Sunday, 4 August 2013

"All That is Horrid Melts into Air": Hayek, Schumpeter and a Very Central European 'Crisis of Capitalism'

Yellow City Egon Schiele (1914)

As catastrophic inflation stalked the imploding Austro-Hungarian Empire in 1918, the young Friedrich August von Hayek was on his way back to Vienna. Hayek was of a generation, now returning from the lost war, utterly demoralized by the vast squandering of the Empire's resources. The dismantling of the imperial territories of the Hapsburg dynasty took place in a barrage of national secessions, though collapse had been creeping up on this peculiar, sickly titan for some time. Hayek was born in Vienna to wealthy parents, his father a respected botanist and his mother from a rich, conservative family. Hayek’s cousin, the philosopher Ludwig Wittgenstein, is often said to have exercised profound influence over his intellectual development, though they met on only a few occasions. But Hayek had no trouble in linking Wittgenstein with a certain Germanic intellectual tradition which was “proud to be different.” In their own rebellious way, Hayek's generation of Vienna intellectuals reproduced the centuries-old belief in German exceptionalism, though this time by “dissecting convention.”[1] This very ideology of exceptionalism in its straightforward imperial form, however, fueled obsessive Hapsburg claims to Bosnia & Herzegovina, later making the slaughter of hundreds of thousands of the Dual Monarchy’s young men inevitable. The cultural brilliance of Hayek’s generation was ultimately devastated by a war underpinned by brazen arrogance.

            Hayek came home to find a new Social Democratic government presiding over a shrunken, embattled, war-ravaged domestic economy. “In this most middle class of European cities,” Sylvia Nasar writes, “there was no food or fuel. Virtually from the moment the new republic was announced no more manufactured goods left Vienna and no shipments of beef, milk, potatoes, or coal arrived.”[2] A thousand years of glorious imperial trade centrality were suddenly stubbed out. One biographer (in typical Bildungsroman style) describes Hayek’s discovery in 1920s Vienna of the moral foundations of his thought: finding himself in the venerable milieu of Austrian economics, he gravitated inevitably towards the tradition of enlightened individualism. Hayek felt that Carl Menger, the Austrian economist, had updated Adam Smith by asking how it was that institutions could evolve gradually over time, free of collective administration or of central will, through the spontaneous input of free individuals. Regardless of the content of the queries, Hayek was nevertheless convinced that such institutions – those “which support the common welfare and are most important for its advancement”[3] – were crucial in the structuring of a good social order. It’s also possible, however, to see his lifelong recourse to this Burkean conservative touchstone as the product of the traumatic destruction of the Austrian monarchical institutions which ordered his youth. Those carefully time-pruned social institutions – the bureaucracy, the military, even the Monarchy itself – vanished, leaving instead an interventionist government printing endless cash and pumping it carelessly into an already inflated economy.

Italian flyers over Vienna, 1918

            To stick with the familiar psycho-history of biography for a moment, it may be no great leap to see Hayek developing two gut responses to the collapse of the Hapsburg Empire and the chaos of republican Austria. As the traditional trade routes and information channels which supported and sustained the byzantine, tariff-heavy imperial economy (which had resulted in such decorous European trade crises as the so called Pig War with Serbia in 1907) disintegrated, Hayek must have felt the loss intensely. What resulted was a passion for the apparently “spontaneous ordering” of venerable old institutions, and a firm dislike of meddling “external” forces (usually government but war was akin to it). On the other hand developed the fetish for so called “market prices”, which were held to communicate all the information necessary for robust trade and, again, should not be tampered with. Hayek’s fear of inflation led to an obsession with establishing for good the rules of the economic game such that individual liberty (in matters, at least, of commerce) could be written in stone. The cure for inflation, and the key to economic well-being, was firm legal order and small, transparent government.

The irony, of course, was that Austria-Hungary, with its vast state apparatus and factional gerontocracy, provided one of the great examples of a system where the so called natural evolution of institutions had thoroughly skewed its behaviour as a whole. Hayek was to find no intellectual model of individual liberty in the Empire of his youth. Hence, perhaps, his flirtation with a kind of Fabian socialism. This, however, died out under the tutelage of von Mises in Vienna. Liberty had to be grounded in the steady, unchanging rule of law, while patronised by institutions that arose spontaneously, free from the organising capacities of a central or collective will.


            Hayek marked a certain departure from German romantic traditions. Hegel, as everyone knows, had been no individualist. His notions of Geist (Spirit) and Sittlichkeit (a kind of collective, ethical substance), had tapped into a rich seam of heroic, collective destiny in German thought. Marx took on much of this baggage. As did, in his own way, Max Weber, who saw Protestant ideology as the motive force in the establishment of capitalism (a thought that would have been anathema to Marx, but nevertheless hardly resisted the collectivist urge within Germany sociology). The resulting Weltanschauung – a term that is perhaps too broad in its connotations – is often caricatured as tending towards totalitarianism. German thought’s preoccupation with questions of race and nationality might, however, be connected to the conditions of that country's late emergence as a capitalist power and the extensive state patronage that evolved out of its competition with older powers like Britain. This aside, Hayek was rare in capturing the Germanic sense of exception not in collective or racial terms but in traditionally liberal, individualist ones.

Joseph Schumpeter, the German-speaking world’s other great inter-War economist, shared Hayek’s regard for the high achievements of 19th century bourgeois capitalism. In many ways Schumpeter and Hayek were mirror opposites. Hayek was born at the heart of the Empire; Schumpeter on the periphery, in the small Moravian village of Třešť. The older of the two, Schumpeter was angling for a government position in the Monarchy’s final cabinet. A socialist republic proved no deterrent either: he was briefly made finance minister under the reformist Marxists Bauer and Renner (on the advice of no less than Rudolf Hilferding, luminary of German Social Democracy). The one thing Schumpeter and the Socialists had in common was a desire for anschluss with Germany, conceived (with great historical irony) as a peaceful solution to centuries of conflict within Mitteleuropa. Both Hayek and Schumpeter were highly ambitious but failed repeatedly to fit in with the intellectual ferment of their times. Both would find their most convincing public voices as dissenting liberals during the next European conflagration: Hayek with his Road to Serfdom (1944); Schumpeter with Capitalism, Socialism and Democracy (1942). For both, popular recognition would prove elusive until the latter part of the 20th century, so at odds were they with the Keynesian settlement of the post-War years.

The reasons for their shared estrangement from the world’s chattering classes post-1945 were, however, quite as separate as their respective ways of understanding capitalism. In Hayek’s reckoning the market was a supremely elegant expression of the rational self-interest of its participants. In all of Hayek’s best writings the market embodies elegance and simplicity, while the embattled liberal order a timeless political achievement beyond the comprehension and control of any single individual: “A complex civilization like ours is necessarily based on the individual adjusting himself to changes whose cause and nature he cannot understand.”[4] There is a growing opacity of social relations that goes on in relatively free societies, in which decisions have unforeseeable effects. Central economic planning – whereby the state organizes the economy for specific ends, always associated for Hayek with socialism – is an attempt to rationalize a system of decentred interactions. Thus Hayek makes the apparently pragmatic argument that increasing specialization within markets themselves is best served by preserved specialization of individual actors. Decentralized markets elude coercion, which itself “leaves the separate [individual economic] agencies free to adjust their activities to the facts which only they can know.”[5] The individual knows best within the narrow field to which their actions pertain. All big institutions like government can do is get in the way.

While pragmatically stated this view develops out of some truly idealist presuppositions about the nature of market interactions, principal among them the belief that all economic decisions are made with appropriate knowledge and that markets themselves can effectively incorporate the unforeseeable effects of those decisions. That markets are rational and spontaneously self-organizing is, of course, a pernicious myth. One need only look at history to see that the first “markets” (in the sense of generalized systems of commodity exchange) didn't emerge spontaneously, but were wrought violently into being by rulers who needed to amass commodities and currencies for military purposes.[6] Markets and states have historically gone hand in hand. Even if the famous economic fairy-tale of free exchange arising spontaneously out of “primitive barter” (a myth spun by Adam Smith but also later by Marx in Vol.1 of Capital) is taken as a metaphor, it fails to reflect anything of the underlying social processes which it attempts to describe. The idealized image of rational actors exchanging commodities freely in relatively free markets in fact effaces an earlier effective of violence, one exerted by the very arbitrary despotism (kings who enserf an unwitting public and so on) which Hayek makes it his mission to decry. The ideology of free markets which Hayek espoused would only attain a modicum of popular acceptance, however, when its value system later became advantageous for elites faced with deep monetary crises.

This profile of Hayek does little to relieve the neoliberal right of its reputation for being both a bit bonkers and very patronizing ("Like young people in any age Hayek worried about society's problems"):


Schumpeter’s description of capitalism, though very different to Hayek’s, attained a more subaltern influence around the same time. Schumpeter’s achievement was to take over from Darwinism – and to a very real extent Marxism – the notion of capitalism as a continuously evolving, historically determined organism. It is in a sense legitimate to say that Hayek concerned himself with a general philosophical idea – “the market” – while Schumpeter, like Marx, looked far more deliberately at the organization of social relations, financial wealth and circulation, innovative and destructive tendencies, and cultural attitudes we call capitalism. It was this different conceptual point of departure that enabled Schumpeter to treat the much trumpeted “crisis of capitalism” as a tendency produced by capitalism itself rather than short term political policies and the influence of a few squabbling intellectuals. Crisis was part of the dynamic process. “There is inherent in the capitalist system,” he wrote, “a tendency to self-destruction.”[7] His reasoning for believing that capitalism would eventually be replaced by socialism was mostly sociological rather than ‘structurally’ economic (in the sense a Marxist would understand it). He saw business classes as being rendered generally obsolete by progressive increases in the standard of life of the mass of developed world populations, pointing toward ever-increasing administrative bureaucracy. Capitalism rationalizes old loyalties, displacing former hierarchical commitments. The intellectual and political classes fostered by the class of big business under capitalism are increasingly hostile to capitalism’s existence, pointing toward a cultural of resentment among the offspring of the capitalist system.[8]

In line with the view of capitalism as by nature innovative, Schumpeter coined the phrase “creative destruction”. “Economic progress in capitalist society,” Schumpeter believed, “means turmoil.”[9] He even echoes the Communist Manifesto – though ineloquently – when he says: “Every situation is being upset before it has had time to work itself out [my italics].”[10] The awkward use of the continuous aspect – ‘every situation is being upset’ – is intended to imply the startling regularity of the process. But instead he just sounds vague. What situations? Upset by what and in what capacity? How much better was the capitalist process encapsulated almost a hundred years earlier by the phrase “All that is solid melts into air”? Still, what is effective in Schumpeter’s description of capitalism is that it erodes the centrality of the organized political subject so precious for Marxism. Whither, in a generalized situation of constant self-transformation, the proletariat? In a system of “creative destruction” all fixed relations are destined to dissolve – even that of proletariat and bourgeoisie.

There is nothing cumulative either in his notion of crisis. While unbinding Marx’s sociology of class from the economics of capitalism, he also attributes a profound redemptive quality to the very crises that were once seen as symptomatic of capitalism’s failings. Capitalism’s crises merely introduce new elements into its creative midst. “These revolutions periodically reshape the existing structure of industry by introducing new methods of production – the mechanized factory, the electrified factory, chemical synthesis and the like; new commodities such as railroad services, motorcars…”[11] and so on. Capitalism initiates, in Schumpeter’s view, an impulse to innovate, which spells crisis for some and opportunity for others. Though in each cycle, displacement and unemployment are the norm in initiating phases, the result is always positive: “an avalanche of consumer goods that permanently deepens and widens the stream of real income.”[12]

Simply by its innate attributes the “capitalist mechanism” raises the standard of life of the masses. Thus we reach a conclusion so naively sanguine that even Joseph Stiglitz questions it.[13] Clearly capitalism is incapable of efficiently recycling its own surpluses without some external coercion. What the Greek economist Yannis Varoufakis describes as a Global Surplus Recycling Mechanism – a way to stabilize distributive distortions created by accumulative tendencies within capitalism – is not only necessary, but consciously shaped by public policy.[14] Witness again then the dependence of markets on the state. Thus while his theory tried to describe capitalism’s tendency to undermine itself, Schumpeter in fact elaborated a whole set of beliefs about capitalism wherein every crisis becomes the forerunner of renewed abundance, and capitalism assumes ideological invulnerability. Schumpeter offers this celebratory corrective to Marx and Engels: All that is horrid (in the capitalist system) melts into air.

The organised proletariat was replaced by Schumpeter with the innovative disposition of individual entrepreneurs and men of business as the principal social and political agents of life under capitalism. In this sense both Schumpeter and Hayek attempted to critique and undermine what they saw as collectivist – for which read socialist – tendencies in the ideology of their peers. In Hayek’s case, capitalism and the legal order which supported it formed a sort of static equilibrium; meanwhile, as Schumpeter saw things, a state of competitive “disequilibrium” was the norm under capitalism. Schumpeter had no fear of monopoly within industry as such. Yet what they shared was a horror of bureaucracy within the managerial, intellectual and political elite; and also a deliberate policy of ideological displacement of the possibility of collective political agency, or the idea that it is legitimate for organised groups of people to undertake grand political acts. Their fundamental commonality ultimately lay in the arena of politics, which was fitting because it was in this arena that they would eventually be adopted as expedients by the very political classes they so suspected.

One might even risk the hypothesis that what fed their nightmares about the capitalist bureaucracy turning upon itself was a shared memory of the pre-War German economy: the young buck of Europe, Germany’s economy increasingly tended towards cartelization and pan-industrial trusts (where companies within industrial sectors collaborate over prices, producing inevitable distortions within the markets, labour unrest and currency crises). This heavily cartelized, heavily state-sponsored, heavy industrial economy, would enter into direct conflict with two of the world’s great financial centres: first Britain and later America. Both Rosa Luxemburg and V.I.Lenin conflated, to a certain extent, monopoly capitalism with imperialism. While Rudolf Hilferding, for the Second International, insisted that capitalism tended towards stability. It could be argued that all took the German industrial economy as their model, seeing in it conflicting transformations of capitalism as such. How much Schumpeter owed to both – on the one hand the tendency in capitalism towards rationalized organisation; on the other, its tendency towards self-destruction – is evidenced by his complex engagement with Socialist Party intellectuals, and his productive combination of the two perspectives. Capitalism not only tended towards self-destruction, but did so - paradoxically - with a planner’s methodical exactitude.

Indeed a certain amount of corporatism (compromises between state, industry and labour), though anathema to the ideologists of Anglo-Saxon capitalism, has always played a role in German industrial relations. Wage squeezes and inflation-busting practices still reflect this today. Germany’s peculiar position within the world economy has simultaneously necessitated and rendered untenable its hybrid of neo-mercantilism (state policy encouraging exports through centrally administered incentives) and regional financial preeminence. Time and again, its industrial strength has caused internal crises or benefited from external ones. Yet what both Hayek and Schumpeter failed to notice was that, even as capitalism was threatened by (in Giovanni Arrighi’s terms) the ‘horizontal’ integration going on within the German industrial model, America was pulling out a very different set of innovations: the ‘vertical’ integration (in which firms would be arranged hierarchically from the shop-floor up to the board of directors) of the global corporation.[15]

That neither foresaw the post-War boom is hardly to their discredit: both Schumpeter and Hayek were writing in the darkest days of the Second World War. This was a time of vast state controls, which it seemed would be impossible to relinquish. It was Schumpeter, perhaps more given to the historical view and more open to institutional change, who by 1946 had an inkling. Though he saw no economic deterrent to the emergence of socialism (of the dour, bureaucratic type), he spied an advertisement for the capitalist system in America’s resplendent growth rates during its engagement in the War. Both, however, fundamentally failed to see how the very managerialism they decried didn’t really threaten capitalism at all, but was in fact going to produce its most innovative successes. Without managerialism, the division of labour that gave the world Fordism would be unthinkable. Also, without the new acceptability of state intervention the post-War settlement that gave the world thirty years of growth could not have been conceived, let alone implemented. In a sense, the world proved faithful to Schumpeter’s love of capitalist institutional, technical and technological adaptation even as it proved his historical theory false. Capitalism was more than able to absorb state input and bureaucratisation. Marx had similarly foreseen the death-knell of the capitalist integument in the emergence of so prosaic an institution as the joint stock company (a stage in the transition, he wrote in Vol .III of Capital, of capitalist reproduction into “mere functions of associated producers”[16]). Schumpeter and Marx both failed to be properly felicitous to their own ways of conceiving capitalism, and mistook the emergence of a novel institutional form for the death of capitalism as such. Thus they forgot their own mottos: that capitalism is at its very best precisely when it innovates through adapting to legal, technical, technological and social changes.

What emerged after the Second World War was in many ways startling. It also, yet again, flatly contradicted Hayek’s view of the simple relation between individual actors and the tyrannical state. American policymakers, extraordinarily intelligent and already experienced with matters of economic management following Roosevelt’s New Deal, would implement a Global Plan (in Yannis Varoufakis’s terms) of incredible breadth and versatility. The Gold Standard would curb inflation by regulating currencies, whilst guaranteeing the preeminence of the dollar as the world’s reserve currency. Post-War reconstruction would create vital space for American trade, demand for America’s goods, and countless investment opportunities – once again making (the Federal Republic of) Germany incredibly important but also awkwardly positioned within the global economy. Japan, and later the Asian Tiger economies, would also be brought into this relationship. The era of the Plan, under American hegemony, would prove to be capitalism’s brightest moment, emerging out of the very conditions Hayek and Schumpeter regarded so gloomily. It should comes as no surprise then that the two economists became publicly accepted only with the collapse of that Plan in the 1970s.

Though arguments between followers of Keynes and Hayek dominate our popular understanding of economics, there is an ever-decreasing amount of daylight between the two. Of course, politically the two use a very different vocabulary – with Keynesians increasingly resorting to technocratic modifications of the more full-throated Hayekians. In reality we remain deeply indebted, in our political-economic vocabulary, to Hayek. It was Hayek “who even before the Second World War had envisaged a constitutional structure raised sufficiently high above the nations composing it to exclude the danger of any popular sovereignty below impinging on it.”[17] So the increasingly distant, trans-national ‘sovereignty’ of the European Union eludes democratic oversight in the name of liberal, international order. Ironically for the world’s Eurosceptic Hayekains, it was their master who first mapped its present institutional contours. Meanwhile, even as we cede our democracy to a supra-national, liberal order, we remain intuitively attached to Schumpeter’s model of capitalism, in which innovation through adaptation is the exclusive preserve of the market, and it is only a matter of time before capitalism digs us out of the same hole it got us in. Capitalist crisis, it seems, can be counted on to provide the world with one thing: apologism for the very thing that creates it.  

[1] Quoted in Ebenstein, Hayek: A Biography, 11
[2] Nasar, Grand Pursuit: The Story of Economic Genius,
[3] Quoted in Ebenstein, Hayek: A Biography, 25
[4] Hayek, The Road to Serfdom, 209
[5]. Hayek, The Road to Serfdom, 51
[6] For a full exploration of this relation between rulers, states and markets, see: David Graeber, Debt: The First 5000 Years
[7] Schumpeter, Capitalism, Socialism and Democracy, 144
[8] The summary this view is taken from was originally delivered in a speech in 1949, and is included under the title ‘The March into Socialism’ in Capitalism, Socialism and Democracy, 375-384: Routledge edition
[9] Schumpeter, Capitalism, Socialism and Democracy, 28
[10] Schumpeter, Capitalism, Socialism and Democracy, 28
[11] Schumpeter, Capitalism, Socialism and Democracy, 59
[12] Schumpeter, Capitalism, Socialism and Democracy, 59
[13] See his introduction to Schumpeter, Capitalism, Socialism and Democracy
[14] See: Varoufakis, The Global Minotaur
[15] For an extensive account of this see: Arrighi, The Long Twentieth Century
[16] Marx, Capital VolIII, Chapter 27
[17] Anderson, ‘Depicting Europe’, London Review of Books, 20.09.07

No comments:

Post a Comment