PLAUSIBLE CAPITALISM

The average rate of increase in total
available production that obtained during the sixty years preceding 1928 has
been projected into the future. So far as this was merely a device in order
to illustrate the significance of past development, there was nothing in this
procedure that could have shocked the statistical conscience. But as soon as
I implied that the following fifty years might actually display a similar
average rate of increase, I apparently did commit a statistical crime; it is, of
course, clear that a historical record of production over any given period does
not in itself justify any extrapolation at all,1 let alone an extrapolation over
half a century. It is therefore necessary to emphasize again that my
extrapolation is not intended to forecast the actual behavior of output in the
future. Beyond illustrating the meaning of past performance, it is merely
intended to give us a quantitative idea of what the capitalist engine might
conceivably accomplish if, for another half century, it repeated its past
performance—which is a very different matter. The question whether it can
be expected to do so will be answered quite independently of the
extrapolation itself. For this purpose we have now to embark upon a long
and difficult investigation.

Before we can discuss the chance of capitalism repeating its past
performance we must evidently try to find out in what sense the observed
rate of increase in output really measures that past performance. No doubt,
the period that furnished our data was one of comparatively unfettered
capitalism. But this fact does not in itself provide a sufficient link between
the performance and the capitalist engine. In order to believe that this was
more than coincidence we must satisfy ourselves first, that there is an
understandable relation between the capitalist order and the observed rate of
increase in output; second, that, given such a relation, the rate of increase
was actually due to it and not to particularly favorable conditions which had
nothing to do with capitalism.

These two problems must be solved before the problem of a “repetition
of performance” can arise at all. The third point then reduces to the question
whether there is any reason why the capitalist engine should, during the next
forty years, fail to go on working as it did in the past.

We shall deal with these three points in turn.
Our first problem may be reformulated as follows. On the one hand, we
have a considerable body of statistical data descriptive of a rate of
“progress” that has been admired even by very critical minds. On the other
hand, we have a body of facts about the structure of the economic system
of that period and about the way it functioned; from these facts, analysis
has distilled what is technically called a “model” of capitalist reality, i.e.,
a generalized picture of its essential features. We wish to know whether
that type of economy was favorable, irrelevant, or unfavorable to the
performance we observe and, if favorable, whether those features may be
reasonably held to yield adequate explanation of this performance. Waiving
technicalities as much as possible, we shall approach the question in a
common-sense spirit.

1. Unlike the class of feudal lords, the commercial and industrial
bourgeoisie rose by business success. Bourgeois society has been cast in a
purely economic mold: its foundations, beams and beacons are all made of
economic material. The building faces toward the economic side of life. Prizes
and penalties are measured in pecuniary terms. Going up and going down
means making and losing money. This, of course, nobody can deny. But I wish
to add that, within its own frame, that social arrangement is, or at all events
was, singularly effective. In part it appeals to, and in part it creates, a schema
of motives that is unsurpassed in simplicity and force. The promises of wealth
and the threats of destitution that it holds out, it redeems with ruthless
promptitude. Wherever the bourgeois way of life asserts itself sufficiently to
dim the beacons of other social worlds, these promises are strong enough to
attract the large majority of supernormal brains and to identify success with
business success. They are not proffered at random; yet there is a sufficiently
enticing admixture of chance: the game is not like roulette, it is more like
poker. They are addressed to ability, energy and supernormal capacity for
work; but if there were a way of measuring either that ability in general or
the personal achievement that goes into any particular success, the premiums
actually paid out would probably not be found proportional to either.

Spectacular prizes much greater than would have been necessary to call forth
the particular effort are thrown to a small minority of winners, thus propelling
much more efficaciously than a more equal and more “just” distribution would,
the activity of that large majority of businessmen who receive in return very
modest compensation or nothing or less than nothing, and yet do their utmost
because they have the big prizes before their eyes and overrate their chances
of doing equally well. Similarly, the threats are addressed to incompetence. But
though the incompetent men and the obsolete methods are in fact eliminated,
sometimes very promptly, sometimes with a lag, failure also threatens or
actually overtakes many an able man, thus whipping up everyone, again much
more efficaciously than a more equal and more “just” system of penalties
would. Finally, both business success and business failure are ideally precise.
Neither can be talked away.

One aspect of this should be particularly noticed, for future reference
as well as because of its importance for the argument in hand. In the way
indicated and also in other ways which will be discussed later on, the
capitalist arrangement, as embodied in the institution of private
enterprise, effectively chains the bourgeois stratum to its tasks. But it
does more than that. The same apparatus which conditions for
performance the individuals and families that at any given time form the
bourgeois class, ipso facto also selects the individuals and families that
are to rise into that class or to drop out of it. This combination of the
conditioning and the selective function is not a matter of course. On the
contrary, most methods of social selection, unlike the “methods” of
biological selection, do not guarantee performance of the selected
individual; and their failure to do so constitutes one of the crucial
problems of socialist organization that will come up for discussion at
another stage of our inquiry. For the time being, it should merely be
observed how well the capitalist system solves that problem: in most
cases the man who rises first into the business class and then within it is
also an able businessman and he is likely to rise exactly as far as his
ability goes—simply because in that schema rising to a position and
doing well in it generally is or was one and the same thing. This fact, so
often obscured by the auto-therapeutic effort of the unsuccessful to deny
it, is much more important for an appraisal of capitalist society and its
civilization than anything that can be gleaned from the pure theory of the
capitalist machine.

2. But is not all that we might be tempted to infer from “maximum
performance of an optimally selected group” invalidated by the further fact that
that performance is not geared to social service—production, so we might say,
for consumption—but to money-making, that it aims at maximizing profits
instead of welfare? Outside of the bourgeois stratum, this has of course always
been the popular opinion. Economists have sometimes fought and sometimes
espoused it. In doing so they have contributed something that was much more
valuable than were the final judgments themselves at which they arrived
individually and which in most cases reflect little more than their social
location, interests and sympathies or antipathies. They slowly increased our
factual knowledge and analytic powers so that the answers to many questions
we are able to give today are no doubt much more correct although less simple
and sweeping than were those of our predecessors.

To go no further back, the so-called classical economists2 were practically
of one mind. Most of them disliked many things about the social institutions
of their epoch and about the way those institu tions worked. They fought the
landed interest and approved of social reforms—factory legislation in
particular—that were not all on the lines of laissez faire. But they were quite
convinced that within the institutional framework of capitalism, the
manufacturer’s and the trader’s self-interest made for maximum performance
in the interest of all. Confronted with the problem we are discussing, they
would have had little hesitation in attributing the observed rate of increase
in total output to relatively unfettered enterprise and the profit motive—
perhaps they would have mentioned “beneficial legislation” as a condition
but by this they would have meant the removal of fetters, especially the
removal or reduction of protective duties during the nineteenth century.
It is exceedingly difficult, at this hour of the day, to do justice to these
views. They were of course the typical views of the English bourgeois class,
and bourgeois blinkers are in evidence on almost every page the classical
authors wrote. No less in evidence are blinkers of another kind: the classics
reasoned in terms of a particular historical situation which they uncritically
idealized and from which they uncritically generalized. Most of them,
moreover, seem to have argued exclusively in terms of the English interests
and problems of their time. This is the reason why, in other lands and at other
times, people disliked their economics, frequently to the point of not even
caring to understand it. But it will not do to dismiss their teaching on these
grounds. A prejudiced man may yet be speaking the truth. Propositions
developed from special cases may yet be generally valid. And the enemies
and successors of the classics had and have only different but not fewer
blinkers and preconceptions; they envisaged and envisage different but not
less special cases.

From the standpoint of the economic analyst, the chief merit of the
classics consists in their dispelling, along with many other gross errors, the
naïve idea that economic activity in capitalist society, because it turns on the
interests of consumers; or, to put it differently, that moneymaking necessarily
deflects producing from its social goal; or, finally, that private profits, both
in themselves and through the distortion of the economic process they
induce, are always a net loss to all excepting those who receive them and
would therefore constitute a net gain to be reaped by socialization. If we look
at the logic of these and similar propositions which no trained economist ever
thought of defending, the classical refutation may well seem trivial. But as
soon as we look at all the theories and slogans which, consciously or
subconsciously, imply them and which are once more served up today, we
shall feel more respect for that achievement. Let me add at once that the
classical writers also clearly perceived, though they may have exaggerated,
the role of saving and accumulation and that they linked saving to the rate
of “progress” they observed in a manner that was fundamentally, if only
approximately, correct. Above all, there was practical wisdom about their
doctrine, a responsible long-run view and a manly tone that contrast
favorably with modern hysterics.

But between realizing that hunting for a maximum of profit and striving
for maximum productive performance are not necessarily incompatible, to
proving that the former will necessarily—or in the immense majority of
cases—imply the latter, there is a gulf much wider than the classics thought.
And they never succeeded in bridging it. The modern student of their
doctrines never ceases to wonder how it was possible for them to be satisfied
with their arguments or to mistake these arguments for proofs; in the light
of later analysis their theory was seen to be a house of cards whatever
measure of truth there may have been in their vision.

3. This later analysis we will take in two strides—as much of it, that is,
as we need in order to clarify our problem. Historically, the first will carry
us into the first decade of this century, the second will cover some of the
postwar developments of scientific economics. Frankly I do not know how
much good this will do the non-professional reader; like every other branch
of our knowledge, economics, as its analytic engine improves, moves fatally
away from that happy stage in which all problems, methods and results could
be made accessible to every educated person without special training. I will,
however, do my best.

The first stride may be associated with two great names revered to this
day by numberless disciples—so far at least as the latter do not think it
bad form to express reverence for anything or anybody, which many of
them obviously do—Alfred Marshall and Knut Wicksell.4 Their
theoretical structure has little in common with that of the classics—
though Marshall did his best to hide the fact—but it conserves the classic
proposition that in the case of perfect competition the profit interest of
the producer tends to maximize production. It even supplied almost
satisfactory proof. Only, in the process of being more correctly stated and
proved, the proposition lost much of its content—it does emerge from the
operation, to be sure, but it emerges emaciated, barely alive.5 Still it can
be shown, within the general assumptions of the Marshall-Wicksell
analysis, that firms which cannot by their own individual action exert any
influence upon the price of their products or of the factors of production
they employ—so that there would be no point in their weeping over the
fact that any increase in production tends to decrease the former and to
increase the latter—will expand their output until they reach the point at
which the additional cost that must be incurred in order to produce
another small increment of product (marginal cost) just equals the price
they can get for that increment, i.e., that they will produce as much as
they can without running into loss. And this can be shown to be as much
as it is in general “socially desirable” to produce. In more technical
language, in that case prices are, from the standpoint of the individual
firm, not variables but parameters; and where this is so, there exists a
state of equilibrium in which all outputs are at their maximum and all
factors fully employed. This case is usually referred to as perfect
competition. Remembering what has been said about the selective process
which operates on all firms and their managers, we might in fact conceive
a very optimistic idea of the results to be expected from a highly selected
group of people forced, within that pattern, by their profit motive to
strain every nerve in order to maximize output and to minimize costs. In
particular, it might seem at first sight that a system conforming to this
pattern would display remarkable absence of some of the major sources
of social waste. As a little reflection should show, this is really but
another way of stating the content of the preceding sentence.

4. Let us take the second stride. The Marshall-Wicksell analysis of
course did not overlook the many cases that fail to conform to that model.
Nor, for that matter, had the classics overlooked them. They recognized
cases of “monopoly,” and Adam Smith himself carefully noticed the
prevalence of devices to restrict competition6 and all the differences in
flexibility of prices resulting therefrom. But they looked upon those cases
as exceptions and, moreover, as exceptions that could and would be done
away with in time. Something of that sort is true also of Marshall.
Although he developed the Cournot theory of monopoly7 and although
he anticipated later analysis by calling attention to the fact that most
firms have special markets of their own in which they set prices instead
of merely accepting them,8 he as well as Wicksell framed his general
conclusions on the pattern of perfect competition so as to suggest, much
as the classics did, that perfect competition was the rule. Neither Marshall
and Wicksell nor the classics saw that perfect competition is the
exception and that even if it were the rule there would be much less
reason for congratulation than one might think.

If we look more closely at the conditions—not all of them explicitly
stated or even clearly seen by Marshall and Wicksell—that must be
fulfilled in order to produce perfect competition, we realize immediately
that outside of agricultural mass production there cannot be many instances
of it. A farmer supplies his cotton or wheat in fact under those conditions:
from his standpoint the ruling prices of cotton or wheat are data, though
very variable ones, and not being able to influence them by his individual
action he simply adapts his output; since all farmers do the same, prices
and quantities will in the end be adjusted as the theory of perfect
competition requires. But this is not so even with many agricultural
products—with ducks, sausages, vegetables and many dairy products for
instance. And as regards practically all the finished products and services
of industry and trade, it is clear that every grocer, every filling station,
every manufacturer of gloves or shaving cream or handsaws has a small
and precarious market of his own which he tries—must try—to build up
and to keep by price strategy, quality strategy—“product differentiation”—
and advertising. Thus we get a completely different pattern which there
seems to be no reason to expect to yield the results of perfect competition
and which fits much better into the monopolistic schema. In these cases
we speak of Monopolistic Competition. Their theory has been one of the
major contributions to postwar economics.

There remains a wide field of substantially homogeneous products—
mainly industrial raw materials and semi-finished products such as steel
ingots, cement, cotton gray goods and the like—in which the conditions
for the emergence of monopolistic competition do not seem to prevail. This
is so. But in general, similar results follow for that field inasmuch as the
greater part of it is covered by largest-scale firms which, either individually
or in concert, are able to manipulate prices even without differentiating
products—the case of Oligopoly. Again the monopoly schema, suitably
adapted, seems to fit this type of behavior much better than does the
schema of perfect competition.

As soon as the prevalence of monopolistic competition or of oligopoly
or of combinations of the two is recognized, many of the propositions which
the Marshall-Wicksell generation of economists used to teach with the
utmost confidence become either inapplicable or much more difficult to
prove. This holds true, in the first place, of the propositions turning on the
fundamental concept of equilibrium, i.e., a determinate state of the economic
organism, toward which any given state of it is always gravitating and which
displays certain simple properties. In the general case of oligopoly there is
in fact no determinate equilibrium at all and the possibility presents itself
that there may be an endless sequence of moves and countermoves, an
indefinite state of warfare between firms. It is true that there are many special
cases in which a state of equilibrium theoretically exists. In the second place,
even in these cases not only is it much harder to attain than the equilibrium
in perfect competition, and still harder to preserve, but the “beneficial”
competition of the classic type seems likely to be replaced by “predatory”
or “cutthroat” competition or simply by struggles for control in the financial
sphere. These things are so many sources of social waste, and there are many
others such as the costs of advertising campaigns, the suppression of new
methods of production (buying up of patents in order not to use them) and
so on. And most important of all: under the conditions envisaged,
equilibrium, even if eventually attained by an extremely costly method, no
longer guarantees either full employment or maximum output in the sense
of the theory of perfect competition. It may exist without full employment;
it is bound to exist, so it seems, at a level of output below that maximum
mark, because profit-conserving strategy, impossible in conditions of perfect
competition, now not only becomes possible but imposes itself.

Well, does not this bear out what the man in the street (unless a
businessman himself) always thought on the subject of private business? Has
not modern analysis completely refuted the classical doctrine and justified
the popular view? Is it not quite true after all, that there is little parallelism
between producing for profit and producing for the consumer and that private
enterprise is little more than a device to curtail production in order to extort
profits which then are correctly described as tolls and ransoms?

Source; Joseph Schumpeter’s, CAPITALISM, SOCIALISM AND DEMOCRACY

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