Capitalism and democracy in the 21st century: a Kaleckian interpretation of a Schumpeterian problem

The paper reinterprets Schumpeter's views on the dynamic effects of taxation, as originally expressed in Crisis of the Tax State, from a Kaleckian perspective. In light of Schumpeter's rejection of Keynesian and Marshallian approaches to taxation, the paper argues that a recently developed Kaleckian approach provides an appropriate basis from which to analyse the effects on the business cycle of balanced changes in the structure of taxation. It is shown that, under certain shifting assumptions, increases in the taxation of wages or profits will stimulate investment and attenuate the amplitude of the business cycle. Ultimately, the shifting of taxes reduces to a conflict over income shares. The changing distribution of income in the United Kingdom in recent years suggests that investment is likely to remain sluggish unless there is a significant reversal of income shares. This may give rise to increasing economic and political tensions into the 21st century.     

Capitalism and democracy in the 21st Century: from the managed to the entrepreneurial economy*

 This paper explains how and why the developed countries are undergoing a fundamental shift away from a managed economy and towards an entrepreneurial economy. This shift is shaping the development of western capitalism and has triggered a shift in government policies away from constraining the freedom of business to contract through regulation, public ownership and antitrust towards a new set of enabling policies which foster the creation and commercialization of new knowledge. The empirical evidence from a cross-section of countries over time suggests that those countries that have experienced a greater shift from the managed to the entrepreneurial economy have had lower levels of unemployment.     

Convergences with Schumpeter: An essay Hirschman has yet to write

The paper explores the contributions of Joseph Schumpeter and Albert Hirschman to our understanding of the dynamics of modern democratic capitalist economies and suggests that much of their respective work displays intellectual overlap and complementarity. It is primarily focused upon the role of economic and political processes as forces of change and adjustment and the necessary degree of built-in inertia required to permit orderly rather than chaotic responses.     

Capitalism, profits and innovation in the new techno-economic paradigm

Innovative profits (of the kind conceptualized by Schumpeter) are today being increasingly created through international corporate networks for technological development. Such profits through innovation are encouraged by newer more flexible organizational forms, and further encouraged (unlike in the conventional perspective on profits and on the incentive to innovate) by knowledge flows between firms. Our empirical evidence, based on US patent data, shows that multinational companies are currently more likely to develop abroad technologies which are less science-based, and less dependent upon tacit knowledge. However, within the science-based industries firms may generate abroad some technologies which are heavily dependent on tacit knowledge, but normally in fields that lie outside their own core technological competencies. We find some evidence of a convergence in corporate technological diversification across large firms, facilitated by the now common spread in the use of information and communication technologies (ICT) as an integrator of formerly separate technological systems. This has led smaller firms to diversify, but giant firms to consolidate activity around those technologies that have become most interrelated.     

Knowledge of growth and the growth of knowledge

The central theme of this address is the complicated relationship between the growth of the economy and the growth of knowledge. This theme is explored with the help of a single concept “restless capitalism” which is used to capture the idea that capitalism in equilibrium is a contradiction in terms precisely because the growth of knowledge cannot be meaningfully formulated as the outcome of a constellation of equilibrating forces. This theme is explored through a discussion of growth accounting, the relationship between innovation, markets and institutions and, as an example, the development of innovation in the field of ophthalmology. We also discuss some pioneering contributions made by Simon Kuznets and Arthur Burns to the discussion of evolutionary growth. From this Schumpeterian perspective we see the economy as an ensemble not an aggregate entity and so see more clearly the importance of microdiversity in the relationship between growth of knowledge and growth of the economy.     

Schumpeter and the `Schmollerprogramm': integrating theory and history in the analysis of economic development

This essay addresses the historical and institutional aspects of Schumpeter's thought. It suggests that Schumpeter prepared a pluralist research agenda, formulated in accordance with the conceptual perspective of the German Historical School, as presented by major scholars such as Schmoller, Sombart, Spiethoff and Max Weber. Schumpeter's notion of development, with its emphasis on the correspondence of economic and socio-cultural evolution, is therefore to be viewed in the context of the comprehensive Schmollerian approach. Moreover the ethical-evolutionary components of Schmoller's ideas point at the vital role of the German Historical School in the elaboration of a modern evolutionary economics in Schumpeterian terms. The essay concludes that the Schmollerprogramm is going to inspire further developments in Schumpeterian economics, as the integration of theory and history continuously marks the research agenda of evolutionary approaches to economic development.     

Democracy and capitalism: Are they compatible in the long-run?

Starting from a discussion of Schumpeter's analysis of the relationships of capitalism, socialism and democracy, it is shown that, in a complex society, democracy is only compatible with a decentralized market economy with safe property rights. But in time democracy shows a tendency to weaken the capitalist system by more and more regulations and an ever-increasing share of government (including the social security system) in GDP. This tendency is a consequence of political competition because of the development of interest groups and the presence of rationally uninformed voters. It leads to a weakening of efficiency, investment, innovation and thus to lower growth rates of GDP. But in time forces opposing this development arise. First, because of the negative consequences of growing government the welfare and regulatory state is bound to move into a crisis in the long run. Thus innovative politicians have a chance to win the support of a majority of voters for reform projects, who perceive finally the ever-increasing burden of higher taxes and regulations and realize that these burdens are not worth the benefits bestowed on them. In doing so, they may face, however, the competition of ideologies. Second, there are other states with lower taxes and less unnecessary regulations which show higher growth rates of GDP, and gain thus relative advantages in international political and military competition since they can command greater resources with the passage of time. To maintain their relative international power position, reforms are thus considered as necessary by rulers. This may be helped by pressure resulting from comparisons of the standards of living done by their citizens.     

The hunt for S-shaped growth paths in technological innovation: a patent study*

Since the works by the business cycle theorists in the 1930s, no attempts have been made to study empirically the long term evolution paths of individual technologies starting with long time series. This is an empirical exploration and confirmation of the now almost assumed image or metaphor of the way technology develops; that it follows an S-shaped growth path which is commonly associated with a similar shaped diffusion function of entrepreneurial activity. The paper also confirms the diversity of technology dynamics and explores how technological cycle takeoffs appear to be clustered within certain historical epochs. The results have implications for our understanding of the evolution paths of individual technologies, and of the evolution of technological systems and waves of innovation. By use of computational statistics, logistic growth functions are fitted to US patent stocks, 1920–1990, at a detailed level of aggregation, including chemical, electrical/electronic, mechanical, transport and non-industrial technologies. Some practical considerations when developing an empirically testable model of innovation cycles are addressed in the paper as well.     

Market institutions and economic evolution

Our cognitive limitations cause us to rely on institutions to guide reasonable behaviour; market institutions reduce the costs of search, negotiation, and monitoring entailed in making single transactions. The making of markets requires an investment of immaterial capital, the major share of which typically is provided by those who expect to be very active on one side of the market. This `external organisation' provides producers with information for the development of new products; by simplifying transactions it also allows consumers greater scope for developing consumption capabilities. Thus the evolution of institutions guides the evolution of goods and services.     

Bringing institutions into evolutionary growth theory

Classical economics was both evolutionary and institutional. With the rise of neoclassical economics, both the evolutionary and the institutional aspects were squeezed out of main line economic theory. The last quarter century has seen a rebirth of both traditions, but as minority intellectual positions, and to a considerable extent separate ones. This essay argues the need for a rejoining of evolutionary and institutional economics, and suggests a way to bring the two strands together in a coherent way.     

Cognition,imagination and institutions in demand creation

Formal rationality plays a limited role in human cognition, which originated in the creation of patterns to interpret phenomena and link phenomena with action. The creation of new patterns rests on imagination, not logic, typically stimulated by a perceived inadequacy in established patterns. Internal routines of the brain and external institutions form structures of cognitive capital; the institutions of markets, including money prices, aid the development of consumption capital, which simplifies most choices and provides scope for selective experiment and innovation in creating goods. Such innovation depends on differences between individuals and changes in their circumstances.     

A resource-based view of Schumpeterian economic dynamics

This paper seeks to offer a theoretical platform where the modern “resource-based view” of the firm might meet with evolutionary economics and the study of entrepreneurship, and with the economics of industrial organization. It does so by proposing the concept of the “resource economy” within which productive resources are produced and exchanged between firms. This is presented as the dual of the mainstream goods and services economy – where the “resource economy” captures the dynamic capital structure of the economy. The paper is concerned to bring out the distinctive principles governing resource dynamics in the resource economy, capturing competitive dynamics in such categories as resource creation, replication, propagation, exchange and leverage; evolutionary dynamics in terms of resource variation, selection and retention; entrepreneurial dynamics in terms of resource recombination and resource imitation, transfer and substitution; and industrial organizational dynamics in terms of resource configuration, resource complementarities and resource trajectories.     

The old and the new: the evolution of polymer and biomedical clusters in Ohio and Sweden

This paper examines the rapid growth of the polymer-based and biomedical clusters in Ohio and Sweden – two regions of similar size and with similar traditions undergoing similar industrial restructuring. Two issues are addressed: First, why has growth been so strong in these particular clusters, i.e., can we identify the sources of the growth and dynamics in these sectors? Second, why do these two clusters differ in Ohio and Sweden in terms of size, level and type of activity, number and composition of actors, size structure of firms and growth patterns over the last couple of decades? In particular, what is the role of public policies as well as cultural, historical, and geographic factors? Our main conclusions are (1) that there is strong path dependence in both clusters in both countries, and (2) that the key to rapid development is a high absorptive capacity combined with rapid diffusion to new potential users. Our policy discussion addresses these issues.     

Schumpeter and the revival of evolutionary economics: an appraisal of the literature

During the last two decades we have seen a revival of interest in the works of Joseph Schumpeter and “evolutionary” ideas in economics more generally. A professional society honouring Schumpeter's name has been founded, and linked to it we have had for more than fifteen years now a professional journal devoted to this stream of thought. However, it has been argued that, despite these developments, the link between Schumpeter's own work and the more recent contributions to evolutionary economics is in fact rather weak. This paper considers this claim. Based on an analysis of Schumpeter's contribution to economics the paper presents an overview and assessment of the more recent literature in this area. It is argued that although there are important differences between Schumpeter's work and some of the more recent contributions, there nevertheless remains a strong common core that clearly distinguishes the evolutionary stream from other approaches (such as, for instance, so-called “new growth theory”). RID="*" ID="*" Many people have contributed to this paper in various ways. Jon Hekland at the Norwegian Research Council started it all by asking me to make an overview of the contribution from “evolutionary economics” to our understanding of contemporary economies. Several people helped me on the way by supplying written material, comments and suggestions, and I am indebted to all of them. Brian Arthur, Stan Metcalfe, Keith Pavitt, Erik Reinert, Paolo Saviotti and Bart Verspagen may be particularly mentioned. A preliminary version was presented at the conference “Industrial R&D and Innovation Policy Learning – Evolutionary Perspectives and New Methods for Impact Assessment” organised by the Norwegian Research Council (“SAKI”) at Leangkollen, Asker, April 18–19.2002. I wish to thank the discussant, Tor Jakob Klette, and the participants at the conference for useful feedback. Moreover I have benefited from comments and suggestions from the editors and referees of this journal. The final responsibility is mine, however. Economic support from the Norwegian Research Council (“SAKI”) is gratefully acknowledged.     

Debt, growth and inflation in large European economies: a vector auto-regression analysis

This paper attempts to empirically test the hypothesis that whether debt matters in the EU. This has been performed by examining the potential adverse effects of debt in large European economies on investment, inflation and growth. Using the hybrid cointegration and vector autoregressive models, the findings, based on the period 1970–97, suggest that debt causes significant adverse effects on investment, but its impact on growth is not clear-cut. Moreover, debt appears to be inflationary in most cases in the long run, though produces no clear short run pattern on inflation.     

The denominations of US coins: a case of institutional evolution

Abstract. The system of denominations of US coins, which the paper treats as a quasi-genetic trait of the US monetary system, has not been constant since inception but rather has evolved over time in the sense of being subject to innovation and selection. However, all the innovations have disappeared, as have a number of the original denominations. Abstract theories of optimal systems of denominations provide a good explanation of one selection factor, but other important influences include limiting the number of separate denominations and accommodating the requirements of decimal counting. However, even some innovations that ultimately disappeared survived for decades.     

Democratic revolutions as institutional innovation diffusion: Rapid adoption and survival of democracy

Recent ‘democratic revolutions’ in Islamic countries call for a re-consideration of transitions to and from democracy. Transitions to democracy have often been considered the outcome of socio-economic modernization and therefore slow and incremental processes. But as a recent study has made clear, in the last century, transitions to democracy have mainly occurred through rapid leaps rather than slow and incremental steps. Here, we therefore apply an innovation and systems perspective and consider transitions to democracy as processes of institutional, and therefore systemic, innovation adoption. We show that transitions to democracy starting before 1900 lasted for an average of 50 years and a median of 56 years, while transitions originating later took an average of 4.6 years and a median of 1.7 years. However, our results indicate that the survival time of democratic regimes is longer in cases where the transition periods have also been longer, suggesting that patience paid in previous democratizations. We identify a critical ‘consolidation-preparing’ transition period of 12 years. Our results also show that in cases where the transitions have not been made directly from autocracy to democracy, there are no main institutional paths towards democracy. Instead, democracy seems reachable from a variety of directions. This is in line with the analogy of diffusion of innovations at the nation systems level, for which assumptions are that potential adopter systems may vary in susceptibility over time. The adoption of the institutions of democracy therefore corresponds to the adoption of a new political communications standard for a nation, in this case the innovation of involving in principle all adult citizens on an equal basis.     

Transferring exploration and production activities within the UK's upstream oil and gas industry: a capabilities perspective

Following Richardson (1972), capabilities comprise tacit, personal, subjective and context-specific knowledge that may be shared in practice only with difficulty across small, task oriented groups within firms or other types of organisation, and are expressed in the form of activities. The definition has been influential, and its focus on tacit knowledge has, arguably, encouraged research activities in the form of studies adopting experimental and simulation techniques, while providing less impetus for complementary empirical inquiry. This paper presents an empirical inquiry into an aspect of the development of capabilities in the UK's upstream oil and gas industry promoted by the changing organisation of activities across oil companies and contracting and supply companies. The main argument is that researchers can gain partial and subjective access to capabilities – distinct from activities – because individuals involved in the industry articulate and codify understandings of capabilities through practical theorising and commercial experimenting. Such articulation and codification plays an important role in the development of capabilities in industrial contexts.     

Multiple attractors and global bifurcations in a Kaldor-type business cycle model

We consider a Kaldor-type discrete-time nonlinear business cycle model in income and capital, where investment is assumed to depend both on the difference between normal and current levels of capital stock, and on the difference between the current income and its normal level, through a nonlinear S-shaped increasing function. As usual in Kaldor business cycle models, one or three steady states exist, and the standard analysis of the local stability and bifurcations suggests that endogenous oscillations occur in the presence of only one unstable equilibrium, whereas the coexistence of three equilibria is characterized by bi-stability, the central equilibrium being on the boundary which separates the basins of the two stable ones. However, a deeper analysis of the global dynamic properties of the model in the parameter ranges where three steady states exist, reveals the existence of an attracting limit cycle surrounding the three steady states, leading to a situation of multistability, with a rich and complex dynamic structure.     

The demand for distinction and the evolution of the prestige car

This paper studies the demand for a distinction good – the prestige car – and examines how this demand for distinction influences the evolution of the product. We focus on two very different sorts of distinction car: the Rolls Royce and the Ferrari. These two examples help us to articulate two polar approaches to the demand for distinction: distinction through antiquity and distinction through novelty. The paper sets out a model of the demand for distinction, and uses it to describe two trajectories along which the prestige car – and the demand for it – may evolve.