Journal of Classical Sociology Copyright © 2002 SAGE Publications London, Thousand Oaks and New Delhi Vol 2(3): 227–255 [1468–795X(200211)2:3;227–255;031193] www.sagepublications.com

The Economic Sociology of Capitalism Weber and Schumpeter

RICHARD SWEDBERG Cornell University

ABSTRACT This article points to a distinct puzzle in the analyses of capitalism

that can be found in the works of Weber and Schumpeter, and gives a new introduction to their analysis of capitalism. Both Weber and Schumpeter wrote voluminously on capitalism, as testified to by such giant works as Economy and Society (Weber, 1978c [1922]) and Business Cycles (Schumpeter, 1939). One can also discern a distinct development in their thought over time: from emphasizing the role of various voluntaristic elements (such as the spirit of capitalism and the spirit of entrepreneurship) to stressing the role of institutions. The puzzle that one can find in their writings is as follows. Weber and Schumpeter both argue that a vigorous and healthy capitalism requires certain economic and non-economic institutions, in addition to something else. An absence of this ‘something else’ may lead to capitalist petrification or collapse, according to both authors. The answers of Weber and Schumpeter to the above puzzle, it is shown in the article, is somewhat different in their early and in their later works. KEYWORDS capitalism, economic sociology, Schumpeter, spirit of capitalism,

Weber

This article has two purposes: to point to a distinct puzzle in the analyses of capitalism that can be found in the works of Weber and Schumpeter, and to give a new introduction to the sociology of capitalism that can be found in the works of these two scholars. The puzzle is as follows. Weber and Schumpeter both argue that certain economic and non-economic institutions are needed for there to be a vigorous and healthy capitalism, but also that this is not enough. Something else is needed – but what? In situations where this ‘something else’ is needed, but where otherwise perfectly adequate institutions are present, Weber and Schumpeter agree that capitalism may either petrify or become so weak that it may fall

pray to counterforces. Let me also note on this particular point that Weber and Schumpeter go directly counter to today’s standard wisdom, in economic sociology as well as in New Institutional Economics, according to which all you need is the right type of institutions, and economic growth will follow more or less automatically. Task number two of this article – to give a new introduction to Weber’s and Schumpeter’s economic sociology of capitalism – may seem presumptuous and uninteresting, for a number of reasons. One of these is that we already have a sociology of capitalism; the other that we already know the economic sociology of Weber and Schumpeter. We indeed already have a sociology of capitalism, or at least the beginnings of one; and I am here referring to recent attempts to look at ‘varieties of capitalism’, different ‘governance regimes’, and so on (for an overview, see, e.g., Hall, 1999:141–6, cf. 136–40). This literature, however, draws very little on Weber and not at all on Schumpeter. There has not been a full exploration of whatever potential there may be for helpful hints in Weber and Schumpeter as to what a solid sociology of contemporary capitalism shall look like. Instead of drawing on the heritage of Weber–Schumpeter and economic sociology, the current sociology of capitalism draws mainly on political economy, in particular on Marx, Polanyi and some concepts it has developed on its own (e.g. Hollingsworth and Boyer, 1997). But even if the current sociology of capitalism may not be exactly what some of us who are active in economic sociology would like it to be, do we really need a new introduction to the analyses of capitalism that can be found in Marx and Weber? My answer, when it comes to Schumpeter, is that current economic sociology has failed to assimilate his ideas (for an exception, see Collins, 1986). Furthermore, his work is considerably more complex and rich than is commonly thought. Few sociologists (or economists) are, for example, aware of the fact that his ideas in Theory of Economic Development – where his famous theory of the entrepreneur is presented – exist in two different versions, of which the original one is unknown.1 Something similar also turns out to be the case with Weber. While some parts of Weber’s oeuvre have been properly assimilated – such as his general sociology, his sociology of law and his sociology of religion – his economic sociology is still little known. That this is the case is something that I tried to show in Max Weber and the Idea of Economic Sociology, which appeared in 1998. Today, a few years later, I find little change. While it has become generally recognized that Weber indeed produced an important body of work in economic sociology, and that this part of his work is just as important as his contributions to politics, law, religion, and so on, practically no studies have been produced during the last few years that try to advance the knowledge of Weber’s work on this point. This is a pity because there exists no other sociological analysis of capitalism, in my opinion, that is as solid and innovative as that of Weber. The following introduc-

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tion to the economic sociology of capitalism in Weber and Schumpeter, in other words, may be seen as a plea that their contribution to the sociology of capitalism is properly recognized.

Weber’s and Schumpeter’s Initial Analysis of Capitalism Weber’s and Schumpeter’s works are often portrayed as coherent wholes with no sharp breaks between their different phases. It has, for example, been argued by Jeffrey Alexander that there is no ‘young Weber’ (as there is a ‘young Marx’) (1983: 7ff.); and whatever tendency there is in the economics literature to sharply distinguish between ‘an early Schumpeter’ and ‘a later Schumpeter’ has been effectively challenged by Richard Langlois (1991). That it is pointless to single out the early works of Weber and Schumpeter for special discussion may well be true if we are interested in surveying their entire oeuvres. This, however, is not something that shall be done here, where I instead will be focusing on their early analyses of capitalism. Up until World War I, it can be added, European capitalism was in many respects a success story, culturally as well as economically, well captured in the phrase used to describe the situation in France during this period: la belle e´ poque. Germany, where Weber lived, had been united in 1871 and its politics were controlled by the Emperor and the landed aristocracy. Economically the German bourgeoisie was doing very well, even if some of its activities were curtailed by the Junkers. The Austro-Hungarian Empire, where Schumpeter lived, displayed some parallels to the German situation. The politics of the Austro-Hungarian Empire were, for example, controlled by the Emperor, who was backed by the nobility. The bourgeoisie was much smaller than in Germany but successful in its own right. Plans to unite all German-speaking peoples into one huge empire existed in Germany as well as in the Austro-Hungarian Empire.

Weber’s Protestant Ethic Weber became interested in capitalism very early in his career and was to remain so till his death in 1920. Both of his dissertations explored different aspects of its origins. The first was a study of medieval trading corporations and the second a study of the emergence of a market in landed property in ancient Rome. Weber’s well-known book on agrarian workers (1984 [1892]) can be characterized as a study of the impact of capitalism on the organization of labor in the countryside in Germany, east of the river Elbe. It is, however, in The Protestant Ethic that we find the fullest attempt in his early production to deal with capitalism in general as well as its origins.

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The main argument of The Protestant Ethic is as follows. By the 1500s a certain type of non-dynamic capitalism had developed in Europe, based on such institutions as the small medieval firm, merchant banks and a fairly sophisticated and pro-capitalistic set of legal provisions, known as the lex mercatoria or the law merchant. Weber terms this type of capitalism ‘traditionalistic’ because the mentality of the key actors was not oriented towards new ways of making money in a methodical manner. The existing ways, it was felt, were good enough (e.g. Weber, 1958a [1904–5]: 64). During the late 1500s and the 1600s, however, a new attitude towards the economy emerged, seemingly out of nowhere. This new mentality set off a series of changes in capitalism, which eventually was transformed into what Weber calls ‘modern capitalism’ (e.g. Weber, 1958a [1904–5]: 64, 68). Initially these new ways of working and doing business were carried out in a spirit of religious enthusiasm by the actors. Later, however, when they had become part of the economic system, they were experienced as a heavy burden, as an ‘iron cage’ in Weber’s famous metaphor (1958a [1904–5]: 181). Most of the studies that make up the huge body of secondary literature that has been devoted to The Protestant Ethic either defend or attack the lynchpin in Weber’s argument: how ascetic Protestantism caused a change in the spirit of capitalism. My suggestion in this article is to set this issue aside and instead concentrate on a less controversial part of Weber’s argument, namely that a new economic mentality or a new spirit of capitalism emerged from the 1500s and onwards in the West (and nowhere else). One reason for putting the religious issue to one side is that Weber’s argument about the link between ascetic Protestantism and a new attitude towards capitalism is not open to empirical verification; we simply do not have the data that it would take either to confirm or to disconfirm his thesis (e.g. Marshall, 1982). To this can be added that my own reason for putting it to one side is that this will allow us to approach The Protestant Ethic from a novel and a more productive angle, given the purpose of this article. This way of proceeding, I argue, may lead us to a better understanding of Western capitalism, without getting into a discussion of the possible impact of ascetic Protestantism on modern capitalism; it also allows us to ask some new and interesting questions about the relationship of economic institutions to the mentality of economic actors. Let me therefore return to The Protestant Ethic and Weber’s description of what the change in capitalist mentality looked like, without making any references to the issue of the possible impact of ascetic Protestantism on capitalism. The only concrete example that Weber supplies us with is that of the continental textile industry, as it existed till the mid-1800s (1958a [1904–5]: 66–9).2 Weber describes the situation in this industry on an everyday level in the following manner. After having produced the cloth in their homes, the peasants brought it to the putter-out, who paid them a traditional price. The customers of the putterout also came to him and bought traditional items for about the same price as they

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always had done. The putter-out worked five to six hours a day and made enough of a profit to live a respectable life. Weber emphasizes that . . . the form of organization [of the putter-out] was in every respect capitalistic; the entrepreneur’s activity was of a purely business character; the use of capital, turned over in the business, was indispensable; and, finally, the objective aspect of the economic process, the book-keeping, was rational. (1958a [1904–5]: 67) Suddenly, however, something happened, according to Weber, that was to destroy the languid manner in which this type of business was carried out. A young man from one of the putter-out families would typically start to check the peasants much more carefully; he would approach his customers himself; he would lower the prices and try for large volumes. His success would set off ‘a bitter competitive struggle’ and eventually lead to the transformation of the whole industry (1958a [1904–5]: 68). Modern capitalism had come into being in the textile industry. One of the many fascinating arguments in The Protestant Ethic is that the change from traditional capitalism to modern capitalism took place not because of a change in the economic institutions but because of a change in the mentality of the economic actors. Institutions, to repeat, did not play the key role. Once this has been said, however, it should be added that, according to The Protestant Ethic, a change in mentality can obviously lead to a change in an institution; the two are related. Weber notes, for example, that one may sometimes start the analysis either from the ‘subjective [viewpoint of the actor]’ or from the viewpoint of ‘objective social institutions’ (1958a [1904–5]: 152).3 How intertwined spirit or mentality and institutions can be is well exemplified in the fullest account in The Protestant Ethic of what Weber means with the term ‘capitalistic spirit’.4 This is to be found in his description of ‘the traditional spirit [of capitalism]’ in the continental textile industry, and it says that traditionalism infused the way that the profit was set, how long you should work and how to treat workers, customers and business associates (1958a [1904–5]: 67).

Schumpeter’s Theory of Economic Development The equivalent of Weber’s Protestant Ethic, when it comes to Schumpeter, is The Theory of Economic Development (1911). This was Schumpeter’s second book; his first had appeared in 1908 – The Nature and Essence of Theoretical Economics5 – and can be described as a theoretical study in the tradition of Walras. In The Nature and Essence the economy is conceptualized as a system that can be affected by various influences from the outside and thereby set in motion. This motion will then traverse the whole economic system until it settles down into a new

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equilibrium. While Schumpeter was an ardent admirer of Walras his whole life, he soon came to feel that Walras had only told half the story. The economic system, he thought, could also be set in motion by forces from within; and this type of change was considerably more important to the evolution of the economy than the changes brought about by forces from the outside. Schumpeter would later describe his own state of mind, just after having completed his first book, in the following manner: I felt very strongly that this was wrong [i.e. Walras’s argument about exogenous forces of change], and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propelling the economic system from one equilibrium to another. It is such a theory that I have tried to build. (1989 [1937]: 166) The Theory of Economic Development can be characterized as an attempt from Schumpeter’s side to flesh out his vision of an economy that is changed from within and where the sole agent of change is the entrepreneur.6 The heart of Schumpeter’s book is therefore to be found in his description of the entrepreneur and entrepreneurship, which comes in the famous Chapter 2. It deserves to be emphasized, however, that Schumpeter did not want to create a theory of the entrepreneur and entrepreneurship per se; what he was after was a theory of the economy as a whole – an economy, nota bene, in change. The Theory of Economic Development thus contains not only the famous Chapter 2 (entitled ‘The Fundamental Problem of Economic Development’7 and not e.g. ‘The Entrepreneur’), but also chapters on ‘Credit and Capital’, ‘Entrepreneurial Profit’, ‘Interest on Capital’ and ‘The Business Cycle’.8 Today most people only read Chapter 2 in Schumpeter’s book, but the question may be raised whether such contemporary phenomena as the ‘New Economy’ and complexity theory constitute signs that Schumpeter’s idea of a whole economy centered on entrepreneurship may be relevant after all. However that may be, in the presentation in this article of Schumpeter’s ideas, it is the famous Chapter 2 that will be the focus of attention. Little that is new can be added to the standard accounts of the version of this chapter that is usually referred to in scholarly discussions, namely Chapter 2 in the English translation from 1934 (which is essentially based on the second German edition from 1926). For this reason, I shall be quite brief in my summary. There is, however, also the fact that the first edition of Schumpeter’s book is never cited in the literature, and its second chapter differs on some interesting points from the standard 1934 version that everybody cites. Since these changes have not been

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discussed in the existing literature on Schumpeter, they will be highlighted in this article.9 It can be added that the first edition of The Theory of Economic Development (1911) also differs on several other points from the English translation of this work, which was made two decades later, at which point Schumpeter as well as economics had changed quite a bit. When Schumpeter wrote the first edition he was a young Austrian economist with extremely high ambitions; he was working at a provincial university; and he had German economics as his reference. By the early 1930s, in contrast, he was a middle-aged man; he had a tenured appointment at Harvard University; and he was trying to relate his work to a new type of economics which was emerging in the Anglo-Saxon world. In the standard version of Chapter 2, Schumpeter explicitly states that ‘economic sociology’ deals with institutions (‘the social framework of the economic course of events’), which he counterposes to the task of economic theory, which is to deal with economic mechanisms (1934: 60–1).10 These economic mechanisms relate either to statics or to dynamics, that is, either to the type of economics that one can find in Walras or to the new type that Schumpeter was trying to develop in The Theory of Economic Development. In the static type of the economy (to which Chapter 1 of Schumpeter’s book was devoted), there is a ‘circular flow’, which means that nothing new ever happens. All is exactly as it always has been in this type of economy: the same items are produced and consumed over and over again, and there are no innovations. ‘Add successively as many mail coaches as you please, you will never get a railway thereby’ (1934: 64). Still, in reality, change does occur in the economy, and it comes about, in Schumpeter’s famous formulation, when the entrepreneur puts together ‘new combinations’ (1934: 65–6, emphasis added). The entrepreneur does not invent anything new; he innovates, which means that he recombines already existing resources. According to a famous passage, entrepreneurship essentially covers the following five situations: ‘(1) The introduction of a new good’, ‘(2) the introduction of a new method of production’, ‘(3) the opening of a new market’, ‘(4) the conquest of a new source of supply of raw materials or half-manufactured goods’, and ‘(5) the carrying out of the new organization of any industry, like the creation of a monopoly position’ (1934: 66). You cannot turn entrepreneurship into a ‘vocation’, Schumpeter argues, since ‘everyone is an entrepreneur only when he actually “carries out new combinations” ’ (1934: 77–8). Every businessman, however, typically has a moment when he is entrepreneurial, ‘however modest’ (1934: 78). In the circular flow it is possible to act in a rational manner, since everything has been done before and consequently can be calculated in advance. This, however, is not the case when you are entrepreneurial, since by definition you are doing something new. The entrepreneur mainly has to rely on ‘intuition’; and may only be courting failure if he is too rational and tries to figure everything out in advance (1934:

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85). He also has to be prepared to meet with considerable resistance from his surroundings; people are as set in their ways as ‘a railway embankment [is set] in the earth’ (1934: 84). What drives the entrepreneur, to cite a well-known passage in Schumpeter’s book, are primarily ‘the dream and the will to found a private kingdom’, ‘the will to conquer’ and ‘the joy of creating’ (1934: 93). This account of the standard version of Chapter 2 in The Theory of Economic Development covers, to repeat, material that is already well known in the literature. The original version of Chapter 2 from 1911 is, however, somewhat different from the standard version from the 1930s, mainly in emphasis.11 As an example of this, one can mention the parallels that are several times drawn in the original edition between the artist and the entrepreneur, which tend to heighten the irrational and individualistic dimension of the entrepreneur. But there is also the fact that some of the ideas that are only mentioned in passing in the standard version of Chapter 2 are elaborated upon to such an extent in the original version that the overall picture of the entrepreneur becomes somewhat different. In the standard version the entrepreneur is essentially a person who puts together new combinations. In the original version of The Theory of Economic Development, on the other hand, Schumpeter says that there are three elements – not just one – that characterize the entrepreneur: 1. 2. 3.

that he puts together new combinations (just as in the later edition); that the really difficult thing for the entrepreneur is not to conceive of these new combinations but to translate them into reality; and that the entrepreneur can only be successful if he can get other people to assist him in carrying out the new combinations.

In the 1911 version of his theory of entrepreneurship, Schumpeter emphasizes very strongly that what is most remarkable about the entrepreneur is not that he has figured out some new combination – good ideas are plentiful and cheap, we are told – but that it is extremely difficult to transform these ideas into reality. ‘New combinations are easy to come by, but what is necessary and decisive is the action and the force to act’ (1911: 163). The entrepreneur, Schumpeter repeatedly states, is fundamentally a ‘man of action’ and always ready to leap into ‘energetic action’ (‘Man der Tat’; 1911: 128, 133, emphasis added). It is consequently in his ‘spiritual constitution’ that the entrepreneur differs from the ordinary person (‘Geistesverfassung’; 1911: 163, cf. 142–3). The second point on which the original edition differs in emphasis from the standard version has to do with the need of the entrepreneur to get other people to assist him in realizing his venture. This point is of considerable interest, among other reasons because it contradicts the common notion that Schumpeter’s entrepreneur is some kind of a super-individualistic hero who carries out the whole innovation by himself. What Schumpeter argues is rather that it is the entrepreneur who has the initial vision, but who also realizes that it is absolutely

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imperative to get the support of other people, and that these people will not by themselves turn into persons who are capable of carrying out new and creative tasks. Most people just want to do things the same way that they have always done them, Schumpeter says, and change represents a threat to them. What the entrepreneur has to do in this situation is to buy them over to his side. This is the only way that he can get their suppport and get them to do something new.

Discussion If we now proceed to a comparison between The Protestant Ethic and The Theory of Economic Development, it is clear that one can find some differences between these two works. Weber’s work is a study of a development that was set off in the European economy in the 1500s and onwards, while Schumpeter’s work is a study of a purely capitalist economy in the abstract; the former is a study in sociology, the latter in economic theory; and so on. From the viewpoint of this article, however, they also have one interesting quality in common. This is that both works illustrate what was referred to in the introduction as a puzzle, namely that the key to a vigorous capitalist development is not exclusively to be found in the existence of suitable economic institutions, but that something else is also needed. This something else is the spirit of modern capitalism in Weber’s case, and the entrepreneur in Schumpeter’s case. Both of these forces appears pretty much from nowhere, or in any case have little to do with the existing capitalist institutions. For Weber, the causality involved is a long chain of peculiar historical coincidences: some parts of a new religious orthodoxy (ascetic Protestantism), which was hostile to its mother religion (Catholicism), happened to set off a kind of behavior in the economy, which succeeded in breaking with economic traditionalism. In Schumpeter’s case, the chain of events is not as long, but the original impulse also comes from outside the existing economic reality; and the entrepreneur himself literally appears out of nowhere. Schumpeter says in The Theory of Economic Development that one can find a small number of entrepreneurs in any human population. In other words, he takes recourse to ‘biology’ to explain the existence of the entrepreneur. Weber is quite insistent on the point that the change in capitalist mentality that started in the West, as a result of Luther’s challenge to the Catholic Church, was not caused by the existing economic institutions. Before this change came about, he states very clearly, a number of important capitalist institutions had been in operation for quite some time, such as the medieval firm, an early version of the banking system, and so on. All of these institutions, however, operated ‘in a traditionalistic [economic] spirit’ (e.g. Weber, 1958a [1904–5]: 65). The qualitative change in the economy, on the other hand, was set off by something else – the spirit of modern capitalism.12

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Schumpeter is as anti-institutionalist as Weber in his analysis. First of all, institutions fall by definition into the domain of economic sociology and not into that of economic theory; and The Theory of Economic Development is meant as a study in economic theory (Schumpeter, 1934: 60). Secondly, and considerably more important, no part of that which is studied by the economic theorist – some of which is clearly sociological in nature13 – can account for qualitative economic change.14 Schumpeter, as we know, was very critical of Walras for his assumption that all sources of change come from outside the economic system, but Schumpeter essentially proceeds in the same way. His entrepreneur supposedly emerges from inside the system – but out of nowhere; he is suddenly just there, as a result of biological chance. Finally, there exist some parallels between the cycle that economic change goes through in Weber and Schumpeter. In Weber, the non-institutional force of the capitalist spirit comes into the world like a whirlwind and literally changes everything – but only to end up itself as an institution that weighs heavily on everyone. The ‘light cloak’ of Baxter, in Weber’s metaphor, became the heavy ‘iron cage’ (Weber, 1958a [1904–5]: 181). The dynamic is quite similar in Schumpeter: the entrepreneur is born into ‘the circular flow’, where tradition rules supreme. In putting together his new combination, the entrepreneur has to fight people’s hostility and resistance to the new. His success in doing so is initially rewarded not by the population but by the mechanical forces of the economy, which supply him with ample entrepreneurial profit. This profit also tempts others to imitate the novel behavior, but soon enough there is no more entrepreneurial profit to be had, and tradition re-establishes itself – and we are back to the circular flow.

The Later Analysis by Weber and Schumpeter of Capitalism Weber and Schumpeter knew each other quite well and also worked together, as editors of Archiv f¨ur Sozialwissenschaft und Sozialpolitik (1916–20), even if they never became intimate friends. Exactly when they met for the first time is unclear, but it is probably safe to assume that they read each other’s works from early on. Weber’s copy of the first edition of The Theory of Economic Development (1911) is still around, and Schumpeter was an extremely avid reader of social science and would not have missed Weber’s work. Weber and Schumpeter both kept writing on capitalism throughout their lives – which in Weber’s case came to an end in 1920, when he was in his mid-50s, and in Schumpeter’s case in 1950, when he was in his mid-60s. While Weber’s later works on capitalism were mainly produced in the 1910s in Germany, those of Schumpeter were primarily written in the 1930s and the 1940s in the United States. Despite the fact that the works of Weber and Schumpeter were written some years apart and on different continents, however, there do exist some interesting parallels between them.

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Weber’s Later View of Capitalism Weber’s production during his last 15 years was to a large extent centered on capitalism. There is first and foremost Economy and Society, a giant study that he started to work on in 1908 but that he never completed. The current edition, in the original German as well as in its English translation, consists of contributions that overlap and that have been tampered with (e.g. Mommsen, 2001). Only Part 1 of Economy and Society (pp. 1–307) consists of texts that were intended for this work and that had been approved by Weber. The rest of this two-volume set was added after his death (Weber, 1978c [1922]: 308–1469). Weber addresses a multitude of issues of interest to economic sociology in Economy and Society, including modern capitalism and its key institutions. His project of exploring the origin of capitalism, as announced in the last pages of The Protestant Ethic, is also carried out in his studies on the economic ethics of the world religions, which are primarily known to the English-speaking world as The Religion of China, The Religion of India and Ancient Judaism (Weber, 1951 [1920], 1958b [1921], 1952 [1921]; see also the following additional texts: Weber, 1946a [1915], 1946b [1915], 1946c [1920]). In 1919–20 Weber gave a lecture series in Munich entitled ‘Outline of Universal Social and Economic History’, which was later reconstructed on the basis of students’ notes and published under the title General Economic History (Wirtschaftsgeschichte) (1981 [1923]). This work is of particular importance in our context, since it contains an analysis that melds the ideas from The Protestant Ethic with a general history of capitalism. Finally, Weber was intensely interested in the future of German capitalism as well as of Western capitalism as a whole, and he wrote quite a bit on this issue in the press (e.g. Weber, 1978b [1918]: 1381–469). Out of this wealth of writings, which are all relevant to an understanding of Weber’s later view of capitalism, I will focus on the following two: Economy and Society and General Economic History. The former starts out with a chapter on sociology in general (‘Basic Sociological Terms’), where Weber presents the key concepts in his sociology. It is also in this part of Economy and Society that one can find the fullest discussion of his notion of institution. According to Weber, the main focus of sociology should be on social action, defined as behavior invested with meaning by the actor, which is oriented to some other actor(s). When the interaction between actors ‘remains relatively constant’ and also appears as ‘obligatory or exemplary’, other actors can ‘orient’ their behavior to it – something which means that a stable ‘order’ has come into being (‘Ordnung’; Weber, 1978c [1922]: 28, 31). The concept of ‘order’ is as close as Weber came to the notion of ‘institution’ in Economy and Society.15 It should be noted, Weber also adds, that an order will become much more stable if it is adhered to because the actors believe in its legitimacy, than if it exists for purely customary reasons or because of some particular interest constellation. Throughout Chapter 1 of Economy and Society, Weber makes references to the subjective dimension of the

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behavior of the actor (‘Verstehen’), but concepts such as ‘mentality’, ‘spirit’, and the like, are not among his ‘basic sociological concepts’. Chapter 2 of Economy and Society (‘Sociological Categories of Economic Action’) contains a concentrated exposition of economic institutions. This chapter is about 150 pages long and covers an enormous amount of material, so a selection is necessary. The three institutions that I have chosen to briefly present here are the market, the firm and capitalism. Though a reference or two to ‘the spirit of capitalism’ can be found in Economy and Society, this notion is not among the ones that Weber chose to explicate in Chapter 2. To some extent this may be due to the fact that it is too general in nature for his purposes in this work. Quite a bit of what is covered by the expression ‘spirit of capitalism’ in The Protestant Ethic can, for example, be found in his discussion of ‘economic motivation’ in Economy and Society (1978c [1922]:110–11, 150–3).16 What motivates those who participate in a market economy and who do not have any property includes, for example, how they ‘value economically productive work as a mode of life’ (1978c [1922]: 110). And what motivates those with a high value in the labor market or who own property typically depends on the degree to which they feel that they have a ‘calling’, either for work of a certain type or for the acquisition of property (1978c [1922]: 110). Weber defines the market as a situation ‘whenever there is competition . . . for opportunities of exchange among a plurality of potential parties’ (1978c [1922]: 635). In other words, he defines the market not as a place where exchange takes place, as is common among economists and sociologists, but as a place that is characterized by two distinct forms of interaction: exchange and competition. Several actors typically compete for being the one who will do the buying or the selling, and after this has been decided, the exchange (which has its own social dynamic) can take place. Competition is defined by Weber as ‘a ‘peaceful’ conflict’, and exchange as ‘a compromise of interests’ (1978c [1922]: 38, 72). A market can be more or less free, depending on its degree of regulation. While classes thrive on the market, it represents a threat to status groups. The actors in a market may want to keep it open to outsiders, but may also want to close it off under certain circumstances and turn it into a monopoly. The capitalist firm is defined in Weber’s theoretical sociology as a special type of ‘economic organization’ which is run for profit (1978c [1922]: 64, 76). In its fully developed and rational form, as this can be found in modern capitalism, the firm contains three types of actors: the entrepreneur, who leads the company; the professionals, who manage it; and the workers, who do most of the production. The entrepreneur is ‘the ‘moving spirit’’ of the firm and the only one who knows as much as the professionals and can overrule them (‘der leitende Geist’; 1978c [1922]: 1403). The professionals regard work as a ‘calling’ and obey orders. The workers represent their own special category in Weber’s sociology and have similarly their own social profile.

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In modern capitalism, Weber emphasizes, the huge corporations are organized along similar lines at state bureaucracies. ‘Bureaucracy . . . is fully developed . . . only in the modern state and . . . in the most advanced institutions of capitalism’ (1978c [1922]: 956; cf. 974). According to Weber’s classic description, this means that the corporation (minus the workers) is organized as follows. The positions are organized in the form of a hierarchy and orders are obeyed.17 Each person has a special area of activity, for which he or she has been especially trained. The bureaucrats carry out their work in a spirit of duty, and they are remunerated with a salary as well as a pension. The bureaucracy represents, according to Weber, the most efficient way of organizing economic activities, from a capitalistic perspective. There exists, however, always a tendency for the bureacrats to take the firm over since they control most of the important information and think that they understand how to run things. This, however, would mean its end as a dynamic capitalist force, among other reasons because bureaucrats are not very interested in profit-making.18 Just as the political leader constitutes the only effective counterweight to the bureaucrats in political life, the entrepreneur is the only effective counterweight to the bureaucrats in economic life (1978c [1922]: 220–1, 956–7). Weber does not speak of ‘capitalism’ in his theoretical economic sociology but of several different capitalisms. He also emphasizes that these different types of capitalism each consists of social action and are not to be seen as rigid social systems. In Chapter 2 of Economy and Society the key section on capitalism is entitled ‘The Principal Modes of Capitalistic Orientation of Profit-Making’ (Section 31); and Weber distinguishes between six different types of these orientations. There is, for example, ‘orientation to the profit possibilities in continuous bying and selling on the market with free exchange’ as well as orientation to profit opportunities that are the result of ‘domination by force . . . by political authorities’ (1978c [1922]: 164–5). It is clear from Section 31 that Weber prefers to view capitalism in terms of social action and, as a consequence of this, to discuss the different types of capitalism in terms of ‘modes of orientation of profit-making’. Nonetheless, he also states that his six types can be grouped under three general headings: ‘politically oriented capitalism’; a type of capitalism that can only be found in ‘the modern Western World’; and a type of capitalism that has ‘been common all over the world for thousands of years’, but which is not politically oriented (1978c [1922]: 165–6). Political capitalism (as it is usually called) basically means capitalistic activity where it is the political authorities that in one way or another control or make possible the profit opportunities. In what can be called rational capitalism, the profit opportunities are to be found primarily in the free market and are approached in a methodical fashion. In traditional commercial capitalism (as one may call the third form of capitalism), profit is produced through minor trade or currency deals. It can finally be noted that in his discussion of the different types of capitalism and capitalistic orientation of profit-making, Weber

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does not use the expression of ‘spirit’ or ‘mentality’, presumably because the subjective dimension is already built into the concept of social action. General Economic History is based on a lecture course given at about the same time as Weber wrote Chapter 2 in Economy and Society, and we would therefore expect the two accounts to be fairly similar. This is also the case. General Economic History, however, differs on the following two points: it is not centered on sociological typologies, as Chapter 2 is, but provides instead a continuous account of the evolution of the economy; it also discusses the impact of other factors than economic ones, especially political and religious factors. Weber’s economic history is divided into four sections, and the last of these, on which I shall concentrate in this article, is entitled ‘The Origin of Modern Capitalism’. In accounting for the economic factors that were important in bringing about capitalism, Weber starts with developments in the 16th century, and the reader is given the impression that by the end of the 1700s modern capitalism had pretty much come into being for good. Weber also discusses the impact of the Industrial Revolution, but it is clear from his account that he does not see it as the decisive event in the history of Western capitalism, along the lines that many economic historians do today. Nonetheless he stresses that it was during this period that the production of goods entered into ‘a union with science’; and he also notes that ‘the connection of industry with modern science . . . enabled industry to become what it is today and so brought capitalism to its full development’ (1981 [1923]: 306). At several points in General Economic History Weber enumerates the factors that in his view created modern capitalism. These fall into three categories: economic, political and religious. The economic factors essentially include institutions that are also discussed in Economy and Society, such as the rational firm, the free market, modern accounting, and the like. A number of new and fascinating historical facts are added to the account that can be found in Economy and Society, but there is little that is new in theoretical or sociological terms. Also political forces have played an important role in the development of modern capitalism, and General Economic History contains two full chapters devoted to this topic, one that is entitled ‘Citizenship’ and the other ‘The Rational State’. Together these chapters make up about a third of the space allotted to ‘the origin of modern capitalism’ in General Economic History; and this testifies to the importance that Weber attached to political forces in the development of modern capitalism. Citizenship has primarily played a role in liberating the individual from the hold of the family and the clan, and in helping him or her to step forward as an autonomous actor. The rational state is absolutely essential to modern capitalism; ‘in [it] alone modern capitalism can flourish’ (1981 [1923]: 339). What Weber singled out as important in the rational state were its procapitalistic attitude and its predictability, based on expertise, in political and legal matters.

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But even if Weber towards the end of General Economic History felt that it was necessary to include a long section on political forces, in order to give a full account of how modern capitalism had come into being, there was more to the story. The very last chapter of the work is entitled ‘The Evolution of the Capitalistic Spirit,19 and it here says: In the last resort the factor which produced capitalism is the rational permanent enterprise, rational accounting, rational technology and rational law, but again not these alone. Necessary complementary factors were the rational spirit, the rationalization of the conduct of life in general, and a rationalistic economic ethic. (1981 [1923]: 354) The roots of the complementary factors that Weber speaks about go far back in history. Judaism, for example, helped to introduce a rational attitude into Western religion through its hostility to magic. Still, Weber’s account of the forces that created the rational spirit, the rationalization of the conduct of life, and a rationalistic economic ethic peaks with his discussion of the impact of ascetic Protestantism. Catholicism, he says, was deeply suspicious of capitalism, while ascetic Protestantism was positive to it. The latter not only helped to usher in a new type of attitude to the economy, but also shaped it, especially through its doctrine of calling. The idea of ‘vocation’, Weber specifies, turned rational activity in one’s work into ‘the fulfillment of a God-given task’ (1981 [1923]: 367). This doctrine gave ‘a fabulously clean conscience’ to the entrepreneur and also supplied him with ‘industrious workers’, who were willing to put up with ‘ruthless exploitation’ (1981 [1923]: 367). General Economic History ends on a similar somber note as The Protestant Ethic. Whatever religious justifications for economic activities there may once have been, these had vanished by the 1800s. Ascetic religiosity has been displaced by a pessimistic though by no means ascetic view of the world, such as that portrayed in Mandeville’s Fable of the Bees, which teaches that private vices may under certain conditions be for the good of the public. (1981 [1923]: 369) According to General Economic History, life in contemporary capitalist society is experienced as a heavy burden by everyone.

Schumpeter’s Later View of Capitalism Just as Weber, Schumpeter devoted a major part of his later scholarly production to capitalism. After 1932, when Schumpeter moved to the United States for good, he worked primarily on Business Cycles (1939), a giant two-volume work

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that represents an attempt to analyze the economic history of capitalism in Germany, Great Britain and the United States between 1787 and 1938. A few years after the publication of Business Cycles, Schumpeter’s most popular work appeared: Capitalism, Socialism and Democracy (1975a [1942]). During the rest of his life Schumpeter kept coming back to the issue of capitalism, and he gave numerous talks on it. His very last public lecture – given in December 1949 at the American Economic Association – was devoted to capitalism and its future (Schumpeter, 1975b [1949]). While Business Cycles deserves an important place in an account of Schumpeter’s scientific work, it is of less interest for the purposes of this article. The main reason for this is that while Business Cycles deals with the evolution of capitalism, it does not include a discussion of its institutions. Schumpeter wanted to focus exclusively on the mechanism of the business cycle, and this was easier, he argued, if he kept institutions constant. He wrote in Business Cycles that he wanted not to span ‘the entire range of the economy and sociology of capitalism’; but to pursue ‘a purely economic argument’ (1939: 86, 279; cf. 96–7, 144–5). In Capitalism, Socialism and Democracy, in contrast, institutions have not only been included in the analysis but also play a central role in Schumpeter’s main thesis, namely that capitalism is about to go under, not because of its failures but because of its success. Schumpeter was convinced that institutions play a key role in the economy and in principle should be part of the analysis.What he disliked about institutionalists such as Veblen and company was not that they focused on institutions but that they did such a lousy job: I have been referred to as the ‘arch-enemy’ of Institutionalism. I plead guilty to the charge, but I want to make it quite clear what it is I object to. If Institutionalism went quietly to work on the programme which seems to be implied in its name, that is to say if institutionalists produced studies about social institutions, such as the family, private property and so on, I should not only not object, but welcome. But they do nothing of the sort. Instead, they criticize without understanding, what has been done and is being done, and they replace positive achievement by ambitious programmes. Whatever of value has been written by any member of that group could have been written by any other economist and does not imply any fundamental change in method and outlook. I reproach to the most famous of institutionalists, to Th. Veblen, bad workmanship and insufficient scientific equipment, which made him take old err for new truth. But this whole movement is passing away. And that eminent economist, who for some time showed some favour to it, Wesley C. Mitchell, has by his most recent work proved that he is willing to lead towards reconciliation. (2000 [1931]: 23)

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Capitalism, Socialism and Democracy does not deal very much with the history of capitalism but mainly focuses on the situation during the 20th century; Schumpeter also speaks quite a bit about the future of capitalism. To give a background to his famous thesis of the self-destruction of capitalism, however, and also to set his argument within the framework of his overall view of capitalism and its history, I shall first say a few words about an article from 1946, entitled ‘Capitalism’ and written for Encyclopaedia Britannica. In this article Schumpeter defines capitalism in the following way: ‘a society is called capitalist if it entrusts its economic process to the guidance of the private businessman’ (1951a [1946]: 184). The entrepreneur is the key figure in capitalism, and Schumpeter contrasts him to the bureaucrat or the manager: ‘the central figure on the capitalist stage, the entrepreneur, is concerned not with the administration of existing industrial plant and equipment but with the incessant creation of new plant and equipment, embodying new technologies that revolutionize existing industrial structures’ (1951a [1946]: 193). As opposed to the tendency of certain social scientists to view capitalism exclusively in economic terms, Schumpeter used this term in a much broader sense: It must be borne in mind that capitalism cannot, any more than any other form of organization, be judged by economic results alone. Accounts must also be taken of the social and cultural achievements for which the capitalist process provided both the means and the psychological requisites. Moreover, . . . any final appraisal really involves appraising an attitude towards life, a scheme of life’s values, in short, a civilization. (1951a [1946]: 192; emphasis added) According to Schumpeter, the history of capitalism can be divided into the following four phases: ‘Early Capitalism’, ‘Mercantilist Capitalism’, ‘Intact Capitalism’ and ‘The Modern Phase’. Like Weber, Schumpeter believed that capitalism existed long before the advent of modern, industrial capitalism, and what he calls Early Capitalism roughly covers the period from Antiquity to the 16th century. He, however, firmly rejects Weber’s thesis about the role of ascetic Protestantism with the argument that capitalism has always developed in a gradual way. ‘We find no sharp break anywhere’, he says, ‘but only slow and continuous transformation’ (1951a [1946]: 184). Mercantilist Capitalism begins in the 16th century and ends towards the beginnings of the 18th century. A certain symbiosis between bourgeois strata and feudal strata characterizes this period, even if the bourgeois strata always remained inferior to the prince and the aristocrats. Intact Capitalism was set off by the Industrial Revolution but takes its beginnings with the Napoleonic wars and lasted till the end of the 19th century. To Schumpeter, this was the period par excellence of capitalism, and also the one that he felt most sympathy for. Individuals, he says, were essentially left alone to do what they wanted, and this resulted in a good society. Liberalism, laissez-faire

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and free trade all flourished during Intact Capitalism, even if counterforces also existed and could be quite strong, as the example of imperialism shows. During the Modern Phase of Capitalism (1898 and later) the economy has continued to grow in a healthy manner, but this has not resulted in peace, free trade and low social expenses, as one could have expected. On the contrary, wars, protectionism and rising taxes have accompanied economic growth. Why this is so, Schumpeter notes, ‘is much more complex and difficult [to explain] than is generally realized, and cannot be attempted here’ (1951a [1946]: 191). He adds that for the future the most likely scenario is a movement towards ‘increasing bureaucratization of economic life, coupled with an increasing dominance of the labor interest’ (1951a [1946]: 203). ‘Regulated capitalism’ or ‘fettered capitalism’ will slowly turn into ‘guided capitalism’ – and this last type of capitalism is so close to socialism, according to Schumpeter, that one might just as well call it precisely this (1951a [1946]: 204). If you try to evaluate the performance of capitalism, Schumpeter says in Capitalism, Socialism and Democracy, it soon becomes clear that it has been extremely successful, when it comes to both the economy and culture. The United States grew, for example, by 2 percent per year between 1870 and 1930, and there is no reason, from a purely economic viewpoint, why capitalism could not repeat this ‘striking preformance’ also in the future (1975a [1942]: 107). In that case, poverty could be eliminated and the unemployed would have enough to get by on. The main reason for the success of capitalism in the past has to do with the entrepreneur and the ‘creative destruction’ that he brings about, by starting up new firms, by introducing new goods, and so on (1975a [1942]: 80–6). Contrary to what is taught in the textbooks of economics, there is also the fact that monopolistic practices have had a very positive impact on the economy. In general, Schumpeter argues, monopoly does not mean that a corporation can simply raise its prices, sit back and collect the extra profit. ‘A monopoly position is in general no cushion to sleep on’ (1975a [1942]: 102). Capitalism, however, is not only about economics but also about culture; and Schumpeter defines ‘the civilization of capitalism’ as ‘the cultural component of the capitalist economy’ (1975a [1942]: 121). Rationalism constitutes the heart of the capitalist culture and is crucial to modern life in general, according to Schumpeter. It means logic and reason, as opposed to magic and mysticism. Economic action has always played a key role in bringing forth rationalism: Now the rational attitude presumably forced itself on the human mind primarily from economic necessity; it is the everyday economic task to which we as a race owe our elementary training in rational thought and behavior. – I have no hesitation in saying that all logic is derived from the pattern of the economic decision or, to use a pet phrase of mine, that the economic pattern is the matrix for logic. (1975a [1942]: 122–3)

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While rationalism existed long before capitalism, the latter has nonetheless contributed to its development in a powerful way. This has mainly been due to the centrality of the monetary unit or the fact that much of human behavior can be measured and controlled with the help of money. There is also the fact that capitalism has increasingly attracted ‘the best brains’, who have added their creativity and strength to the cause of rationalism (1975a [1942]: 125). The capitalist process has helped to create magnificent cultural achievements: . . . not only the modern mechanized plant and the volume of the output that pours forth from it, not only modern technology and economic organization, but all the features and achievements of modern civilization are, directly or indirectly, the products of the capitalist process. (1975a [1942]: 125) More concretely, capitalism has created modern medicine, modern painting and the modern novel. Schumpeter also includes what he calls ‘Individualist Democracy’ among its results, and by this he means ‘personal freedom of mind and body’ (1975a [1942]: 126). Capitalist culture, Schumpeter sums up, is rationalistic, pacifist and pro-scientific. But despite all of these economic and cultural achievements, capitalism is about to disappear from the scene of history, Schumpeter says. There are a number of reasons for this, each of which is elaborated upon in Capitalism, Socialism and Democracy. The capitalist process is first and foremost undermining the role of the bourgeoisie by decreasing the role of the entrepreneur; it is also eliminating the protective strata of capitalism as well as weakening such key institutions as property and the contract. To this should be added the general atmosphere of hostility that capitalism has helped to develop, and a general weakening of bourgeois motivation. ‘Can capitalism survive?’, Schumpeter asks at one point in his book; and his famous answer is, ‘No. I do not think it can’ (1975a [1942]: 61). In modern capitalism, according to Schumpeter, entrepreneurship tends to become obsolescent. Modern capitalism has rationalized entrepreneurship in various ways, something that has made it easier for everyone to understand it and accept it. While people today may still be tied to the old order of things through various interests and therefore fear the new, they are nevertheless ready to accept novelties in a way that is unprecedented in human history. This also means that there is less and less need for the heroic entrepreneur of former times; he is about as necessary as a general in a society without war. This whole development, Schumpeter suggests, has much to do with the emergence of the giant industrial enterprise: The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and ‘expropriates’ its owners, but in the end it also

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ousts the entrepreneur and expropriates the bourgeoisie as a class which in the process stands to lose not only its income but also what is infinitely more important, its function. (1975a [1942]: 134) Through its very success, capitalism is also about to eliminate the last remnants of feudal society, which in many ways have helped to maintain capitalism by operating as its flying buttresses. Aristocrats have joined the bourgeoisie and supplied it not only with experience and talent but also with a bit of that ‘mystic glamour’ that is so important for successful rule. ‘The stock exchange is a poor substitute for the Holy Grail’, to cite an aphorism from Schumpeter’s book (1975a [1942]: 137). Capitalism is also in need of this type of support since it totally lacks the capacity to make itself liked among people. ‘Emotional attachment to the social order’, according to Schumpeter, is ‘the very thing capitalism is constitutionally unable to produce’ (1975a [1942]: 145). Two of the key institutions of capitalism are also getting weaker. The first is property, which is being hollowed out: the old-fashioned owner has disappeared from the scene of history and been replaced by managers and shareholders, who do not have much of a feel for what property is. While the old type of owner knew his factory inside-out, managers and shareholders only have an abstract concept of property, symbolized by the share. What drives this whole development is, again, the giant capitalist firm. Similarly, the contract is losing ground. Originally it was used to regulate a situation where real choices needed to be made, and where entering into a contract was an act of importance. Today, however, contracts are impersonal and bureaucratized. The labor contract exemplifies this trend, with its restricted and predictable meaning. Schumpeter also speaks quite a bit about ‘the social atmosphere of capitalism’ and how capitalism has succeeded in creating ‘almost universal hostility’ to itself (1975a [1942]: 143). A key factor in this development has been the rational attitude, which not only was used to criticize feudalism but has also been extended to capitalism. Everything is questioned; nothing is holy. Intellectuals have played a particularly important role in giving voice to this hostility and in amplifying it. Intellectuals live by being critical, according to Schumpeter, and usually see nothing positive in capitalism. But capitalism is not only being attacked from the outside, it is also disintegrating from the inside; its will to live and to fight have been severely sapped. In general, the bourgeois is unheroic to the point of the comic and does not even dare to say ‘boo to a goose’ (1975a [1942]: 138). His lifestyle has also undermined much of his original vitality. While the bourgeois of the past lived in a large house, with a large family, and saw himself as the creator of a long-lasting dynasty, today’s bourgeois lives in an apartment, has fathered a few or no children, and lives by a short time horizon. The bourgeois, Schumpeter says, is being

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‘decomposed’; socialism may soon take over the whole thing, and he does not even care (1975a [1942]: 156–63).

Discussion When one moves from the early works on capitalism by Weber and Schumpeter to their later works, it is clear that quite a bit of the effervescence and vitalism has disappeared. During the later part of his life Weber developed his well-known theory of charisma, which can also be applied to his own theory of capitalism as well as to that of Schumpeter. There is initially the creative entrepreneur of The Theory of Economic Development and Weber’s spirit of capitalism that transforms a whole economic system. Then, however, the focus changes to the role of institutions and how the creativity of the entrepreneur gets routinized – until the entrepreneur finally disappears for good. It would not be entirely wrong to state that while the early Weber and the early Schumpeter emphasized the role of non-institutional forces, they would later stress the role of institutional factors. Still, it would probably be more correct to say that there is a balance between the two in the later production of Weber and Schumpeter, or, more precisely, that institutional and non-institutional factors enter into complex forms of interaction. While in The Protestant Ethic there is a movement from the spirit of modern capitalism to the iron cage of modern capitalism, in General Economic History institutions that are of relevance to capitalism emerge long before the advent of the spirit of modern capitalism, and are then followed by a long period when new capitalist institutions emerge as well. In Capitalism, Socialism and Democracy the general development is from an economy with plenty of room for the entrepreneurial spirit to one that does not need it. Schumpeter’s analysis of the period of transition between these two is, however, full of interesting subtleties. There exist institutions whose spirit is slowly being hollowed out; institutions that are run by people whose motivation is being weakened; and so on. One important parallel that exists between Weber’s and Schumpeter’s later works on capitalism is that both assign a key role to one actor that is not present in their early works: the giant corporation. In Weber’s case this new actor is at the center of his theory of bureaucracy; it is also reflected in his argument that the entrepreneur is the only actor who can stand up to the bureaucrats. In Schumpeter’s case, it is the giant corporations that eliminate the entrepreneur and replace him with managers who are administrators and nothing more. To Schumpeter, the giant corporation also constitutes the avant-garde in ushering in socialism, without anyone noticing or very much caring. In brief, the development that Alfred Chandler has written so much about and in such glowing terms (‘managerial capitalism’) was much more ambivalent to Weber and Schumpeter (e.g. Chandler, 1984).

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While Chandler saw the giant corporation as the motor for ever more economic progress, it also represented something of a threat to capitalism and humanity more generally, according to Weber and Schumpeter. Weber was afraid that the giant corporations might let loose the forces of bureaucracy and set off a development that would end up by pushing Western society back to the days of ancient Egypt. Schumpeter pretty much thought the same. Things would in his opinion get increasingly worse if the 20th century continued as it had begun. Whether one preferred to call the new stage of society ‘socialism’ or ‘capitalism’ was of little consequence since they amounted to the same thing: a permanent stage of ‘the circular flow’ in which nothing new would ever happen and where humankind would fall back into inertia and darkness.

The Puzzle – and Its Solution According to Weber and Schumpeter In the introduction to this article I referred to a distinct puzzle in the works of Weber and Schumpeter, namely that something more than the right type of institutions are needed for there to be a vigorous and healthy capitalism. I noted that many of today’s analyses of capitalism, by economists as well as by sociologists, proceed on the assumption that it is sufficient to have good economic institutions for there to be a strong economic development. In order better to understand the views on this topic by Weber and Schumpeter, I will first discuss their argument that something more than the institutions are needed for there to be capitalism in general; and, after that, their parallel arguments for there to be a vigorous capitalism. What is needed for any capitalism to exist, besides the relevant institutions, is, according to Weber, a ‘spirit of capitalism’, and, according to Schumpeter, a ‘capitalist civilization’. If we start with Weber, it is clear from The Protestant Ethic that what he calls ‘traditional capitalism’ had its own distinct spirit – a traditional spirit of capitalism; and from this we may conclude that all types of capitalism have their own spirit. What precisely does this spirit consist of? Weber enumerates the following items as characteristic for the traditional spirit of capitalism: . . . the traditional manner of life, the traditional rate of profit, the traditional amount of work, the traditional manner of regulating the relationships with labor, and the essentially traditional circle of customers and the manner of attracting new ones. All these dominated the conduct of the business, were at the basis, one may say, of the ethos of this group of businessmen. (1958a [1904–5]: 67) In Gordon Marshall’s opinion, the spirit of capitalism consists of ‘attitude’ as well as ‘behavior’ (Marshall 1982: 64–5). Weber himself uses the term

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‘mentality’ (‘Gesinnung’) as synonymous with ‘spirit’ (‘Geist’) and admits that the latter is chosen a bit ‘ad hoc’ – presumably because he liked the association to religion in the concept of ‘spirit’ (1978a [1907]:27, 36). In his later work, especially in Economy and Society, Weber translates spirit primarily into the sociological categories of ‘economic motivation’ and ‘economic ethic’. To these one should add ‘lifestyle’ (‘Lebensstil ’, ‘Lebensf¨uhring ’) and ‘ethos’. Also the early Schumpeter thinks that there is more to the existence of capitalism than institutions. The argument in The Theory of Economic Development is, however, a bit complex in this regard. In a situation of circular flow, the capitalist economy consists of institutions and economic mechanisms; in a situation where there is economic development there is, furthermore, the entrepreneur, without whose activities there would be stagnation. As I see it, Schumpeter overdoes the difference between the circular flow and economic development; in reality, there is always a bit of creativity and entrepreneurship in any economy. Hence, in Schumpeter’s early work, whatever there is beyond economic institutions is the entrepreneur, or the individual who even in adverse situations will try out something new. In Schumpeter’s later works, the situation is similarly complex, but for other reasons. First, in addition to the economic process itself (by which Schumpeter more or less means economic mechanisms), there is what he calls ‘the capitalist civilization’. This civilization consists of institutions as well as of a number of items, such as ‘motivation’, ‘atmosphere’, ‘lifestyle’, ‘rationalism’, art, science, and so on. We note some similarity to Weber on this score, especially when it comes to ‘motivation’ and ‘lifestyle’, even if Schumpeter interprets these in a broader sense than does Weber. If we now switch from the extra something that is needed for capitalism in general to exist, to the extra something that is needed for vigorous capitalism to exist, the opinions of Weber and Schumpeter are as follows. According to the early Weber and The Protestant Ethic, vigorous capitalism came about through the introduction of a modern capitalist spirit into the already existing economic institutions of traditional capitalism. This spirit can be characterized as an attitude that energizes the individual in economic matters, making him or her more alert to profit opportunities and also making work more central to his or her life. All of these economic activities are carried out in a methodical manner. In Weber’s later works, he carefully enumerates the economic institutions that are necessary to a vigorous modern capitalism; and these are, according to General Economic History, the following: the rational enterprise, rational accounting, the modern state (including rational or calculable law), the free market, free labor, rational technology and the commercialization of economic life (1981 [1923]: 276–7, 312–14, 354). To this are then added the following three items, which roughly cover what Weber in The Protestant Ethic calls the spirit of modern capitalism: the rational spirit, the rationalization of the conduct of life, and a rationalistic economic ethic. Apart from references to the rationalistic economic

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ethic and the element of vocation, there is little that helps to specify in what the creativity of the spirit of modern capitalism exactly consists. While Weber in General Economic History, as opposed to in The Protestant Ethic, very clearly states that no vigorous capitalism is possible without the appropriate institutions, there is the same emphasis on the creativity of the spirit of capitalism as an explanation for why modern capitalism came into being. We also find the same argument about modern capitalism turning into an iron cage once the influence of the original spirit of capitalism wanes, that is, once it stops being voluntary and is replaced by institutional demands. The novelty in relation to The Protestant Ethic has mainly to do with Weber’s account of what he calls a rationalistic economic ethic – which he describes as a way of doing business where a rational and alert approach in economic affairs characterizes one’s dealings with foreigners as well as with people from one’s own community. The situation is quite different when it comes to The Theory of Economic Development, whose Chapter 2 can practically be read as a manual for how to make capitalism dynamic. Individuals put together new combinations in the economy; they raise money to finance these; and they then translate their plans into reality, despite strong resistance from the surroundings. What drives the individual is the desire to found a dynasty, the wish to be creative, and the pleasure of getting things done. The section on the civilization of capitalism in Capitalism, Socialism and Democracy looks essentially at a situation where this no longer is possible. As in The Protestant Ethic, the spirit dies out when instead of being voluntary it gets institutionalized and routinized. What, then, is the solution to our puzzle: what is needed, beyond appropriate economic (and non-economic) institutions, for a vigorous capitalism to exist? The answer that one can find in Weber’s as well as in Schumpeter’s work is straightforward enough: you need a number of individuals who are driven to be creative in economic affairs by their own inner motivation – not by pressure from the outside and from institutions. These individuals are driven, to phrase it a bit differently, to try out new approaches in economic life because this is perceived as deeply meaningful to them. What you need can alternatively be characterized as a rational capitalist spirit (Weber) or as a strong entrepreneurial drive, in the form of a healthy capitalist civilization (Schumpeter). This spirit or drive must exist in the heart of the individual and cannot be replaced by the existence of institutions.20 The right type of institutions are necessary for a healthy capitalism to exist, but they cannot bring it about by themselves. Without the capitalist or entrepreneurial spirit, the institutions will stifle a healthy capitalism and replace it with traditional capitalism or some form of socialistic capitalism. On this last point special attention should be paid to the fact that there exists one capitalist institution that may have a distinctly negative impact on the development of a vigorous capitalism. This is the giant corporation; and it is possible to see the writings of Weber and Schumpeter on capitalism – from their early emphasis on a vigorous capitalism to their later worry about the future of capitalism – as a direct

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reaction to the rise of the giant corporation, or what Chandler (1984) calls ‘managerial capitalism’. The central message of Weber and Schumpeter is as follows: • •

capitalist institutions are a necessary but not a sufficient condition to bring about a healthy capitalism; and the key to a vigorous capitalism is to be sought in the structure of ‘the spirit of capitalism’ (Weber) or ‘the civilization of capitalism’ (Schumpeter). This means that research of such items as ‘mentality’, ‘ethos’, ‘lifestyle’, ‘economic ethic’, and the like, should be high on the current agenda of economic sociology.

Notes For comments and support I would like to thank Victor Nee and Thorbjorn Knudsen. 1.

I am exaggerating – in German-speaking countries, scholars naturally read the first edition. The point to make, however, is that also in these countries it is nearly always the second edition from 1926 that is referred to.

2.

I have not written ‘empirical example’, but ‘concrete example’, since Weber does not provide any figures or much concrete detail. Since there existed textile mills in Weber’s family, it is usually assumed in the Weber literature that Weber knew quite a bit about this type of industry when he wrote The Protestant Ethic. To this can be added that a few years after this study had appeared, Weber made a detailed empirical study of a textile mill that his family owned (Weber, 1988 [1908]). When he revised The Protestant Ethic just before his death in 1920, he found no reason to make any chances in the description of the textile industry, to which the main text of this article now will return.

3.

In these quotes Weber is speaking about religion – he is starting from ‘the subjective adaption of an ascetic faith’ as opposed to ‘the objective social institutions of the older Protestant churches’ – but in my opinion the same argument is valid for the economy (cf. 1958a [1904–5]: 151–52).

4.

The spirit of modern capitalism is illustrated by the example of Benjamin Franklin (e.g. Weber 1958a [1904–5]: 49–57, 64–5).

5.

This is Schumpeter’s own translation of Das Wesen und der hauptinhalt der theoretischen Nationalokonomie. ¨ This work has never been translated into English.

6.

Schumpeter always refers to qualitative and sudden change in Theorie, when he speaks about entrepreneurship. He admits that infinitesimal change is perfectly possible, but also notes that this type of change is quantitative in nature and therefore differs from the type of change that his theory of entrepreneurship deals with.

7.

‘Das Grundphanomen ¨ der wirtschaftlichen Entwicklung’ in the original 1911 edition.

8.

The first edition has, in addition, a last chapter entitled ‘Das Gesamtbild der Volkswirtschaft [The Overall Picture of the Economy]’. The other chapters have titles that have been kept in the translation of the second edition.

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9.

Interesting work on comparing the first to the second edition of The Theory of Economic Development is currently being carried out by Torbjorn Knudsen and Marcus Becker at Odense University (see Becker and Knudsen, in press).

10.

Schumpeter habitually refers to institutions as the surrounding framework of economic mechanisms (e.g. 1951b [1949]; cf. Swedberg, 1989).

11.

The original version of Chapter 2 is a little less than double the size of the English translation from 1934 (cf. 1911: 103–98; 1934: 57–94). In quite a few cases the formulations are exactly the same in the two editions, even though both also contain interesting formulations that cannot be found in the other. In some respects the later version is clearly preferable to the original one. The two famous typologies of the five different types of innovations and of the three motives that drive the entrepreneur, for example, are only to be found in their well-known and distinct form in the second edition (cf. 1911: 138ff., 159; 1934: 66, 93–4). Schumpeter also decided not to include some ethnocentric and pejorative references to Africans from the second edition. The closest that he comes to a definition of the entrepreneur in the 1911 edition is the following statement: ‘We consequently assert that anyone is an entrepreneur who realizes a new combination, for which, as we have seen, non-hedonistic action is practically always necessary’ (1911: 172).

12.

Weber, just like Schumpeter in The Theory of Economic Development, does not deny that incremental change is possible in a traditionalistic economy.

13.

It is often noted by sociologists that what Schumpeter exclusively considers as falling into the domain of economic theory belongs more naturally to that of sociology. An obvious example would be the resistance from his social environment that the entrepreneur encounters when he tries something new. There also are others (e.g. Swedberg, 1989).

14.

As the reader may recall, according to Schumpeter, small and quantitative changes can come about in the circular flow; but only the entrepreneur can set off qualitative changes in the economy.

15.

In Economy and Society, as well as elsewhere, Weber also uses the term ‘institution’ (‘Institution’; e.g. 1972: 899). This is done in a casual way, roughly the way that other social scientists of the day tended to do.

16.

Weber used the notion of ‘spirit of capitalism’ until his death, for example in his studies of the economic ethics of the world religions (see, e.g., 1951 [1920]: 247).

17.

It has been argued that Weber’s view of the capitalist firm was influenced by the fact that the early German firms were modeled after the Prussian state bureaucracy (Kocka, 1981).

18.

Bureaucrats have an ‘abhorrence of the acquisitive drive’ (1978c [1922]: 1108–9).

19.

In Wirtschaftsgeschichte, of which General Economic History is a translation, the term ‘Gesinnung’ or ‘mentality’, not ‘Geist’ or ‘spirit’, is consistently used. Presumably this mirrors Weber’s terminology during his lectures.

20.

A latter day economic sociologist might say that what is needed for a healthy capitalism, apart from good institutions, are networks. This, however, is not at all the answer of Weber and

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Schumpeter. Weber’s ascetic Protestant is actually characterized by his lack of networks and existential loneliness; and Schumpeter’s entrepreneur comes fully armed out of nowhere, a bit like Pallas Athena from the brain of Zeus.

References Alexander, Jeffrey (1983) Theoretical Logic in Sociology: Vol. 3. The Classical Attempt at Theoretical Synthesis: Max Weber. Berkeley: University of California Press. Becker, Marcus and Thorbjorn Knudsen (in press) ‘Schumpeter 1911: Farsighted Visions on Economic Development’, American Journal of Economics and Sociology. Chandler, Alfred (1984) ‘The Emergence of Managerial Capitalism’, Business History Review 58(Winter): 473–503. Collins, Randall (1986) ‘Weber and Schumpeter: Toward a General Sociology of Capitalism’, pp. 117–42 in Weberian Sociological Theory. Cambridge: Cambridge University Press. Hall, Peter A. (1999) ‘The Political Economy of Europe in an Era of Interdependence’, pp. 135–63 in Herbert Kitschelt, Peter Lange, Gary Marks and John Stephens (eds), Continuity and Change in Contemporary Capitalism. Cambridge: Cambridge University Press. Hollingsworth, Rogers and Robert Boyer (eds) (1997) Contemporary Capitalism: The Embeddedness of Institutions. Cambridge: Cambridge University Press. Kocka, J¨urgen (1981) ‘Capitalism and Bureaucracy in German Industrialization before 1914’, Economic History Review 34: 453–68. Langlois, Richard (1991) ‘Schumpeter and the Obsolescence of the Entrepreneur’. Working Paper 91–1503, Department of Economics, University of Connecticut. Marshall, Gordon (1982) In Search of the Spirit of Capitalism: An Essay on Max Weber’s Protestant Ethic Thesis. London: Hutchinson. Mommsen, Wolfgang (2001) ‘Max Weber’s “Grand Sociology: The Origins and Composition of Wirtschaft und Gesellschaft. Soziologie” ’, History and Theory 39: 364–83. Schumpeter, Joseph (1911) Theorie der wirtschaftlichen Entwicklung. Leipzig: Duncker & Humblot. [The date on the title page is 1912.] Schumpeter, Joseph (1934) Theory of Economic Development. Cambridge, MA: Harvard University Press. Schumpeter, Joseph (1939) Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, 2 vols. New York: McGraw-Hill. Schumpeter, Joseph (1951) ‘Capitalism’, pp. 184–205 in Essays. New York: Addison-Wesley. (Orig. pub. 1946.)

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Schumpeter, Joseph (1975a) Capitalism, Socialism and Democracy. New York: Harper & Row. (Orig. pub. 1942.) Schumpeter, Joseph (1975b) ‘The March into Socialism’, pp. 415–25 in Capitalism, Socialism and Democracy. New York: Harper & Row. (Orig. pub. 1949.) Schumpeter, Joseph (1989) ‘Preface to the Japanese Edition of Theorie der wirtschaftlichen Entwicklung’, pp. 165–8 in Essays. New Brunswick, NJ: Transaction. (Orig. pub. 1937.) Schumpeter, Joseph (2000) ‘The Present State of Economics OR On Systems, Schools and Methods’, Internet adress: http://home.t-online.de/home/ hedtke/text2~1.htm. (Orig. pub. 1931.) Swedberg, Richard (1989) ‘Joseph A. Schumpeter and the Tradition of Economic Sociology’, Journal of Institutional and Theoretical Economics 145: 508–24. Weber, Max (1946a) ‘Religious Rejections of the World and Their Directions’, Pp. 323–59 in Hans Gerth and C. Wright Mills (eds) From Max Weber. New York: Oxford University Press. (Orig. pub. 1915.) Weber, Max (1946b) ‘The Social Psychology of the World Religions’, pp. 267–301 in Hans Gerth and C. Wright Mills (eds) From Max Weber. New York: Oxford University Press. (Orig. pub. 1915.) Weber, Max (1946c) ‘The Protestant Sects and the Spirit of Capitalism’, pp. 302–22 in Hans Gerth and C. Wright Mills (eds) From Max Weber. New York: Oxford University Press. (Orig. pub. 1920.) Weber, Max (1951) The Religion of China: Confucianism and Taoism. Glencoe, IL: Free Press. (Orig. pub. 1920.) Weber, Max (1952) Ancient Judaism. New York: Free Press. (Orig. pub. 1921.) Weber, Max (1958a) The Protestant Ethic and the Spirit of Capitalism. New York: Charles Scribner’s Sons. (Orig. pub. 1904–5.) Weber, Max (1958b) The Religion of India: The Sociology of Hindusim and Buddhism. New York: Free Press. (Orig. pub. 1921.) Weber, Max (1972) Wirtschaft und Gesellschaft: Grundriss der verstehendenden Soziologie, 5th edn. T¨ubingen: J.C.B. Mohr. Weber, Max (1978a) ‘Kritische Bermerkungen zu den vorstehenden “Kritische Beitr¨agen” ’, pp. 227–37 in Johannes Winkelmann (ed.) Die Protestantische Ethik: Kritiken und Antikritiken. G¨utersloh: Mohn. (Orig. pub. 1907.) Weber, Max (1978b) ‘Parliament and Government in a Reconstructed Germany’, pp. 1381–469 in Economy and Society: An Outline of Interpretive Sociology, 2 vols. Berkeley: University of California Press. (Orig. pub. 1918.) Weber, Max (1978c) Economy and Society: An Outline of Interpretive Sociology, 2 vols. Berkeley: University of California Press. (Orig. pub. 1922.) Weber, Max (1981) General Economic History. New Brunswick, NJ: Transaction. (Orig. pub. 1923.)

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Weber, Max (1984) Die Lage der Landarbeiter im ostelbischen Deutschland. Max Weber Gesamtausgabe, Vol. I/3. T¨ubingen: J.C.B. Mohr. (Orig. pub. 1892.) Weber, Max (1988) ‘Zur Psychophysik der Arbeit’, pp. 61–255 in Gesammelte Aufs¨atze zur Soziologie und Sozialpolitik. T¨ubingen: J.C.B. Mohr. (Orig. pub. 1908.)

Richard Swedberg is Professor of Sociology at Cornell University. His main research areas are economic sociology, including the relationship of law and economy, and classical sociological theory. His books include Schumpeter: His Life and Work (1991), Max Weber and the Idea of Economic Sociology (1998) and Principles of Economic Sociology (forthcoming in 2003). Swedberg is currently working on a series of essays on the economic sociology of law. Address: Department of Sociology, 314 Uris Hall, Cornell University, Ithaca, NY 14853, USA. [email: [email protected]]

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