4.1.Methodological approach

Schumpeter became famous for the term "creative destruction". The idea is, that certain individuals for reasons that have to do with their character are able to change the productive structure and impose innovations. If we want to have an idea what he is talking about we can think of charismatic figures like Bill Gates, Steve Jobs, Larry Page etc..

There are two problems with this theory. First of all, economic progress can't be explained this way, because at least nowadays radical changes in the productive structure are the result of more or less planned investments in research and development. Larry Page is very famous, but without Tim Berners-Lee, almost unknown, google wouldn't exist and Tim Berners-Lee wouldn't have invented html without governmental subsidies. (Actually google wouldn't exist either without Linus Thorvald, because without the free linux, we would only have few websites, and for these few websites, we wouldn't need a search engine. The list can obviously be enlarged without any effort. Larry Wall is another example. At the beginning of the internet Perl was the only language supported by the internet. Any other approach was very difficult.)

However this is a minor problem. More critical is the fact that the main message of Josehp Schumpeter is the fact that he was the first to realise, before Keynes, that it is not "capital", in the sense of classical and neoclassical theory, not consumed income of the past, that attracts resources, but money and money is not necessarily not consumed income of the past. For a more detailed explanation see interest rates.

As Adam Smith, see balance of payement, he was not fully aware that this destroys completely the fundamentals of classical thinking and he still sticks to the idea that the resources are always fully employed, but he was the first to realise that the classical concept of "capital" is wrong.

Until know, see for instance Léon Walras, we have seen that man plays no role in the economy. Capital and labour moves alone to the best uses and the resources are steered by universally valid laws the same way the course of the planets is steered by the law of physics.

The problem is, that this methodological approach denies from the very beginning the fundamental strength of market economies. The strength of market economies consists in the trial and error process that leads to optimal allocation of resources, not as a "law" the equilibrium will never be reached, but as a tendency, see optimal allocation of resources. But if the existence of the problem is already denied, if we assume that the resources flows automatically to the best use, there is as little need and possibility for human decision making as in the universe. Markets economies are useless, because the problem they resolve best doesn't exist.

There are no entrepreneurs in the classical and neoclassical theory and it is only in the Theory of Economic Development by Joseph Schumpeter that this figure appears on stage of economic thinking.

Economists, especially if they teach at universities, are public employees, in other words the exact opposite of an entrepreneur. The get paid independently from any performance, they have a life long job, no risk and in the artificial world they are living in, there is no change in 200 years. The neoclassical theory corresponds therefore to their experience. Once employed at the university, they have an eternal equilibrium and their is no need for any reallocation of resources. That can explain why Joseph Schumpeter is excluded from the academic curricula. We don't believe really that he is right with his "creative destruction", but it would be useful to mention that something like an entrepreneur exists in the real world.

The second possible reason why Schumpeter doesn't form part of the academic canon is the fact that his theory is not suited for mathematical modelling. Perhaps not even Keynes would have been canonised if his theory were not presented by a graphical / mathematical model. We can assume that, because the original version plays no role in academic teaching.

Joseph Schumpeter is much easier to read than Keynes. Most people, especially academic teachers who teach the IS-LM model until they fall into the grave, did not realise that Keynes refutes completely the concept of money as a pure veil and still less, that in the keynesian theory the interest rate in not a price in the sense of a market price, see interest rates.

From a purely didactical point of view Schumpeter makes therefore sense. He doesn't have really a monetarian theory, that's something we see for the first time in the General Theory of Employment, Interest and Money, but he is well aware of the role played by money.

Due to the fact that he assumes full employment, he assumes that an increase of money would lead finally to an increase of prices and that the "creative destructor" must be able to pay a higher interest rates than others in order to get the money, what is only possible, if the profitability of his investments is high, what is in general only the case with new technologies who have a deep impact on the whole economic structure. In other words: In the schumpeterian logic only a reallocation of already employed resources is possible and that leads to more efficiency, because the already employed resources will flow to a use where there (monetary) marginal output is higher. (Otherwise, obviously, they would remain where they are.)

However this is wrong in case of unemployment. In case of unemployment we have resources whose performance is low, for instance poorly qualified work. In order to activate these resources, interest rates has to be low, otherwise their use will not be profitable enough to pay back the loan. The logical consequences is therefore to lower the interest rates until we reach full employment.

From a purely economic point of view the new concept of money is more relevant than the "creative destruction", although the last one became famous. This concept is a complete break with classical and neoclassical thinking, although Joseph Schumpeter was not completely aware that the whole classical and neoclassical theory collapses, if capital is subsituted by money.

As all the neoclassical authors he reflected about the methodological approach to be taken, to be more precise, about the object of economics.

Wenn wir uns nun nach den allgemeinen Formen der wirtschaftlichen Dinge, nach ihren Regelmäßigkeiten oder nach einem Schlüssel zu ihrem Verständnisse fragen, so sagen wir damit ipso facto, dass wir sie in diesem Augenblicke als das zu Erforschende, das Gesuchte, das "Unbekannte" betrachten und sie auf relativ "Bekanntes" zurückführen wollen, so wie das eine jede Wissenschaft mit ihrem Untersuchungsgegenstand tut. Gelingt es uns, einen bestimmten Kausalzusammenhang zwischen zwei Erscheinungen zu finden, so ist unsere Aufgabe dann gelöst, wenn jene Erscheinung, die in diesem Kausalzusammenhang die Rolle des "Grundes" spielt, keine wirtschaftliche ist. Dann haben wir getan, was wir in dem betreffenden Falle als Nationalökonomen tun können und müssen das Wort anderen Disziplinen überlassen. Ist aber jener "Grund" selbst wieder wirtschaftlicher Natur, so müssen wir unsere Erklärungsversuche fortsetzen, bis wir auf einen nichtwirtschaftlichen stoßen. Das gilt für die allgemeine Theorie wie für einen konkreten Fall. Wenn ich z.B. sagen könnte, dass das Phänomen der Grundrente auf der Verschiedenheit der Bodenqualität beruhte, so wäre damit der wirtschaftlichen Erklärung genügt.

Joseph Schumpeter, Theorie der wirtschaftlichen Entwicklung, Erstes Kapitel
If we study the general forms of economic relationships, if we analyse the regularities or if we are looking for the key that allows us to understand them it is obvious that in this moment we consider them as our object of research, as the thing we are looking for and that is unknown. We want to explain them by the fact we already have in hand as it usual in any science. If we succeed to establish a relationship between to phenomenon, our mission is accomplished, if the phenomenon that plays the role of a cause in this relationship doesn't belong to the economic sphere. In this case we have done, what we can do as economists and we have to leave open the field to other sciences. However if this reason is once again of economic nature, we have to continue with our research until we reach a none economic reason. This is true in general and related to a concrete issue. If I could say for instance that the phenomenon of the rent is due to different quality of the soil, the problem would be resolved from an economic perspective.

We would say that the definition of Alfred Marshall, see methodological approach, is shorter. The object of economics is human behaviour as far as it can measured with money. Alfred Marshall is even very precise. The motive actually can't be measured, but we can measure the strength of the motive. If someone buys a bicycle and pays 5000 dollars for it, in other words a very expensive bicycle, we know that he like bicycles, but we don't know why he likes bicycles. Perhaps he serious about doing sport or he just wants to impress the people.

Joseph Schumpeter has another definition, however the basic problem exists in both versions. Joseph Schumpeter says, to put it short and straigthforward, that an economist studies economic problems, without actually defining them. In the case of Alfred Marshall we have at least a definition.

Both definitions are not really helpful from a practical point of view. If the non economic issues are determinant for the "economic" problem it makes little or no sense to abstract from this problem. That would be like saying that a chemical reaction responsible for a certain illness is beyond the object of study of medicine and therefore there is no need to care about.

If the behaviour we can measure with money depends on something else we can not measure with money, the thing we can't measure is more interesting, because it is the cause and not only the effect. A problem Alfred Marshall was well aware of.

The sentence " In this case we have done, what we can do as economists and we have to leave open the field to other sciences" is nonsense. Economics is a transversal science and has to study a problem until it is resolved, whatever is needed to resolve it.

In practise this kind of thinking has lead to a purely quantitative approach. That means, that the models used in economics only take into account very few variables and parameters, whose explanatory power is near to zero.

To illustrate it was a simple example: The marshallian cross of the demand curve and the supply curve is always true and it is always true that the will cross somewhere and that we have an equilibrium at this point. This is true for Myanmar and the USA, for Somalia and France, the Kongo and Germany, but that is meaningless. In Myanmar, Somalia and Kongo the equilibrium price for food is so high, that people spend almost all of their income for food and if this price increases a little bit, they starve. In the USA, France and Germany the money spent for food is a minimal part of their income and if people want to save money spent for food, if they relinquish luxuory food, they can get it for almost nothing. A pure quantitative analysis explains almost nothing.

Joseph Schumpeter, by the way, doesn't respect his own methodological approach. He describes the creative destrutor, the leader as he calls him, in PSYCHOLOGICAL terms, see dynamic economy. We can even say that Joseph Schumpeter based his whole cycle theory on psychological phenomenon. The fact that psychology is not really his strength and most of his psychological assumptions are not very plausible, but that doesn't change nothing concerning the fact that he doesn't respect his own methodological approach.

The problem is that with this methodological approach the analysis of the causal chaines is ininterrupted when it becomes interesting. Everybody for instance agrees, and it is hard to deny that, that economic development depends on education, training, the production of know how, the investments in research and development and the capacity to transform that in marketable products.

[It is needed to say that marketable products are the goal, because some studies just count the amount of people with academic degrees and draw from that the conclusion that higher education doesn't lead to economic growth. It is obvious that the larger the amount of people who have a degree in law or in economics, the lower the economic growth, because these people are part of the problem, but not part of the solution.]

However the success of investments in education, training, the production of know how etc. is not (only) a question of money or any other quantitative relationship. There is no function of the type "you invest the amount of money X and you get an increase in know how y".

[Actually there are "studies" of this kinde, but the result of these studies are nonsense.]

It is not more expensive, to illustrate that with a trivial example, to write a textbooks about economics that is worth nothing and to write a good book about economics. A good teacher is not necessarily more expensive than a good teacher and useless reseach not cheaper than research that allows to resolve concrete problems. Most of these question are related to the steering mechanisms and it is not more expensive to implement an order that gives the right incentives than one who gives wrong incentives.

The author would say, that the german ordoliberalism, see ordoliberalism, is nothing really new. The author would say that it is an annotation to Adam Smith. However it stresses the fact that most economic questions has to do with the right economic order and this problem is completely inexistent in academic economics and has nothing to do with quantitative statements.

The conception that economics studies a phenomenon until a certain point and than leave the issue to other sciencies leads nowhere and as an academic program it is a catastrophy, because the graduates of economics will know nothing useful when it come to resolve the problems of the real world and outside the subsidies jobs in "investigation" institutions there are jobs only for people who can resolve concrete problems.

That means concretely: What Schumpeter understands by things belonging to the "economic sphere" has to be taught in three semesters and the other five semesters until the master has to be spend in a specialisation.

If economics doesn't follow this way, it will disappear, because we will see in the future a lot of studies like health economies, who introduces economics in the study of a specialisation, health, agriculture, education and so on and if specialists have the needed knowledge of economics and are up to date in their specialisation, there will be little need for economists. For a more detailed discussion see preliminaries.

Beside that reality is different. We never have economic problems with some side effect on other issues. We have always social problems, health care system, demographic change, climate change, limited resources etc. with economic side effects. To start the analysis with the side effects is somehow weird.

If the price of oil for instances increases, a text book of economics will analyse the problem that way. The rise of the oil price will lead to inflation, given a certain amount of money, the money neede for transaction purposes will increase and the amount of money for speculative resources and therefore the interest rates will rise. Investments will decrease and so on. This is perhaps nice to know, but doesn't resolve the problem. The problem is, that a change in the production structure is needed. That is the beginning of the problem and economists can analyse how to induce best a change in the productive structure.

[To make more concrete: There are different ways to finance wind power plants. These plants can be financed by the government, private companies or by kind of a "people shares", every inhabitant gets a part of it, in other words, they are sold at a low price. The next question is, if we talk about CO2 emissions, if it is really a good idea that the northern countries reduce their CO2 emissions and if it would not be better to help underdevelopped countries to get independent from scarce resources by using more solar energy. Most of these countries has better conditions than industrialised countries to reduce the CO2 emissions by using alternative energies. In other words: Most problems has economic side effects, but it is a weird approach to start the analysis with the side effects.]

Still more problematic is the often put forward argument of the "pure" science. From the moment on that someone pays for the "pure" science, there is no pure science, there is at most basic research, see research an development subsidised by the government. "Pure" science can be a hobby. There is a tendency to declare something as "pure" science when actually it is just useless.

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The object of economics

Schumpeter: Economists studies the relationships of economic phenomenon until they reach a cause that belongs to the non economic sphere.

Alfred Marshall: The object of economics is the human behaviour as far as it can be measured with money.

Vilfredo Pareto and Léon Walras: They don't define the object of economic studies, but their methodological paradigm is physics.

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