After Marx:
Structural Change and Steady States

a dark satanic mill


Marx's frightening vision did not carry over into Neoclassical theory. But then, it is hard to say the early Neoclassicals had a substantial theory of growth at all. The possible exception was Marshall, but even he improved little upon the Classical system (of Smith and Ricardo, not Marx). That was only to be really developed in later years.

Concern with growth was then largely confined to the German and English Historical Schools, although these thinkers did little more than improve the recording and collection of facts on economic history. They did explore, for instance, institutional and cultural roots of productivity and factor changes (especially regarding population growth and the social-cultural habits that induced capital accumulation), but the essence of their system were only footnotes to the Classical theory. The American Institutionalists also did little beyond this - except that their massive empirical efforts on business cycles and national incomes accounts might have spurred new interest into the phenomenon of growth. Simon Kuznets, in particular, was instrumental in this respect.

However, in the 1920s and 1930s, three new sets of stories emerged which improved upon the Classical theory substantially. They all drew, to a good extent, from Karl Marx's theoretical schema that had been channeled by a European tradition that ran through Tugan-Baranovsky, Spiethoff and Aftalion. Specifically, two themes ran through the new stories: firstly, that the economy should be considered explicitly in its disaggregated, multi-sectoral structure; secondly, the concept of a steady-state growth path is introduced as a a reference point for such an economy.

The first of these "structural" theories was that developed by Joseph A. Schumpeter in his 1911 classic, Theory of Economic Development and then further explored later on in his Business Cycles (1939) and his Capitalism, Socialism and Democracy (1942). His system was, again, supply driven: the main secular engine of growth was the increase in factor supplies. The difference, however, was Schumpeter's resurrection of Smith's concern with the entrepreneur as an innovator who improved growth by efficiently combining resources, adopting new technical improvements in machinery and conducting the division of labor.

Schumpeter's starting point is the steady state, or rather, a smoothly expanding economy. Unlike Smith, his population growth was exogenous and his savings rate rather constant or, at best, a residual and not a driver of growth - he was not very much concerned with distribution. In Schumpeter's view, the driver of "development" (as opposed to boring "growth") were discontinuous punctuated changes in the economic environment. These, he claimed, were brought about by a variety of things (e.g. sudden discoveries of new factor supplies), but entrepreneurial innovation was the central one.

The entrepreneur's innovations drive development but their motive, like Marx had argued, was "raw instinct" - profit-derived wealth being merely an "index" of that instinct. Innovation, again like Marx, was not wholly exogenous: quite the contrary, competition for small profits "induced" entrepreneurs to innovate, whereas uncompetitive periods with high profits were a brake on the rate of innovation.

It only takes a few leaders. From a steady economy, a technical innovation by a single entrepeneur opens up new profitable avenues - therefore, more entrepreneurs are induced to innovate, thereby increasing the profits in the economy as a whole, thereby driving growth. But as as the "supply of entrepreneurs" in any generation is numerically exhausted, capitalists turn upon each other and compete away the existing profits. Profits begin to decline and the economy slows down. However, the decline in profits will eventually, again, induce those with entrepreneurial inclinations to once again innovate.

One may think of this as more of a cycle theory than a growth theory, but Schumpeter claimed that there were ratchet effects in innovation so that entrepreneurial-driven spurts of economic activity led to progressively higher levels of income. And there is no long run need to slow down: unlike Ricardo, Schumpeter claimed that there were no diminishing returns to innovation. The only reason one may be driven towards slower, steady-state is that all the entrepreurs in a generation might be already "used up".

There are also institutional preconditions for innovation: a capitalist system (private ownership of property) was one, existence and availability of plentiful credit is another. Like Wicksell, Schumpeter abandoned Say's Law and claimed that credit made present activity independent of past activity and thus enabled entrepreneurship. Hence, since entrepreneurial innovation could be arrested by lack of credit, then financial innovation was also an important factor for increasing growth.

Although he did not have diminishing returns to innovation, Schumpeter did have long-run elements in his theory which induced a breakdown in growth. These are rooted in social-cultural changes: enterprise may grow to the point entrepreneurial function may be replaced by bureaucratic managers who are less apt to innovate; growth uncovers economies of scale and may lead to permanently high industrial concentration and high profits (which again, are a brake on innovation); also, entrepreneurial activity will be progressively viewed as "bad" because capitalism leads to the breakdown of social and family relations and alienates the bourgeoisie and, in particular, is despicable to intellectuals who are highly influential upon public attitudes; this negative view of rapacious entrepreneurship will then conspire, culturally speaking, to diminish the supply of entrepreneurs. (Also, that same breakdown in the family may also take away from the "dynastic" aspirations which often lies behind the "raw instincts" of entrepreneurs).

The concept of "steady-state" was still primitive in Schumpeter. It was given more precision in the second set of theories we consider, namely the "steady-state" multi-sectoral growth theories of Gustav Cassel (1918) and John von Neumann (1937). Both Cassel and von Neumann presented growth models which are akin to Marx's reproduction scheme in many respects but differed essentially in the absence of "crisis". One can argue that it was probably more inspired by the general equilibrium theory of Léon Walras (1874), who also referred to the concept of steady state growth in his theory of capital.

John von Neumann, in particular, followed the Classical idea that surplus is the determinant of growth but, contrary to the Classicals, did not concern himself with any falling rates of profit. John von Neumann's concern was in the formalization of steady-state growth, but without reference to any Classical constraints that might bring the surplus down and bring the economy to a stationary state without growth. To some extent, this was due to the fact that, as a mathematician, von Neumann abstracted much from the "social considerations" that often went into the Classical theories, i.e. he did not concern himself with possible resource constraints presented by land, or changes in fertility, or "entrepreneurial" behavior or any other such concepts. His exercise was a thoroughly mathematical one -- foreshadowing the later formalization of the Classical theory by Sraffa and Leontief in many ways.

As a result, the dynamic models of Gustav Cassel and John von Neumann have a perpetual multi-sectoral, steady-state growth rate which they saw as perpetual and constant. They identified the rate of growth to be identical to the rate of profit - the "Golden Rule" already implicit in the Classicals, Schumpeter and Walras. For more on all this, see our reviews of the Walras-Cassel model and the von Neumann system.

The final set of growth theories that emerged in the 1920s and 1930s are the "structural" theories of growth developed by the Soviet economist Grigory Fel'dman (1928) and the Kiel School (e.g. Adolph Lowe (1926, 1954, 1976), Fritz Burchardt (1928, 1931), Alfred K臧ler (1933), Emil Lederer (1931), Hans Neisser (1933, 1942), Wassily Leontief (1941)). They effectively take the story up where Cassel-von Neumann drop off. They are more explicitly indebted to Marx's theory, particularly his schema of extened reproduction and his recognition of technological unemployment.

The Kiel School was particularly interested in what happens off the steady-state path. They focus on technological change as the big crucial variable that is constantly leading to increases in the rate of return on capital and thus higher investment. The difference is that the resulting growth is not steady, but rather "disproportionate". For instance, after technical progress, investment goods sector output increases while that of consumer goods industries lags behind, leading thereby to changes in relative prices during the process of adjustment. These changes in relative prices can lead to technological unemployment in certain industries (e.g. consumer goods) while growth proceeds at bursting speed in others. There is, as Neisser expressed it, "a race" betwen technical displacement of labor in some sectors and the rate of absorption of labor in other sectors from capital accumulation. Notice that "traditional" recipes for curing unemployment, e.g. lowering wages or stimulating demand, will not affect the technological unemployment problem as these are aggregate measures, not designed for the specific sectoral problems. As they Lederer noted:

"The primitive conception that, whenever unemployment exists one could always restore equilibrium by a reduction in wages belongs into the junk-room of theory" (E. Lederer, 1931: p.32)

Several aspects of the structural theories of growth of the Kiel School were absorbed by dynamic input-output models (e.g. Leontief , 1953; Samuelson and Solow, 1953; Morishima, 1964, 1973). They were more directly influential on the development of Friedrich von Hayek's (1928, 1931) theory of macrofluctuations and John Hicks's (1973) theory of the disequilibrium growth "traverse".


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