! being trans-formed. It is the very trans-formation,
the meta-morphosis, the trans-crescence of the economic system that precludes any equi-librium,
any equi-valence of its internal values. An economic system that is able internally (from
within) to undergo the incessant transformation that Schumpeter intends to theorize is quite
simply conceptually incapable of being in equilibrium because equilibrium can be predicated
only of economic systems based on equal exchange, that is, the exchange of equivalents. But
Schumpeters dynamic process is one in which the values produced by the economic system are
incessantly and qualitatively changing because of political forces that turn market prices into
something entirely diferent from equilibrium prices, because they refect a political reality
rather than a reality of pure competitive exchange on the basis of marginal utility. This means
that Schumpeters dynamic process, the Dynamik, is categorically diferent from the static economy,
the Statik, intended by equilibrium theory. Schumpeters dynamic economy is one in which
equilibrium, if attributed to it, is a contradictio in adjecto!
Schumpeter himself explicitly states in the Theorie that dynamic equilibrium is impossible
because it is a contradiction in terms, an oxymoron: yet he does not seem to realize that for that
very reason it is also impossible for the distinct process of Entwicklung to lead from one
equilibrium to another! When speaking of Entwicklung, Schumpeter rightly treats equilibrium as
a stationary state in which all exchange values or market prices are fxed in accordance with
the utility schedules of market participants taken as individuals. But then, he fails to notice that
for the economic system to move from equilibrium to equilibrium, those exchange values or
market prices can no longer be fxed, frst, in a regime of pure competition, and second,
according to utility schedules, - because the very reality of Entwicklung, the dynamic process,
determines values and prices not according to the pure economic laws of equilibrium theory with
its axiomatic utility schedules, but rather according to the very impure practico-political
processes that allow the economic system to be trans-formed and to mutate!
Schumpeters clear attempt here to reconcile Marxs critique of political economy with Walrass
axiomatic schema of Neoclassical equilibrium theory by reconciling whilst maintaining the
distinct character of the Statik and the Dynamik founders on the evident logical impossibility of
the attempt that is, of theorizing the capitalist economy on these two distinct processes: that
of Neoclassical stationary equilibrium which describes an economy of pure equal exchange based on
marginal utility, and that of the Marxian critique of political economy based on the political
antagonism of capitalist accumulation. This is so because a theory based on pure exchange leading to
equilibrium views the economic system as one in which prices the rate of exchange of goods,
where supply meets demand refect the equi-valence of the determinant of prices, whether this
be marginal utility or labour-power, whereas a theory based on political antagonism cannot
regard prices as signifying the equivalent values, either objective quantities (labour-power
measured by time) or rates of change of subjective estimations (marginal utilities), prescribed by
the Law of Value of both Classical and Neoclassical Political Economy.
Diferently put, equilibrium theory deals with equivalent values (whatever it is that is being
priced for exchange) whose underlying sub-stance is utility because its prices are all
relative to the utilities exchanged within the equilibrium system of exchange as defned, and
cannot be determined until all exchanges have been completed. Furthermore, the axiomatic
condition of perfect or pure competition prevents individual market participants from entering
combinations or from changing production functions so as to obtain an advantage over other
market participants. In complete contrast, Marxian theory treats the economic system as one in
which political antagonism determines prices and therefore no independent market mechanism
can fx prices as the exchange rates of equivalent values. Neoclassical equilibrium theory and the
Marxian critique of political economy cannot be regarded as distinct processes except in the sense
that they deal with subject-matters that are categorically diferent and therefore incommensurable
and incomparable.
The all-important point that is being made here is that once we exit the axiomatic conditions of
equilibrium theory and we allow market participants (a) to efect changes to production functions
and (b) to co-operate selectively to the detriment of others, then market prices are no longer
determinable in accordance with the given utility schedules of market participants because these
no longer act as equals in terms of their production functions and their market power. In
neoclassical equilibrium theory it is the axiomatic goal of equilibrium that determines prices
so that these prices are necessarily relative to the constraint of equilibrium axioms that
ensure the formal equality of market participants. (Tony Lawson, in the essay cited above, makes
this perceptive point.) But once the axioms of the atomicity and formal equality of market
participants are removed, then the determination of market prices is no longer possible because
there can no longer be an equilibrium in what has become an economic system whose prices
are afected by political conditions and antagonisms that are not amenable to measurement.
Yet, whilst he clearly contends here that the economic system already contains the internal
force or source of energy that will disrupt any equilibrium that might [temporarily] be attained and
degenerate into periods of profound instability and crisis, Schumpeter is also equally adamant
that it is possible to theorize positions of equilibrium or tranquility (Joan Robinsons
preferred term, in The Accumulation of Capital) during which the behavior of the economic
system is scientifcally predictable or stable and can even be said to be in harmony. Whilst he
wishes to construct a purely economic theory of economic change that relies on endogenous
rather than external factors, Schumpeter still insists on the need to diferentiate this purely
economic theory from the more static theory of economic equilibrium as a distinct process,
even though the two processes are quite evidently not only distinct but also in fact
categorically inconsistent!
Schumpeter therefore bases himself on a dual typology of economic science: a Statik science
represented by orthodox Neoclassical Theory as the scientifc attempt to systematize
empirical observations about the economic system founded exclusively on the
empirical reality of market exchange and pricing that must lead to a state of
equilibrium which is why he insists that the economy moves from equilibrium to
equilibrium; and a Dynamik science capable of being a purely economic theory of
economic change founded on the fact that the capitalist economy seems to be able to trans-
form itself and, in so doing, go through a wave-like or cyclical motion or evolution
that propel[s] the economic system from one equilibrium to another, - a propulsion not due
to external factors unconnected with the scientifc operation of the economic system,
but much rather to the fact that
the economic system [itself] 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
Apart from the fact that external infuences could be hypothetically the ultimate cause of
capitalist disturbances, it remains true for Schumpeter that
practically all the phenomena, diCculties, and problems of economic life in
capitalist societyB as well as the e'treme sensitiveness of capitalism to
disturbance, would be absent if productive resources Dowed every year
through substantially the same channels toward substantially the same
goals, or were prevented from doing so only by e'ternal inDuences,
[%usiness /ycles, p.E#
It follows therefore that any economic theory that limits itself to the task of describing or
classifying or merely analyzing this circular fow (Kreislauf) of economic activity would
not only fail to account for the disturbances (Storungen) and for all the phenomena,
difculties, and problems of economic life in capitalist society, but it would also fail to account
for the actual combined quantitative growth [Wachstum] and qualitative development
[Entwicklung] of the capitalist economy and society, that is to say, it would not account
for capitalist accumulation. Both Classical and Neo-classical equilibria represent only a
circular fow (Kreislauf) of goods exchanged, because in a state of pure competition
(reinen Wettbewerbs) market exchange leads eventually to the exhaustion of any profts
or surpluses, and therefore of any growth or development or evolution or
indeed even crisis, that may exist initially when the economy is in dis-equilibrium.
Following Marx in opposition to Walras, Schumpeter maintains that the economic system is
characterized by two distinct processes that generate opposing forces, one of which
guides it toward equilibrium (what Marx called simple reproduction) and one that
pushes it out of that position (Marxs expanded reproduction). In these premises, the
Law of Value shared by both Neoclassical equilibrium theory and Classical Political
Economy necessarily entails, at least theoretically, the inevitability of economic
stagnation the former because aggregate supply must equal demand until no further
proftable exchange is possible (this is the outcome of Walrasian tatonnement), and the latter
because competition among capitalists and competition for higher wages from workers
will eliminate all possibility of proft arising from the exploitation of workers - as
Schumpeter consistently and validly argues throughout his work. (This point is discussed
at length in the next section.)
No doubt, the fact that Schumpeter is able to mention Walras and Marx without pointing out the
categorical incompatibility of the two approaches (the distinct processes) to economic theory
testifes to Schumpeters own lack of dialectical comprehension of the fundamental politico-
philosophical and even onto-epistemological concepts involved. (These more dialectical
matters, obliquely invoked by the Schumpeterian notion of creative destruction, will be
discussed in a later section in connection with Marxs infuence on Schumpeter.) Even so,
however, there can be little doubt that Schumpeter had some idea of the difcult issues that
capitalist accumulation posed for the development of a purely economic theory of economic
change, as his attempts at conceptualizing these issues show quite clearly. Let us look closely at
how Schumpeter engages in this difcult conceptual exercise.
The frst fundamental issue that Schumpeter addresses for his entire monumental theoretical
efort in economic and social theory is contained in this question:
[3ow does an economy ma(e the transition from one level - which itself was
viewed as the *nal point and point of equilibrium - to another levelF This question
ta(es us to the very essence of economic development.[$AE
To this fundamental question, Schumpeter gives the following answer an answer consistent
with and borne out in all of his subsequent work:
[$A9 This [present wor(, the Theorie is an attempt to present a theoretical
analysis of development, of its mechanism, in the form of a scheme to which the
facts of development would generally conform. We look frst at a general cause
for the changes in the fundamental structure, i.e. in the level of the circular o!.
We locate this cause in the fact that " as !e e#pressed it " ne! combinations get
driven through. We sa! that !hen ne! combinations are carried through this
can be attributed to the actions of a particular type of economic agent !hom !e
called an $entrepreneur$.
Now, let us sift carefully through this statement and state exactly how and where Schumpeter has
gone wrong in seeking to tie the two distinct processes in economic analysis. First, Schumpeter
clearly assumes that there is such a thing as a state or level of equilibrium. His question then is
how to account for changes in the level of equilibrium. And Schumpeter claims to have found
the cause for this change in levels of equilibrium in
the actions of a particular type of economic agent whom we called an
GentrepreneurH [who is responsible forB the new combinations [that causeBthe
changesBin the level of [equilibrium or circular Dow.
But the difculty with this reasoning is that the notion of equilibrium applies to a theory of the
economic system in which any changes in combinations, any new combinations, are
instantly semaphored or communicated to all other economic agents because these changes
are not changes occurring in time but are rather changes in the logical structure of the
equilibrium level! In equilibrium theory the economic agents do not make any changes at all
because all market participants are absolutely axiomatically, formally and logico-mathematically
equal due to the axiomatic conditions of pure competition in which equilibrium prices are
fxed and determined by the theory! What Schumpeter is proposing here, instead, is a theory (one
of economic change) in which prices are no longer determined by the formal, axiomatic, logico-
mathematical equality of market participants, but rather by one specifc market participant
capable of causing or carrying out new combinations or innovations Schumpeters entrepreneur.
But in this case the fundamental condition of equilibrium theory the condition of pure
competition no longer obtains! Schumpeter has introduced into the analysis, entirely illicitly,
a new condition that allows the entrepreneur to change autonomously and independently the
rules of exchange. But if this is the case, the prices that now obtain in the market as a
result of the entrepreneurs actions can no longer be equilibrium prices and indeed can never be
equilibrium prices because the economic system can never be said to be in equilibrium for
the simple reason that market prices are now determined not through pure exchange or
pure competition but rather by the political conditions that allow entrepreneurs to change
the rules of competition independently of other market participants!
Please note that here we speak of political conditions and not, as the critics of equilibrium
theory from Srafa to Joan Robinson and beyond do, of imperfect competition because (a) such
an expression suggests that perfect or pure competition is possible and indeed conceivable (!),
and (b) because the imperfection is not due to transaction costs or frictions but rather to the
ability of market participants to combine politically to afect prices. As we are about to show, not
only is pure competition not possible it is indeed also inconceivable because it is an aporetic or
antinomic notion that contains in itself the seeds of its own destruction.
That Schumpeter was aware of these conceptual difculties aficting his theory of Entwicklung in
its relation to Neoclassical equilibrium theory is made utterly transparent by the following
revealing discussion in the Theorie in which Schumpeter comes very close (almost!) to
identifying the incomparability of the two distinct processes:
%ure economic la!s describe a particular behavior of economic agents, !hose
goal is to reach a static equilibrium and to re"establish such a state after
each disturbance. %ure economic la!s are similar to the la!s of
mechanics !hich tell us ho! bodies !ith mass behave under the inuence
of any e#ternal $forces$, but !hich do not describe the nature of those
$forces$. &n mechanics it is assumed that bodies 'that is, ob(ects !ithout
a )self* or* !ill* or )freedom*+ !hen no force 'that is, unless a force+
a,ects them from the outside, do nothing of themselves and do not
produce even a single ne! phenomenon of a mechanical nature. &n the
same !ay pure economics provides us !ith formal laws as to ho! the
economy is 'that is, economic agents are+ shaped under the inuence of
conditions coming from the outside. &t sho!s '-./+ ho! the economy
'that is, economic agents, no! only )bodies*+ responds to changes in
those conditions coming from the outside. Therefore, in such a
conception, pure economics almost by defnition 'a#iomatically]
excludes the phenomenon of a $development of the economy from
within$.
No! It is not almost by defnition that pure economic laws exclude a development of the
economy from within: it is indeed by defnition (!) that they do so! And this is
because the market participants of equilibrium theory, its self-interested in-dividuals,
are not allowed axiomatically to act as economic agents! Schumpeters confusion is
shown quite clearly when he states above that
[pure economic laws describe a particular behavior of economic agents, whose
goal is to reach a static equilibriumB
Not at all! The self-interested in-dividuals of economic theory do not and can never have any
economic goals of their own and most certainly not the goal of reaching equilibrium
(!) because their economic goals are fxed axiomatically from outside (Schumpeters
own expression above!) in their utility schedules and cannot be changed autonomously
if equilibrium prices are to have any meaning at all! In equilibrium theory economic
agents are not agents at all because the goal of equilibrium is not theirs but is
rather set from outside as an axiomatic condition of the analysis. It is not that economic
equilibrium exists because its market participants desire it: it is rather that the desires of
market participants, their utility schedules, adjust to the axiomatic condition that there be
such an equilibrium! (Again, this is a point that Tony Lawson highlights genially in his
work and that Frank Hahn acknowledged.) In reality, the self-interested nature of
economic agents, hence their self-hood, contradicts their atomicity in the sense that an
atom like a body in mechanics cannot have a self capable of acting but can only be
acted upon because its free-dom (its room to manoeuvre or Ellenbongsraum, as Max
Weber called it) is limited and defned by the equal and opposing free-doms of all
other participants which is why we have chosen to describe these freedoms as free-
doms, that is, as formal dom-ains.
Schumpeter comes very close to perceiving that what makes these self-interested economic agents
passive atoms or mechanical bodies in equilibrium theory - rather than (self-
conscious, active) agents -, is the fact that their self-interests, their individual free-
doms, are limited by the equal and opposing free-doms of all other agents - so that
they are reduced indeed to the unconscious mechanical role of bodies as in mechanical
physics. Thus, the economic agents of equilibrium theory are not agents at all
because they are restrained from inter-acting with one another as a result of the axiomatic
defnition of pure competition! Equilibrium is the state most consistent with the formal
pure equality of these economic agents: their free-dom is in reality only inertia,
that is, the power to remain in the same state unless acted upon by an external force. In
pure competition the only state possible is one of equilibrium because the purity of
competition means that no advantage can be gained by individual agents through
innovation either singly or in concert. And therefore there cannot be any proft in the
theory of equilibrium.
Equilibrium is a frozen or stationary state because by axiom, by defnition, no single agent is
allowed to act upon or co-operate with other agents or the economic system so as to gain
an advantage over others. This makes proft and interest impossible. And yet this is exactly
what Schumpeter allows his entrepreneur to do! But to do this is to move from the
theoretical logico-mathematical framework of equilibrium theory to a new political
framework of analysis in which equilibrium prices are no longer fxed axiomatically as
in equilibrium theory but rather politically, that is, through the political power
possessed by capitalist entrepreneurs to impose their innovations or new
combinations on the rest of society or, if you like, on the market.
In summary, Schumpeters attempt to derive a purely economic theory of economic change has
led him to refute the theoretical legitimacy of equilibrium theory, because of its axiomatic
inability to change, and also of his own pure theory of economic change, because it
shows that economic change cannot be explained by a purely economic theory. The
Law of Value has fnally been exposed for what it is one of the biggest intellectual
frauds in the history of humanity!
Both in the Statik and in the Dynamik economic agents are motivated by self-interest bounded
only by the self-interests of all other economic agents. But only in the Dynamik does this
proft-seeking intention become the reality of proft-making. The Statik therefore resembles
a schema entirely analogous to the laws of mechanics in the sense that its atomistic self-
interested individuals are restrained from acting upon the laws of economics by the
equally self-interested actions of other market participants. Consequently, the economic
agents of the Statik resemble entirely the bodies of mechanical physics in that they are
acted upon by the axiomatic laws of economics but do not themselves act or initiate
anything of their own free will (Wille) or volition (Willkur). Least of all are they allowed to
act in concert or to do anything that may gain them an advantage over other
competitors because this would infringe against the axiom of pure competition.
In other words, the economic agents of the Statik are not agents at all because they merely react
to the external forces exerted by the equal self-interests of all other economic agents
which must, by defnition and axiomatically, result in economic equilibrium! Because
of its in-dividuality or a-tomicity, the self-hood of the Statik economic agent is
reduced to sheer mechanical automaticity by the equal and opposing self-interests of all
other individuals. The freedom (of will and of choice) of the individual in the Statik is
curtailed and determined or confned or limited by the equal and opposing freedoms of
other economic agents. Thus, the individual freedom of the self becomes a mere
mechanical free-dom, a mechanical inertia, that is to say, the power to move subject to
the dom-ains (free-doms) of all other economic individuals. The mechanical interaction of
the self-interests of economic agents in the Statik reduces each selfsh individual to the
status of a mere body, that is, to the opposite of an agent!
2. Mechanical Equilibrium and Political Market Process: From Proft-Seeking to Proft-Making
We showed in the last section how Schumpeter perceived that in equilibrium theory the very
purity of self-interest means that the laws of competition imposed axiomatically on
individual agents are in contradiction with that self-interest. Pure self-interest and pure
competition (atomicity) are inconsistent apories because the limitation on pure self-
interest imposed by the requirement of perfect competition contradicts the purity of the
self-interest of economic agents as well as the purity of perfect competition. This is so,
frst, because pure self-interest would push economic agents to ignore the requirements
of perfect competition, and second because perfect competition would induce economic
agents to engage in imperfect competition as well! (The union of opposites is a logical
faw frst identifed by Nicholas of Cusa. For a discussion, see Ernst Cassirer, Individual
and Cosmos.) This aporetic aspect of the axioms of Neoclassical equilibrium theory leads
away from its purity or perfection and into the conceptual analysis of its real
implementation which requires conceptual limits on the purity and perfection of both
self-interest and competition. The formal equality of self-interests, their mutual free-dom,
can ensure only a frozen or static mechanical equilibrium or, with Schumpeter, a circular
fow. Self-interest works aporetically, then: on one side, it breaks out of pure
equilibrium, it leads to the impurity of imperfect competition, as a logical-conceptual
requisite of its purity; and on the other side, it leads back to equilibrium as a result of
the countervailing equal purity of other self-interests, that is to say, as a result of the
laws of pure competition.
By postulating a development of the economy from within, Schumpeter is simply making
explicit what is implicit in the axiomatic pure laws of economics reduced to the status
of laws of mechanics: he is trying to break free of the apories of pure equilibrium
theory by introducing the impurity implied in the very purity of self-interest and
competition a self-interest so ab-solute (immune from regulation) that it cannot be
bound even by the externally-imposed, axiomatic laws of pure competition, or what
Schumpeter calls pure laws of economics. As we demonstrated above, if we understand
equilibrium as a state of pure laws of economics and Entwicklung or development as
a state of disruption or crisis of that equilibrium on the way to, in transition to, a new
or fresh or another state or level of economic equilibrium, then such a transition is
simply impossible because equilibrium and Entwicklung (development-through-crisis or
evolution) are categorically diferent concepts or conceptually inconsistent categories.
And yet, as Cacciari has observed (in Transformation of the State and Political Project), the
notions of development and crisis entail the existence of a state of non-
development and non-crisis. Both development and crisis point to an ideal or pure
model whether this be Walrasian equilibrium or Robinsonian tranquility or
Schumpeters circular fow that provides a measure or a metre by means of which we
can say that an economic system is developing or is in crisis. In a later section we will see
how Schumpeter himself shows at one and the same time how his theory of economic
development is bound to the pure model of equilibrium and also how it may be possible
to defne development or crisis in a novel and diferent way that does not imply
negatively the actual existence of a state of theoretical equilibrium or even of a
harmonious state of tranquility or of circular fow.
Once again, as we showed in the discussion above, Schumpeter seems to be quite aware of the
impossibility of the pure laws of economics laid out in equilibrium theory being
logically consistent with the pure economic theory of economic change: in his own
words, he is aware that a dynamic equilibrium is a contradiction in terms, an oxymoron.
Yet he persists with the idea that it is possible for an economic system that allows of
economic change to transit from one equilibrium to another a statement that must be
contradictory given that this transition can be achieved only by infringing against the
axiomatic rules governing equilibrium. Whilst he insists on the distinctness of the
two processes the Statik and the Dynamik in the sense that they are logically
inconsistent, Schumpeter obstinately persists with the attempt to base his entire theory of
economic development, Entwicklung, precisely on the ability to transit these intransitable
processes, to fuse and bond them together.
As we shall see presently, it was this chemical mixture or bonding that Schumpeter envied in the
theoretical work of Karl Marx and specifcally with regard to the concepts of economic
development and of histoire raisonnee. Indeed it is possible to suggest that Schumpeter
found his own theoretical vocation in his own critique of Marxs labour theory of value
a critique that his mentor, Eugen Bohm-Bawerk, had already conducted and that enabled
him to enucleate a novel theory of the nature and causes of interest. Schumpeters
mission was instead to discover the nature and origin of proft and, by imitating Marx,
to combine proft with a specifc economic subject the entrepreneur. Following and
applying faithfully Bohm-Bawerks critique of Marx, Schumpeter insists that Marxs
labour theory of value has as supreme aim the demonstration of the presence of
exploitation in capitalist enterprise, and that this demonstration is to be carried out
under the overarching assumption of perfect competition. Just as he was able to show
that proft is impossible in equilibrium theory, so is Schumpeter able to dispose easily of
the existence of surplus value and of exploitation in conditions of perfect competition.
But it is the sequence of the reasoning that Schumpeter performs with regard to Marxs theory of
surplus value that is most enlightening in tracing the train of thought that led
Schumpeter to his own theory of economic development. Let us examine this line of
thought carefully:
:oreover, it can be shown that perfectly competitive equilibrium cannot e'ist in
a situation in which all capitalist-employers ma(e e'ploitation gains. +or in this
case they would individually try to e'pand production, and the mass e8ect of this
would unavoidably tend to increase wage rates and to reduce gains of that (ind
to )ero. .t would no doubt be possible to mend the case by appealing to the
theory of imperfect competition, by introducing friction and institutional
inhibitions of the wor(ing of competition, by stressing all the possibilities of
hitches in the sphere of money and credit and so on. 1nly a moderate case could
be made out in this manner, however, one that :ar' would have heartily
despisedB.
This is so easy only as long as we see in the theory of surplus value nothing but a
proposition about stationary economic processes in perfect equilibrium. ?ince
what he aimed at analy)ing was not a state of equilibrium which according to him
capitalist society can never attain, but on the contrary a process of incessant
change in the economic structure, criticism along the above lines is not
completely decisive. 0urplus values may be impossible in perfect equilibrium but
can be ever present because that equilibrium is never allo!ed to establish itself.
They may always tend to vanish and yet be always there because they are
constantly recreatedBThis aspect proves to be of considerable importance.
(/?IJ)
Clearly, it is not the case that Marx thought that capitalism can never attain a state of equilibrium: in
reality what Marxs critique of bourgeois Classical Political Economy aimed at was
showing that the reality of capitalism can never be theorized with the analytical
categories of equilibrium analysis. It is not the case, therefore, that Marx thought that
capitalism is incapable of attaining equilibrium because it is in a constant process of
incessant change as if this were just a matter of degree, just a matter of hitting a specifc
quantitative target. Rather, what Marx was saying is that the categories of equilibrium
theory - which are certainly applicable to the Classical Political Economy of Smith and
Ricardo as well as to Neoclassical economics - are conceptually inapplicable to its reality
because it is not a quantitative reality but a political one. In other words, the value involved
in the capitalist mode of production is not an objective quantity; value refers instead to
historically specifc social relations of production. (We shall examine this point closely
in the next section.)
So long as surplus value is seen as an amount, a value over and above what is needed for labour-
power to reproduce itself (sur-plus, Mehr-wert or added value, in German), then it is
clear that the laws of competition can serve to regulate the distribution of this fxed
amount in such a way that any initial inequality or exploitation is gradually eliminated to
a point where no value is extracted exploitatively from workers for the simple reason
that perfectly competitive equilibriumwould unavoidably tend to raise wage rates and to
reduce gains of that kind to zero. We can see therefore that if we postulate the existence of
equilibrium as an axiom of economic analysis, then surplus value or proft is impossible
because the axiomatic requirement of equilibrium will reduce all economic values and
prices to relative prices which cannot be fxed until all transactions have been
conducted once and for all which in turn excludes the notion of surplus value when
combined with perfect competition. Similarly, if we theorize surplus value as an objective
quantity instead of as a quantity dependent on relative prices, then perfect competition
will ensure equilibrium.
But the point is that although surplus value may be impossible in equilibriumit can ever be present
because that equilibrium is never allowed to establish itself! And it is never allowed to
establish itself not because of frictions in the operation of market competition not
because of that imperfection -, but rather because the very notion of surplus value
has a categorically diferent meaning once the productive system is transformed by the
actions of its participants, of its economic subjects!
In other words, it is the very reduction or reifcation of surplus value to a thing, to an
amount, that (a) makes equilibrium theoretically possible, and (b) makes possible the
gradual disappearance of surplus value or proft by means of competition, because
capitalists will raise wages until all surplus value and exploitation vanish! To paraphrase
Schumpeters own words, surplus value may tend to vanish because of inter-capitalist
competition and rivalry; but it will never so vanish because it is constantly recreated. But
for something to be incessantly recreated it simply cannot be a thing or a quantity
or a measurable value: surplus value must be a social relation! If the determination of
proft or surplus value is changing incessantly with the economic system, then this
incessant change cannot be quantitative but must be qualitative because quite evidently
surplus value and proft are not entities that can be determined precisely either in
relative prices, as in Neoclassical equilibrium, or in absolute prices determined by
socially necessary labour time, as in Classical equilibrium.
What this means is that once we accept that perfect equilibrium does not describe the reality of
capitalism in which surplus value or its monetary equivalent, proft, is the essential
feature of economic activity, then we must accept that capitalism is not a thing or
quantity or measurable value, but it is rather a political value! In short, once we
change our analytical perspective from the Statik of equilibrium analysis to the Dynamik
of economic development, then even the subject-matter of our theory changes, it is trans-
substantiated, and we must shift from the quantifable relative or absolute values or
prices of equilibrium theories to the ethico-political values of development theory!
Pure competition leads to a stationary and stagnant state because, although it makes proft-seeking
imperative or axiomatic, under its conditions proft-making is utterly im-possible! But
then, it is also the purity of competition - the political antagonism implicit in its
conceptual inclusion of proft-seeking or the proft motive - that logically implies or entails
its actual implementation as proft-making and therefore the competitive advantage of
innovation. It is thus that market process becomes a conceptual requirement of the pure
notion of equilibrium: market process is the applied version of pure equilibrium theory:
market process is the extrinsication of equilibrium. Market process occurs when pure
theoretical proft-seeking is allowed to become its impure or applied historical version
that is, proft-making.
It follows therefore that the transition from proft-seeking to proft-making involves the exit from
conditions of perfect competition in such a way that some competitors will be dis-advantaged
whilst some will gain a competitive advantage. This advantage must be of a kind that no exchange by
the disadvantaged competitors will be able to eliminate, and that is not derived from external or
exogenous factors. The only endogenous factor then is the proft-seeking motivation itself and
the ability of some competitors (a) to change the production function, that is, to innovate, and (b)
to restrain other competitors from adopting the innovations that lead to the new production
function. Factor (a) necessarily involves innovation as defned by Schumpeter; and such innovation
could hypothetically be originated by a single economic agent. But factor (b) necessarily requires
the adoption of competition-restrictive measures, that is to say, of political measures! And
these quite evidently cannot be carried out by a single economic agent but must be enforced by
some economic agents innovative entrepreneurs for Schumpeter - against others.
For any kind of competition to exist, short of all-out confict, certain rules of the game must be
agreed upon. But these rules cannot encompass every aspect of competition because, if
they did, the end result would be competition so pure that no real competition could
take place! At equilibrium, competition would be restricted and confned to being a
velleity the sterile intention to seek proft as a necessary trait of self-interest. But once
this velleity of proft-seeking is given the opportunity to be implemented as proft-making,
this fact by itself requires a fundamental change in the modus operandi of the economy, one
in which for proft-making to be at all possible (a) innovation and (b) policies to protect
it must be allowed to take place. Therefore, for actual competition to take place, there
must always be room for competitors to innovate, that is to say, to introduce new and
unforeseen or unforeseeable strategies or techniques that will undermine the existing
competitive rules founded on the formal equality of the competitors. But the possibility
of such innovation and therefore of such inequality will result inevitably in political
confict and antagonism that will have either to be mediated politically or else to be
resolved violently. In either case the search for proft goes well beyond the nature of
proft itself as utility or welfare or ownership to the very essence of political
power!
(A similar point is made by Demsetz in Freedom and Coercion.)
Conventional competition competition as it is theorized in all non-Schumpeterian economics
contains the ineluctable tendency, in terms of its axioms and its aims, to induce a state of
equilibrium or stagnation. That is because innovation is not seen as a necessary aspect of
the coercion intrinsic and endogenous to the very concept of competition! Yet to be truly
competitive, and therefore to be able to realize a proft, the capitalist entrepreneur must
compete with existing businesses not just on price or quantity but indeed on
innovation, that is to say, by introducing new products or techniques that
fundamentally undermine and threaten to obliterate the business models of competitors!
Competition without innovation would lead sooner or later to a stationary state of
equilibrium.
;ll the more controversial is the proposition that entrepreneurs4 pro*ts and
related gains which arise in the disequilibria caused b$ the impact of
inno&ation are, as far as the business process itself is concerned and apart from
consumers4 borrowing, the only source of interest payments and the only 9cause9
of the fact that positive rates of interest rule in the mar(ets of capitalist society.
)his means that in perfect equilibrium interest would be *ero in the
sense that it would not be a necessar$ element of the process of
production and distribution or that pure interest tends to &anish as the
s$stem approaches perfect equilibrium. -roof of this proposition is very
laborious #9, because it involves showing why all the theories which lead to a
di8erent result are logically unsatisfactory, (%usiness /ycles, p."KL. ?ee also
/?IJ, p."#" on ,The 1bsolescence of the 0ntrepreneur2.)
It may well be that the search for proft motivates innovation; it is certainly not innovation that
motivates the search for profts. And yet it is most certainly not the search for profts in
and of itself that forces economic agents to innovate. So long as we defne proft in
terms of pure competition as all economic theory does, then it is impossible to explain the
existence or possibility of proft! For innovation and economic change to occur,
competition must be of such a character that at once it coerces and it enables some
competitors to gain an advantage over other competitors by undermining not just their
proftability but also their very existence! In other words, competition must reach far
beyond the sphere of exchange; it must reach to the very foundations of civil society
competition must extend to a type of confict that goes beyond exchange and that
encompasses the political relations between economic agents. Competition must include
political antagonism!
.n other words, the problem that is usually being visuali)ed is how capitalism
administers e#isting structures, whereas the relevant problem is how it
creates and destroys them. ;s soon as it is recogni)ed, his [the
economistHs outloo( on capitalist practice and its social results changes
considerably.
The *rst thing to go is the traditional conception of the modus operandi of
competition. 0conomists are at long last emerging from the stage in which
price competition was all they saw. ;s soon as quality competition and
sales e8ort are admitted into the sacred precincts of theory, the price
variable is ousted from its dominant position. 3owever, it is still
competition within a rigid pattern of invariant conditions, methods of
production and forms of industrial organi)ation in particular, that
practically monopoli)es attention. 1ut in capitalist reality as distinguished
from its te#tbook picture, it is not that kind of competition !hich counts
but the competition from the ne! commodity, the ne! technology, the
ne! source of supply, the ne! type of organi2ation3. " competition !hich
commands a decisive cost or quality advantage and which strikes not
at the margins of the profts and the outputs of existing frms but
at their foundations and their very lives. (/?J, p.E$)
Even in the case in which competition is over price, it can be said that lower prices can be
achieved from a position of pure competition only when some form of innovation is
present!
Competition, then, may well stand for an alternative way of describing political antagonism: the
problem is, however, that the overall regulation of this competitive antagonism is to
facilitate proft-making, and therefore the owners of capital; and secondly that
competition has the overriding role as a repressive weapon against workers in competition
with one another over employment, wages and working conditions.
Proft-seeking is the subjective motivation behind innovation; but innovation is the objective
factor for the existence of proft, for proft-making as a practical activity! Except that, in turn,
the implementation of innovation is impossible without impure or imperfect competition. And
imperfect competition implies necessarily the presence of political antagonism to decide just how
imperfect competition will be and to whose advantage. In equilibrium theory, although
individual confict is certainly present because economic agents seek to maximize their individual
utility or self-interest, they can do so only through exchange, and therefore this individual
confict cannot axiomatically become political again because individual economic agents are
not allowed to combine their self-interests. But this means that proft-making, as distinct from
proft-seeking, is axiomatically impossible in a Neo-classical economy and that it will be
whittled away to zero in a purely competitive Classical economy! In other words, pure
competition is at once inconsistent both with proft-making and therefore also with innovation,
unless its defnition is extended to cover not just exchange but the political antagonism of
imperfect competition as well!
Thus, proft-making and innovation can be implemented only in a state of imperfect
competition because a state of perfect competition excludes axiomatically the possibility
of advantage that comes from innovation that is to say, the entrepreneurial
premium, Schumpeters proft, would be neutralized instantly. The entrepreneurial
premium or proft requires this friction between the proft-seeking or motive of pure
competition and the proft-making of innovation. This friction is what lies between
pure and imperfect competition; it is the battleground of politics and political institutions.
(Friction or traction, Wittgenstein would say, is what you need to be able to walk on a
perfectly smooth surface. Pure competition is just such a surface: it implies the static
plane of proft-seeking, but it cannot provide the dynamic traction of proft-making!)
Schumpeter acknowledges the necessity of this political intervention:
The introduction of ne! methods of production and ne! commodities is hardly
conceivable !ith perfect 4 and perfectly prompt 4 competition from the
start. ;nd this means that the bul( of what we call economic progress is
incompatible with it. ;s a matter of fact, perfect competition is and
always has been temporarily suspended whenever anything new
is being introduced automatically or by measures devised for
the purpose 4 even in otherwise perfectly competitive conditions. (5067,
p."=L)
The commonsense of this tool of analysis may be formulated as followsM *rst, if
we deal with, say, the organism of a dog, the interpretation of what we observe
divides readily into two branches. @e may be interested in the processes of life
going on in the dog, such as the circulation of the blood, its relation to the
digestive mechanism, and so on. But however completely we master all
their details and however satisfactorily we succeed in linking them up
with each other this will not help us to describe or understand how
such things as dogs
Noseph ?chumpeter, %usiness /ycles. ("9#9) K9
have come to exist at all. !bviously we have here a di"erent process
before us involving di"erent facts and concepts such as selection or
mutation or generally evolution. .n the case of biological organisms nobody
ta(es o8ense at the distinction. There is nothing arti*cial or unreal about it and it
comes naturally to us< the facts indeed impose it on us.
.t is incessant change in the data of the situations, rather than the inadequacy
of the data of any given situation, which creates what loo(s li(e
indeterminateness of pricing. @e conclude, on the one hand, that we must
ta(e account of this pattern when dealing with the process of change which it
is our tas( to analy)e in this boo( and which must be e'pected to create
precisely such situations, and, on the other hand, that it does not paraly#e the
tendency toward equilibrium [8leichge!ichtstenden2(%/, p.$#)
There comes a time when even the bourgeoisie must contemplate its own surcease. In this
revealing passage, Schumpeter canvasses with Heideggerian Entschlossenheit (or, as the Freiburg
philosopher would put it, with resoluteness in confronting being-toward-death) the eventual
demise of capitalism. The very reality of social change and of economic evolution contains the
certainty of capitalist extinction: The facts indeed impose it on us. This is a reality that equilibrium
analysis by its very formal character quite simply cannot countenance. There is no being-toward-
death in equilibrium, no Da-sein and no extinction. But the important realization in
Schumpeters refection above is not so much this existential dread, the fact that formal theory
can never encompass existence (cf. Kierkegaards vehement critique of Hegels dialectic); it is
rather the fact that equilibrium theory completely neglects the most essential aspect of economics
the pro-duction of goods and services and therefore the metabolism of the economic
system with the physical environment of which human beings are part (this is indeed the very
frst concern of Schumpeters intellectual mentor, Eugen Bohm-Bawerk, at the beginning of The
Positive Theory of Capital).
The certainty that equilibrium theory afords lies in the axiomatic determination of prices. Yet,
once we allow the market participants of equilibrium, which as we have shown are merely
mechanical inert bodies, to become political economic agents, then the prices of the economic
system become wholly indeterminate, precisely because the system indergoes incessant
transformation or mutation. For Schumpeter, the problem with both Classical and Neoclassical
economic theories is that their formalization of the relations between the component parts or
functions of the economy (supply, demand, investment, consumption, interest, monetary mass), is
entirely static or closed or self-referential, and is therefore entirely incapable of accounting
for the equally observable fact of the dynamic movement of the capitalist economy, for its
mutation from one equilibrium to another, - equilibria that are quite diferent not only in
quantitative but also in qualitative terms! Capitalist development is not just horizontal quantitative
growth or development (Wachstum); it is above all vertical qualitative mutation or evolution
(Entwicklung). Schumpeters initial objection to the translation of Entwicklung with development
rather than evolution is all here: development refers to incremental change; evolution
points starkly at the possibility of extinction. Of course, the term evolution has its own
problems in the sense, frst, that capitalism is not a dog (however much we Marxists woud like
to think of it as such), in other words it is not an animal species with genes so that the analogy is
very imperfect; and second that evolution, as Schumpeter himself pointed out, has a tone of
complacency about it. Indeed, it is even possible to challenge the status of equilibrium
economics as science given that, to reprise Schumpeters metaphor of the circular fow or
Kreislauf, equilibrium analysis is just that mere ana-lysis! It is, as it were, a descriptive or ana-
tomical schema that can only photograph or sketch an economic system and classify its
individual organs. It relies exclusively on pure exchange and on the maximization of welfare or
utility from the redistribution of given endowments. Above all else, because equilibrium is
quite simply a formal descriptive schema, it exists only logically, but it does not ec-sist in the sense
that it does not face the certainty of death, in the case of its individuals, or the certainty of
extinction, in the case of the capitalist economic system. Once the certainty of ontogenetic death
and phylogenetic extinction are taken into account, then we understand that the individuals
that make up the economic system must deal with their physical environment, with their physis:
this is the metabolism that is entirely and conceptually absent from the equilibrium schema and
that is instead essential to the notion of market process, that is, to the unfolding or extrinsication of
an economic system in the physical world.
What equilibrium analysis cannot do is understand and explain how the economic system
metabolises, how it interacts with its social, political, and physical environment, how it grows,
mutates, and dies or, phylogenetically, how it evolves and becomes extinct. Seen from the point
of view of market process which, as we explained earlier, is the quasi-logical or dialectical
conceptual extrinsication or unfolding of the concept of equilibrium, its Heideggerian ec-sistence
seen from this perspective, equilibrium is a purely descriptive or classifcatory exercise: it merely
describes the logical and functional relation of each component of an economic system to other
components, and then determines the price matrix that will maximize the individual utility
schedules of its self-interested individuals.
But two essential points must be made and understood: frst, the prices or exchange rates of
goods at equilibrium are mathematical identities that do not tell us what is being exchanged
except for the purely metaphysical notion of utility. The equi-valence of the exchange in a
static framework merely destroys or dissolves in the identity of the objects exchanged, in their
formal equi-valence, their diference (cf. Heidegger, Identity and Diference) - in such a way that the
exchange is not pro-ductive, it is not meta-bolic there is no change in this ex-change! Even
then, this exchange of utilities is quite simply impossible when we consider the atomicity of
the self-interested individuals of equilibrium theory. For it is quite absurd to imagine that such
absolutely self-interested and in-dividual entities Aristotelian entelechies! could ever be
able to exchange anything at all! For any exchange to be possible or meaningful, there must be a
sub-stance that makes the objects of exchange equi-valent of the same value. But it is precisely
this Objective Value that is utterly absent in equilibrium analysis because of the bottomless in-
dividuality and irreconcilable self-interest of its market entities, of its individuals! The only
value present in equilibrium is Subjective Value which, as an inevitable result of its
subjectivity, is quite simply incommensurable. But every self-interest must share some
common element with other self-interests to give meaning to the confict of interests (the
diference) that makes exchange possible. Every com-petition must have an object over which
competitors com-pete (seek together)! This object, this sub-stance or quidditas, this subject-matter
that forms the communion of the exchange (the contractual meeting of the minds over an object,
its syn-allagmatic [to bring the diferent together] or cat-allactic [to turn enemy into friend through
exchange] character) is entirely missing in the theory of equilibrium!
Second, as a corollary of the frst point, equilibrium theory allows only for the exchange of
goods and services: it tells us nothing about how they are pro-duced, that is, it tells us about
the subjective estimations by market participants of their goods for exchange with respect to
one another, but tells us nothing about the relation of market participants to their natural
environment. Third, market participants are mere inert bodies that obey the axiomatic conditions
imposed by equilibrium theory: they are certainly not economic agents making their own
spontaneous decisions. And fnally these economic agents are not allowed to interact with one
another or with their physical environment an exclusion that automatically removes the
object, the subject-matter of economics and eschews politics from the feld of economic inquiry
because (a) there is no object over which to haggle (there is no disputandum, no com- of com-
petition and no con- of con-fict), and (b) atomic in-dividuals cannot form friends with whom
to fght foes (cf. Carl Schmitts defnition of the Political in The Concept of the Political).
In other words, seen from the perspective of the market process, equilibrium (a) is internally
inconsistent because it contains aporetic and antinomic concepts, (b) does not allow for the
ontological and phylogenetic ec-sistence of its individuals in the sense that their existence is
purely logico-mathematical , (c) does not allow for pro-duction, that is, for the metabolic interaction
of human beings (alone or together) with their physical environment, and (d) is entirely devoid of
Politics because of its individualistic existential or ontogenetic axioms which exclude
phylogenetic reality. As we have seen, without this metabolic or frictional interaction with
themselves (the Political) and with the world (phylogenesis) without the physis -, capitalist
competition or enterprise is unthinkable because innovation and proft-making are unimaginable,
and so too therefore is economic change. The self-interested individuals that make up the
market mechanism of equilibrium analysis are inert bodies that obey mechanically the axiomatic
pure laws of competition imposed externally and logico-mathematically on them.
There are two essential aspects to metabolism here that are entirely diferent from and make it
incompatible with equilibrium analysis. The frst is that the economic system is trans-formed
from within by the spontaneous actions of its economic agents. And the other aspect is that
these economic agents transform the economic system not merely relatively to one another as
atomistic individuals, that is, considered ontogenetically as they must do axiomatically in
equilibrium theory which involves only relative prices or exchange rates and therefore only
pure exchange indeed an exchange so pure that it lacks an object -; but they also
transform the economic system by interacting (a) with one another as aspects of being human,
that is to say, phylogenetically, and (b) with their physical environment, which includes not just
surrounding nature, but also their own physical being, their physis.
We have therefore two questions: the frst is the transcendental question of existence, and the
second is the immanent question of metabolism. The former involves for the study of economics the
ontological question of why is there an economic system at all and not nothing (cf. Heideggers
question why is there something and not nothing at all? in Einfuhrung in die Metaphysik); and
the latter involves the question of why the economic system is what it actually is now what is its
material history. These are the crucial questions that Schumpeter attempts to consider and fails
because he limits himself to the transcendental question but never even remotely tackles the most
important question the historico-materialist one of metabolism.
It is simply irrelevant and incorrect to accuse Schumpeter of failing to integrate theory and history.
Given that Schumpeter never even considers the question of immanent metabolism, given that he
considers only the question of transcendental existence that is to say, the application of an
abstract formal schema to empirical facts -, there was simply no way in which these antithetical
concepts could ever be integrated! Such a criticism of Schumpeter is a lucus a non lucendo a fre
that will not light because of the antithetical terms in which the question is posed by
Schumpeter. And Schumpeter poses the question in these terms precisely because he is
attempting to make whole the literal meaning of to integrate! the social reality of
capitalism that is broken and fragmented! As a result, Schumpeters theory must forever oscillate,
like a pendulum, between logico-mathematical formalism constituted by the functional-analytical,
descriptive-anatomical schema of equilibrium theory, on one side, and the subjective-voluntarist,
ethico-political hypostasis of the Innovationsprozess on the other.
To deplore the absence of reality in equilibrium theory (vedi Lawson, Economics and Reality) or
Schumpeters failure to integrate theory and history (vedi Mouras homonymous essay) is
to make the biggest error of all! And that is that no economic theory, however
sociologically or historically informed, will be able to refect the antagonistic reality of
capitalism scientifcally! No theory - as theory! - will be able to integrate what is the broken,
fragmented antagonistic reality of capitalist society! Lawson and Moura have completely
misconstrued the ineluctable ethico-political instrumental purpose of bourgeois
economic theory behind its scientifc mask and indeed the instrumental purpose of
any economic theory, that is, of any theory that attempts to present as scientifc what
is necessarily a partisan (Schmitt), non-neutral account of social reality! (Cf. Webers
Objektivitat for what is decidedly the greatest attempt from a bourgeois social theoretician
to com-prehend these paramount issues.)
Lawson and Moura make precisely this mistake of confusing political antagonism with existential
human choice, which is a purely individual category that conceptually obscures the
sphere of politics because the Political cannot be reduced to the humanistic abstractions of
individual existence and free will (not to mention the theological one of the soul cf.
Jaegers The Theology of the Early Greeks). Like Schumpeter, in their attempt to outline and
prescribe a historically-conscious or refective economics - they confne themselves to
transcendence and therefore fail to consider what is the real problem with Schumpeters
pure economic theory of economic change - namely, the complete neglect of metabolism,
that is, of the sphere of pro-duction and of the social and political antagonism that is the
very essence of the capitalist mode of production.
To be sure, Schumpeters theory does rest on the ineluctability of confict, the universal Eris, not just
in capitalism but in the entirety of existence that is the entire point of his Dynamik and,
as we are about to see, of his entire rationalisation of the scientifc need for a Statik! Like
Nietzsche, Weber and fnally Heidegger, Schumpeter presents and understands social
and political and economic confict as an absolutely ineliminable reality not only of
human, but indeed of all existence. As we remarked above, there is no dialectical spiral
in Schumpeter and in the entirety of the negatives Denken from Schopenhauer to Hayek:
there is only the eristic pendulum of stark opposition (Gegen-stand) between human self-
interests that are transcendental and ontogenetic (cf. Heideggers notion of Da-sein and
Nietzsches notion of exploitation) and therefore admit of no immanentistic
phylogenetic and dialectical reconciliation (cf. Hegels notion of Versohnung). That is
the whole point to the methodological individualism of the Austrian School.

Let us look afresh at the lengthy quotation from Schumpeters Business Cycles with which we
started this review of his theory of economic development.
&he commonsense of this tool of analysis may be formulated as follows- first, if we deal with, say, the organism of a
dog, the interpretation of what we observe divides readily into two branches. 9e may be interested in the
processes of life going on in the dog, such as the circulation of the blood, its relation to the digestive
mechanism, and so on. =ut however completely we master all their details, and however satisfactorily we
succeed in linking them up with each other, this will not help us to describe or understand ho" such things as
dogs
8oseph (chumpeter, =usiness 'ycles. 1B6762 56
have come to e*ist at all. '$viously# "e have here a different process $efore us# involving different facts and concepts
such as selection or mutation or# generally# evolution& 0n the case of biological organisms nobody takes
offense at the distinction. &here is nothing artificial or unreal about it and it comes naturally to us: the facts
indeed impose it on us.
0t is incessant change in the data of the situations, rather than the inadequacy of the data of any given situation, which
creates what looks like indeterminateness of pricing. 9e conclude, on the one hand, that we must take
account of this pattern when dealing with the process of change which it is our task to analyze in this book
and which must be e,pected to create precisely such situations, and, on the other hand, that it does not
paralyze the tendency toward equilibrium *Gleichge"ichtstenden,+1-usiness Cycles, p.I72
As we can see, Schumpeter discusses in the same breath two matters that he does not link explicitly
but whose link is necessary nonetheless: and the reason that he fails to make this link
explicit is that he does not see that the link is indeed necessary! First, there is the fact that
his shift in approach to economic theory from static analysis (Statik) to dynamic theory
(Dynamik) involves the examination of the economic system not as an aggregate of inert
mechanical bodies governed by pure economic laws that mirror exactly the laws of
mechanics, so that any change to that system must be due to exogenous factors, but
rather as a living organism made up of component members that interact meta-bolically both
with one another and with their physical environment. But then, again discussed in the
same breath, there is the fact that this novel approach of treating the economic system as
a living organism so that there is incessant change in economic data means also that
now prices are indeterminate, although Schumpeter hastens to add that this does not
paralyze the tendency to equilibrium, falling thus into the error that we pointed out
previously, namely, that of treating Dynamik and Statik as a categorical continuum when
he himself admits throughout his oeuvre that the two processes, evolution and
equilibrium, are categorically incompatible.
As we saw in an earlier section of this review, the real reason why prices must be indeterminate in
Schumpeters novel approach the Dynamik - is not so much that there is incessant
change in economic data, as Schumpeter seems to believe, but rather that the economic
system is now seen as a living organism that interacts metabolically with its physical
environment- with its physis. Schumpeter does not see that his economic agents
(Wirthschafts-subjekte) cannot be treated as atomistic individuals because these
presumed in-dividuals are now able to pro-duce, to innovate, rather than merely to
exchange existing endowments. In other words, in the Dynamik, the individual
component members of the economic system become economic agents able to initiate
economic activity, that is to say, they can pro-duce new economic resources and needs rather
than merely exchange existing or given economic resources - the endowments of
neoclassical equilibrium theory. These presumed individuals are now theoretically able
to produce for exchange and to exchange for production, and not simply to exchange.
Because of this, it is impossible to attribute a scientifcally objective or determinate or
absolute value or price to production because prices regulate the distribution of the
product and it is quite impossible to attribute both the ownership of the product and
the economic claim to the pro-duct on the part of diferent pro-ducers because pro-duction
involves the metabolic interaction of individual economic agents, singly and collectively,
with their physical environment. And this metabolic interaction is impossible to measure
to value and to price because it constantly changes the relations among individual
producers in both a quantitative and a qualitative sense. To repeat, it is impossible to
attribute ownership and economic claims by producers to production because
economic agents are now considered not merely to exchange existing resources
(endowments) with one another, but instead are also able to produce new resources by
interacting meta-bolically with the physical environment in which the economic system
operates.
And they interact metabolically with the physical environment not ontogenetically, as atomistic
individuals; instead, they must so interact phylogenetically, as component members of a
living organic community. For it is impossible for an economic system that is a living
organism to attribute ownership claims to its individual members given that, as a living
organism, it must interact metabolically with its physical environment! Indeed,
although it is tempting to refer to this physical environment as the external physical
environment, it is quite misleading to do so because there is nothing external to a
living organism about the physical environment in which it must metabolize.
This is why prices are indeterminate in this new framework of social analysis: if we treat the
economic system not as a closed totality but rather as a living organism metabolizing
with its physical environment it is quite impossible to calculate at all, through any price
mechanism, the contribution of individual members to the production or welfare of the
living organic community.
We can see therefore that by moving away from Statik to Dynamik Schumpeter ought to have
added three new inter-related theoretical components to his analytical framework: the
frst is social labour, the second is production, and the third is metabolism. It can
be objected that Schumpeter meant to include all three elements in his overall category of
innovation, but we will show presently that although the concept of innovation
certainly includes that of pro-duction, intended as the making of fresh resources and
needs, Schumpeter fails to theorize pro-duction explicitly as metabolism or living
activity, and the other two elements he either confuses (individual labours with
social labour) or wholly neglects (metabolism) because of his obsessive focus on the
economic system as totality and on metabolic production as individual labour
rather than social labour.
The fact that the economic system is now transformed from within by its economic agents who are
not subject to infexible axioms set from outside , this fact means that the prices that obtain in
the economic system must be indeterminate for the simple reason that it is impossible to assign a
logico-mathematical or scientifcally absolute value on the innovations that transform the
economic system by means of an objective market mechanism. To be objective, prices and
values in Schumpeters pure economic theory of economic change would have to be determined
objectively, from outside - as if the economic system were a closed system or totality. But this is
precisely what his theory of economic development (Entwicklung) cannot allow because its central
postulate is that any change, mutation, trans-formation or e-volution of the economic system
must be endogenous, must come from within as well as be incessant, and therefore the change
or mutation must be in relation to the without, the physical environment in which the
economic system operates not as a closed system but as a metabolic living organism.
Again, what makes prices and values indeterminate is not so much that the economic system is
in a state of incessant change, as Schumpeter maintains, but rather it is the fact that this
incessant change is the outcome of decisions and actions taken by economic agents - and not by
the inert mechanical bodies of neoclassical equilibrium theory - in relation to a physical
environment that allows them to produce metabolically fresh resources and needs that constantly transform
the existing relations of production between economic agents both individually and collectively. For this
reason, the very notion of innovation is simply categorically incompatible with the objective
(meaning internally fxed) determination of relative prices based on Subjective Value that obtains
in Walrasian equilibrium or indeed with the objective (meaning externally fxed)
determination of absolute prices prescribed by the Labour Theory of Value of Classical Political
Economy.
Because this dynamic economic system is transformed from within by the innovative actions of
what are now properly-called economic agents and not by the inert mechanical bodies of
static Walrasian equilibrium for this reason, the economic system is no longer one of pure
exchange but it becomes instead one in which pro-duction takes place, one in which goods and
services are pro-duced (brought forth) metabolically by the interaction of economic agents not
only with one another but also with their physical environment. This means that not only are
economic agents interacting individually with one another and with the physical environment: but
it means also that the economic system cannot be examined in its entirety, as a whole, as a
totality, precisely because it is interacting meta-bolically with its physical environment just like a
living organism. Only when exchange involves pro-duction can this exchange be more than a
sterile id-entity (the same entity); only then can it make a dif-ference (a practical,
unquantifable, qualitative change): only then can there be change in the ex-change between
economic agents - precisely because the exchange is un-equal in that its value is now
determined not relatively to its individuals, not subjectively, but collectively in metabolic relation
between the economic system as a living organic community and its physical environment.
This means that market exchanges no longer constitute a zero-sum game but efectively change
the internal relations of individual participants both quantitatively and qualitatively so that prices
and values are not just indeterminate but in fact are meaningless in any other than a political sense
in the sense that any equality or equi-valence can be established only politically, either violently or
legitimately. In other words, unlike the Statik, in the Dynamik pure exchange is no longer
possible: economic agents exchange to pro-duce and pro-duce to exchange. This means essentially, as we
are about to see, that pro-duction is living activity or living labour and that there can be no
individual labours but only social labour. Put diferently, labour is a phylogenetic, not an
ontogenetic category.
Schumpeters likening of the economic system to a dog in the quotation above reveals most
clearly his mental confusion in this regard: because if the economic system is regarded as a living
organism that, frst, interacts metabolically with a physical medium in which it can evolve, and
therefore, second, can assess and theorize this evolution in relation to some frame of
reference that can be objective only in the sense of being the result of decisions and actions
taken by the component members of that living organism as an organic community, then it is
obviously quite impossible to assign and attribute precise values and prices to the contributions
of individual members of that living organism as if these individual members or economic agents
were separable from the living organism! It is obvious that any such separation and assessment
of individual contributions can occur only by means of ethical or political standards that the
organic community imposes on itself but most certainly not by means of an absolute scientifc
standard.
The fact that Schumpeter sees the economic system on one side as a living organism - as a dog
- that must confront its physical environment, and then on the other side as a collection of atomic
individuals who are able to mutate the economic system from within through their autonomous
innovations without interacting as a collective living organism with their (external) physical
environment this fact is the source of all the confusions in which Schumpeter gets mired. On the
one hand, Schumpeter wishes to examine the economic system as a closed totality whose
component members can be treated as isolated individuals; but then, he forgets that this is
impossible without considering how this totality or system must interact metabolically with its
physical environment and therefore how it can no longer be treated as a totality or system
that can be mutated from within by its individual members without this mutation or
evolution having to be assessed not from the viewpoint of the atomic individual but
exclusively from the viewpoint of the living organism, of the living organic community, by
reference to its physical environment !
The change from an atomistic theory like that of equilibrium in which estimations of value are
entirely individual and subjective and therefore can be described not measured, if by measure we
mean an absolute standard! and determined tautologically in terms of relative prices, to an
organicist theory in which the economic system is measured against its physical environment in
terms of a politically agreed and collective standard , this change in the theoretical framework of
analysis means that now the economic system is no longer based on competition between atomic
individual members but rather on an organism or better an organic community (in the case of
animals, a species) that is not a closed totality but is instead a living organism dealing meta-
bolically with its physical environment!
The point here is that if we start with an atomistic state like equilibrium, then the rules of
exchange must be imposed exogenously whilst at the same time it is impossible to assess the
efciency of the economic system as a whole - as an economic system, at the systemic level,
as a totality, because that totality would have to encompass its physical environment and
therefore it could never constitute such a totality intended as a closed system whose prices and
values are determined internally or self-referentially. The axiomatic atomicity of equilibrium
theory, by making all values strictly individually subjective, forces us to treat the economic system
precisely as such a closed self-referential system or totality and prevents us from treating it as
a living organism dealing openly or metabolically with its physical environment! Yet, if we
assume that the economic system is a living organism, then it will be impossible to determine
individual contributions from its members to overall social production or wealth precisely
because there are no individual contributions or individual labours, whereas in fact we have
social contributions or social labour.
@erhaps the greatest mistake that #dam (mith made in his analysis of the division of labour 1and therefore
of production2 in =ook &wo of The .ealth of /ations was to treat this division of labour as the effect of
e,change and not as the cause of e,change" #nybody with any spark of historical and anthropological
knowledge and any scintilla of thoughtful reflection will be able to conclude that human beings are able to
e,change anything not only because they cannot engage in individual labours but because they are
physiologically incapable of surviving, like the ro$insonnade in >efoe/s 0o$inson Crusoe, as isolated
individuals" $uman beings quite simply could not even e*ist as individuals, let alone be able to
survive, in complete isolation" #ll human labour is social labour and cannot even be conceived as
individual labour" =rian %oasby has reminded us that e,change is a matter of life and death, without
for that matter being able to perceive the inevitably phylogenetic nature of human labour. =ut this notion of
the indispensability of the division of social labour and therefore of e,change" is a conclusive
counter4argument to the $obbesian notion of the state of nature on which ?eoclassical equilibrium
theory is based 4 as a system made up of atomistic self4interested individuals.
Atomistic theory can determine only relative exchanges whereas organicist theory can assess only
communal goals: the two systems are simply incomparable and incommensurable because
the frst can be viewed as a totality because its individuals are mechanically inert bodies,
whereas the second is in constant becoming and the decisions and actions of its individual
members cannot be assessed individually. Neither theory can ever devise an Objective Value
for the simple reason that living activity whether human or otherwise - cannot be measured in
terms of a standard of value that is external to that activity or absolute! For human
communities, any such standard of value can be applied only as the result of political
domination by some social agents over others or else by political consent but never
objectively in terms of an absolute standard!
Once again, the central point that we are making here is that, once we consider human society
from an organicist rather than an atomistic viewpoint, economics as a sphere of social analysis
separate from politics becomes quite simply im-possible because the partiality of all economic
concepts, the im-possibility of reducing human activity to purely economic categories, implies
their dissolution in any scientifc sense. It was this socio-political separation (Trennung) of
human society between economy and politics, between private property and political institutions,
between bourgeois and citizen, between civil society and political State that was the ultimate
theoretical concern of the rationalist philosophers from Rousseau and Hegel to Marx. And it was
the assertion of the ultimate im-possibility of over-coming and super-seding this separation
(Trennung) in fact, the impossibility of any social synthesis both at the economic level, between
economic agent and product, and at the sociological level, between private (property) and public
(political) spheres that is the central and essential feature of the negatives Denken from
Schopenhauer to Nietzsche and Weber, to the Austrian School and Heidegger.
Indeed, it is this very separation (Trennung) extended to the individual level of any economic
agent be it a worker or entrepreneur - from (a) the immanently social nature of production in
a phylogenetic and physio-logical sense (not the division of labour, which is an empty
abstraction, but the division of social labour which bourgeois economic theory reduces to
individual labours), (b) the means of production, and (c) the pro-duct - that constitutes the
most indispensable foundation of the negatives Denken at the economic level as a reaction to Hegels
dialectic of self-consciousness frst expounded in the Phenomenologie des Geistes and later
elaborated in Marxs critique of political economy. As Weber makes clear from the very opening
of Parlament und Regierung, the matter of ownership is always and everywhere one of sheer
violence: it is the overlord who enforces the separation of the peasant from the land, of the artisan
from the tools and indeed of the soldier from the weapons. And therefore also from the pro-
duct of their activities. Schumpeter himself draws the essential distinction between directing
and directed labour in the opening chapter of the Theorie in a manner that clearly indicates the
lack of con-nection between worker and pro-duct. The simple fact that the claim by the
Entrepreneur to the proft generated from innovation can only be legal means immediately
that this claim will be disputed and will be the subject of confict and that indeed even the
adoption of innovations will give rise to social confict.
The insuperable contradiction of Neoclassical Theory and of the Austrian School is that they
frmly espouse the negatives Denken with regard to this separation the Trennung - at the
individual and at the social level, and yet they claim to be able to establish a scientifc
economic link between producers on one side and their claims to the distribution of the
product on the other side!
Economics as Metabolic Interaction
The novel metabolic framework of social analysis that we are outlining here allows the assessment
of the capitalist mode of production not from the theoretically meaningless viewpoint of
economic science which, as we have demonstrated, is an absurdity but from a materialist
and immanentist standpoint which is conscious of its political foundations without, in its turn,
reducing the Political to its humanist and phenomenological that is to say, to its transcendentalist
distortion. Because Schumpeter shares the atomicism or methodological individualism of
Neoclassical Political Economy which seeks to determine welfare purely in terms of individual
contributions, then it is obvious that he must cling desperately to the equilibrium model to
maintain theoretical what he calls scientifc consistency for his economic analysis.
Schumpeter fails to see, however, that the very fact that we have an option as to whether we
choose the atomistic or the organicist framework of politico-economic analysis can mean only one
thing: - and that is that the choice of theoretical frame-work can only be ethico-political and
never scientifc in an absolute or objective sense!
&his is a point that Ma, 9eber perceived and e,amined far more acutely and assiduously than (chumpeter
ever did. =ut 9eber committed the mistake of believing that once a goal 11"ec!2 was selected according
to a value 1.ert2, then the means of achieving that goal 11"ec!2rationalitat2 could be prescribed and
determined scientifically. &his then became the basis of the science of choice that $ayek and Gobbins
theorized for @olitical )conomy. 9hat none of these theoreticians perceived is that the very selection of the
means for achieving a goal is also an ethico4political question and this is a realization that quite clearly
undermines the entire notion of scientific rationality. &he end does not !ustify the means. 1'f. %eo
(trauss/s biting critique of 9eber in /atural 0ight and )istory.2
The aim of the above elucidation is simply to illustrate the absurdity on the part of Schumpeter of
adopting the methodological individualism of the Austrian School that is, the approach
whereby all social concepts must be derived from individual actions in pursuit of subjective
individual interests in the context of his proposed dynamisch analysis of capitalist economic
Entwicklung. The untenability the absurdity of this theoretical position becomes starkly
evident once Schumpeter endeavours to shift (and this is a mark of his intellectual honesty) his
analytical frame-work from the Statik to the Dynamik. Let us see how.
In the previous sections we established what is the main thrust of our thesis to this point, namely,
that Schumpeter is quite aware of the conceptual inconsistency of the distinct processes
of Statik and Dynamik, but he must continue with his theory of Entwicklung as if they
could be combined, as if they were distinct processes of a single mechanism or process
of economic change(Veranderungsmechanismus) because otherwise, without the assistance
of Statik analysis, he could not present the Dynamik as a pure economic theory of economic
change as a consequence of the indeterminateness of pricing. As the following extract
shows, despite being aware that the logico-mathematical framework of equilibrium
analysis is wholly inapplicable to his Dynamik, from beginning to end Schumpeter always
held fast to the centrality of the problem of equilibrium. as the foundation to the claim of
economics to be a science, for the almost exclusive reason that it is the only means of
lending exactitude to economic analysis:
.ast mJchte ich sagen, dass die konkreten Gesultate fKr meinen Lweck von nur sekundMrer =edeutung sind.
8edenfalls strebe ich, wie gesagt, nicht systematische <ollstMndigkeit an. ;ur eine verhMltnismMNig kleine
Lahl von grundlegenden (Mtzen soll vorgefKhrt werden. 0m Lentrum steht das Gleichge"ichtspro$lem,
dessen =edeutung vom (tandpunkte praktischer #nwendungen der &heorie nur gering, das aber
fundamental f3r die .issenschaft ist. 0n >eutschland ist ihm nicht hinlMngliche =eachtung geschenkt
worden und es ist von 9ichtigkeit hervorzuheben, daN es die -asis unseres exakten Systemes ist. >ie
&ausch4, @reis4und Geldtheorie und deren wichtigste #nwendung, die e*a!te 4erteilungstheorie, basieren
darauf und ihnen ist der grJNte &eil der folgenden #usfKhrungen gewidmet. >iese >inge bilden !enen &eil
der ?ationalJkonomie, der fKr e*a!te -ehandlung reif und dem eine solche bisher zuteil geworden ist.
Meine >arstellung beruht auf der fundamentalen (cheidung zwischen O(tatikP und O>ynamikP der
<olkswirtschaft, ein @unkt, dessen =edeutung nicht genug betont werden kann. Die Methoden der reinen
5!onomie reichen vorl6ufig nur f3r die erstere aus# und nur f3r die erstere gelten ihre "ichtigsten
0esultate& Die 7Dynami!8 ist in 9eder -e,iehung et"as von der 7Stati!8 v:llig verschiedenes# methodisch
e$enso "ie inhaltlich& GewiN ist !ene (cheidung nicht neu. 1Das .esen, <orwort.2
The methods of pure economics, claims Schumpeter, apply most fully and yield their best and
most important results only for Statik analysis; they are separate in nature and content
from those of Dynamik analysis. Nevertheless, he does not see the necessity of discarding
the pure laws of economics on what would be the very valid and incontrovertible
ground that if such laws are in confict with the theoretical necessity for any valid
economic theory to be able to comprehend economic change, then those pure laws of
economics must be completely spurious! Instead, Schumpeter is quite happy to go along
with the pretence that Statik and Dynamik can co-exist.
We will examine closely the methodological and ultimately political reasons or prejudices, if
you like behind Schumpeters atavistic attachment to Walrasian equilibrium in a later
section. Yet we may claim to have demonstrated already why in reality economics can be
said to be scientifc only to the extent that it acknowledges its ethico-political origins
because otherwise it degenerates into the logico-mathematical tautology of Walrasian
equilibrium or else, in the case in which the ethico-political element becomes absolute and
millenarian, into a prophetic teleology or, to be more precise, either into a conceptual
hypostasis or else into an eschatology. To repeat: despite the fact that Schumpeter clearly
perceives by this stage of his analysis the untenable status of the conceptual elements he
has adopted most importantly, the conceptual inconsistency of Statik and Dynamik -, he
is nevertheless unwilling to jettison the deterministic framework of neoclassical
equilibrium theory. Conversely put, despite his staunch reluctance to acknowledge his
departure from the scientifc logico-mathematical mechanical paradigm of Neoclassical
and Walrasian equilibrium analysis, what Schumpeter has clearly introduced with his
Dynamik is precisely this ethico-political dimension in economic theory that efectively
transforms (to invert Lenins most incorrect dictum) economics into a specifc concentrate of
politics. But we ought to point out at this juncture that by politics we do not mean a
wholly ideological or purely ethical sphere. Economics is a concentrate of politics
only if by economics we mean the theory of social relations of production. But the
actual real relations of production are political also in a physio-logical, and not just
an ideo-logical, sense.
The crucial point that was absolutely essential to Schumpeters reasoning behind the need for a
Dynamik to correct the unreality of the Statik was that the latter artifcially separated the
economic system as a collection of atomistic individuals co-ordinated externally like
inert bodies under the laws of mechanics from other spheres of social life. Therefore, the
Statik treated the economic system as an independent totality, as a closed system,
with its own mechanical or scientifc logico-mathematical operation. Paradoxically, by
seeking to demonstrate that the sphere of pure economic theory can also produce
endogenously innovations that have far-reaching consequences for other spheres of
social life principally science and technology -, Schumpeter was already pointing to the
fact that this separation of the social process was entirely artifcial and that, as he
himself comprehensively put it, the social process is really one indivisible whole.
Yet in this formulation lay hidden a fallacy that Schumpeter most certainly committed. What
Schumpeter meant to do with the Dynamik was to theorize an economic system that
could mutate from within, through the innovative decisions and actions of true
economic agents. Yet we have shown that his theory of economic development refers to
economic agents as atomistic individuals operating within an economic system that is
seen as a totality, that is, without reference to the physical environment with which this
presumed system or totality must metabolize and therefore cannot remain as a
closed system or totality! Quite evidently, Schumpeter neglected this essential fact
though admittedly a difcult one to theorize - in his transition from Statik to Dynamik: to
the extent that the members of a living organic community can infuence or mutate its
metabolic interaction with its physical environment, to that extent the decisions and
actions of the members of such a living organism cannot be theorized as individual
decisions and actions that can be measured by any scientifc or objective absolute
standard as if such a living organism could be analyzed or theorized as a closed system
or in its totality.
Schumpeters Dynamik, as we have shown, can be theorised only in an organicist framework and
not in an atomistic one because there can be no Dynamik, no mutation or evolution, no
meta-morphosis, in an economic system whose science can determine only relative
values between its individual components. Evolution in the Schumpeterian sense of
Entwicklung can be understood and have meaning only from the standpoint of a living
organic community for the simple reason that the mutation of the economic system can be
judged as such as a mutation, as a meta-morphosis only with regard to a pro-
ductive frame of reference only as meta-bolism and not as a system or a totality
whose internal values and prices can be determined objectively (in an absolute
scientifc sense) - not as stasis, as is the case for equilibrium theory and indeed also
for Classical Political Economy. The organic community can be trans-formed from
within by its economic agents, but this trans-formation can be com-prehended only with
regard to pro-duction, that is, only with regard to how this living organism metabolizes
with its physical environment of which it is an unseverable and indissoluble part.
This is a realisation of the highest importance for social theory and for our critique of
bourgeois economic theory, - and the reason why we are insisting on this point to
lengths that may seem extreme to some. In the specifc case concerning Schumpeters
Theory of Economic Development, this point is absolutely vital because it constitutes
the central and fatal plank of our critique of his entire theoretical framework. What we
are saying here is that economic relations cannot be regarded as pure relations of
exchange between individuals whether this be exchange of goods, of plans, or of
ideas -, but are and must be theorised as social relations of pro-duction. They must
include the immanently physio-logical reality of human living activity.
What this means is that what is most important in social life is not so much how the product
is distributed between individuals and classes. By far more important instead is
precisely what is produced and how it is produced! Human reality must be theorised
by taking into account not merely the inter-personal or psychological relations
between individuals or classes, but above all by considering how human beings
satisfy and produce their needs by interacting metabolically with their environment.
The question of physis, (what Heidegger called the question of the thing die
Frage nach dem Ding) is vital to a truly revolutionary praxis because the critique of
capitalism must invest more than just the unequal distribution of the product: it
must be concerned above all with what the product is and how it is produced!
Once again, this is so because human being taken phylogenetically cannot be separated from
its physical environment. Human praxis must not be reifed into subjective
concepts that hypostatise it into hieroglyphic values: it must be regarded as living
activity. Without the essential metabolic interaction of human beings not just with
one another but with their physical environment economic relations would boil down
to mere exchange, to mere inter-personal relations that concern psychology and ethics
rather than the production and satisfaction of human needs. We would be bound to
the sphere of the Kantian Sollen (Ought) which is antinomically separated from the
sphere of the Sein (Is) precisely because human being is regarded contemplatively,
philosophisch - transcendentally rather than immanently. This is the interpretative key
to our immanentist approach to social theory and praxis as against the
transcendentalism of bourgeois economic theory.
As we are about to demonstrate, Schumpeters conception of the Innovationsprozess as the
transformation mechanism of the capitalist economy is entirely one-sided because, for
one, it attributes the transformation of the capitalist economy to the innovative or
creatively destructive initiative and Individualitat the Spirit! of the Enterpreneur
and leaves to one side the political antagonism that induces capitalist innovation and is
contained by and in it! (On the concept of the State as containing [to catechon]
antagonism, cf. Cacciari, Il Potere che Frena.) And for another because once we accept that
capitalism amounts to a process of creative destruction due to the innovative or
creative individuality of entrepreneurs, then there is simply no way how this oppressive
economic system can ever be destroyed - creatively or not! and be replaced with a
superior system of production and satisfaction of human needs.
Within these premises, because Schumpeter treats the organic community as a totality that can
evolve endogenously but then fails to consider its metabolic change, he ends up with a
framework of economic analysis in which there is confict between the individual
components of the economic system but there can be no resolution or supersession
of this confict. There is a pendulum in and out of equilibrium, but no dialectical spiral! In
Schumpeters Entwurf, there is confict and opposition between the individual members
of the organic community and this confict drives the economic system out of its
stasis and on to a new equilibrium. But there is no supersession of this pendular
movement between the static poles of equilibrium and evolution, competition and
adaptation, Statik and Dynamik, innovation and conservation, entrepreneur and capitalist,
proft and interest. The confict is never capable of resolution, it can never be overcome
because economic activity is defned as an ineluctable psychological confict pitting
atomistic individual against atomistic individual and oscillating between the polar
opposites. Clearly, here it is not the facts that inform the theory but the theory that jams
the facts into the straitjackets of antithetical concepts. And therefore Schumpeters
economic system or social process can never be examined as a living organic
community; it can never escape the gravitational centre of static equilibrium which
then sets the asymptotic limits of the theoretical analysis. Equilibrium becomes a
negative utopia that can never be allowed to be reached on pain of bringing society to a
complete standstill, to total paralysis, to stasis; and yet it is a necessary tool of analysis
for the ideological transfguration of the bestial reality of capitalist exploitation into an
empyrean of pure competition and welfare maximisation or Pareto optimality.