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Schumpeter's Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism

Schumpeter's Evolutionary Economics: A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism

by Esben Sloth Andersen


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ISBN-13: 9781843313342
Publisher: Anthem Press
Publication date: 04/01/2009
Series: Anthem Other Canon Economics
Edition description: First Edition, 1
Pages: 500
Product dimensions: 6.20(w) x 9.10(h) x 1.60(d)

About the Author

Esben Sloth Andersen is Professor of Evolutionary Economics in the Department of Business Studies, Aalborg University.

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Schumpeter's Evolutionary Economics

A Theoretical, Historical and Statistical Analysis of the Engine of Capitalism

By Esben Sloth Andersen

Wimbledon Publishing Company

Copyright © 2009 Esben Sloth Andersen
All rights reserved.
ISBN: 978-1-84331-334-2



When the Austrian-American economist Joseph A. Schumpeter died in 1950, he had received many forms of recognition. He was Professor of Economics at the famous Harvard University in the USA; he was the most cited scholar in the whole field of economics (Samuelson, 1981a, 1); he had recently served as the President of the American Economic Association and had just been elected to become the first President of International Economic Association. This exceptional status was based on Schumpeter's contributions to all major parts of economics and to other social sciences, his all-encompassing network of scholarly contacts, and his ardent support for the new generation of ambitious economists. However, as pointed out by Paul Samuelson, Schumpeter was not satisfied with the status he received. According to Samuelson, who considered himself to have been both Schumpeter's friend and pupil, he was sceptical about his "Popeship" because this was not what he had strived for. From his youth, Schumpeter's main ambition had been to become one of the great economists, and he thought that such economists are not orthodox Popes, but radical scientific innovators. Since he did not succeed in his attempt to renew the science of economics, Samuelson (1981a, 1) suggested that Schumpeter "would have traded his Popeship for a Keynesian revolution". This does not mean that Schumpeter would have liked to promote an arbitrary scientific revolution. Instead, he wanted to trade his position within the economic establishment for an evolutionary-economic breakthrough, which he had tried to obtain throughout his academic life.

The decades since Schumpeter's death have clearly proven the low value of his Popeship. Like John Maynard Keynes, he was born in 1883, and they died within few years of each other; but there are crucial differences in the way posterity reacted to them. Keynes is commonly remembered as the major initiator of macroeconomic theory. The large extent to which modern economic theory has integrated and developed his problems and tools means that we seldom have to refer to him directly. Schumpeter obtained a quite different posthumous status. We economists have forgotten his Popeship of equilibrium economics, but we still maintain folklore about him as the most romantic and paradoxical of all economists. More importantly, we remember him for his vision of innovation and structural change within the economic system. Although we largely base our remembrance on a few striking formulations from the most reader-friendly parts of his works, like a couple of chapters from Capitalism, Socialism and Democracy, he still serves important functions. First, Schumpeter represents our bad consciousness of not having treated in a convincing way the grand questions of economic evolution and the transformation of capitalism. Second, his incomplete analytical contributions serve as a challenge to apply the much-improved mathematics of evolution to reconsider his visionary accounts. Finally, since the great questions of the process of economic evolution are unlikely to become answered through isolated economic analysis, he points us to the hitherto largely unsolved problem of establishing a systematic collaboration between the different social sciences.

The evolutionary-economic breakthrough that Schumpeter hoped for is presently within sight; and similar breakthroughs might come about in sociology, political science, and elsewhere. This situation allows us to consider his wish of trading a Popeship for a scientific revolution in a new light. Actually, it has, for many researchers, become obvious that Schumpeter was an important pioneer. However, the more precise study of his contributions to the extension of the social sciences towards the analysis of evolutionary processes has not been easy. The difficulties, which will become clear from the present book, are largely related to the fact that he produced an immensely complex work. Furthermore, his work applies old-fashioned terminology and confronts the problems of past generations of researchers. Finally, he wrote in two languages, and some of his core contributions have not yet been translated from German. For these and other reasons, there is still much confusion about the nature of his work and about the degree to which it still represents a challenge for modern researchers. This is the background for the present account for the emergence and elaboration of Schumpeter's evolutionary economics, which is mainly based on reconstructive readings of his books. The main proposition is that he was a pioneer of a special form of evolutionary economics and that he wanted to add analogous forms of evolutionary sociology and evolutionary political science. Although his form of evolutionary analysis is not identical to the forms that are presently emerging, there is a large degree of compatibility (Fagerberg, 2003). Furthermore, the remaining incompatibility cannot only be considered the result of Schumpeter's idiosyncrasies. It also represents a challenge for presentday research.

1.1 The name of the game: 'evolutionary economics'

The core propositions of the present book are: (1) that Schumpeter's basic ambition was to complement equilibrium economics with an evolutionary economics that analyses capitalist economic evolution; and (2) that his major contributions to economics relate to his attempts to fulfil his ambition. The arguments for the two propositions will bring us back to the works that he produced before the First World War. However, the fact that some of these works are still only available in German language is only one of the minor difficulties in developing the argument. The major obstacle is the terminological and conceptual problems that relate to the terms 'evolutionary' and 'evolution'. Although the clarification of these terms is a major theme throughout the present book, it is convenient to reach a minimum level of clarification from the very beginning. The works of the early Schumpeter do not supply us with such clarification. A major reason is that he developed his basic contribution at a time when the evolutionary approach, after an upswing in the nineteenth century, was facing an eclipse. The reaction against the inflated application of the evolutionary approach meant that during "the first few decades of the twentieth century evolution was a dirty word" and that "[e]volutionism as a theoretical approach ... was practiced or endorsed only at risk to one's intellectual career" (Sanderson, 1990, 45-6). This reaction was especially strong while Schumpeter used German language as his primary means of presenting his scientific contributions. It is in this context that we should interpret a remark that Schumpeter made in the radically revised and shortened second edition of his Theorie der wirtschaftlichen Entwicklung. Here he emphasised that

"we must be careful in dealing with the phenomenon of evolution [Entwicklungsphänomen] that we observe, still more with the concept in which we comprehend it, and most of all with the word by which we designate the concept[.] ... [A]ll the over-hasty and insufficiently founded generalisations in which the word [soziale Entwicklung] plays a part have led many of us to lose patience equally with the word, the concept, and the issue." (Entwicklung II, 88-9; cf. Development, 57-8)

The worries that Schumpeter, in 1926, formulated about the German word 'Entwicklung' re-emerged when he helped Redvers Opie in translating his magnum opus into English. Even the chosen title of the book — "The Theory of Economic Development" — was problematic. Schumpeter, quickly after the publication of Development, began to switch from the term 'economic development' to 'economic evolution'; and he used the latter term consistently in Business Cycles from 1939. Moreover, even while The Theory of Economic Development was being printed, he in May 1934 wrote a letter in which he called his book "The Theory of Economic Evolution" (BL, 267); and he accepted the French translation with the title Théorie de l'évolution économique, that is, without using the French word 'développement' (S1935e). Nevertheless, modern economists and sociologists still use term 'economic development' as the primary label for his theory. On this background, it is interesting to note that it is not the necessary translation of his German text. In contrast to the situation in France and the English-speaking countries, speakers of German language in the first decades of the twentieth century largely used a single word for two concepts. 'Entwicklung', which etymologically means 'unwinding', covered both 'development' and 'evolution'.

The English word 'evolution' originates from the Latin 'evolutio'. It is related to the verb 'evolvere' that means 'unwinding' or 'unrolling'. The book of antiquity was a rolled volume of writing and its reading required a process of unrolling. The noun 'evolutio' was used to denote the process of reading through the unrolling of such a book. This background meant that the original usage of the English 'evolution' referred to goal-directed and pre-programmed processes. The same was the case for 'development'. This word arrived to England from France, where 'développement' referred to the process of unfolding. Then Darwin published his Origin of Species with its radically different account for change. As a result, the word 'evolution' started to obtain a new meaning; and it ended up denoting the unplanned process of the irreversible change of biological species, human languages, and the routines of social life. In contrast, 'development' kept the meaning that it had originally shared with 'evolution'. Although this division of labour between the two words arrived slowly, the distinction was relatively clear in the early 1930s. At that time, the best translation of the title of "Theorie der wirtschaftlichen Entwicklung" was "The Theory of Economic Evolution", that is, the title Schumpeter used in the mentioned letter from 1934. By the way, this letter commented on the fact that he — a foreigner — had got a paper (S1934a) included in a collection intended for courses in English style and composition.

The confusion that has emerged from the two possible translations of a single German word has today largely been overcome. It has become clear that the unplanned process of change described in Schumpeter's The Theory of Economic Development has nothing to do with the goal-directed and programmable processes of old-style developmental thinking about social change. Nevertheless, the choice of the words "Economic Development" for the title of this book has retarded the formulation of the evolutionary interpretation of Schumpeter's work significantly. In the 1930s, Schumpeter and his translator (Redvers Opie) missed an important opportunity for labelling the book in accordance with modern scientific terminology. The present book tries to undo their decision by translating all occurrences of 'Entwicklung' as 'evolution' — unless Schumpeter was clearly exploiting the ambiguity of German language to use the word in the meaning of 'development'. The importance of this decision is emphasised by the fact that Schumpeter predominantly wrote in German from the decade before World War I until he moved to the USA in 1932.

Schumpeter's early writings are characterised by another terminological problem that had largely been overcome in the 1926 edition of Theorie der wirtschaftlichen Entwicklung, which was used for the production of Development. However, the terminological problem is obvious in the first edition of this book (from 1912) and in his programmatic account of the essence and limits of equilibrium economics (from 1908). In these two books and elsewhere, he used the term "Economic Statics" for what can roughly be called equilibrium economics and "Economic Dynamics" for the theory of economic evolution. Although the distinction between these branches of economics is crucial for his argument, he largely applied the original terms — Statics and Dynamics — in quotation marks and he pointed out that the terminology is "very unfortunate" (Wesen, 182). One of the problems is that the terminology was likely to create confusion, and this problem was to an overwhelming extent confirmed by a large literature that in the next decades tried to clarify the Statics-Dynamics dichotomy — but instead created increasing confusion. The problem was that the words 'statics' and 'dynamics' were used to denote a large number of concepts and that these concepts have often been very loosely defined. Therefore, Fritz Machlup (1959,109) characterised them as "kaleidoscopic words". Just as children have used the old-fashioned tube with mirrors and coloured glass to produce a huge number of different patterns, economists have used the "kaleidoscope" of the static-dynamic dichotomy to develop a surprisingly large number of meanings. According to Machlup, the problem "is not that the division of economic analysis into Statics and Dynamics makes no sense, but that it makes too many senses". Although the clarification of the senses in which Schumpeter used the terms "Economic Statics" and "Economic Dynamics" is an important theme of the present book, their translation into 'equilibrium economics' and 'evolutionary economics' may serve as a preliminary solution.

It is only after we have solved the major problems of terminology that it becomes clear that the evolutionary interpretation of Schumpeter's works has been provided by himself. Actually, we can derive most of this interpretation from a couple of sentences in his first book from 1908 — the untranslated Wesen und Hauptinhalt der theoretischen Nationalökonomie. In this book on the essence and main contents of theoretical economics, he emphasised the need of a strict division of labour between works in the two fundamental fields of economics:

"Statics [equilibrium economics] and Dynamics [evolutionary economics] are completely different fields; they concern not only different problems but also different methods and different materials. They are not two chapters of one and the same theoretical building but two completely independent buildings. Only Statics [equilibrium economics] has hitherto been somewhat satisfactorily worked up and we essentially only deal with it in this book. Dynamics [evolutionary economics] is still in its beginnings, is a 'land of the future'." (Wesen, 182-3)

Although Schumpeter's first book focussed on equilibrium economics, its purpose was not just to propose a reform plan for this branch of economics. On the contrary, the problems, methods, and materials that he reserved for evolutionary economics were those that, from the very beginning, engaged him as a researcher. He actually throughout Wesen pointed at this branch. He did so by repeatedly emphasising what concepts equilibrium economics cannot really contain and what problems it cannot solve. This negative definition of evolutionary economics as covering parts of the residual of concepts and problems left over by equilibrium economics was followed by a positive definition. This definition is most clearly stated in Entwicklung I — where the analysis of capitalist economic evolution is performed in terms of the concepts of capital, entrepreneurial profit, interest, credit, and business cycles. Together, these two books (Wesen and Entwicklung I) provided Schumpeter with the research programme that would engage him for the rest of his life. They demonstrate that he did not want to obtain a "Popeship" by working within the already-defined equilibrium economics but strived for the honour of being the pioneer of a complementary and very important branch of economics.


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Table of Contents

List of Figures ix

List of Tables xi

Preface xiii

Acknowledgements xvii

Abbreviations xix

1 Introduction 1

1.1 The name of the game: 'evolutionary economics' 2

1.2 Schumpeter's evolutionary pivot 6

1.3 Alternative images of Schumpeter's work 15

1.4 The structure of the present book 19

I Equilibrium Economics and Evolutionary Economics 21

2 The Early Years 23

2.1 Research programmes for the twentieth century 23

2.2 Preparing to become a great economist 28

2.3 Schumpeter's new intellectual combination 35

3 From Walrasian Statics To Evolutionary Dynamics 39

3.1 Different interpretations of Wesen 40

3.2 Exploring the "Magna Carta" of theoretical economics 44

3.3 Resolving the battle of methods 50

3.4 The Statics-Dynamics dichotomy 53

3.5 Types of entrepreneurs and parameters of the system 58

3.6 Conclusion 65

4 Elitist Dichotomies and General Evolutionary Analysis 67

4.1 The 'lost' chapters of Entwicklung I and their translation 68

4.2 From elite theory to the Schumpeterian dichotomies 75

4.3 The dichotomies of Pareto and Schumpeter 83

4.4 Towards a general theory of social evolution 89

4.5 Conclusion 95

5 Evolutionary Dynamics in the Capitalist Economy 99

5.1 Three interpretations of Entwicklung I 101

5.2 Starting at the Böhm-Bawerk Seminar of 1905 104

5.3 Theories of interest and of capitalism 107

5.4 The evolutionary function of business cycles 113

5.5 The "spirit of capitalism" and the system of concepts 122

5.6 Conclusion 132

II The Evolutionary Trilogy 135

6 Approaching the Evolutionary Trilogy 137

6.1 The evolutionary trilogy and its name 137

6.2 The fields of evolutionary analysis 141

6.3 The evolutionary mechanisms of the capitalist engine 144

7 The Capitalist Engine and Socio-Political Evolution 155

7.1 Two ways of reading Capitalism 156

7.2 Mark II of the capitalist engine and its implications 161

7.3 Emergence of the capitalist engine and the tax state 169

7.4 Democratic political evolution: Mark I and Mark II 174

7.5 The endless economic frontier and the sociological trend 180

7.6 Conclusion 186

8 Waveform Economic Evolution and Business Cycles 189

8.1 The complex contents of Cycles 190

8.2 Towards a reasoned history of the capitalist process 198

8.3 The Kondratieffs and Juglars of the third approximation 209

8.4 The pure model of the first approximation 217

8.5 The second approximation with the secondary wave 225

8.6 Extensions of the second approximation 233

8.7 Conclusion 238

9 The Basic Mechanisms of Economic Evolution 241

9.1 Development as part of the evolutionary trilogy 243

9.2 The circular flow and the mechanism of adaptation 250

9.3 The function of the Schumpeterian entrepreneur 262

9.4 Combining the mechanisms of innovation and adaptation 273

9.5 Mark I and Mark II of the capitalist engine 284

9.6 Conclusion 293

III Works in Progress 295

10 Schumpeter and the Years of High Theory 297

10.1 Schumpeterian unfinishedness 297

10.2 The years of high theory and high econometrics 300

10.3 The principle of indeterminateness 307

10.4 The theoretical apparatus of economics 315

10.5 Schumpeter's "final thesis" 322

11 Evolutionary Analysis and the History of Economics 327

11.1 The gradual development of History 329

11.2 Long waves in the evolution of economic analysis 336

11.3 Why do we study the history of economics? 342

11.4 Economics as a tool-based science and its evolution 346

11.5 The brakes of the scientific engine 350

11.6 The fundamental fields of scientific economics 358

11.7 Conclusion 366

12 Beyond Schumpeter's Evolutionary Economics 369

12.1 The fields of evolutionary economics 370

12.2 Evolutionary economic theory: general problems 373

12.3 Evolutionary economic theory: specific mechanisms 379

12.4 Evolutionary economic statistics 387

12.5 Evolutionary economic history 397

12.6 Evolutionary economic as a whole 407

Appendices 411

A Chronology 413

B Literature on Schumpeter 417

C Accessing and Grouping Schumpeter's Works 421

C.1 The Schumpeter Archives 421

C.2 Collections of Schumpeter's papers and letters 422

C.3 Translating Schumpeter's German texts 423

C.4 Subjects of Schumpeter's works 425

D Some Tools for Evolutionary Analysis 427

D.1 The ecological approach to evolutionary analysis 427

D.2 The statistical approach to evolutionary analysis 436

Schumpeter's Works 447

Other References 461

Index of Schumpeter's Works 483

Index of Persons 489

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