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The stream of goods is enriched, production is partly reorganised, costs of production are diminished, and what at first appears as entrepreneurial profit finally increases the permanent real incomes of other classes. Similar to Schumpeter's point of view, according to Veblen capitalist economies were bound to deep cyclical movements inherent to the system, which resulted from a conflict between changes in the business enterprise and in the machine process:.

The true, or what may be called the normal, crises, depressions, and exaltations in the business world are not the result of accidents, such as the failure of a crop. They come in the regular course of business. As a consequence of the dynamic processes of change driving the evolution of capitalist societies, both Veblen and Schumpeter projected a long-term transformation of capitalist societies to some alternative economic order.

According to both of them, this manifested in terms of an ideological shift. Veblen assessed the institutionalisation and standardisation of the machine process under capitalist economies as being decisive for this transformation:. The machine process pervades the modern life and dominates it in a mechanical sense. Its dominance is seen in the enforcement of precise mechanical measurements and adjustment and the reduction of all manner of things, purposes and acts, necessities, conveniences, and amenities of life, to standard units.

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Even though Veblen considered changes in the machine process i. For Veblen, the predominance of the machine process related to its routinisation and standardisation was an origin of class struggle between the class of the businessmen and the working class:. There is an appreciable and widening difference between the habits of life of the two classes […]. So that the two classes come to have an increasing difficulty in understanding one another and appreciating one another's convictions, ideals, capacities, and shortcomings.

Changes in habits of thought of the working class induced by a growing material welfare in capitalist societies Veblen deemed a dead end to the evolution of capitalist societies. These changes would result in a successive disruption of natural rights and an excavation of the institution of free ownership. Furthermore, the social conflict between the working class and the class of the businessmen would be fuelled, since. But after allowance has been made for this almost physical restraint upon the acquisition of property by the working classes, something is apparently left over, to be ascribed to the moral effect of the machine technology.

The industrial classes appear to be losing the instinct of individual ownership. The acquisition of property is ceasing to appeal to them as a natural, self-evident source of comfort and strength. The natural right of property no longer means so much to them as it once did.

Thus, again changes in habits of thought of the working class and especially of those workers engaged in trade unionism fostered this transformation:. The classes affected with socialistic vagaries protest against the existing economic organization, but they are not necessarily averse to a somewhat rigorous economic organization on new lines of their own choosing. Also Schumpeter described capitalist evolution as leading to tendencies of socialism: it is the struggle for survival of business units not on the basis of perfect or free competition but due to monopolistic competition.

Schumpeter thus considered perfect competition as an unstable situation in the evolution of capitalist economies. As discussed by Michaelides and Milios , in Schumpeter's notion competitive markets over time were counteracting innovations in capitalist societies and he therefore considered them as not favouring economic evolution.


Contrary to Veblen's arguments in terms of behavioural psychology, for Schumpeter this was due to sociological conditions, as perfect competition leads to the excavation of profits related to innovation. According to Schumpeter, this subsequently implied a lack of incentive to innovate and to undertake the risk associated with innovative behaviour.

Referring to the situation observed after World War I in some European countries, Schumpeter argued that the establishment of trusts and big concerns will — especially among political and intellectual elites — lead to criticism of capitalism, fuelled by social discontent. Political and intellectual elites would protest against inequality and unemployment.

And the formation of trade unions would result in an institutional environment, which he considered as harmful to free ownership. Similar to Veblen, Schumpeter saw thus the decline of capitalism as a consequence of the excavation of the institution of free ownership going hand in hand with a suppression of entrepreneurship.

Schumpeter projected the decline of capitalism as the result of its own success. This transformation towards some socialist order he considered the final stage of capitalist evolution:. Capitalism , pp. Summing up, while the transformation from capitalist societies to some socialist order for Veblen originated from psychological processes, Schumpeter considered it as a result of socio-economic processes. Using a metaphor, one can say that both climbed the same hill of evolutionary economic theorising from different base camps and with diverse equipment.

In their evolutionary theorising, Veblen relied on anthropology, psychology, and biology, whereas Schumpeter was closer to sociology and history. Another demarcation line between these two economists can be found with respect to the appraisal of pure economics. This is well reflected in their references to and attitude towards their contemporaries' and predecessors' works on the dichotomy between statics and dynamics and its relation to pure economic theorising.

While Veblen wanted to revolutionise economics and saw pure, static economics as incompatible with an evolutionary economic theorising, Schumpeter chose, so to speak, a more modest way to develop an evolutionary economic theory. Despite these differences their basic understanding of economic systems shows striking similarities.

Both authors approached the field of evolutionary theorising by leaving the field of pure economic theorising. Both of them can be reconciled concerning their notion of evolutionary change arising from within the system. Furthermore, for both of them, economic evolution resolves in a concatenation of different endogenous processes prevailing on different levels: Thus, economic evolution proceeds through various different channels — changes are observed in the material environment and in the socio-economic environment, on the individual level and on the level of society as a whole.

Veblen's and Schumpeter's understanding of evolutionary economic systems also resembles in the way they perceived of individual behaviour and changes to it. From a methodological viewpoint, what accounted for both was to introduce changing individual behaviour. While Veblen above all focused on behavioural psychology, Schumpeter predominantly relied on sociological arguments in this respect. Other similarities between Veblen's and Schumpeter's ideas on how an evolutionary economics ought to look like can be found in their explanations of capitalist evolution: they both did not restrict their evolutionary approaches to the trend of some economic variable.

Instead, they included the transformation of society itself, resolved by a concatenation of processes prevailing in capitalist systems. Capitalist societies are characterised by the possibility of free negotiation of contracts and private property. Yet, inherent to the evolution of capitalist societies is the manifestation of monopolistic tendencies, which according to Veblen source from a standardisation and routinisation of the machine process.

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For Schumpeter, it was the standardisation and routinisation of research and development activities, which suppresses free competition. In the end, the decline of capitalism for both of them induced a transition towards socialism. It is this transition from one economic order to an alternative one, exemplified in this paper by means of the evolution of capitalist societies, which makes the economic theories of Schumpeter and Veblen evolutionary, as compared to allegedly dynamic economic theories which are only concerned with pure economic considerations.

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They were focused on the economic process embedded in distinct social, material, and cultural environments which continuously change from within. Creative destruction in the Schumpeterian sense, so to speak, is therefore not the endpoint. It is the starting point of a more comprehensive line of argument including social transition.

This might be deemed one of the most distinct elements of Veblen's and Schumpeter's evolutionary economics.

We are grateful to Professor Heinz D. Kurz and Professor Malcolm Rutherford for fruitful discussions and useful comments on earlier drafts of this paper. We also like to thank two anonymous referees for their valuable hints on how to improve the paper. National Center for Biotechnology Information , U. Eur J Hist Econ Thought. Published online Apr 8. Author information Copyright and License information Disclaimer. Abstract At present, the discussion on the dichotomy between statics and dynamics is resolved by concentrating on its mathematical meaning.

Keywords: T. Veblen, J. Schumpeter, dynamic economic systems, pure economics, evolutionary economics. The relevance of static economics In Das Wesen , Schumpeter summarised the state of the art of pure, static economics at the beginning of the twentieth century. Schumpeter for example referred to John Stuart Mill's Principles of Political Economy , in which the first three books are concerned with statics, while the fourth book explicitly deals with dynamics: All this, however, has only put us in possession of the economical laws of a stationary and unchanging society.

Veblen , in this context referred to John Bates Clark's distinction between statics and dynamics, the latter advocating that static laws are […] real laws. As for the case of Clark, Schumpeter noted in retrospect in History of Economic Analysis that a clear distinction between stationary and evolutionary states [was made by Clark]. Veblen's claim for economics to deal more intensely with behavioural traits was reinforced in The Limitations of Marginal Utility : In so far as modern science inquires into the phenomena of life, whether inanimate, brute or human, it is occupied about questions of genesis and cumulative change, and it converges upon a theoretical formulation in the shape of life-history drawn in causal terms.

In a comment on Marx he wrote: The economic interpretation of history does not mean that men are […] wholly […] actuated by economic motives. Additionally, economic evolution was considered to take place in the material environment, reflecting what Schumpeter in Theorie described as process and product innovations: [Development] covers the following five cases: 1 The introduction of a new good […] or of a new quality of a good.

In a similar vein, Veblen argued: The complex of technological ways and means grows by increments that come into the scheme by way of improvements, innovations, expedients designed to facilitate, abridge or enhance the work to be done. Capitalist dynamics under an evolutionary perspective Following their assessment of the interdependence between changes in the material and the socio-economic environment as well as the connection to individual behaviour, Veblen and Schumpeter devoted considerable parts of their scientific work on developing ideas of how meaningful evolutionary economic theorising ought to look like.

Processes of change under the capitalist system For Schumpeter the pivotal point for understanding the complex processes driving capitalist systems from within was the observation that in dealing with capitalism we are dealing with an evolutionary process […] due to the fact that economic life goes on in a social and natural environment which changes and by its changes alters the data of economic action.

One of the most fundamental business principles in capitalist societies, according to Veblen, was the institution of free ownership: As the machine process conditions the growth and scope of industry, and as its discipline inculcates habits of thought suitable to the industrial technology, so the exigencies of ownership condition the growth and aims of business, and the discipline of ownership and its management inculcates views and principles habits of thought suitable to the work of business traffic.

Yet, Schumpeter's entrepreneur behaved differently to Veblen's businessman in such a way as that the latter does not go creatively into the work of perfecting mechanical processes and turning the means at hand to new and or larger uses. Changes in business structures due to organisational and institutional innovations, according to Schumpeter, feed back on individual behaviour: The impact of new things—new technologies for instance—on the existing structure of an industry considerably reduces the long-run scope and importance of practices that aim […] at conserving established positions and at maximizing the profits accruing from them.

This sequence of up- and downswings he explained as follows: [T]he boom and the depression begins after the passage of the time which must elapse before the products of the new enterprises can appear on the market. His theory hence explains: The effect of the appearance of new enterprises en masse upon the old firms and upon the established economic situation […]. From capitalism to socialism As a consequence of the dynamic processes of change driving the evolution of capitalist societies, both Veblen and Schumpeter projected a long-term transformation of capitalist societies to some alternative economic order.

Veblen assessed the institutionalisation and standardisation of the machine process under capitalist economies as being decisive for this transformation: The machine process pervades the modern life and dominates it in a mechanical sense. For Veblen, the predominance of the machine process related to its routinisation and standardisation was an origin of class struggle between the class of the businessmen and the working class: [T]he fact still is apparent that the everyday life of those classes which are engaged in business differs materially in the respect cited from the life of the classes engaged in industry proper.

Furthermore, the social conflict between the working class and the class of the businessmen would be fuelled, since [t]he conditions of life imposed upon the working population by the machine industry discourage thrift. Acknowledgements We are grateful to Professor Heinz D. Footnotes 1 These references to Schumpeter's notion of the state of the art of pure economics at the beginning of the twentieth century resemble Veblen's perception of static economics as discussed in more detail below.

This distinction between methodological individualism, methodological holism, and institutional individualism was further discussed in Rutherford , who refers to both Veblen and Schumpeter as sharing elements of institutional individualism in their method. References Agassi J. Methodological individualism. The British journal of sociology. Institutional individualism. Schumpeter's evolutionary economics: a theoretical, historical and statistical analysis of the engine of capitalism.

London: Anthem Press; The future of economic theory. The quarterly journal of economics. Journal of economic issues. Statics and dynamics in economic theory. Structural change and economic dynamics. Schumpeter's early contributions on crisis theory and business-cycle theory.

History of economic ideas. How Veblen generalized Darwinism. Schumpeter's new combinations. Journal of evolutionary economics. Frankfurt: Frankfurter Allgemeine Buch; Veblen on the machine process and technological change. Cambridge journal of economics. Schumpeter and Max Weber — central visions and social theories. Statics and dynamics: kaleidoscopic words. The southern economic journal. The communist manifesto, with an introduction by A.

Harmondsworth: Penguin Books; []. Did Hilferding influence Schumpeter? History of economics review. The principles of political economy.

Michal Kalecki et l'essor de la macroéconomie

London: John W. Parker; An evolutionary theory of economic change. Institutions in economics. Cambridge: Cambridge University Press; The institutional movement in American economics, Die neuere Wirtschaftstheorie der Vereinigten Staaten. Theorie der wirtschaftlichen Entwicklung. Business cycles. A theoretical, historical and statistical analysis of the capitalist process. Abridged, with an introduction by Rendigs Fels. New York: McGraw-Hill; []. Auflage von History of economic analysis. Capitalism, socialism, and democracy.

Theory of economic development. With a new introduction by John W. New Brunswick: Transaction; []. Reprint of the 1st English translation from Schumpeter and the idea of social science. Schumpeter: a biography. Joseph A. Schumpeter: his life and work. Cambridge: Wiley; Why is economics not an evolutionary science? The preconceptions of economic science. The theory of business enterprise.

As he grew older, Kalecki was ever more convinced of this, and his view of humanity was getting increasingly pessimistic. Feiwel wrote the following summary of Kalecki's life:. His legacy, however, cannot be erased. He demanded perfection, or at least an unalloyed commitment to that goal, he could not tolerate slovenly thought or superficial minds, and, most significant, he simply would not compromise his principles. Looking back over his troubled years, Kalecki once made the sad but true observation that the story of his life could be compressed into a series of resignations in protest-against tyranny, prejudice, and oppression.

Despite the fact that Kalecki authored many theoretical economic constructs, his interest in economics was more practical than academic and resulted from his work in engineering, journalism, credit investigation, use of statistics and observation of business operations. Full-time university teaching, for which he did not have formal qualifications a degree , he did only during the last thirteen years of his career. He was contemptuous of abstract research and declined Keynes's invitation to undertake a critique of Jan Tinbergen 's econometric business cycle work, for which he would also lack an in-depth knowledge of statistical theory.

Kalecki stressed that the predominant economic growth models were built on the assumption of an idealized laissez-faire capitalism and did not properly take into account the crucial and empirically demonstrable role of the government sector , the state's intervention and the interaction between the state and private sectors. In Kalecki wrote: ' Their class instinct tells them that lasting full employment is unsound from their point of view and that unemployment is an integral part of the normal capitalist system.

According to that principle, income is determined by expenditure decisions, not by the exchange of resources capital or labor. Kalecki and Keynes claimed that in capitalist economy, production and employment levels economic equilibrium are determined foremost by the magnitude of investment by business enterprises the crucial "driver of the business cycle" , not by price and wage flexibility.

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Savings are determined by investments, not the other way around. Contrary to the Ricardian , Marxian and Neoclassical economics, Kalecki asserted that higher wages lead to fuller employment. His monetary theory was rooted in the business cycle theory of Knut Wicksell. Quesnay's circular flow of income fell into disrepute in the political economy of the 19th century, when the idea that prices integrate exchange decisions gained ground, but was revived by Joseph Schumpeter , who pointed out the necessity of considering the circular flow of income recognition of the economic cycle as an integrating factor in order to gain a comprehensive understanding of the total economic process in a given period.

The principle was discarded again with the arrival of neoliberal domination in economics and its main current defined by prices of economic equilibrium. More than Keynes, Kalecki was skeptical about government's ability to sustain fiscal and monetary stimulus policies or of business support for full employment.

Like Keynes, Kalecki was concerned with demand management. Kalecki distinguished three ways of stimulating demand: through the government improving conditions for private investment a time-consuming and burdensome for the populace process of which he was skeptical , through redistribution of income from profits to wages, and through public investment that increases employment and demand automatically.

On the Complexities of Complex Economic Dynamics

Kalecki was engaged in the problems of developing countries. He argued that their industrialization depended on land reform and taxation of land owners and the middle classes. He was skeptical about a positive role of foreign direct investment in stimulating economic modernization. Polish economist Oskar Lange , who worked with Kalecki also on centrally planned socialist economies of the Soviet Bloc , characterized him as a " leftist Keynesian ".

According to Toporowski, Kalecki's monetary theory is of particular significance. Unlike Keynes, Kalecki regarded credit as a fundamental system of financial reckoning in capitalist economy, not just as clearing of payments between commercial banks and a central bank. He saw monetary policy as endogenous to the business cycle, dependent on business investment rather than on interest rate and credit policy of central bankers. Unlike Keynes, who followed the partial equilibrium approach, for Kalecki economic dynamics was synonymous with the business cycle, where "the circular flow of income generates cumulative changes from one period to the next".

Kalecki and Lange stressed the necessity of analysis of actually-functioning capitalism in both the advanced and developing countries, before economic theories could be built or courses of action prescribed. The volume of economic literature written by Kalecki during his life was very large. Although in most of his articles he returned to the same subjects business cycles, determinants of investment, socialist planning , he often did it from a slightly unusual perspective and with original contributions. Kalecki's most famous contribution is his profit equation.

Kalecki, whose early influences came from Marxian economists, [25] thought that the volume and profit sharing in a capitalist society were vital points to be treated. This followed from Karl Marx 's work on relationships such as the rate of surplus value or the organic composition of capital and even a forecast about the overall trend of profits. However, Marx was not able to make a meaningful statement about the total volume of profits in a given period.

Kalecki derived this relationship in an extremely concise, elegant and intuitive way. He starts by making simplifications which he later progressively eliminates. These assumptions are:. With these assumptions Kalecki derives the following accounting identity :. This is the famous profits equation, which says that profits are equal to the sum of investment and capitalists' consumption. At this point, Kalecki goes on to determine the causal link between the two sides of the equation: does capitalists' consumption and investment determine profits or profits instead determine capitalists' consumption and investment?

Kalecki says,. Now, it is clear that capitalists may decide to consume and to invest more in a given period than in the preceding one, but they cannot decide to earn more. It is, therefore, their investment and consumption decisions which determine profits, and not vice versa". For someone who has not seen the preceding relationship before, it might, upon examination, seem somewhat paradoxical. If the capitalists consume more, obviously the amount of funds which they have at the end of the year should be less.

However, this reasoning, obvious to the individual entrepreneur, is not true for the business class as a whole, as the consumption of one capitalist becomes part of the profits of another. In a way, "they are masters of their fate". The previous causal relationship still applies, and goes from investment to saving. That is to say, total savings are determined once investment has been determined. Therefore, in some way, investment generates sufficient resources. Finally, we can eliminate the assumptions of the original equation: the economy can be open, there may be a government sector and we can let workers save something.

The resulting equation is:. In this model total profits net taxes this time are the sum of capitalists' consumption, investment, public deficit, net external surplus exports minus imports minus workers' savings. Before trying to explain income distribution, Kalecki introduces some behavioural assumptions in his simplified equation of profits. For him, investment is determined by a combination of many factors difficult to explain, which are considered given, exogenous. Regarding capitalists' consumption, he considers that a simplified form is the following equation:.

If this consumption function is substituted into the profit equation, we have:. The advantage of the above manipulation is that we have reduced the two earnings determinants capitalists' consumption and investment to only one investment. Income distribution is the other pillar of Kalecki's efforts to build a business cycle theory. To do this, Kalecki assumes that industries compete in imperfectly competitive markets, more particularly in oligopolistic markets where firms set a mark-up on their variable average costs raw materials, wages of employees on the shop floor that are supposed to be variable in order to cover their overhead costs salaries to senior management and administration , to obtain a certain amount of profit.

The mark-up fixed by firms is higher or lower depending on the degree of monopoly , or the ease with which firms can raise price without causing reduction in the quantity demanded. This can be summarized in the following equation:. The equation allows us to derive the wage share in the national income. It follows that the wage share in the national income depends negatively on mark-up and on the relationship of raw material costs to wages. At this point Kalecki's interest is in finding out what happens to the wage share during the business cycle.

During recessions , firms collaborate among themselves to cope with the fall of profits, so the degree of monopoly increases and this increases the mark-up. Now we have the three components necessary to determine total product: an equation of profits, a theory of income distribution and an equation that links the product with profits and income distribution. The preceding equation shows the determination of income in a closed system without public sector.

It shows that output is completely determined by investment. How will output change from one period to the next? The problem of the change in output and hence the business cycle is therefore due to changes in the volume of investment. It follows that it is in investment where we must find the reasons for the fluctuations of a capitalist economy. The above argument demonstrates the crucial role played by investment in a capitalist system. Finding a well-specified investment function would facilitate resolution of many problems in the capitalist economy.

This subject had been treated for an extended period by Kalecki, and he was never completely satisfied with his solutions. This is because the factors that determine investment decisions are multiple and not always clear. What follows is the solution Kalecki gave in one of his books. The equation shows that investment decisions depend positively on savings generated by the firm, the rate of change of profits, a constant which is subject to long-term changes, and negatively on the increase of fixed capital.

The above equation is able to generate cycles by itself. During booms, firms are able to generate more cash flow and enjoy increases in profits. However, the increase in orders for capital investment increases the stock of capital, until it becomes unprofitable to make more investments. Ultimately, the variations in the level of investment generate the business cycles. As Kalecki would say:. Doubtless many people will consider this paradoxical.

But it is not the theory which is paradoxical, but its subject — the capitalist economy. In the first half of the s, Oxford University Press published 7 volumes of Collected Works of Michal Kalecki , referring to him as "one of the most distinguished economists of the 20th century. Goodwin , as well as the modern American post-Keynesian economists. Toporowski said that in the 21st century we urgently need to recover Kalecki's concepts and the rule of the circular flow of income as an integrating factor of macroeconomic analysis.

Lacking these, the economists have regressed toward Victorian values that praise the supposed virtue of thrift of the wealthy.


We must return to the vision of Kalecki and Oskar Lange regarding economic development of traditional societies, vision that stressed the role of such development as changing social structures, not as just augmenting the potential of individuals. From Wikipedia, the free encyclopedia. Warsaw , Polish People's Republic. Capital as power: a study of order and creorder. World Economics Association Newsletters, 1 February XIII : 21—