Capitalism and Democracy in the 21st Century: Proceedings of the International Joseph A. Schumpeter Society Conference, Vienna 1998 “Capitalism and Socialism in the 21st Century”

372 Pages·2001·7.869 MB·English

by  Peter Bernholz (auth.), Prof. Dr. Dennis C. Mueller, Prof. Dr. Uwe Cantner (eds.)

Capitalism and Democracy
in the 21 st Century
Dennis C. Mueller . U we Cantner
Editors
Capitalism and Democracy
in the 21 st Century
Proceedings of the International
Joseph A. Schumpeter Society Conference,
Vienna 1998 "Capitalism and Socialism
in the 21 st Century"
With 42 Figures
and 33 Tables
Springer-Verlag Berlin Heidelberg GmbH
Prof. Dr. Dennis C. Mueller
Universitat Wien
Institut fUr Wirtschaftswissenschaften
Briinner StraBe 72
1240 Wien
Austria
Prof. Dr. Uwe Cantner
Friedrich-Schiller- U ni versitat J ena
Wirtschaftswissenschaftliche FakulHit
Lehrstuhl fUr VWLlMikrookonomik
Carl-Zeiss-Platz 3
07743 Jena
Germany
First published in
"Evolutionary Economics", Vol. 10, No. 1-2 and 3, 2000.
ISBN 978-3-7908-2480-3
Library of Congress Cataloging-in-Publication Data
Die Deutsche Bibliothek - CIP-Einheitsaufnahme
Capitalism and Democracy in the 21st Century: Proceedings of the International Joseph A.
Schurnpeter Society Conference, Vienna 1998 "Capitalism and Socialism in the 21 st Century";
with 33 Tables 1 Dennis C. Mueller; Uwe Cantner, ed.
ISBN 978-3-7908-2480-3 ISBN 978-3-662-11287-8 (eBook)
DOI 10.1007/978-3-662-11287-8
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Contents
Editorial ......................................... 1
Bernholz P
Democracy and capitalism:
Are they compatible in the long-run? .................... 9
Audretsch DB, Thurik AR
Capitalism and democracy in the 21st century:
from the managed to the entrepreneurial economy .......... 23
Mair D, Laramie AJ
Capitalism and democracy in the 21 st century:
a Kaleckian interpretation of a Schumpeterian problem . . . . . . . 41
Ozveren E
Capitalism and democracy at a crossroads:
the civilizational dimension ........................... 55
Presidential address
Mueller DC
Capitalism, democracy and rational individual behaviour 73
Capitalism and globalization
Kingston W
A spectre in haunting the world -
the spectre of global capitalism . . . . . . . . . . . . . . . . . . . . . . . . . 89
Silva MLF, Pinto de Andrade J, Torrance TS
Reflections on the perspectives of the global economy
from the point of view of emerging economies . . . . . . . . . . . .. 115
Cantwell J, Santangelo GD
Capitalism, profits and innovation
in the new techno-economic paradigm ................... 137
Taghavi M
Debt, growth and inflation in large European economies:
a vector auto-regression analysis. . . . . . . . . . . . . . . . . . . . . . .. 165
VI Contents
The innovation process
Scherer FM, Harhoff D, Kukies J
Uncertainty and the size distribution of rewards
from innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 181
Grabowski H, Vernon J
The determinants of pharmaceutical research
and development expenditures . . . . . . . . . . . . . . . . . . . . . . . . .. 207
Eliasson G
Industrial policy, competence blocs and the role
of science in economic development ..................... 223
Vonortas NS
Multimarket contact and inter-firm cooperation in R&D 249
The democratic process
Wohlgemuth M
Political entrepreneurship and bidding for political monopoly .. 279
Schumpeter and the history of ideas
Loasby BJ
Market institutions and economic evolution . . . . . . . . . . . . . . .. 303
Foster J
Competitive selection, self-organisation
and Joseph A. Schumpeter . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 317
~marczyk P
Convergences with Schumpeter:
An essay Hirschman has yet to write . . . . . . . . . . . . . . . . . . . .. 335
Bloch H
Schumpeter and Steindl on the dynamics of competition 349
Ebner A
Schumpeter and the 'Schmollerprogramm':
integrating theory and history in the analysis
of economic development ............................. 361
Editorial
Uwe Cantner\ Dennis C. Mueller2
1 Wirtschaftswissenschaftliche Fakultiit, Lehrstuhl fur Volkswirtschaftslehre/Mikrookonomik,
Friedrich-Schiller-Universitiit Jena, Carl-ZeiB-Str. 3, 07743 Jena, Germany
2 Institut fur Wirtschaftswissenschaften, Universitiit Wien, BWZ, Briinner StraBe 72,
A-1240 Wien, Austria
1 Introduction
In June 1998, the International Joseph A. Schumpeter Society held its
biannual congress in Vienna. Approximately 140 papers were presented,
and there were about 200 participants at the conference. The theme of the
1998 conference was Capitalism and Democracy in the 21st Century.
This theme is an obvious take-off on the title of one of Schumpeter's most
famous books. The intent in choosing this topic was to get at least some
participants at the conference to take stock of where capitalist and demo
cratic countries are at the close of the 20th century, and where they might
be headed in the 21st century, just as Schumpeter did in Capitalism, Soci
alism and Democracy in the middle of the 20th century.
This volume contains a collection of papers all concerned either in a di
rect sense or in a wider perspective with the work of Joseph A. Schump
eter. Several important areas of research can be identified upon which
Schumpeter's work had a lasting influenced. One obvious such area is
Schumpeter's writing about the future of capitalism. Indeed, this area
formed the underlying theme for the conference. A second major strand of
Schumpeter's research concerns innovation and its consequences for eco
nomic development. A third area is concerned with the political process
and the role of political leadership. The collection of essays in this volume
is developed along these main lines, complemented by papers discussing
the place of Schumpeter's work within the history of economic analysis.
In the following sections we characterize each of the papers selected.
2 Capitalism and democracy in the 21st century
A first group of papers contains discussions and analyses rather closely re
lated to the Schumpeter's Capitalism, Socialism and Democracy, first pub
lished in 1942. In this work Schumpeter put forward a number of interest
ing arguments and visions, which attracted a large number of scholars and
initiated much further research. Most intriguingly in this work, Schumpeter
explored the relationship between a capitalistic system and democracy, and
questioned whether capitalism is viable in the long-run, given the attrac
tion of socialism in democratic countries. This issue is taken up in papers
by Peter Bernholz, Eyiip Ozveren, and Dennis Mueller. All three draw the
conclusion that capitalism and democracy are not complementary and do
not have to necessarily coexist.
2 U. Cantner, D.C. Mueller
Peter Bernholz (Democracy and Capitalism: Are they compatible in
the long-run?) emphasizes that over time democracy leads to the introduc
tion of more and more regulations and increases the government share in
GDP - either by higher taxes or by installing more regulative measures.
These in tum weaken the capitalistic system. This evidences itself as lower
efficiency, less investment, less innovation and thus lower growth rates.
Several factors opposing this development are then discussed: (1) the crisis
of government which then allows innovative politicians to succeed in find
ing majority support for reform policies; (2) the complementary effect of
international comparison with countries having lower taxes, less regulation
and higher growth rates. As Bernholz suggests, however, this does not
guarantee that democracy will necessarily be restored once it is displaced,
or that its failures can be avoided. Such crises of democratic capitalism
may also contain the seeds for a quite different political system - as for
example totalitarianism.
The relation between capitalism and democracy is also discussed by
Eyiip Ozveren (Capitalism and democracy .. at a crossroads: the civiliza
tion dimension). Referring to Schumpeter, Ozveren argues that capitalism
progresses following a process of creative destruction, where the creative
component always dominates the destructive part. Thus, in economic terms
capitalism is viable. This, however, implies that the economic infrastruc
ture and the institutional set-up of the economy is constant. For Schum
peter, capitalistic development has a detrimental effect on those institu
tions. By uncreative destruction the institutional framework which makes
capitalism viable is destroyed by capitalism itself, which guides the system
into socialism. This relationship is questioned by Ozveren. It is argued that
capitalism and democracy do not necessarily coexist and that there are ele
ments in both conceptions which are conductive for each other. Moreover,
those constraints which one conception imposes on the other are dis
cussed. In general the question is addressed, whether a fully working de
mocracy is compatible with capitalistic development.
Dennis Mueller (Capitalism, democracy and rational behaviour) de
monstrates how many of the paradoxes of rational actor models market
and political behavior can be resolved by adopting a theory of preference
formation based on behavioral psychology. Such an approach depicts indi
vidual behavior as adaptive and "backward looking." Mueller then shows
that the viability of capitalism and of democracy heavily depends on the
existence of farsighted actors which recognize that market actions today as
well as voting today have both immediate and long run effects on an indi
vidual's welfare. For capitalism this materializes especially in activities
such as saving, investment and innovation. For democracy this shows up
in the often modest direct effects of elections on individual welfare
coupled with the effects of individual actions in the political process on its
the long-term viability.
Another theme that arises in Schumpeter's Capitalism, Socialism and
Democracy concerns the pivotal role large firms play in advancing techno
logical progress - an argument which runs directly counter to his reason
ing in his Theorie der wirtschaftlichen Entwicklung (1912) (Theory of
Economic Development (1934). In this much earlier work, the entrepreneur
and thus the small firm are considered as the main forces driving technolo-
Editorial 3
gical progress and economic development. David Audretsch and Roy
Thurik (Capitalism and Democracy in the 21st Century: from the man
aged to the entrepreneurial economy) present evidence related to this top
ic. They illustrate that capitalism, at least during the last quarter of the
20th century, does not show a tendency toward an ever greater dominance
of giant firms. One rather observes a tendency for an increasing element of
entrepreneurship in capitalist countries, although to differing degrees. This
quite obviously is not in line with Schumpeter's vision of the future of ca
pitalism. In particular David Audretsch and Roy Thurik investigate how in
a number of OECD economies there has been observed a shift from the
so-called managed economy - where large firms are the main carrier of
technological know-how and driver of technological progress - towards an
entrepreneurial economy - where small new firms are identified as being
the technologically most advanced and dynamic. Among the large number
of theoretical and empirical issues related to such a shift, Audretsch and
Thurik are mainly interested in the observed employment effects. They ar
gue that the traditional trade-off between wages and employment does not
hold anymore. An empirical cross-section analysis for 23 OECD countries
shows that those countries which succeeded in introducing a larger ele
ment of entrepreneurship before 1984 experienced a greater decrease in un
employment in the subsequent decade.
Douglas Mair and Anthony J. Laramie (Capitalism and democracy in
the 21st century: a Kaleckian interpretation of a Schumpeterian problem)
take up another issue in Schumpeter's work, the tax state. Schumpeter
himself rejected all contemporary analytical frameworks dealing with the
issue of taxation (i.e. the analyses of both Keynes and Marshall). Schump
eter assigned tax policy a role in influencing the business cycle. The
authors suggest in this respect that a Kaleckian approach is suitable for in
vestigating the influence of changes in the structure of taxation on the
business cycle. On this basis Mair and Laramie develop a model able to
show how taxation depending on the specific circumstances chosen may
affect investment, innovation and the business-cycle. From the various re
sults obtained, perhaps the most interesting concerns the effects of income
inequality and the differential taxation of profits and wages. The more un
equal incomes are, the less investment there tends to be. In an empirical
test for the United Kingdom from 1980-1996 this relationship seems to
hold, since the share of wages in income declined, while real investment
activity within this period remained roughly constant. This finding leads
the authors to follow Schumpeter and worry about the future of capitalism
in a democratic society.
3 Capitalism and globalization
The second group of four papers also looks at the capitalistic process from
a Schumpeterian perspective. Here, however, the focus is not on whether
capitalism can survive or not, but rather on various attributes of the capi
talist process as, for example, in a global economy.
4 U. Cantner, D. C. Mueller
William Kingston (A spectre in haunting the world the spectre of glo
balisation) again takes up Schumpeter's vision of the future of capitalism,
but this time in the context of the process of globalization currently taking
place. He discusses the viability of capitalism, described in terms of prop
erty rights and property rights systems, in a global economy. Kingston ar
gues that the design of property rights may have a decisive influence on
the degree of inequality between economies. The more inequality arises
especially in international comparison, the more is this detrimental to the
viability of capitalism. Kingston sees globalization as bringing about in
creasing ineqUality. He is not convinced that Schumpeter's vision about
the future of capitalism has already been falsified, although he acknowl
edges that Schumpeter missed several crucial factors in his argument.
The paper by Maria Lucia Falcao Silva, Joaquim Pinto Andrade and
Thomas S. Torrence (Reflections on the perspectives of the global econo
my from the view of emerging economies) is also concerned with interna
tional inequality, and here with respect to the position and ability of emer
ging economies to pursue a sovereign and independent monetary policy
leading to macroeconomic stability. A fixed exchange-rate rule or a nar
row-band arrangement can be an important source of instability, which a
developing country can import. With domestic liquidity and credit highly
dependent on foreign exchange reserves, an autonomous exchange rate
policy becomes more and more difficult to maintain, because "periphery
countries" continuously face unsteady capital inflows, and are highly vul
nerable to both external shocks and speculative attacks. Since the center
economies do not face these problems or are much better equipped to get
rid of them, the authors finally question whether one has to accept these
traps for emerging economies in a globalized world.
John Cantwell and Grazia Santangelo (Capitalism, profits and innova
tion in the new techno-economic paradigm) are interested in innovative
activities organized on an international, i.e. global level. They investigate
how multinational firms in a globalized world pursue technological pro
gress. Based on the conception of localized and often tacit knowledge,
they are interested whether and to what degree multinational firms diversi
fy their innovative activities internationally. The empirical analysis shows
(i) that the degree of diversification is rather different between sectors, (ii)
that technologies developed abroad are normally not among the firms' core
technologies, and (iii) that over time there is a tendency toward a conver
gence of technological diversification across large firms.
Majid Taghavi (Debt, growth and inflation in large European econo
mies: a vector auto-regression analysis) investigates the effect of the gov
ernmental debt of European countries between 1970 and 1997 on their in
flation, investment and to growth. Using the vector auto-regression tech
nique, Taghavi analyses the possibility of manifold causal dependencies.
After reducing these to a small number of cause-effect relations, he reports
the effects on inflation, investment and growth that are to be expected
from a 1% increase in debt in four EU core countries (France, Germany,
Italy and UK) as well as for the EU area as a whole. Majid Taghavi finds
that the increased debt clearly causes adverse effects on investment and in
most cases on inflation in the long run. Debt increases impact on growth,
however, are not unequivocal.
Editorial 5
4 The innovation process
As is true of every International Schumpeter Society conference, several
papers looked at the innovation process and research and development.
This area of research is one where Schumpeter's influence shows up most
vividly. The papers in this group have a special focus on innovation re
lated industrial structures, on firms' R&D decisions, on industrial policy
oriented towards innovative activities of firms, and on inter-firm coopera
tion in R&D.
This section starts with EM. Scherer, Dietmar Harhoff and Jorg Kukies
(Uncertainty and the size distribution of rewards from innovation) who
approach an already traditional topic within industrial organization, the
structural feature of a skewed size, profit etc. distribution of firms. They
focus their analyses on the profit distribution of firms and herein they fo
cus on innovative firms. An empirical analysis shows clearly that on the
basis of several databases the skewed distribution always can be detected.
In a second step the authors investigate what processes were responsible
for such an outcome. Starting with a traditional Gibrat -process and extend
ing this to a more sophisticated stochastic simulation model they are able
to "produce" firm distributions which come reasonably close to those de
tected empirically.
The paper by Henry Grabowski and John Vernon (The determinants of
pharmaceutical research and development expenditures) is concerned
with the decision of a firm to invest in R&D - a research topic, which the
two authors have addressed several times down through the years. Observ
ing a rising trend in R&D intensity in the pharmaceutical sector over the
years 1975 to 1997 - where this ratio had been constant in the years be
fore 1975 - they search for an explanation. They find one in the important
role played be cash flows in the financing of R&D in the pharmaceutical
sector, and the increases in the returns to this investment that occurred at
that time.
Gunnar Eliasson (Industrial policy, competence blocs and the role of
science in economic development) is concerned with the role of public pol
icy in fostering technological change with all its consequences for indus
trial competitiveness and economic growth. To identify the policy function
Eliasson - relying on his impressive account of research in this area - in
troduces the concept of competence blocs, which are understood as a set
ting within which technological change and innovations are "produced" in
an experimental and consciously or unconsciously collective way. The se
lection among different technological solutions and innovations is per
formed on several levels. The functioning of such competence blocs relies
heavily on the competencies and the kind of actors and institutions in
volved. This is demonstrated by referring to five case studies. Eliasson
proposes that not the outcomes of, but the procedures within competence
blocs should be the major focus, i.e. the efficiency and the completeness
of competence blocs.
Inter-firm cooperation in R&D and their potential anti-competitive ef
fects are the interest of Nicholas Vonortas (Multimarket contact and inter
firm cooperation in R&D). Such cooperation is widely seen as a device to
combine different technologies in a complementary way. Critics often ar-