 So I'll be discussing the theory of growth in Schumpeter and Marx. So to start with I'll just mention what what I've read So what this talk is based on? On the side of Joseph Schumpeter 1883 to 1950. I've only read the theory of economic development published in 1934 on the side of Karl Marx 1818 to 1883 I will base my comments mostly on dos Kapital But I've read a lot of other things by Marx and Engels which will inform my presentation first I'll compare the methodology of these two economists then discuss Equilibrium or the the cycle of revenue CMC commodity money commodity then growth So MCM using Marx's term the the circuit of capital within that then a number of Subtopics come up including how we define capital. What is capital? How do we conceptualize it? How do we define profit? What is it? What's our theory of profit? So in terms of overall methodology one thing I was struck by was that Schumpeter follows Marx in ascending from the abstract to the concrete Which is to say that there are a number of more or less explicit? Assumptions that are known to be false in order to simplify the problem analytically and then Those assumptions are relaxed one by one and then we see how well does the theory so far developed? function under these more concrete realistic Circumstances like Marx for Schumpeter. It's important to distinguish surface phenomena from essence This is not true necessarily of all economists so in particular the Neoclassical economists or what Marx calls the vulgar economists are content with taking the analytical Concepts that arise naturally by participants in an economy as the ones that are needed for theory and then like Marx Schumpeter's presentation devised cleanly into two parts, which are also the two parts of my presentation using Marx's terminology the circuit of revenue commodity money And the circuit of capital money commodity money And for Schumpeter these the first one is called the circular flow And I'm not sure that he has a explicit term for the second, but it's a it's a growing economy Okay, so first Schumpeter's circular flow collapses What in Marx are are two analytical? Constructs so one is simple commodity production which comes up in capital volume one and One is simple reproduction which comes up in volume two. So I'll just say a word about those in simple commodity production. We're only looking at circulation so this is where owners of commodities meet in the market and exchange equivalent for equivalent in simple reproduction instead we're looking at those circumstances under which a Economic system is able to reproduce itself from one cycle to another and that includes for instance ratios of outputs in What Marx called department one which produces? producer goods means a production and department to the part of the economy that produces consumption goods for for consumers for Marx simple commodity production is a much more Extract analytical step right at the beginning of his presentation it's not clear at that point that profit is even possible and in simple reproduction we have a Economy where the capitalists consumption needs are supported by Their profit, but it's not a growing economy and there's no technological change. So the reason that Schumpeter is able to collapse These two constructs of Marx is because he lacks an exploitation theory of profit So so Marx needs to distinguish, you know, the very simple case in which there's no profit From the case in which there's profit, but no growth Whereas Schumpeter doesn't see profit as possible in a stagnant economy for Schumpeter It's only because of growth that there is profit because he lacks the exploitation theory of profit and the reason why He lacks the exploitation theory of profit is because he uses a subjective theory of value rather than Marx's labor theory of value alright, so now I turn to MCN the Circuit of capital a growing economy and then just to remind you I will cover capital theory profit theory and Credit theory so how do our two authors define capital before going into that? I think it's helpful to remind ourselves what Schumpeter's teacher Bumper Verk says so according to Bumper Verk Capital is basically just another word for what Marx calls means of production for Schumpeter Capital is the means of payment in the hands of an entrepreneur. That is to say money when an entrepreneur has it for Marx capital is self valorizing value and What that means for him will become a little bit more clear when I compare him and Schumpeter in more detail So Schumpeter's definition of capital is very close to Marx's But where Marx sees the whole MCM cycle as Itself capital Schumpeter sees only the two ends as capital, but not the C So let me just say a word about what that means So for Marx a capitalist starts with some money then buys means of production and labor power With that money then brings those means of production and labor power together in the production process then creates Commodities from that combination and then sells those commodities and if everything has worked The sale of the commodities at the end of the production process gets the capitalist more money then he started with at the beginning of the process that voyage of a Certain amount of money to becoming a larger amount of money is capital and Every form taken by the value of that cycle is also capital Whereas for Schumpeter the entrepreneurs capital. It's just the money and the means of production And labor power is something else So he he has his capital he invests his capital then he gets capital back from the production process. So Largely a terminological difference now. I do think it's intriguing that For Bumbaverk Schumpeter's teacher only the C is capital only means the production is capital Whereas for Schumpeter it's it's the M on either side of the C that's capital So they have Distinct opposite even and yet compatible understandings of what capital is so now I think I've said enough about capital and I'll turn to profit first profit for Marx Which is substantially more complicated than a profit for Schumpeter. So I beg your patience Marx distinguishes three kinds of profit profit of alienation profit of exploitation and surplus profit which for reasons of parallelism, I will call profit of differential innovation Now the distinction between profit of alienation and profit of exploitation He takes from Sir James Stewart 1712 to 1780 I will read two quotes from Stewart that are quoted by Marx in theories of surplus value in the price of goods I consider two things are really existing and quite different from another The real value of the commodity and the profit upon alienation positive profit Implies no loss to anybody it results from an augmentation of labor industry or ingenuity and Has the effect of swelling or augmenting the public good relative profit Which is the same as his profit of alienation is what implies a loss to somebody It makes a vibration of the balance of wealth between parties But implies no addition to the general stock so any time that Someone sells Something for more than its value. They are accruing profit of alienation for those you know who care about such things in the so-called transformation problem when a Capital receives a higher profit than it would be Entitled to in virtue of its contribution of surplus value to the social pool of surplus value Which comes because of its higher organic composition of capital that is also profit of alienation there They are just taking surplus value from other Producers now if that sounds like a massive gobbledygook. It's because You haven't been looking into the technicalities of Marxist economics and And now is not the place to go into that So I just mentioned that for for those people for who it means something this distinction between profit of alienation and profit of Exploitation is essential to Marx. It's his starting point in simple commodity production that profit of alienation can arise in exchange But there's no way for there to be profit at the social level through profit of alienation So there must be another source of profit that happens in the production process and that's profit of exploitation so the characteristics of profit of alienation are that it does not contribute to the wealth of society and That it's characteristic of merchants capital and of finance capital both two forms of Capital that existed before capitalism and continue to exist today both merchants and finance receive profit without Contributing to the wealth of society. So now profit of exploitation. This is what Marx is most famous for It is surplus value. That is the value of the surplus product the price of the part of production that does not Sustain the labor surplus labor is performed by the proletariat and it's characteristic of industrial capital the difference between the value produced by the working class and the value that The working class Receives in their sale of their labor power to capital that difference is surplus value and that is the source of Profit of exploitation Okay, now the third type of profit profit of differential innovation. This is what Marx calls surplus profit It is the advantage that accrues to early adopters of labor-saving technology or the providers of new commodities when a New productive technique comes in that lowers unit costs in particular lowers unit labor inputs then that firm can undersell other companies in order to gain market share and They will only slightly undersell in order to have as high a profit as possible Even though their costs are substantially different so the difference between the socially necessary labor time that is set by the overall productive conditions in that sector of the economy and the firm individual level Necessary labor time that difference allows that firm to charge more than their costs and more than average profits and that Additional profit that accrues to them that surplus profit. That's profit of differential Innovation Marx doesn't talk much about the introduction of new commodities He focuses on this process of lowering unit labor Inputs, but it's it's clear that in the case of introducing a new commodity The mechanism is similar in that case initially there is no market price. So the first producer to market gets to set a monopoly price society only figures out what the Value-determined price is once there's a competitive market for it and and in that time that it takes for the market to fill up The monopolist gets to have a above-average profit on that Commodity and that is profit of differential innovation as well now profit of differential innovation is only short-term because as Either other producers start making a new commodity or other producers start using the Increasingly efficient productive technique the profit of differential innovation is eroded. It seems to me that profit of differential innovation is a subtype of profit of alienation but I Just leave that as a comment So now I look at profit in Schumpeter much simpler all profit for Schumpeter is profit of differential innovation Schumpeter's much simpler theory of profit again emanates from his Value theory and his theory of growth there cannot be profit for him in a stagnant economy so that's basically where he abstracts from Profit of exploitation In equilibrium where supply and demand are in balance just like from Marx There can't be profit of alienation It's only when you get technological innovation that you get profit for Schumpeter and that's this profit of differential innovation So now I'll talk just a bit more about surplus profit That's profit of differential innovation and its relationship to technological innovation both Schumpeter and Marx emphasize that Technological innovation yields these surplus profits in the short term But only Marx emphasizes the compulsion to introduce technological innovation in order to reduce the wage bill So for Schumpeter, there's a kind of ex machiné component to entrepreneurs an entrepreneur shows up is aware that some opportunity exists and then creates profit by Seeing that opportunity through whereas for Marx the competitive environment of capitalism forces Companies to innovate if you don't strike first Then someone else will beat you and take your market share So the only way to protect your market share is to be constantly trying to reduce costs One major difference between these two thinkers has to do with the general rate of profit So for Marx the general rate of profit is the price of the surplus product produced by its surplus labor Divided by the total social capital so the question is how much profit is there in the whole society and that Is a function of how much exploitation there is in the whole society and how much capital investment There is in the in the whole society So all of the capitalists look and they say okay, I've been able to exploit this much labor Using this much upfront payment. That's the general profit, right? But for Schumpeter all profit is surplus profit, which is locally determined So there is no general rate of profit. There's no there's no mechanism by which a General rate of profit in society could be established. There's only like local fleeting Pockets of profit so now on to the famous law of the tendency of the rate of profit to fall and one Interesting point in common between these two thinkers is that they both have a form of this law Although this law is famously associated with Marx Smith and Ricardo have it as well and it seems so does Schumpeter So both Marx and Schumpeter think that the profit rate has a tendency to fall for Schumpeter This is because there are no profits in the circular flow unless you get an entrepreneur who's introducing an innovation which then leads to a local Profit of differential innovation a surplus profit, then there's no profit the default at the social level is a zero profit rate and it's only Entrepreneurs coming and introducing innovations that kind of keeps the profit rate above zero And that's always a local phenomenon. Those profits are always eroded through competition. So it's a struggle against the fall in the rate of profit for Schumpeter So for Marx there is a positive profit rate at the social level as I just discussed earlier the amount of exploitation at the social level divided by the amount of Capital invested at the social level but for Marx because of increasing labor productivity the amount of living living labor that Certain amount of capital is able to set in motion is always decreasing over time so then the ratio of exploited living labor to upfront capital costs is always going down and and that process of technological innovation In terms of increasing labor productivity is what drives the profit rate down So the question naturally arises if there is this tendency for the rate of profit to fall Does that lead necessarily to the end of capitalism as a form of social economic organization? If we look at Schumpeter He does not appear to foresee such a breakdown as long as there are entrepreneurs It seems possible that as more and more entrepreneurial Opportunities are addressed by entrepreneurs. It becomes harder to become an entrepreneur harder to find new Innovations new products, but Schumpeter doesn't really address that possibility explicitly So I think let's go with that. He imagines a Supply of entrepreneurs will be indefinitely available and there's no reason to foresee the end of capitalism now for Marx this is an extremely controversial question and depends essentially on whether capital is Sufficiently devalued during a crisis So let me just talk that through a little bit the thing that's driving the profit right down is that the ratio of living labor to capital invested upfront goes down over time as Labor productivity increases as I described before now if in a crisis You have to write down the means of production to a great extent then that will Reopen the possibility for another round of capital accumulation and the question is is that process of destroying the value of Existing capital during a crisis is that process sufficient to start things over again, or do you start at a higher level where Even though the profit rate recovers a bit it doesn't recover enough. Heinrich Grossman is the theorist who Most powerfully puts forward the hypothesis that it is Marx's view that The profit rate decreases even across the cycle of boom and bust So sticking with the law of the tendency of the rate of profit to fall I want to address the role of the entrepreneur in these two competing theorists So for Schumpeter the entrepreneur raises the profit rate by making surplus profit In the first place there would be no profit without the entrepreneur He pays bankers and does other things that potentially Moves that surplus profit around in the economy and that's the only reason why anyone else has any profit Whereas for Marx the entrepreneur lowers the profit rate by reducing Unit costs Schumpeter emphasizes new products Whereas Marx emphasizes cheaper products of the same quality and I think that that difference Largely accounts for the difference of emphasis Modifying something new I think does counteract the tendency for the rate of profit to fall Whereas making an existing commodity cheaper Accelerates the rate of the profit falling