2.

Mechanical Equilibrium and Political Market Process: From Profit-Seeking to Profit-Making

We showed in the last section how Schumpeter perceived that in equilibrium theory the very purity of
self-interest means that the laws of competition imposed axiomatically on individual agents are
in contradiction with that self-interest. Pure self-interest and pure competition atomicity! are
inconsistent apories because the limitation on pure self-interest imposed by the requirement of
perfect competition contradicts the purity of the self-interest of economic agents as well as the
purity of perfect competition. "his is so# first# because pure self-interest would push economic
agents to ignore the requirements of perfect competition# and second because perfect competition
would induce economic agents to engage in imperfect competition as well$ "he union of
opposites is a logical flaw first identified by %icholas of &usa. 'or a discussion# see (rnst
&assirer# Individual and Cosmos.! "his aporetic aspect of the axioms of %eoclassical equilibrium
theory leads away from its purity or perfection and into the conceptual analysis of its real
implementation which requires conceptual limits on the purity and perfection of both self-
interest and competition. "he formal equality of self-interests# their mutual free-dom# can ensure
only a fro)en or static mechanical equilibrium or# with Schumpeter# a circular flow. Self-interest
wor*s aporetically# then+ on one side# it brea*s out of pure equilibrium# it leads to the impurity
of imperfect competition# as a logical-conceptual requisite of its purity, and on the other side# it
leads bac* to equilibrium as a result of the countervailing equal purity of other self-interests#
that is to say# as a result of the laws of pure competition.
-y postulating a development of the economy from within# Schumpeter is simply ma*ing explicit what is
implicit in the axiomatic pure laws of economics reduced to the status of laws of mechanics+
he is trying to brea* free of the apories of pure equilibrium theory by introducing the impurity
implied in the very purity of self-interest and competition . a self-interest so ab-solute immune
from regulation! that it cannot be bound even by the externally-imposed# axiomatic laws of
pure competition# or what Schumpeter calls pure laws of economics. /s we demonstrated
above# if we understand equilibrium as a state of pure laws of economics and Entwicklung or
development as a state of disruption or crisis of that equilibrium on the way to# in transition
to# a new or fresh or another state or level of economic equilibrium# then such a transition
is simply impossible because equilibrium and Entwicklung development-through-crisis or
evolution! are categorically different concepts or conceptually inconsistent categories.
/nd yet# as &acciari has observed in "ransformation of the State and Political Pro0ect!# the notions of
development and crisis entail the existence of a state of non-development and non-crisis.
-oth development and crisis point to an ideal or pure model . whether this be Walrasian
equilibrium or 1obinsonian tranquility or Schumpeter2s circular flow . that provides a
measure or a metre by means of which we can say that an economic system is developing or is in
crisis. Schumpeter himself shows at one and the same time how his theory of economic
development is bound to the pure model of equilibrium and also how it may be possible to define
development or crisis in a novel and different way that does not imply negatively the actual
existence of a state of theoretical equilibrium or even of a harmonious state of tranquility or of
circular flow+
3evelopment has a tendency to move out of equilibrium. "his is quite different from what we could call organic
development, it leads to quite different pathways that lead somewhere else. If the economy does reach a new
state of equilibrium then this is achieved not by the motive forces of development, but rather by a reaction
against it. Other forces bring development to an end, and by so doing create the first precondition for
regaining a new equilibrium.[4567
8nce again# as we showed in the discussion above# Schumpeter seems to be quite aware of the
impossibility of the pure laws of economics laid out in equilibrium theory being logically
consistent with the pure economic theory of economic change+ in his own words# he is aware
that a dynamic equilibrium is a contradiction in terms# an oxymoron. 9et he persists with the
idea that it is possible for an economic system that allows of economic change to transit from one
equilibrium to another . a statement that must be contradictory given that this transition can be
achieved only by infringing against the axiomatic rules governing equilibrium. Whilst he insists
on the distinctness of the two processes . the tatik and the !ynamik . in the sense that they
are logically inconsistent# Schumpeter obstinately persists with the attempt to base his entire
theory of economic development# Entwicklung# precisely on the ability to transit these
intransitable processes# to fuse and bond them together.
/s we shall see presently# it was this chemical mi"ture or bonding that Schumpeter envied in the
theoretical wor* of :arl ;arx and specifically with regard to the concepts of economic
development and of histoire raisonnee. <ndeed it is possible to suggest that Schumpeter found
his own theoretical vocation in his own critique of ;arx2s labour theory of value . a critique that
his mentor# (ugen -ohm--awer*# had already conducted and that enabled him to enucleate a
novel theory of the nature and causes of interest. Schumpeter2s mission was instead to discover
the nature and origin of profit and# by imitating ;arx# to combine profit with a specific
economic sub0ect . the entrepreneur. 'ollowing and applying faithfully -ohm--awer*2s
critique of ;arx# Schumpeter insists that ;arx2s labour theory of value has as supreme aim the
demonstration of the presence of exploitation in capitalist enterprise# and that this demonstration
is to be carried out under the overarching assumption of perfect competition. =ust as he was able to
show that profit is impossible in equilibrium theory# so is Schumpeter able to dispose easily of the
existence of surplus value and of exploitation in conditions of perfect competition.
-ut it is the sequence of the reasoning that Schumpeter performs with regard to ;arx2s theory of surplus
value that is most enlightening in tracing the train of thought that led Schumpeter to his own
theory of economic development. >et us examine this line of thought carefully+
Moreover, it can be shown that perfectly competitive equilibrium cannot exist in a situation in which
all capitalist-employers make exploitation gains. For in this case they would individually try to expand
production, and the mass effect of this would unavoidably tend to increase wage rates and to reduce
gains of that kind to zero. t would no doubt be possible to mend the case by appealing to the theory of
imperfect competition, by introducing friction and institutional inhibitions of the working of
competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on.
!nly a moderate case could be made out in this manner, however, one that Marx would have heartily
despised".
#his is so easy only as long as we see in the theory of surplus value nothing but a proposition about
stationary economic processes in perfect equilibrium. $ince what he aimed at analyzing was not a
state of equilibrium which according to him capitalist society can never attain, but on the contrary a
process of incessant change in the economic structure, criticism along the above lines is not
completely decisive. Surplus values may be impossible in perfect equilibrium but can be
ever present because that equilibrium is never allowed to establish itself. #hey may
always tend to vanish and yet be always there because they are constantly recreated"This aspect
proves to be of considerable importance. %&$'()
&learly# it is not the case that ;arx thought that capitalism can never attain a state of equilibrium+ in
reality what ;arx2s critique of bourgeois &lassical Political (conomy aimed at was showing that
the reality of capitalism can never be theori)ed with the analytical categories of equilibrium
analysis. <t is not the case# therefore# that ;arx thought that capitalism is incapable of attaining
equilibrium because it is in a constant process of incessant change . as if this were 0ust a matter
of degree# 0ust a matter of hitting a specific quantitative target. 1ather# what ;arx was saying is
that the categories of equilibrium theory - which are certainly applicable to the &lassical Political
(conomy of Smith and 1icardo as well as to %eoclassical economics - are conceptually
inapplicable to its reality because it is not a quantitative reality but a political one. <n other words#
the value involved in the capitalist mode of production is not an ob0ective quantity, value refers
instead to historically specific social relations of production. We shall examine this point
closely in the next section.!
So long as surplus value is seen as an amount# a value over and above what is needed for labour-power
to reproduce itself sur-plus# #ehr-wert or added value# in ?erman!# then it is clear that the laws
of competition can serve to regulate the distribution of this fixed amount in such a way that any
initial inequality or exploitation is gradually eliminated to a point where no value is extracted
exploitatively from wor*ers . for the simple reason that perfectly competitive equilibrium$
would unavoidably tend to raise wage rates and to reduce gains of that kind to %ero. We can see
therefore that if we postulate the existence of equilibrium as an axiom of economic analysis# then
surplus value or profit is impossible because the axiomatic requirement of equilibrium will reduce
all economic values and prices to relative prices . which cannot be fixed until all transactions
have been conducted once and for all . which in turn excludes the notion of surplus value when
combined with perfect competition. Similarly# if we theori)e surplus value as an ob0ective quantity
instead of as a quantity dependent on relative prices# then perfect competition will ensure
equilibrium.
-ut the point is that although surplus value may be impossible in equilibrium$it can ever be present
because that equilibrium is never allowed to establish itself$ /nd it is never allowed to establish
itself not because of frictions in the operation of mar*et competition . not because of that
imperfection -# but rather because the very notion of surplus value has a categorically
different meaning once the productive system is transformed by the actions of its participants# of
its economic sub0ects$
<n other words# it is the very reduction or reification of surplus value to a thing# to an amount# that a!
ma*es equilibrium theoretically possible# and b! ma*es possible the gradual disappearance of
surplus value or profit by means of competition# because capitalists will raise wages until all
surplus value and exploitation vanish$ "o paraphrase Schumpeter2s own words# surplus value may
tend to vanish because of inter-capitalist competition and rivalry, but it will never so vanish
because it is constantly recreated. -ut for something to be incessantly recreated it simply
cannot be a thing or a quantity or a measurable value+ surplus value must be a social
relation$ <f the determination of profit or surplus value is changing incessantly with the economic
system# then this incessant change cannot be quantitative but must be qualitative because quite
evidently surplus value and profit are not entities that can be determined precisely either in
relative prices# as in %eoclassical equilibrium# or in absolute prices determined by socially
necessary labour time# as in &lassical equilibrium.
What this means is that once we accept that perfect equilibrium does not describe the reality of capitalism
in which surplus value or its monetary equivalent# profit# is the essential feature of economic
activity# then we must accept that capitalism is not a thing or quantity or measurable value#
but it is rather a political value$ <n short# once we change our analytical perspective from the
tatik of equilibrium analysis to the !ynamik of economic development# then even the sub&ect-
matter of our theory changes# it is trans-substantiated# and we must shift from the quantifiable
relative or absolute values or prices of equilibrium theories to the ethico-political values of
development theory$
Pure competition leads to a stationary and stagnant state because# although it ma*es profit-seeking
imperative or axiomatic# under its conditions profit-making is utterly im-possible$ -ut then# it is
also the purity of competition - the political antagonism implicit in its conceptual inclusion of
profit-see*ing or the profit motive - that logically implies or entails its actual implementation as
profit-making and therefore the competitive advantage of innovation. <t is thus that market
process becomes a conceptual requirement of the pure notion of equilibrium+ mar*et process is
the applied version of pure equilibrium theory+ market process is the extrinsication of
equilibrium. ;ar*et process occurs when pure theoretical profit-see*ing is allowed to become its
impure or applied historical version . that is# profit-ma*ing.
<t follows therefore that the transition from profit-seeking to profit-making involves the exit from
conditions of perfect competition in such a way that some competitors will be dis-advantaged whilst some
will gain a competitive advantage. "his advantage must be of a *ind that no e"change by the disadvantaged
competitors will be able to eliminate# and that is not derived from external or exogenous factors. "he
only endogenous factor then is the profit-seeking motivation itself and the ability of some competitors a!
to change the production function# that is# to innovate# and b! to restrain other competitors from adopting
the innovations that lead to the new production function. 'actor a! necessarily involves innovation as
defined by Schumpeter, and such innovation could hypothetically be originated by a single economic agent.
ut factor !b" necessarily requires the adoption of competition-restrictive measures# that is to say# of
political measures$ %nd these quite e&idently cannot be carried out by a single economic agent but
must be enforced by some economic agents ' inno&ati&e entrepreneurs for Schumpeter - against
others.
'or any *ind of competition to exist# short of all-out conflict# certain rules of the game must be agreed
upon. -ut these rules cannot encompass every aspect of competition because# if they did# the
end result would be competition so pure that no real competition could ta*e place$ /t
equilibrium# competition would be restricted and confined to being a velleity . the sterile
intention to see* profit as a necessary trait of self-interest. -ut once this velleity of profit-
seeking is given the opportunity to be implemented as profit-making# this fact by itself requires a
fundamental change in the modus operandi of the economy# one in which for profit-ma*ing to be
at all possible !a" inno&ation and !b" policies to protect it must be allo(ed to take place.
"herefore# for actual competition to ta*e place# there must always be room for competitors to
innovate# that is to say# to introduce new and unforeseen or unforeseeable strategies or techniques
that will undermine the existing competitive rules founded on the formal equality of the
competitors. -ut the possibility of such innovation and therefore of such inequality will result
inevitably in political conflict and antagonism that will have either to be mediated politically or
else to be resolved violently. <n either case the search for profit goes well beyond the nature of
profit itself as utility or welfare or ownership to the very essence of political power$
/ similar point is made by 3emset) in 'reedom and &oercion.!
Conventional competition . competition as it is theori%ed in all non-Schumpeterian economics . contains
the ineluctable tendency# in terms of its axioms and its aims# to induce a state of equilibrium or
stagnation. "hat is because innovation is not seen as a necessary aspect of the coercion intrinsic
and endogenous to the very concept of competition$ 9et to be truly competitive# and therefore to
be able to reali)e a profit# the capitalist entrepreneur must compete with existing businesses not
0ust on price or quantity . but indeed on innovation# that is to say# by introducing new
products or techniques that fundamentally undermine and threaten to obliterate the business
models of competitors$ &ompetition without innovation would lead sooner or later to a stationary
state of equilibrium.
*ll the more controversial is the proposition that entrepreneurs+ profits and related gains which arise in
the disequilibria caused by the impact of innovation are, as far as the business process itself is
concerned and apart from consumers+ borrowing, the only source of interest payments and the only
,cause, of the fact that positive rates of interest rule in the markets of capitalist society. This means
that in perfect equilibrium interest would be zero in the sense that it would not be a necessary
element of the process of production and distribution, or that pure interest tends to vanish as the
system approaches perfect equilibrium. -roof of this proposition is very laborious ./, because it
involves showing why all the theories which lead to a different result are logically unsatisfactory,
%0usiness &ycles, p.123. $ee also &$'(, p.1.1 on 4#he !bsolescence of the 5ntrepreneur6.)
<t may well be that the search for profit motivates innovation, it is certainly not innovation that motivates
the search for profits. /nd yet it is most certainly not the search for profits in and of itself that
forces economic agents to innovate. So long as we define profit in terms of pure competition as
all economic theory does# then it is impossible to explain the existence or possibility of profit$ 'or
innovation and economic change to occur# competition must be of such a character that at once it
coerces and it enables some competitors to gain an advantage over other competitors by
undermining not 0ust their profitability but also their very e"istence$ <n other words# competition
must reach far beyond the sphere of exchange, it must reach to the very foundations of civil
society . competition must extend to a type of conflict that goes beyond exchange and that
encompasses the political relations between economic agents. &ompetition must include political
antagonism$
n other words, the problem that is usually being visualized is how capitalism administers existing
structures, whereas the relevant problem is how it creates and destroys them. *s soon
as it is recognized, his 7the economist8s9 outlook on capitalist practice and its social
results changes considerably.
#he first thing to go is the traditional conception of the modus operandi of competition. 5conomists
are at long last emerging from the stage in which price competition was all they saw. *s soon
as quality competition and sales effort are admitted into the sacred precincts of theory, the
price variable is ousted from its dominant position. :owever, it is still competition within a
rigid pattern of invariant conditions, methods of production and forms of industrial
organization in particular, that practically monopolizes attention. But in capitalist reality
as distinguished from its textbook picture, it is not that kind of competition
which counts but the competition from the new commodity, the new
technology, the new source of supply, the new type of organization. !
competition which commands a decisive cost or quality advantage and which
strikes not at the margins of the profits and the outputs of existing firms but at their
foundations and their very lives. %&$(, p.;<)
(ven in the case in which competition is over price# it can be said that lower prices can be achieved from a
position of pure competition only when some form of innovation is present$
&ompetition# then# may well stand for an alternative way of describing political antagonism+ the problem is#
however# that the overall regulation of this competitive antagonism is to facilitate profit-ma*ing#
and therefore the owners of capital, and secondly that competition has the overriding role as a
repressive weapon against wor*ers in competition with one another over employment# wages and
wor*ing conditions.
Profit-seeking is the subjective motivation behind inno&ation) but inno&ation is the objective factor for
the e*istence of profit# for profit-making as a practical acti&ity$ (xcept that# in turn# the implementation
of innovation is impossible without impure or imperfect competition. /nd imperfect competition implies
necessarily the presence of political antagonism to decide 0ust how imperfect competition will be and to
whose advantage. <n equilibrium theory# although individual conflict is certainly present because
economic agents see* to maximi)e their individual utility or self-interest# they can do so only through
exchange# and therefore this individual conflict cannot axiomatically become political . again
because individual economic agents are not allowed to combine their self-interests. -ut this means that
profit-ma*ing# as distinct from profit-see*ing# is axiomatically impossible in a %eo-classical economy
and that it will be whittled away to )ero in a purely competitive &lassical economy$ <n other words# pure
competition is at once inconsistent both with profit-ma*ing and therefore also with innovation# unless its
definition is extended to cover not 0ust exchange but the political antagonism of imperfect competition as
well$
"hus# profit-ma*ing and innovation can be implemented only in a state of imperfect competition because
a state of perfect competition excludes axiomatically the possibility of advantage that comes
from innovation . that is to say# the entrepreneurial premium# Schumpeter2s profit# would be
neutrali)ed instantly. "he entrepreneurial premium or profit requires this friction between the
profit-see*ing or motive of pure competition and the profit-ma*ing of innovation. "his friction
is what lies between pure and imperfect competition, it is the battleground of politics and political
institutions. 'riction or traction# Wittgenstein would say# is what you need to be able to wal* on a
perfectly smooth surface. Pure competition is 0ust such a surface+ it implies the static plane of
profit-see*ing# but it cannot provide the dynamic traction of profit-ma*ing$! Schumpeter
ac*nowledges the necessity of this political intervention+
The introduction of new methods of production and new commodities is hardly
conceivable with perfect " and perfectly prompt " competition from the start. *nd
this means that the bulk of what we call economic progress is incompatible with it. *s a
matter of fact, perfect competition is and always has been temporarily suspended whenever
anything new is being introduced automatically or by measures devised for the purpose "
even in otherwise perfectly competitive conditions. %#S$%, p.1=3)