The Entrepreneurial Myth and the Instability of Capitalism
Dobb’s institutional analysis is well illustrated in CESP, especially in the development of his penetrating critique of the ‘entrepreneurial myth’ (Dobb 1925: 3-5). He contended that capitalistic development and growth, alluded to above, along with capitalistic entrepreneurship (in conjunction with a non-interventionist state) becomes highly problematic. In short, according to Dobb capitalist entrepreneurialism has strong contradictory tendencies toward both overproduction and underproduction.
It is in Dobb’s first book, CESP, where he begins to develop these highly contradictory tendencies of capitalism (see ibid.: 379-387 for overproduction tendencies, and 157-174 and 361-377 for underproduction and stagnationist tendencies of capitalism). Dobb points out that there is a difference between the social entrepreneurial function and the particular agent or agency that fulfills this social function (ibid.: 44ff). In capitalism the agents who fulfill and carry out the social entrepreneurial function are private, profit-motivated, individual entrepreneurs, or what Dobb called ‘capitalist undertakers’ (ibid.: 4-15). Thus, unique to capitalism is that a key social function, and arguably the key socioeconomic function (i.e. the social entrepreneurial function), is performed by profit-motivated private capitalist undertakers. In other modes of production, the social entrepreneurial function is instituted as a public good and carried out by an agent motivated by some sort of social interest.
The entrepreneurial myth itself is simply that capitalist undertakers are seen to be necessary for a vibrant economy, technological change, and growth. Dobb disputes this myth on two grounds. First, capitalist undertaking is historically and institutionally contingent (Dobb 1924 [1955]: 8). Second, and more importantly, capitalist undertaking makes socioeconomic crises immanent (Dobb 1925: 383-387).
The institutionalization of capitalist undertaking, in both its industrial and financial forms, occurs essentially through the process of primitive accumulation (Dobb 1946: 199). There are several historical currents and causes (ibid.: 221-254); nonetheless the important historical results are the monopolization of social resources and new class differentiation (Dobb 1925: 130-142). These results allow for particular differential advantage of the new monopoly class to ‘claim a larger share of the income of the community than their fellows’ (ibid.: 125).
According to Dobb this sharp new inequality disrupts the ‘index of utility’ (ibid.: 160) (note the Marshallian language). Every financial gain of an individual undertaker increases the inequality and lowers the marginal utility of money for the undertaker. Hence, the undertaker is in a more advantageous position to face the risk and uncertainty that accompany entrepreneurial activity and discourage others with higher marginal utility of money from taking risks, and encourages them to accept the capitalistic working conditions. The institutional presence of capitalist undertaking tends to augment inequalities whereby ‘the rich tend to get richer, and the poor conversely to get poorer’ (Dobb 1924 [1955]: 13) and inequality generates political instability. Worse still, argued Dobb, capitalist undertaking manifests immanence for socioeconomic miscalculation and maladjustment, that is, crisis. Here, Dobb argues that privatized undertaking requires calculation for the quantity supplied of other capitalist producers: ‘Short of a system of espionage or the frank publication of business secrets and intentions, one can know scarcely anything at all’ regarding the quantity supplied of one’s competitors (Dobb 1925: 379). Thus, in ignorance of the production plans of others, capitalist undertakers carry out investment and production in a veil of uncertainty, introducing a significant risk of financial loss.
Dobb contended that in the absence of sound calculation, oversupply becomes a strategic tendency. He writes, ‘There is abundant field for miscalculation; here, where basis for sound calculation is absent, emotional influences (business optimism, etc.) enter in’ (Dobb 1924 [1955]: 14). Thus, more than a decade before Keynes’s notion of ‘animal spirits’, Dobb underscored the importance of emotional influences of the investing classes for the determination of the levels of employment, output, and the (mal)adjustment of society due to the miscalculations of capitalist undertakers. Dobb explains there is a general tendency for the capitalist undertaking class to make miscalculations in the same direction (Dobb 1925: 380, 1937: 275). These universal miscalculations create ‘a sharp conflict between business anticipations and the actual facts’ (Dobb 1925: 384). The ‘actual facts’ manifest ‘severe maladjustment and wastage...over-capitalisa- tion and over-production’ (Dobb 1924 [1955]: 14), ‘in a word, a crisis’ (Dobb 1925: 384).
The effect of ignorance, uncertainty, and risk upon the class of capitalist undertakers becomes devastating for society. The tendency toward oversupply will lead undertakers to curtail production and ‘to turn away as many [productive] resources and as much labour as they can and “the bonds which unite different enterprises will become channels through which the depression will spread to other enterprises”’ (ibid.: 386). This quote clearly demonstrates Dobb’s anticipation of Keynes’s theory of effective demand well before The General Theory as well as anticipating the rise to prominence of the multiplier.
A crisis will transform any previous optimism among undertakers ‘to pessimism and timidity . The sudden disappointment will sap the strength of the capitalist spirit—destroy the undertaker’s self-confidence and his incentive to brave uncertainty’ (ibid.: 384). Thus, crises tend to be self-reinforcing due to a lack of effective demand and undertakers’ ‘pessimism and timidity’. In an economy dominated by capitalist undertaking, ‘[o]ptimism and pessimism alike will act as a rapidly spreading epidemic’. Boom and bust, in a word, crisis is immanent when the entrepreneurial function is in the hands of individual capitalist undertakers.
Dobb contends in his early work that there are tendencies within a capitalistic economy toward both political instability and economic inequality. The former because of the tendency toward severe inequality and the latter because of immanence of crisis due to ignorance, uncertainty, and risk. Let us emphasize Dobb’s employment of a Marshallian theoretical framework in CESP. Dobb correctly recognizes this to be limiting to the understanding of social being. He began to understand a Marshallian theoretical framework, and neoclassical economics more generally fails to explain the distribution of income and wealth. As explained above, Dobb believed that returning to classical political economy would provide a theoretical road forward.[1]
By 1937, Dobb began to theorize crisis as not only immanent, but also necessary and permanent. In other words, he did not believe that Keynesian interventionism could overcome the crisis tendencies of capitalism.[2] [3] On the necessity and permanence of crisis Dobb drew heavily from Marx. However, Marx’s theory of crisis was far from complete. Moreover, capitalism had changed since the time of Marx (Dobb 1957).
Drawing from the insights of volume II of Marx’s Capital, the Marxian schemas of reproduction would become the foundation of Dobb’s theory of crisis. Marx’s incomplete analysis fails to develop an explicit theory of crisis. For Dobb the leading instability characteristic of capitalism is the social entrepreneurial function in the hands of private individual capitalist undertakers. Capitalist development does not result from any thought-out aggregate plan. In capitalism ‘it just happens—accidentally as it were—as the result of a large number of autonomous individual decisions each of them taken in ignorance of other and parallel decisions, on the basis of market data plus guesswork or “expectations” as to future movements’ (Dobb 1967: 56; italics in original). The significance of this observation is that there is, both, by definition and institutional design, ‘anarchy of production’. This simply means that production decisions are made ‘atomistically’ and are supposed to be coordinated by the mechanism of price movements in markets (Dobb 1962: 30). According to neoclassical economists, capitalist production operates without regulation as long as there is sufficient competition (Dobb 1937: 37).
However, since the time of Marx’s Capital oligopolization had become more pronounced (Dobb 1966b). Moreover, Dobb underscored the rise of big government and its intervention as well as the rise of big labor.11 The rise of big business manifests in overcapacity utilization (Dobb 1927: 145-148) as a strategic weapon to use against rivals (Dobb 1925: 157-176) and union activity (Dobb 1927: 177-198, 1940b). In twentieth-century capitalism, Dobb argues, overproduction had become the general tendency of the system. He contends that the overproduction tendencies are ‘familiar’ to all economists, examples ‘consist in the chaotic duplication of railway facilities, the frequent overlapping of public utility services, the mushroom growth of shopping and entertainment facilities’ (Dobb 1937: 279).
The problem of overproduction is not necessarily a problem of underconsumption (ibid.: 87ff). Rather overproduction creates uneven growth between Department I (capital goods) and Department II (consumption goods), what Marx called a ‘crisis of disproportionality’. Marx assumes throughout volume II of Capital that balanced growth is achieved between departments, and thus is formally possible.[4] However, Dobb never tired of pointing out, there is no ‘actual tendency in capitalist society for these abstract conditions [of balanced growth] to be fulfilled—on the contrary, they were only observed “by an accident”’ (Dobb 1937: 102, 1942 [1955]: 196, 1973: 163). Economic crisis is the process of system adjustment. In this sense crisis is necessary for reproduction (Dobb 1937: 111, 1962: 69, 1973: 161-162). Thus, in counter-distinction to many mainstream theories, Dobb did not consider crisis as an abnormal occurrence, but the normal functioning of capitalism (Dobb 1959a). Instead, crisis is a necessary equilibrating force of capitalism when disproportionalities arise between departments and sectors.
Dobb also de-emphasizes the fall in the rate of profit as a primary cause of crisis (Dobb 1959b). He believed that technological change and the power of oligopolies could reverse the tendency of the fall in the rate of profit (Dobb 1966b). To be sure, a fall in the rate of profit was, according to Dobb, very important for understanding the structural dynamics of modern capitalism and the behavior of oligopolistic firms (Dobb 1937: 108-110). Certainly, a fall in the rate of profit could add to a crisis and contribute to secular stagnation (Dobb 1959b). However, Dobb believed the crisis tendencies of capitalism manifested regardless of whether the rate of profit is falling or rising. In short, a fall in the rate of profit is not necessary for the manifestation of crisis.
Dobb held that no policy could reform capitalism and overcome its structural tendency toward overproduction, disproportionalities, and crisis (Dobb 1966a: 27-38). In other words, (neo)liberal policy to curtail monopoly powers, remove price rigidities, ease capital mobility, restrict labor union activity, and so on would fail. This is because even if they are implemented they would increase the accumulation process, and generate overproduction and disproportionalities. Indeed, according to Dobb, the more that (neo) liberal policies are put in place, the more that fluctuations would sharpen (Dobb 1924 [1955]: 13-14, 1949 [1955]: 105). In this sense, crises are a permanent feature of capitalist organization. Thus, Dobb establishes, much as Marx had before him (Clarke 1994), that there is an immanence of, necessity for, and permanent structural tendencies toward crisis in capitalist economies and when the entrepreneurial function is carried out by individual capitalist undertakers, motivated by profit.
- [1] Dobb and Keynes each rejected marginal productivity theory. They both emphasized that the marginalproductivity theory of wages was fundamentally misleading. However, Dobb and Keynes pose quite different critiques. More striking is that Dobb emphasizes an inadequate theory of entrepreneurial profitsand the tendency toward industrial monopolization. Keynes’s theory would underscore the importanceof the determination of the rate of interest and the role of money.
- [2] Dobb defends this position in his last book (Dobb 1973: 226-246), but was lecturing on the ‘impossibility’ of capitalist reform as early as the mid-1920s (Shenk 2013a: 64).
- [3] Indeed, in the mid-1920s, Keynes asked Dobb to contribute a book on Wages to the CambridgeEconomic Handbooks series, of which Keynes was the general editor. In this book Dobb clearly anticipates John Kenneth Galbraith’s Theory of Countervailing Power, to explain both the rise of big businessand oligopolization as a competitive strategy and the emergence of big labor and big government as arelated historical process. Dobb, however, gives these tendencies and processes no special name.
- [4] Marx’s schemas provided the basis for G.A. Feldman’s Soviet model of growth (see Domar 1957: 225231). Marx’s schemas also anticipated the work of Leon Walras, and provide the basis of balanced economic growth reminiscent of the later models of Roy Harrod (1939) and Robert Solow (1956). Dobbwas far less interested in the conditions of ‘balanced’ growth, but recognized its importance. He was moreinterested in explaining the conditions of instability, crisis, and stagnation.
