Joseph Schumpeter was born the same year Karl Marx died. One might say Schumpeter was destined to follow in Marx’s footsteps. Marx had involved himself in the study of Capitalism and became a great source of influence for Schumpeter who elaborated on his theories. An essential part of their study was devoted to Capitalist Dynamics. Their views on the subject show fundamental similarities but demonstrate several differences as well, which are explained in part by their different experience of economic history. This paper will focus on comparing and contrasting the capitalist dynamics of Karl Marx and Joseph Schumpeter, their theories on what Capitalism is driven by and how it evolves.
As a starting point, it is interesting to distinguish Marx’s and Schumpeter’s opposed feeling of Capitalism. Marx studied the laws of motion of Capitalism because he was concerned about the exploitation of workers and thus was against Capitalism. Schumpeter, on the other side, approved of Capitalism and considered free market Capitalism the “best economic system”[i]. Marx believes that unemployment will increase as workers are replaced by machines and that Capitalism impoverishes the masses. On the other side, Schumpeter believes that Capitalism can ameliorate the conditions of the workers: “The capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses. It does so through a sequence of vicissitudes, the severity of which is proportional to the speed of the advance. But it does so effectively.”[ii] Karl Marx, however, was not completely against Capitalism as it “rescued a considerable part of the population from the idiocy of rural life”[iii].
Both agree on the cyclical nature and dynamic aspect of Capitalism. Both agree that it is in constant motion and that cycles are “endogenous”[iv] to the system. However, their theories on the cause of these business cycles differ. Karl Marx’s conception is that the cycles of Capitalism are generated by the capitalist’s drive to accumulate under free market competition. By definition , the search for profit is the capitalist’s fundamental drive. Profit, or surplus-value, is produced by wage labour and realized through the sale of commodities. Under competition, the capitalist can only rival his competitors by operating with more capital. Hence a part of the surplus-value is accumulated for that purpose. The capitalist’s urge for profits becomes more of an urge for capital accumulation: ‘Accumulate, accumulate; that is Moses and the Prophets’[v]. Capital has an initial value; because of competition, the capitalist accumulates surplus-value, which leads to a higher accumulation of capital, which leads to more accumulation of surplus-value, leading to more accumulation of capital, etc…thus establishing a cycle of capital accumulation. As capitalists produce more and more commodities to accumulate capital, they inevitably arrive to a point of overproduction when the commodities produced find no buyers. This engenders a crisis. Firms go bankrupt, workers get layed off, sales decrease, production is constricted, prices fall, income is reduced and capital loses value. Eventually it comes to a point where output has been reduced more than purchasing power and the rate of surplus-value is superior to the value of capital, thus production can start anew and the rate of profit increases. Investment is then stimulated, employment increases, national income expands, and we enter a new economic cycle. According to Marx, the compulsion for capital accumulation is the fundamental cause of economic cycles.
[ii] Schumpeter, J.A., Capitalism, Socialism and Democracy, Harper and Brothers, New York, 1950, p.68
[iii] Marx, K.H. and Friedrich Engels, Manifest der Kommunistischen Partei, Burghard, London, 1848, Chapter 1.
[iv] Goodwin, R.M., ‘The M-K-S System: The Functioning and Evolution of Capitalism’, in The Economic Law of Motion of Modern Society: A Marx-Keynes-Schumpeter Centennial, Wagener, H.J. and Drukker, J.W., eds.,Cambridge University Press, 1986, p.16.
[v] Marx, K.H, Das Kapital I, Otto Meissner, Hamburg, 1867, Part VII, Chapter 24, Section 3.