Three Economists: Keynes, Marx and Schumpeter

Three Economists: Keynes, Marx and Schumpeter

 

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Abstract:

This paper does two things: it analyzes the basic approaches to economics of the three men listed - Three Economists: Keynes, Marx and Schumpeter introduction. Second, this paper will see to compare and contrast them using nine specific modes of comparison. Speaking more generally, this paper will compare and contrast the above writers under the idea that social life is not separate from economic life, and therefore, as a consequence, economics is social, and social is moral, and therefore, economics is a moral science.

 

This paper will concentrate on the basic theoretical approaches of three famous economists, JM Keynes, Karl Marx and Joseph Schumpeter. All three will be analyzed with one thing in mind: the nature of the morality of economics. Economics is part of society, and society, in order to make sense, must have a moral root. Hence, economy must partake in this moral root. The question of the relation of economics to society, and hence, to the moral root of society is the best way to compare and contrast the basic approaches to these three writers, none of whom actually believed that economics existed on a different plane from the rest of society. This paper will begin with a basic description of the three economists mentioned, and then, in a separate section, will deal with the major issues of contrast that derive from the analysis.

I.

All three economists above were also social theorists. All three had specific problems with the classical model of Smith and Say, and all three, importantly, existed at a time of “advanced capitalism,” that is, from the period between the 1848 revolutions and the end of World War II, the period of the untrammeled victory of capitalism over most of the world and the domination of its machinery of thinking. The level of economic complexity of this era is such that economics was no longer a science, too many variables needed to be taken into account to make any prediction, far too many than any one school or idea could muster. The complexity of advanced, mechanized and urban capitalism was such that any approach to economic theory with a social bent must be of its very nature incomplete and always awaiting new sources of information or new trends. Economics in this era becomes a mass of theory and complications arising from the huge scope of the economic system and the massive array of variables that confront the researcher.

JM Keynes (d. 1946) is one of the most famous economists of the 20th century. His life spanned both the 19th and 20th centuries, and his work might be summarized as one of the ways of simplifying the massive economic complexity of the modern world. He was a liberal in basic politics and rejected any form of revolution. He believed that capitalism was workable, but just with a substantial dollop of government assistance.

For some of the basic information here, this paper is largely reliant on the excellent paper by Dudley (1946), “The Pragmatic Basis of Keynes’ Political Economy.” This paper is perfect for a project such as this because, 1) it deals with the relations of economics to the broader issues in modern societies, and 2) it deals with practical applications rather than abstractions. Because Keynes was a practical politician as well as a theorist, this paper is a major contribution.

Keynes’ theory cannot really be summarized in pithy sentences. It is a growth, a development that took an entire lifetime to begin to perfect. To begin in any specific place is a bit arbitrary, but has to be done. Keynes made a basic distinction between two forms of capitalism, or more accurately, two forms by which capitalist relations dominates a society. The first is industrial capital. This is the classic 19th century model so beloved by Marx. This is the economic society of machines, production and hard work. But it is confronted by a very different sort of capitalism, one not foreseen by the classical school, that is, the coming domination of finance capitalism and the speculative and inflationary spirit it contains (Dudley, 1946, 122).

It does not seem as if there is any immediate relation between the two, and there is no theory that one derives from the other in some necessary way. They are, however, two radically differing ways of viewing political economy. The domination of finance capital is one of the most serious problems of 20th century capitalism, and Keynes sees this as one of the most serious causes of unemployment (128). Even more, such an approach to economic relations is inflationary, since money, not capital, is the dominant variable in economic relations. Hence the second major issue concerns the control over the money supply. For Keynes, this is the primary question in 20th century economics. He goes so far as to blame nearly all financial ills of society on the unstable value of money (128ff). Hence, speculation is inflationary, misappropriates liquidity, and leads to unemployment. To put this simply, one can say that a money (rather than hard capital) dominated economy is almost by definition unstable, and really, the only beneficiaries of such an economic prejudice are those who have the wherewithal to manipulate the money supply and speculate on the value of currency (128).  Needless to say, Keynes is a partisan of the industrial form of capitalist relations, and may have seen the destructive tendencies (e.g. on the stock market) of a purely speculative economy. Clearly, the experience of the Great Depression influenced this approach to economic thought.

Keynes is not a partisan of revolution like Marx. Nevertheless, he strongly questions the working class’ satisfaction with a system where the value of their wages is manipulated by anonymous speculators on the money market, and the produce of their labor is itself valued thereby. The working class sees huge fortunes being made by actually not working, i.e. not creating anything, and hence, could create a more radical disconnect between labor and capital, i.e. when capital is seen as primarily liquid (122-125).

Even more, the problem of an unstable money supply that is crated by a finance-capitalist system causes increased savings. While many modern economists love the idea of large savings as a way to increase the money supply when necessary, Keynes sees it as a problem, for he sees savings a basically unused and mis-appropriated liquid capital (130ff). If money is in the bank, it is not part of the economy, it is not being spent on items or services. Hence, the more money in the bank, the slower the economy and a slump in economic life can be predicted. Too much saving leads to unemployment, since that money is sitting idle, while circulating money puts people to work.

Possibly the most famous element in Keynes theory is his idea of the state’s involvement in the economy as a productive partner. Of everything Keynes wrote, this is the most irritating to the libertarian school, or the so-called classical school. For Keynes, balance is everything. He does not believe that business cycles can truly be eliminated (though stable money would help). But in the condition of a cyclical economy, that is, slumps followed by adjustments in prices, followed by booms (which drive prices up again), is too unstable, and causes savings, due to fear of investment. Hence, “Keynesianism” is often summarized as the state taking action to balance these cycles. The system is simple: in boom times when inflation is a danger, the state needs to restrict money, that is, to put a small damper on the boom itself. In times of bust, that is, falling prices, the state should increase money supplies and spend itself, hence counteracting the increasing savings that comes into existence in bad times, where people are afraid to invest (141ff). Of course, the basic issue here, according to Dudley, is the controlling of unemployment. There are several issues here: first, that unemployment can be alleviated by state spending, and second, that full employment (in a non-technical sense, that is 100% employment) is itself not necessarily a good thing, since the greater the employment, the smaller the individual; wage and smaller the actual productivity of each worker. Think of this as a sort of inflation of labor. Keynes sees “full employment” in the technical sense, as that level of employment that maximizes both wages and production without the danger of “inflationary labor.”

Marx would clearly have taken issue with the above. Ultimately, had Marx been alive in the 1940s, he would have chided Keynes for holding the economy as a single unit, rather than being fundamentally divided between owners (including the state) and workers. The state can never be a neutral arbiter, since it serves the dominating class only.

Karl Marx’s vision, as described in the excellent essay by Le Baron (1971) “Marx on Human Emancipation,” is a historical journey to the full development of mankind’s potential. While Marx’s theory is far too involved for a short paper like this, it might be summarized by holding that human beings are products, as well as creators, of their environment. All ultimately is reducible to economic relations in that labor is how mankind expresses itself (Le Baron, 1971, 559-560). To the extent labor is divided into classes, individuals are not fully actualized. In modern capitalism, individuals are part of a huge machine of production that reduces them to things: human machines that produce so that the elite whom own capital (however defined) can make large profits.

In every stage of history, defined as the changing  from a slave to a feudal economy, and from that to capitalism, there is not merely the shifting of economic patterns or changes in technology, there are also changes in social forms and modes of thinking. But it is this shift in thinking, what it is to be human, what work is, etc., that really lies at the root of the word “revolution” (Le Baron, 1971, 563). A revolution is not really such unless it is accompanied by radical shifts in the way people live and think. Hence, for Marx, economics is not merely about relations or technology, but about the very nature of humanity. In other words, there is no fixed human nature, human beings think “natural” is whatever is dominant at the time. But economic history is made up of shifts, shifts in how people view individualism and community: putting this very simplistically, it is the gradual emancipation of the individual from oppressive forms of economic exploitation. From the extreme form of exploitation of slavery, comes a less extreme form in feudalism, to an even more hidden form of exploitation in capitalism, and through the last revolution, eliminating exploitation altogether in socialism (567-568ff).

But this process is fueled by the developments of new technologies that eventually lead to new ideas about the world that germinate in the waning days of the old society. But this is the very concept of liberation: that as economic relations change (for the better), so do attitudes. A revolution, in other words, is not just about destroying a ruling class, but about remaking the very root of humanity (cf. esp. 565).  Economics is social development, and can never be seen as apart from it: morality can be summarized as the use of technology to liberate humanity not merely from want and necessity, but from class society and the domination of one man over another. Ultimately, for Marx, economics has a moral end. That’s not to say it’s not a matter of science, Marx thought economics was the master science, but it is about the creation of a man who can be all things, who is not part of a machine, but that the machine becomes a part of him, so to speak. Liberation is the final end of economic science, when both attitudes and technology develop in such a way that there is no longer any need for domination, for classes or for inequality.

And lastly, the social-economic approach of Joseph Schumpeter needs to be dealt with. For this section, the article by Harry Dahms (1995) is extremely useful in dealing with economics in relation to morality and society.  Unlike Marx, Schumpeter was opposed to using economics in a scientific way. The modern economy was far too complex for a scientific treatment, and hence, rejected Marx for this (and other) reasons. For Schumpeter, like Marx, he is concerned with the relation of social forms to economic change. This is all important: like Marx, Schumpeter views the social ideas of a people, at a specific time, as relative both to itself and to its level of economic development. He identifies two economic types: first the creative entrepreneur. This person is the real engine of economic change, an engine almost completely ignored by Marx, in fact, the latter would reject this “individualistic” approach to economic change. The second is the bureaucrat, the rational citizen who has no new ideas, but is content in “managing” the ideas of others as they are manifested in socio-economic  life. These are the bureaucrats and the office workers (Dahms, 1995, 1-5). These are the two necessary forces in social life.

The “creative” force is the most interesting in the theory of Schumpeter, interesting for many reasons, not the least of which is that Marx’s response would be so violent. The creative entrepreneur is the engine; he is not rational in the ordinary sense, he goes out on a limb, he refuses to compromise. The bureaucrat does not understand him. For Marx, this is unacceptable: the “creative genius” is only the product of the society that nurtured this propensity and hence, cannot be given rewards different from the remainder of the laboring world.

Like Marx, Schumpeter does have a (sort of) philosophy of history dealing with economic change, but a theory that only really has application since the 1840s. Basically, the structure of economic life is stressing the ability of the creative minds to function. Marxists, according to Schumpeter (and Dahmns) cannot really deal with the creative genius. In fact, the existence of a settled, “rational,” bureaucratic economy is such the norm that the creative genius is being relegated to nothingness. Even more, the creative genius is largely extinct, where the “creativity” in contemporary society is really the product of the office water cooler (9-10). Soon, the economy becomes a non-complex, bureaucratic organism, where objects are not so much crated as managed. Production and consumption are both highly regulated and bureaucratized. This leads to two stages: the first, the separation of the bureaucracy from real life, a situation that this writer typifies economic life in 2009. There is an imperative then, for the bureaucratic and managerial life of the economy to be reintegrated with society, a condition that Schumpeter would describe as “socialism,” but a socialism in a manner that Marx would not recognize.

II.

The issues that these three writers being up are manifold. For the sake of organization and brevity, this paper will reduce them to nine. The first section of this paper dealt with a thumbnail sketch of the theories involved (and highly simplified them in the process), the second will be more analytic, seeing contrasts and comparisons in the theories above.

1. The most basic issue and the purpose of this paper: the relation of economic relations to society. The great weakness of Keynes is that he sees economics, as in the “classical school” as something apart from society. Both Schumpeter and Marx take a more integral view. In fact, in a real marxian socialism, society will integrate all of its creative powers into a single integral whole: no more producers/consumers; intellects/manual workers, blue-collar/white collar, etc. Such dyads will disappear into a single, integral social whole of whole men and women. Schumpeter, while accepting this imperative, does not have the moral sense that Marx has.

2. The relation of personal transformation to the economy is another issue that is “basic.” Economic relations are not merely about production and consumption, but about human self-expression. Both Schumpeter and Marx agree. Again, being a cliche liberal, Keynes generally holds the position that human society is something apart from economics, economics is a sub-science that deals strictly with production and consumption. Social life exists on other planes. This is a classical liberal approach. But both Marx and Schumpeter hold that economics is separated from social life because of alienation: Marx, the alienation of the working class from its product, Schumpeter, the alienation of the “great men” from social life in general.

3. The relation between economics and though is a correlate to the above. If economic change can be correlated with alterations in thought (e.g. a move to individualism over the family in the transition from feudalism to capitalism), then the classical position should be abandoned. Economics is a part of social life, but one temporarily alienated from life in general, especially the life of thought.

4. The big issue: individuals versus social forces. Both Keynes and Marx hold the latter, Schumpeter the former. An individual approach sees society as being comprised of leaders and followers. Both are necessary, but both are not given the same rewards. For Schumpeter, economic change is not an impersonal interplay of forces, but the explicit daring of the great men and their ideas. For Marx and Keynes (but for different reasons) forces of class or the money supply are the true causes of things.

5. The great refutation of Schumpeter to Marx is that, since the latter considered revolution as bringing in the “whole” man as opposed to the modern, alienated one, Schumpeter says that Marx is wrong. For Marx, the revolutionary generation is being nurtured in alienation, developing a different sort of consciousness from their forbears. But Schumpeter says there is no new consciousness being developed, but the opposite: the ordinary are defeating the revolutionary. If Schumpeter is right, then revolution is impossible in Marx’s sense, since the revolutionaries are all thinking like bureaucrats. The higher man is gone: all is management. In fact, Schumpeter might say to Marx that he completely underestimated capitalism affect to create generations upon generations of global mediocrities. The very opposite of the “new man” that Marx was so enamored with.

6. Being more speculative, it might be the case that Marx and Keynes will agree that finance capital is emerging (now we would say it has emerged) from the domination of hard capital, i.e. machines, etc. This means that the world has gotten even more exploitative than before. At least before, the entrepreneur was dominant. His ideas gave him his fortune. Now, no ideas are necessary, just the manipulation of money and markets. So now, the billionaires do not even produce anything, but manipulate the markets whose value has been created by labor.

7. But more generally, Schumpeter and Marx both hold that capital, however defined, is central. In other words, without capital, there is no creativity. The eccentric genius will be ignored today unless said genius is a billionaire and can then project his genius to the world. No capital, no reward. Hence, both Marx and Schumpeter will hold together that all is capital, and capital rules the world. In both cases (but for different reasons), the true mover of history is frustrated in the face of pure money, money divorced from the world, from production, from rational control.

8. A huge issue here has already been alluded to: Marx ignores the world of the creator, the genius. For Marx, society is stable and essentially homogeneous: there is capital and there is labor. All other differences are radically secondary and have no economic or social value. But for Marx’s theory to work, the genius must be relegated to being a mere “product of society.” Otherwise, he would be a class to himself, and hence, deserving of the grater rewards than labor, labor that merely does what the geniuses tell them.

9. Lastly, Keynes has no sense of liberation. As a liberal, he holds that society will generally go on being what it has been. There is no liberation since men are men, infallible and typical, sin is ever present, and hence, there is no “end.” There are only means.

Hence, by way of conclusion, this paper has done what it has set out to do: to basically describe the sense of morality within economic theory, and the failure of a theory, such as Keynes, that leaves morality out of economic analysis. To insist that economics differs fundamentally from social life in general is to argue that economics exists on one plane, morality another. This is false.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography (with Brief Annotation):

 

Dillard, Dudley (1946). “The Pragmatic Basis of Keynes’ Political Economy.” The Journal of Economic History 6: 121-152

This article got me thinking about the relation of economics to society. In other words, it holds that economics can never be considered apart from social life, its habits, folkways and values. In many ways, it set the stage for this paper as well as provided a very nice summary of Keynes’ views and set them in a social context. Also, it was written for the layman rather than the specialist, which made it ideal for a paper at the high school level.

 

Le Baron, Bentley (1971). “Marx on Human Emancipation.” The Canadian Journal of Political Science 4: 559-570

While a bit more difficult, this paper put Marx into social perspective. The real stress here is the stress of this paper: economic change is about mental change. Economics is about liberation: about the human being as free from want and necessity, and hence, pursuing more humanistic objects rather than worrying about the basics of food and shelter, things that render humanity at the level of animals.

 

Dahms, Henry (1995). “From Creative Action to Social Rationalization of the Economy: Joseph Schumpeter’s Social Theory.” Sociological Theory 13: 1-13.

This paper is the basis for the above section on Schumpeter. The big stress is on the relation of “creativity” to “rationalization.” The connection is made perfectly clear: creativity gets the system going, rationalization keeps it going. The latter are conservative (in the vague sense) while the former is radical, seeking deliberately to go beyond the typical. This thesis places Schumpeter as holding economics as a part of social life (neither above or below it). It unified this paper and its approach.

 

 

 

 

 

 

 

 

 

 

 

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