Exceptional Individuals in a Well-Governed Capitalism
Revisiting the Walgreen Lectures on Institutional Innovation
I wrote:
Institutional Innovation:
We can now examine Schumpeter’s final innovation, which dealt with institutional rather than economic theory. At the time of his death in 1950, Schumpeter was about to embark on a lecture series that would explain the nature of institutional change and provide a more detailed account of the relationship between economic and institutional change. His proposals for the Walgreen Lectures, which were to be titled ‘American Institutions and Economic Progress’ are so brief and sketchy that it is impossible to be certain how Schumpeter’s analysis would have developed. The lecture notes that survive do, however, suggest a radical new method for understanding institutional change. The Walgreen Lectures would explain the ‘interaction’ of ‘economic and political factors’.
Schumpeter repeats his earlier arguments about institutional and reverse causality. ‘Economic life is never uninfluenced by institutional factors’, and ‘institutional patterns shape the economic process’. On the other hand, ‘economic evolution will shape human values, attitudes, legal structures, administrative practice, and so on, to some extent’. Moreover, ‘lag phenomena’ or ‘discrepancies’ between institutions and economic processes ‘are among the most important explanatory factors of human history’. Some elements of Schumpeter’s institutional analysis in the Walgreen Lectures are conventional, while others are unhelpful. The claim that ‘group motives’ can ‘determine the possibilities for economic and institutional change’ states the obvious. In addition, Schumpeter’s definitions of ‘institutions’ are imprecise and all-encompassing, including informal and formal institutions, market institutions, attitudes of mind, and ‘patterns of behaviour’.
Yet the Walgreen Lectures also suggest something completely new — a three-part schema for the theorization of institutional change that mirrors his theory of economic change. The economic theory, as noted earlier, takes in
the ‘circular flow’ [of equilibrium],
real development resulting from innovations, and
crises that change the course of development.
In observing this process of economic progress, says Schumpeter, ‘we were of course aware all the time that economic life is never uninfluenced by institutional factors, but we simplified matters by the device of “freezing” political and social conditions’. Now, Schumpeter proposed to ‘do exactly the same in reverse: assuming the economic process to run along as depicted, we shall investigate the manner in which social institutions change in time’. In three short paragraphs, Schumpeter outlines the equivalent types of institutional change.
The ‘routine business’ of an institution ‘may best be analysed by analogy with an economic concept . . . the concept of a stationary state’. Thus, ‘even a routine activity induces of itself a slow process of institutional change’.
Routine change in the ‘stationary state’ contrasts with deliberately adaptive ‘autonomous institutional change’ led by groups of political, administrative, and ideological agents, whose motives and interests may be ‘entirely different from those of the people for whom these groups speak’. The motives of these groups suggest ‘an interesting analogy with the economic concept of profit’.
Further change involves the ‘responses’ of leading agents ‘to the impact of factors external to the given institutional pattern’. For example, ‘any major war or any major economic crisis affects a country’s institutional pattern for good’.
Much as in his theory of economic change, the typology of institutional change presented in the Walgreen Lectures could be conceptualized as ‘three corresponding pairs of opposites’:
opposition of routine equilibrium to discontinuous change;
opposition of static and dynamic methods of analysis; and
opposition between two agents of change — managers of the equilibrium and radical innovators.
The emphasis given to institutional innovators is especially interesting. Schumpeter writes of the ‘indeterminate’ influence of the ‘leading personnel’ and ‘exceptional individuals’ in society. He also says that ‘factors of economic and institutional progress’ are shaped by ‘the qualities of the human material, the intelligence, foresight, endurance, and so on, that are at any time present’.
It would seem, therefore, that Schumpeter proposed to utilize pattern variables of economic evolution as the basis for an equivalent and original conceptualization of institutional change, and to suggest that a similar dynamic of change may operate in both the institutional and economic spheres. One significant aspect, which nevertheless remains unexplained, is that the motive for institutional change is analogous to profit making.
Picking up where Schumpeter left off, we can try to specify this dynamic and to expand the analysis to take account of the problems faced by developing societies in transition to capitalism. My argument will be that Schumpeter’s hints about the nature of institutional change can clarify the interconnected institutional and economic patterns of capitalist transition. Moving from theoretical logic into concrete analysis, three sequences should be examined:
An equilibrium of institutional routines.
Disequilibriating processes of internal policy innovation giving rise to real institutional development.
External disequilibriating economic processes influencing the timing and pattern of institutional development.
To simplify matters, my discussion … conflates the sequence by merely separating the equilibrium routines from the disequilibrium forces … [and] incorporates a fourth process, which Schumpeter did not recognize, namely disequilibriating innovations that are routinized in capitalism. In general terms, it can be noted that the ‘disequilibrium’ elements of Schumpeter’s schema deal with external forces acting upon institutions and internal forces driving change within institutional spheres. The theoretical approach I propose also distinguishes equilibrium tendencies that maintain a slow evolution from disequilibrium episodes that intensify the forces of change. This method of utilizing Schumpeterian economic theory to explain institutional change is not a gratuitous application of economic theory to social and political analysis. I believe that Schumpeter’s intention was to show that economic and institutional changes are part of a single process. His schema draws attention to interlinked conditions of contemporary capitalist transition.
The insights I will draw from a reformulation of Schumpeter’s approach may be summarized as follows:
Neither institutional equilibrium nor economic equilibrium are good for development.
Particular qualities of leadership and entrepreneurship are indispensable in both institutional and economic fields.
Combined interest and ideology motives in the institutional sphere may acquire a potency that approaches but does not equal the economic profit motive.
Imperfect political competition can facilitate institutional innovations.
Furthermore, I note that Schumpeter’s stress on recurrent instability in capitalist economic and institutional change renders it radically different from incrementalist theory. Douglass North has written that: ‘Instability is one thing; the process by which change and adjustment take place is something else’ (Structure and Change in Economic History p. 31). Adopting Schumpeter’s approach, we must arrive at the opposite conclusion. A Schumpeterian theory of institutional change calls attention to the unavoidable but necessary instability of contemporary capitalist transitions …
This chapter has examined a Schumpeterian model of autonomous, discontinuous, and disequilibrium institutional change that could be appropriate for developing countries. Arguably, if this form of institutional transition were more widely followed in developing countries more of them might today be further along the road to capitalism. Most important is that the strong logic of this model shows why successful institutional change need not be a prolonged and purely spontaneous process. Hayekian theory does not offer a complete panorama of the possibilities for capitalist transition. The followers of Hayek in the ‘growth versus design’ debate continue to prefer the microscopic mode of analysing historical and contemporary institutional change. My objective has been to flesh out Schumpeter’s claim that real development — the creation of ‘new combinations’ — is likely to occur macroscopically in disequilibrium conditions. In this regard, the process of capitalist transition is distinctive. Capitalism’s development is punctuated by discontinuity during periods of instability. Institutional progress in contemporary developing countries telescopes the changes in shorter time frames.
There is, nevertheless, a subsequent scenario, only briefly outlined here, that fits more easily with the microscopic perspective on change in advanced societies. When development reaches a certain threshold within a social system, i.e. once it has run past the social system’s indefinable point of capitalist transition, and after several cycles of institutional crisis, discontinuous creative destruction may give way to a calmer situation in which smaller-scale innovations maintain a new disequilibrium routine of selection and adaptation. We may then speak of a transitional mode of periodic radical change mutating into the ‘normal’ pattern of very advanced capitalist society. The minimally destructive, regular, small-scale, timely adjustment does not replace the large-scale techno-economic cycles of economic history, which are bound every now and then to throw up a cataclysmic series of events. For the most part, it is simply that adjustment to ‘long waves’ becomes a learnt innovation routine for matching institutions to the economic pattern.
[MGH older/wiser: That final sentence is rather idealistic in retrospect as this routine did not occur after the 2008-2009 crisis, which is why we are still in such a pickle today. In many of the 60 columns I wrote for Project Syndicate in 2012-2013 I argued that leaders of the Western world should be paying more attention to the policy advice of Schumpeter, and rather less to the advice of Keynes and Krugman. There should be fewer bailouts of social and economic sectors and less monetary stimulus and public debt in order that adjustment can occur. But our leaders then were not ‘exceptional individuals’, and adjustment must still come eventually, more than likely as inflation, recession, deepening socio-political crisis, and possibly geopolitical conflict. Why am I making these points now? Because individuals matter in history, and yet there was no safety net in 1760 or 1800. Today, we cannot trust the top 2 or 3 or 5 percent of ‘exceptional’ individuals to make the right decisions for welfare and economic growth because they have been artificially sustained — politically or economically — through not having being exposed to public budget and market disciplines during crises.]
The Source:
Michael G. Heller, Capitalism, Institutions, and Economic Development, Routledge 2009 [pp. 131-133, 151-2]
The References:
Joseph Schumpeter [1950] ‘American Institutions and Economic Progress’, in The Economics and Sociology of Capitalism, R. Swedberg (ed.), Princeton 1991
Joseph Schumpeter [1934] The Theory of Economic Development, New Brunswick: Transaction Publishers 1983
Evolutions of social order from the earliest humans to the present day and future machine age.