Question

Research and write at least two paragraphs comparing the contributions of Marx and Schumpeter to economic thought. Include references.

Answer 1

Schumpeter :- We turn now to Schumpeter’s theory of economic evolution. Schumpeter takes as his starting point the Walrasian model of a stationary capitalist economy in perfect equilibrium. He observes that in this model there are three ‘factors’, treated as data or parameters, through which change may be introduced into the economy. These are consumer tastes, quantities of factors of production, and methods of production or technology. Schumpeter excludes from his own model the first two as possible independent sources of change. Changes in tastes seldom occur autonomously. In any case, given the level of consumer incomes and production methods (as assumed in Walras’s model), any change in consumer tastes will result in a reallocation of society’s existing resources rather than initiate a process of ‘incessant change.’ Changes in factors of production can be divided, broadly speaking, into changes in population and changes in the quantities of produced goods(i.e. capital goods). Schumpeter has little difficulty in dismissing the first as an independent factor in initiating economic change. He argues that there is no unique relationship between an increase in population and, say, an increase in output per head: population changes may be associated with falling, constant or rising levels of productivity. Likewise, increases in produced goods if they embody the same technology as that already in use—say, production of more and more mail coaches—can not initiate a process of incessant change. In other words, the accumulation of capital by itself does not necessarily mean development. This is how in Schumpeter’s model the entire burden of explaining economic development falls on autonomous changes in methods of production, a term that he uses broadly to include not only changes in techniques narrowly defined but also new methods of business organisation, new products, the discovery of new materials and markets. He calls these changes ‘Innovations’. The essence of the idea is that things are done differently from existing practice and, as a result, existing resources are put to better and more productive uses. We note that since innovations do not take place by themselves, they have to be introduced by someone, that ‘someone’ occupies the central place in Schumpeter’s theory of development. He is an Entrepreneur. Let us now see how entrepreneurial initiative generates economic development. We start with a competitive capitalist economy in the stationary state and imagine that an entrepreneur enters upon this scene with a plan to introduce an innovation; say, a new technique to produce a particular product. We assume that innovation is a major one, like the railways or the computer, rather than a new kind of sandwich and that it is financed by bank credit. The success of the innovation will mean that the entrepreneur introducing it will have seized an advantage in terms of costs over his established rivals. With the old price still prevailing, he will enjoy ‘monopoly’ profits the size of which will be determined by the difference between his costs and those generally prevailing in the industry and the time it will take others to match hisefficiency. As the success of the new method is perceived, some of the establishedfirms will begin to imitate the new method and follow the path cleared by the leader; and as the success of the new method is more widely observed more and more will follow suit. Eventually, all, or nearly all, of the producers will have adopted the new technique. By then, the price of the product will have fallen to the average costs of production associated with the new method, andprofits will have been eliminated. This dynamic process is sometimes referred to as ‘Schumpeterian competition’.We can now summarise some of the results of the changes brought about by the innovation in the industry where it was introduced.

(A) Costs of producing the product in question have fallen and so has the price of the product; (B) the size of the market for the product in question should have increased (depending on its elasticity of demand) and, given the assumption of increasing returns to scale, we expect the typical size of the industrial unit to have increased; (C) most of the firms in the industry have earned profits, the size of profits of each firm depend-ing on the stage at which it adopted the new method; (D) those firms that were unable to adjust to new conditions have been eliminated. This is of course only a partial view of the process generated by the innovation in question (let us call it ‘primary’ innovation). It is partial because up to this point we have only considered the impact of the innovation on the industry where it was first introduced. Seeing beyond it, we observe that the success of the primary innovation will naturally have an influence on other industries. There will obviously be a significant impact on the sectors that supply it with capital goods and other inputs. This impact will, in the first instance, consist of increased demand for their products. And this, in turn, will increase the possibilities for greater division of labour and general technical improvements in this sector of the economy. Downstream industries will also be expected to receive develop-mental impulses from the primary innovation. The new technology associated with the primary innovation (and the ‘secondary innovations’ that may have followed) might also have found uses in other sectors of the economy. The general point here is that an important innovation in one sector of the economy gives rise to chain reactions and creates possibilities for development well beyond thefield of its original application. This view of the process suggests clustering of innovations in a small number of related sectors. Innovations will also be clustered in time. It is at this point that Schumpeter's theory of development links up with his theory of the business cycle which, as we will see presently, is simply an aspect of the development process. What we have been witnessing in the preceding paragraphs is an economic upswing or a period of prosperity initiated by the primary innovation. This phenomenon is explained by the fact that innovations and developments associated with them come in a swarm-like movement. First comes the leader, the original innovator, who is followed by his imitators in the same industry; then, we see entrepreneurs introducing secondary innovations in other parts of the economy who are then followed by their imitators, and so on. It is this herd-like stampede that causes the upswing.

Marx:- Marx famously depicts the worker under capitalism as suffering from four types of alienated labour. First, from the product, which as soon as it is created is taken away from its producer. Second, in productive activity (work) which is experienced as a torment. Third, from species-being, for humans produce blindly and not in accordance with their truly human powers. Finally, from other human beings, where the relation of exchange replaces the satisfaction of a mutual need. That these categories overlap in some respects is not a surprise given Marx’s remarkable methodological ambition in these writings. Essentially he attempts to apply a Hegelian deduction of categories to economics, trying to demonstrate that all the categories of bourgeois economics — wages, rent, exchange, profit, etc. — are ultimately derived from an analysis of the concept of alienation. Consequently, each category of alienated labour is supposed to be deducible from the previous one. However, Marx gets no further than deducing categories of alienated labour from each other. Quite possibly in the course of writing, he came to understand that a different methodology is required for approaching economic issues. Nevertheless, we are left with a very rich text on the nature of alienated labour. The idea of non-alienation has to be inferred from the negative, with the assistance of one short passage at the end of the text ‘On James Mill’ in which non-alienated labour is briefly described in terms which emphasise both the immediate producer’s enjoyment of production as a confirmation of his or her powers, and also the idea that production is to meet the needs of others, thus confirming for both parties our human essence as mutual dependence. Both sides of our species essence are revealed here: our individual human powers and our membership in the human community.

Marx was inspired by classical political economists such as Adam Smith and David Ricardo, while his own branch of economics, Marxian economics, is not favored among modern mainstream thought. Nevertheless, Marx's ideas have had a huge impact on societies, most prominently in communist projects such as those in the USSR, China, and Cuba. Among modern thinkers, Marx is still very influential among the fields of sociology, political economy and strands of heterodox economics. While many equate Karl Marx with socialism, his work on understanding capitalism as a social and economic system remains a valid critique in the modern era. In Das Kapital (or Capital in Eglish), Marx argues that society is composed of two main classes: Capitalists are the business owners who organize the process of production and who own the means of production such as factories, tools, and raw material, and who are also entitled to any and all profits. The other, much larger class is composed of labor (which Marx termed the "proletariat"). Laborers do not own or have any claim to the means of production, the finished products they work on, or any of the profits generated from sales of those products. Rather, labor works only in return for a money wage. Marx argued that because of this uneven arrangement, capitalists exploit workers. Another important theory developed by Marx is known as historical materialism. This theory posits that society at any given point in time is ordered by the type of technology used in the process of production. Under industrial capitalism, society is ordered with capitalists organizing labor in factories or offices where they work for wages. Prior to capitalism, Marx suggested that feudalism existed as a specific set of social relations between lord and peasant classes related to the hand-powered or animal-powered means of production prevalent at the time.