The Economic Sociology of Capitalism
Given that this is the first in a (hopefully) long series of Journal summaries I will just quickly outline the rogue structure: I will not be writing with the quality of a Journal review article or anything like that; I am merely reading the papers and jotting down some key quotes and my thoughts (if any). The purpose of these summaries is purely selfish in nature to help jog my memory of certain articles when I go looking for them in the years to come.
The Economic Sociology of Capitalism is a very interesting look at Schumpeter and Weber by Richard Swedberg. The first thing that really stood out to me was this section on Schumpeter [my bolding]:
In the standard version of Chapter 2, Schumpeter explicitly states that ‘economic sociology’ deals with institutions (‘the social framework of the economic course of events’), which he counter poses to the task of economic theory, which is to deal with economic mechanisms (1934: 60–1). These economic mechanisms relate either to statics or to dynamics, that is, either to the type of economics that one can find in Walras or to the new type that Schumpeter was trying to develop in The Theory of Economic Development.
n the static type of the economy (to which Chapter 1 of Schumpeter’s book was devoted), there is a ‘circular flow’, which means that nothing new ever happens. All is exactly as it always has been in this type of economy: the same items are produced and consumed over and over again, and there are no innovations. ‘Add successively as many mail coaches as you please, you will never get a railway thereby’ (1934: 64). Still, in reality, change does occur in the economy, and it comes about, in Schumpeter’s famous formulation, when the entrepreneur puts together ‘new combinations’ (1934: 65–6, emphasis added). The entrepreneur does not invent anything new; he innovates, which means that he recombines already existing resources. According to a famous passage, entrepreneurship essentially covers the following five situations: ‘(1) The introduction of a new good’, ‘(2) the introduction of a new method of production’, ‘(3) the opening of a new market’, ‘(4) the conquest of a new source of supply of raw materials or half-manufactured goods’, and ‘(5) the carrying out of the new organization of any industry, like the creation of a monopoly position’ (1934: 66).
While I will certainly be covering the 'static' type of economic mechanism - the type that neoclassical economics specialises in - my bigger concern is the latter, 'dynamic' type: the entrepreneur; or, more importantly, the institutions and organisational structures that enable entrepreneurship. Swedberg continues:
In the 1911 version of his theory of entrepreneurship, Schumpeter emphasizes very strongly that what is most remarkable about the entrepreneur is not that he has figured out some new combination – good ideas are plentiful and cheap, we are told – but that it is extremely difficult to transform these ideas into reality. ‘New combinations are easy to come by, but what is necessary and decisive is the action and the force to act’ (1911: 163). The entrepreneur, Schumpeter repeatedly states, is fundamentally a ‘man of action’ and always ready to leap into ‘energetic action’ (‘Man der Tat’; 1911: 128, 133, emphasis added). It is consequently in his ‘spiritual constitution’ that the entrepreneur differs from the ordinary person (‘Geistesverfassung’; 1911: 163, cf. 142–3).
This, I believe, would appear to be in direct opposition to modern IP laws. Anyone can have an idea; actually turning that idea into a reality and getting consumers to buy it - in other words, to create value - is the hard part.
Swedberg then discusses Weber's view on Bureaucracies:
The bureaucracy represents, according to Weber, the most efficient way of organizing economic activities, from a capitalistic perspective. There exists, however, always a tendency for the bureacrats to take the firm over since they control most of the important information and think that they understand how to run things. This, however, would mean its end as a dynamic capitalist force, among other reasons because bureaucrats are not very interested in profit-making. Just as the political leader constitutes the only effective counterweight to the bureaucrats in political life, the entrepreneur is the only effective counterweight to the bureaucrats in economic life (1978c [1922]: 220–1, 956–7).
This is an extremely interesting and important revelation: yes state bureaucracies may, on paper and in a static sense, be the most efficient ways of organisation; however, bureaucracies kill the dynamic aspect of efficiency - the very thing neoclassical models exclude - and this is a huge issue. Swedberg:
Weber does not speak of ‘capitalism’ in his theoretical economic sociology but of several different capitalisms. He also emphasizes that these different types of capitalism each consists of social action and are not to be seen as rigid social systems. In Chapter 2 of Economy and Society the key section on capitalism is entitled ‘The Principal Modes of Capitalistic Orientation of Profit-Making’ (Section 31); and Weber distinguishes between six different types of these orientations. There is, for example, ‘orientation to the profit possibilities in continuous buying and selling on the market with free exchange’ as well as orientation to profit opportunities that are the result of ‘domination by force . . . by political authorities’ (1978c [1922]: 164–5).
...he also states that his six types can be grouped under three general headings: ‘politically oriented capitalism’; a type of capitalism that can only be found in ‘the modern Western World’; and a type of capitalism that has ‘been common all over the world for thousands of years’, but which is not politically oriented (1978c [1922]: 165–6). Political capitalism(as it is usually called) basically means capitalistic activity where it is the political authorities that in one way or another control or make possible the profit opportunities. In what can be called rational capitalism, the profit opportunities are to be found primarily in the free market and are approached in a methodical fashion. In traditional commercial capitalism (as one may call the third form of capitalism), profit is produced through minor trade or currency deals.
If I had to choose a definition, I would have to say that today we have a full on version of political capitalism; the rational capitalism of centuries past has well and truly departed.
Let us get back to Schumpeter for now (which is more relevant to my research):
Schumpeter was convinced that institutions play a key role in the economy and in principle should be part of the analysis. What he disliked about institutionalists such as Veblen and company was not that they focused on institutions but that they did such a lousy job:
"I have been referred to as the ‘arch-enemy’ of Institutionalism. I plead guilty to the charge, but I want to make it quite clear what it is I object to. If Institutionalism went quietly to work on the programme which seems to be implied in its name, that is to say if institutionalists produced studies about social institutions, such as the family, private property and so on, I should not only not object, but welcome. But they do nothing of the sort. Instead, they criticize without understanding, what has been done and is being done, and they replace positive achievement by ambitious programmes. Whatever of value has been written by any member of that group could have been written by any other economist and does not imply any fundamental change in method and outlook. I reproach to the most famous of institutionalists, to Th. Veblen, bad workmanship and insufficient scientific equipment, which made him take old err for new truth. But this whole movement is passing away. And that eminent economist, who for some time showed some favour to it, Wesley C. Mitchell, has by his most recent work proved that he is willing to lead towards reconciliation." (2000 [1931]: 23)
An excellent point and the vagueness of institutions has been something I have had to grapple with. Institutional analysis needs to focus on micro issues just as Schumpeter said it needed to survive. By applying new institutional economics; organisational theory; the theory of the firm; and (yes) even neoclassical economics to seaports I am hoping to go in a direction somewhere along the lines of what Schumpeter was asking for.
More Schumpeter on the dynamic entrepreneur versus the static bureaucrat (that could be a chapter title!):
The entrepreneur is the key figure in capitalism, and Schumpeter contrasts him to the bureaucrat or the manager: ‘the central figure on the capitalist stage, the entrepreneur, is concerned not with the administration of existing industrial plant and equipment but with the incessant creation of new plant and equipment, embodying new technologies that revolutionize existing industrial structures’ (1951a [1946]: 193).
Schumpeter's (well-document) hope for the dynamic entrepreneur and capitalism was very pessimistic:
He adds that for the future the most likely scenario is a movement towards ‘increasing bureaucratization of economic life, coupled with an increasing dominance of the labor interest’ (1951a [1946]: 203). ‘Regulated capitalism’ or ‘fettered capitalism’ will slowly turn into ‘guided capitalism’ – and this last type of capitalism is so close to socialism, according to Schumpeter, that one might just as well call it precisely this (1951a [1946]: 204).
One wonders if Schumpeter would call what we have today socialism? I suppose if the above quote is his definition of socialism, then his prediction has already come true?
He continues on to monopoly and how only a legislated monopoly - a state-granted monopoly - can survive in the long-term:
Schumpeter argues, monopoly does not mean that a corporation can simply raise its prices, sit back and collect the extra profit. ‘A monopoly position is in general no cushion to sleep on’ (1975a [1942]: 102).
Back to Weber:
In Weber’s later works, he carefully enumerates the economic institutions that are necessary to a vigorous modern capitalism; and these are, according to General Economic History, the following: the rational enterprise, rational accounting, the modern state (including rational or calculable law), the free market, free labor, rational technology and the commercialization of economic life (1981 [1923]: 276–7, 312–14, 354). To this are then added the following three items, which roughly cover what Weber in The Protestant Ethic calls the spirit of modern capitalism: the rational spirit, the rationalization of the conduct of life, and a rationalistic economic ethic.
That is all true but both Weber and Schumpeter argued that institutions alone do not result in prosperity.
The right type of institutions are necessary for a healthy capitalism to exist, but they cannot bring it about by themselves. Without the capitalist or entrepreneurial spirit, the institutions will stifle a healthy capitalism and replace it with traditional capitalism or some form of socialistic capitalism.
So how does one achieve a "capitalist or entrepreneurial spirit?" Both Schumpeter and Weber were extremely critical of the giant corporation in capitalism - but I believe economists have concluded that one of the reasons corporations have become so large is because of factors such as limited liability, regulatory burdens (need an army of lawyers), the benefits of lobbying versus producing and so on. Swedberg concludes that:
The central message of Weber and Schumpeter is as follows:
• capitalist institutions are a necessary but not a sufficient condition to bring about a healthy capitalism; and
• the key to a vigorous capitalism is to be sought in the structure of ‘the spirit of capitalism’ (Weber) or ‘the civilization of capitalism’ (Schumpeter). This means that research of such items as ‘mentality’, ‘ethos’, ‘lifestyle’, ‘economic ethic’, and the like, should be high on the current agenda of economic sociology.
While my research is not in economic sociology - thus the latter paragraph is not entirely relevant (although is an important factor to consider) - all in all this was a very interesting read. There is no doubt that the works of both of these economists will feature in my thesis.
