Polanyi and Schumpeter: Transitional processes via societal spheres

Abstract

We examine parallels and differences, intersections and complementarities in the notions of societal transition by Karl Polanyi and Joseph A. Schumpeter. Considering their intellectual heritage, methodology and scope, we propose a three-sphere framework to analyse their theories and study the interdependencies within capitalism. The three spheres essential to both thinkers are the political, the socio-cultural and the economic: the latter dominates the others in capitalist societies. The resulting rationalisation (Schumpeter) and commodification (Polanyi) distort the socio-cultural sphere and transcend towards the political sphere which undermines democracy. Applying our framework, we identify similar transitional mechanisms but derive different implications for society.

Keywords:

• Karl Polanyi
• Joseph A. Schumpeter
• transformation
• institutional change
• societal spheres

JEL CLASSIFICATION CODES:

• B25

Acknowledgment

The authors wish to thank anonymous referees, Heinz D. Kurz, Richard Sturn, Claudius Gräbner-Radkowitsch, and Patrick Mellacher for comments on earlier versions of this paper as well as participants of the EAEPE Annual Conference 2020, Momentum Kongress 2020, ICAE Research Seminar (December 2020), CHOPE Summer School 2021 (Duke University), International Schumpeter Conference 2021 and the Young Scholar Session at the ESHET Conference 2021. All remaining errors are the authors’.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 For the sake of clarity, we use the term “transition/transitional” to refer to the dynamic of societal change common in both authors’ theories. When relating to Schumpeter’s view of different spheres we use the term “evolution/evolutionary” in contrast to Polanyi’s consideration of societal change as a process of antagonistic (counter-)movements. The latter is termed as “transformation/transformative” throughout the following analysis.

2 For example, both were able to attend schools with excellent reputations: Schumpeter went to the Theresianium, a private boarding school in Vienna, and Polanyi graduated from the Minta Gymnasium, an elite grammar school in Budapest.

3 Nationalökonomie was the contemporary term for economics or political economy.

4 For a critical review on the extent to which he succeeds in this and the degree of applicability today, see Moura (2003).

5 “Therefore, in describing the circular flow one must treat combinations of means of production (the production-functions) as data, like natural possibilities, and admit only small variations at the margins, such as every individual can accomplish by adapting himself to changes in his economic environment, without materially deviating from familiar lines. Therefore, too, the carrying out of new combinations is a special function, and the privilege of a type of people who are much less numerous than all those who have the “objective” possibility of doing it. Therefore, finally, entrepreneurs are a special type, and their behaviour a special problem, the motive power of a great number of significant phenomena.” (Schumpeter [1934], 2004, 81)

6 As he later outlines in CSD, one of his main concerns was not to implement socialism prematurely and thus undermine the development of the productive forces and associated wealth accumulation through capitalism. This might partly explain his motivation to engage in these political debates.

7 This account likely stems from his engagement with static equilibrium models and its assumption of perfectly competitive markets that rule out any incentives for change. Therefore, in Schumpeter’s thinking, it is the innovative entrepreneur who brings about change and introduces a dynamic element (Schumpeter [1934] 2004, chapters 1 and 2).

8 For the purpose of this paper, the scientific sphere is neglected as it is not imperative for Schumpeter’s transition mechanism in CSD (although he fairly often mentions elites more broadly) and it does not play a major role in TGT either.

9 Schumpeter talks about the motive of gain that is the driving factor for individuals to exert themselves. The promise of gain and upward mobility is “strong enough to attract the large majority of supernormal brains and to identify success with business success” (Schumpeter [1942] 2003, 81).

10 “Bourgeois society has been cast in a purely economic mold: its foundations, beams and beacons are all made of economic material. The building faces toward the economic side of life. Prizes and penalties are measured in pecuniary terms. Going up and going down means making and losing money. This, of course, nobody can deny. But I wish to add that, within its own frame, that social arrangement is, or at all events was, singularly effective. In part it appeals to, and in part it creates, a schema of motives that is unsurpassed in simplicity and force. The promises of wealth and the threats of destitution that it holds out, it redeems with ruthless promptitude. Wherever the bourgeois way of life asserts itself sufficiently to dim the beacons of other social worlds, these promises are strong enough to attract the large majority of supernormal brains and to identify success with business success.” (Schumpeter [1942] 2003, 73)

11 See chapter 18 “The Human Element”.

12 See Medearis (1997, 820) who in this context speaks of the vindication of democratic values.

13 “These tendencies must be understood “objectively”, and […] therefore no amount of anti-feminist or antireformist talk or even of temporary opposition to any particular measure proves anything against this analysis. These things are the very symptoms of the tendencies they pretend to fight.” (Schumpeter [1942] 2003, 127)

14 Compare Schumpeter ([1942] 2003 127): “I have pointed out before that social legislation or, more generally, institutional change for the benefit of the masses is not simply something which has been forced upon capitalist society by an ineluctable necessity to alleviate the ever-deepening misery of the poor but that, besides raising the standard of living of the masses by virtue of its automatic effects, the capitalist process also provided for that legislation the means “and the will.” The words in quotes require further explanation that is to be found in the principle of spreading rationality.”

15 Nevertheless, Medearis (1997) shows that Schumpeter did not actually embrace the democratising tendencies of his time and developed his elitist rule concept in light of the necessity to curb those tendencies. His “‘democratic’ socialism could only refer to a society that happened to combine a political system of ‘competitive leadership’ with state control of the economy” (Medearis 1997, 829).

16 The research on Schumpeter’s understanding of democracy in CSD is extensive (for a short overview until the 1990s see the introduction of Medearis (1997)). Scholz-Wäckerle (2016) discusses how democracy evolves along with several contradictions, including Schumpeter’s competitive view on democratic processes. Also, political science deals with the Schumpeterian concept of democracy, e.g., Achen and Bartels (2017) and Shapiro (2016).

17 Compare Scholz-Wäckerle (2016) and his discussion of Schumpeter’s conception of elites and their function in democratic processes, where they “[…] try to reserve democracy for the republican idea through the conceptualization and interpretation of democracy as working under the same mechanics as free markets […]” (Scholz-Wäckerle 2016, 1005).

18 See e.g., (Ober 2017) or (Mackie 2009), who argue that Schumpeter’s definition of democracy is implausible as it undermines the very basic element of democracy – the existence of individual and common will. Similarly, Medearis (1997) focuses on the difference and presence of an elitist democracy and democracy as an evolutionary power in the course of history in Schumpeter’s work – and thereby finds partly similar results as we do.

19 “For mankind is not free to choose. This is not only because the mass of people are not in a position to compare alternatives rationally and always accept what they are being told. There is a much deeper reason for it. Things economic and social move by their own momentum and the ensuing situations compel individuals and groups to behave in certain ways whatever they may wish to do – not indeed by destroying their freedom of choice but by shaping the choosing mentalities and by narrowing the list of possibilities from which to choose” (Schumpeter [1941] 1991, 129f).

20 While Polanyi does use the term “entrepreneur”, we stick to “industrialist” for the sake of clarity.

21 Compare Schumpeter here pointing to the fact that the old, feudalistic institutional structure with aristocratic leadership left a vacuum of power that was filled by entrepreneurs and expanded their agency. At the same time, the former leadership by the aristocrats was not only restrictive, but furthermore of protective nature, that caused instability when degraded: “For those fetters not only hampered, they also sheltered” (Schumpeter [1941] 1991, 135).

22 “Under conditions such as these the routine conflict of interest between employers and employees took on an ominous character. While a divergence of economic interests would normally end in compromise, the separation of the economic and the political spheres in society tended to invest such clashes with grave consequences to the community. The employers were the owners of the factories and mines and thus directly responsible for carrying on production in society (quite apart from their personal interest in profits). In principle, they would have the backing of all in their endeavour to keep industry going. On the other hand, the employees represented a large section of society; their interests also were to an important degree coincident with those of the community as a whole. They were the only available class for the protection of the interests of the consumers, of the citizens, of human beings as such, and, under universal suffrage, their numbers would give them a preponderance in the political sphere. […] No complex society could do without functioning legislative and executive bodies of a political kind. A clash of group interests that resulted in paralysing the organs of industry or state either of them, or both-formed an immediate peril to society” (Polanyi [1944] 2014, 243f).

23 For a comprehensive discussion of Polanyi’s thoughts on fascism and how the opportunity of fascist movements is deeply rooted in capitalism see e.g., Dale and Desan (2019). They furthermore discuss Polanyi’s thesis of socialism as a second way out of the crisis of modern society brought about by the institutional separation of economy and politics.

24 As Medearis (1997) shows, Schumpeter also talks about a deadlock situation arising out of the political power labour organisations assumed in the early 20th century. Schumpeter writes: “The admission of labor to responsible office and the reorientation of legislation in the interest of the working class were in a sense an adjustment to a new state of things. But, with the two exceptions mentioned [Russia and Italy], all nations nevertheless attempted to run their economies on capitalist lines, thus continuing to put their trust in an engine, the motive power of which was at the same time drained away by crushing taxation.” (Schumpeter[1941] 1991, 346f) and further “The business class has lost the power it used to have, but not entirely. Organised labor has risen to power, but not completely. Labor and a government allied to the unions can indeed paralyze the business mechanism. But it cannot replace it by another mechanism. [. . . ] [E]verybody check-mates everyone else.” (Schumpeter [1948] 1991, 430)

Additional information

Funding

The authors acknowledge funding by the Austrian Science Fund (FWF) under grant number [ZK 60].