The Economic Sociology of Capitalism - … · The Economic Sociology of Capitalism ... Society(Weber, 1978c ... few years that try to advance the knowledge of Weber’s work on this

The Economic Sociology of CapitalismWeber and Schumpeter

RICHARD SWEDBERG Cornell University

ABSTRACT This article points to a distinct puzzle in the analyses of capitalismthat can be found in the works of Weber and Schumpeter, and gives a newintroduction to their analysis of capitalism. Both Weber and Schumpeter wrotevoluminously on capitalism, as testified to by such giant works as Economy andSociety (Weber, 1978c [1922]) and Business Cycles (Schumpeter, 1939). One canalso discern a distinct development in their thought over time: from emphasizingthe role of various voluntaristic elements (such as the spirit of capitalism and thespirit of entrepreneurship) to stressing the role of institutions. The puzzle thatone can find in their writings is as follows. Weber and Schumpeter both argue thata vigorous and healthy capitalism requires certain economic and non-economicinstitutions, in addition to something else. An absence of this ‘something else’may lead to capitalist petrification or collapse, according to both authors. Theanswers 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 ofcapitalism that can be found in the works of Weber and Schumpeter, and to givea new introduction to the sociology of capitalism that can be found in the worksof these two scholars. The puzzle is as follows. Weber and Schumpeter both arguethat certain economic and non-economic institutions are needed for there to be avigorous and healthy capitalism, but also that this is not enough. Something elseis needed – but what? In situations where this ‘something else’ is needed, butwhere otherwise perfectly adequate institutions are present, Weber and Schump-eter agree that capitalism may either petrify or become so weak that it may fall

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pray to counterforces. Let me also note on this particular point that Weber andSchumpeter go directly counter to today’s standard wisdom, in economic sociol-ogy as well as in New Institutional Economics, according to which all you need isthe right type of institutions, and economic growth will follow more or lessautomatically.

Task number two of this article – to give a new introduction to Weber’sand Schumpeter’s economic sociology of capitalism – may seem presumptuousand uninteresting, for a number of reasons. One of these is that we already have asociology of capitalism; the other that we already know the economic sociology ofWeber and Schumpeter. We indeed already have a sociology of capitalism, or atleast 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 over-view, see, e.g., Hall, 1999:141–6, cf. 136–40). This literature, however, drawsvery little on Weber and not at all on Schumpeter. There has not been a fullexploration of whatever potential there may be for helpful hints in Weber andSchumpeter as to what a solid sociology of contemporary capitalism shall looklike. Instead of drawing on the heritage of Weber–Schumpeter and economicsociology, 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 whatsome of us who are active in economic sociology would like it to be, do we reallyneed a new introduction to the analyses of capitalism that can be found in Marxand Weber? My answer, when it comes to Schumpeter, is that current economicsociology has failed to assimilate his ideas (for an exception, see Collins, 1986).Furthermore, his work is considerably more complex and rich than is commonlythought. Few sociologists (or economists) are, for example, aware of the fact thathis ideas in Theory of Economic Development – where his famous theory of theentrepreneur is presented – exist in two different versions, of which the originalone is unknown.1

Something similar also turns out to be the case with Weber. While someparts of Weber’s oeuvre have been properly assimilated – such as his generalsociology, his sociology of law and his sociology of religion – his economicsociology is still little known. That this is the case is something that I tried to showin 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 recognizedthat 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 lastfew years that try to advance the knowledge of Weber’s work on this point. Thisis a pity because there exists no other sociological analysis of capitalism, in myopinion, 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 otherwords, may be seen as a plea that their contribution to the sociology of capitalismis properly recognized.

Weber’s and Schumpeter’s Initial Analysis ofCapitalismWeber’s and Schumpeter’s works are often portrayed as coherent wholes with nosharp breaks between their different phases. It has, for example, been argued byJeffrey 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 sharplydistinguish between ‘an early Schumpeter’ and ‘a later Schumpeter’ has beeneffectively challenged by Richard Langlois (1991). That it is pointless to singleout the early works of Weber and Schumpeter for special discussion may well betrue if we are interested in surveying their entire oeuvres. This, however, is notsomething that shall be done here, where I instead will be focusing on their earlyanalyses of capitalism.

Up until World War I, it can be added, European capitalism was in manyrespects a success story, culturally as well as economically, well captured in thephrase used to describe the situation in France during this period: la belle epoque.Germany, where Weber lived, had been united in 1871 and its politics werecontrolled by the Emperor and the landed aristocracy. Economically the Germanbourgeoisie was doing very well, even if some of its activities were curtailed by theJunkers. The Austro-Hungarian Empire, where Schumpeter lived, displayed someparallels to the German situation. The politics of the Austro-Hungarian Empirewere, for example, controlled by the Emperor, who was backed by the nobility.The bourgeoisie was much smaller than in Germany but successful in its ownright. Plans to unite all German-speaking peoples into one huge empire existed inGermany 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 sotill his death in 1920. Both of his dissertations explored different aspects of itsorigins. The first was a study of medieval trading corporations and the second astudy of the emergence of a market in landed property in ancient Rome. Weber’swell-known book on agrarian workers (1984 [1892]) can be characterized as astudy of the impact of capitalism on the organization of labor in the countrysidein Germany, east of the river Elbe. It is, however, in The Protestant Ethic that wefind the fullest attempt in his early production to deal with capitalism in general aswell as its origins.

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The main argument of The Protestant Ethic is as follows. By the 1500s acertain type of non-dynamic capitalism had developed in Europe, based on suchinstitutions as the small medieval firm, merchant banks and a fairly sophisticatedand pro-capitalistic set of legal provisions, known as the lex mercatoria or the lawmerchant. Weber terms this type of capitalism ‘traditionalistic’ because thementality of the key actors was not oriented towards new ways of making moneyin 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 theeconomy emerged, seemingly out of nowhere. This new mentality set off a seriesof changes in capitalism, which eventually was transformed into what Weber calls‘modern capitalism’ (e.g. Weber, 1958a [1904–5]: 64, 68). Initially these newways of working and doing business were carried out in a spirit of religiousenthusiasm by the actors. Later, however, when they had become part of theeconomic system, they were experienced as a heavy burden, as an ‘iron cage’ inWeber’s famous metaphor (1958a [1904–5]: 181).

Most of the studies that make up the huge body of secondary literaturethat has been devoted to The Protestant Ethic either defend or attack the lynchpinin Weber’s argument: how ascetic Protestantism caused a change in the spirit ofcapitalism. My suggestion in this article is to set this issue aside and insteadconcentrate on a less controversial part of Weber’s argument, namely that a neweconomic mentality or a new spirit of capitalism emerged from the 1500s andonwards in the West (and nowhere else). One reason for putting the religiousissue to one side is that Weber’s argument about the link between asceticProtestantism and a new attitude towards capitalism is not open to empiricalverification; we simply do not have the data that it would take either to confirm orto disconfirm his thesis (e.g. Marshall, 1982). To this can be added that my ownreason for putting it to one side is that this will allow us to approach TheProtestant Ethic from a novel and a more productive angle, given the purpose ofthis article. This way of proceeding, I argue, may lead us to a better understandingof Western capitalism, without getting into a discussion of the possible impact ofascetic Protestantism on modern capitalism; it also allows us to ask some new andinteresting questions about the relationship of economic institutions to thementality of economic actors.

Let me therefore return to The Protestant Ethic and Weber’s description ofwhat the change in capitalist mentality looked like, without making any referencesto the issue of the possible impact of ascetic Protestantism on capitalism. The onlyconcrete example that Weber supplies us with is that of the continental textileindustry, as it existed till the mid-1800s (1958a [1904–5]: 66–9).2 Weberdescribes the situation in this industry on an everyday level in the followingmanner. After having produced the cloth in their homes, the peasants brought itto the putter-out, who paid them a traditional price. The customers of the putter-out also came to him and bought traditional items for about the same price as they


always had done. The putter-out worked five to six hours a day and made enoughof a profit to live a respectable life. Weber emphasizes that

. . . the form of organization [of the putter-out] was in every respectcapitalistic; 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 todestroy the languid manner in which this type of business was carried out. Ayoung man from one of the putter-out families would typically start to check thepeasants much more carefully; he would approach his customers himself; hewould lower the prices and try for large volumes. His success would set off ‘abitter competitive struggle’ and eventually lead to the transformation of the wholeindustry (1958a [1904–5]: 68). Modern capitalism had come into being in thetextile industry.

One of the many fascinating arguments in The Protestant Ethic is that thechange from traditional capitalism to modern capitalism took place not because ofa change in the economic institutions but because of a change in the mentality ofthe economic actors. Institutions, to repeat, did not play the key role. Once thishas 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 arerelated. Weber notes, for example, that one may sometimes start the analysis eitherfrom the ‘subjective [viewpoint of the actor]’ or from the viewpoint of ‘objectivesocial institutions’ (1958a [1904–5]: 152).3 How intertwined spirit or mentalityand institutions can be is well exemplified in the fullest account in The ProtestantEthic of what Weber means with the term ‘capitalistic spirit’.4 This is to be foundin his description of ‘the traditional spirit [of capitalism]’ in the continental textileindustry, 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 businessassociates (1958a [1904–5]: 67).

Schumpeter’s Theory of Economic Development

The equivalent of Weber’s Protestant Ethic, when it comes to Schumpeter, is TheTheory of Economic Development (1911). This was Schumpeter’s second book; hisfirst 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 TheNature and Essence the economy is conceptualized as a system that can be affectedby various influences from the outside and thereby set in motion. This motion willthen traverse the whole economic system until it settles down into a new


equilibrium. While Schumpeter was an ardent admirer of Walras his whole life, hesoon 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 ofchange was considerably more important to the evolution of the economy thanthe changes brought about by forces from the outside. Schumpeter would laterdescribe his own state of mind, just after having completed his first book, in thefollowing manner:

I felt very strongly that this was wrong [i.e. Walras’s argument aboutexogenous forces of change], and that there was a source of energy withinthe economic system which would of itself disrupt any equilibrium thatmight be attained. If this is so, then there must be a purely economictheory of economic change which does not merely rely on external factorspropelling the economic system from one equilibrium to another. It issuch a theory that I have tried to build.

(1989 [1937]: 166)

The Theory of Economic Development can be characterized as an attemptfrom Schumpeter’s side to flesh out his vision of an economy that is changed fromwithin and where the sole agent of change is the entrepreneur.6 The heart ofSchumpeter’s book is therefore to be found in his description of the entrepreneurand entrepreneurship, which comes in the famous Chapter 2. It deserves to beemphasized, however, that Schumpeter did not want to create a theory of theentrepreneur and entrepreneurship per se; what he was after was a theory of theeconomy as a whole – an economy, nota bene, in change. The Theory of EconomicDevelopment thus contains not only the famous Chapter 2 (entitled ‘The Funda-mental Problem of Economic Development’7 and not e.g. ‘The Entrepreneur’),but also chapters on ‘Credit and Capital’, ‘Entrepreneurial Profit’, ‘Interest onCapital’ and ‘The Business Cycle’.8 Today most people only read Chapter 2 inSchumpeter’s book, but the question may be raised whether such contemporaryphenomena as the ‘New Economy’ and complexity theory constitute signs thatSchumpeter’s idea of a whole economy centered on entrepreneurship may berelevant after all.

However that may be, in the presentation in this article of Schumpeter’sideas, it is the famous Chapter 2 that will be the focus of attention. Little that isnew can be added to the standard accounts of the version of this chapter that isusually referred to in scholarly discussions, namely Chapter 2 in the Englishtranslation from 1934 (which is essentially based on the second German editionfrom 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 inthe literature, and its second chapter differs on some interesting points from thestandard 1934 version that everybody cites. Since these changes have not been


discussed in the existing literature on Schumpeter, they will be highlighted in thisarticle.9

It can be added that the first edition of The Theory of Economic Develop-ment (1911) also differs on several other points from the English translation ofthis work, which was made two decades later, at which point Schumpeter as wellas economics had changed quite a bit. When Schumpeter wrote the first editionhe was a young Austrian economist with extremely high ambitions; he wasworking 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 tenuredappointment at Harvard University; and he was trying to relate his work to a newtype 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 eco-nomic course of events’), which he counterposes to the task of economic theory,which is to deal with economic mechanisms (1934: 60–1).10 These economicmechanisms relate either to statics or to dynamics, that is, either to the type ofeconomics that one can find in Walras or to the new type that Schumpeter wastrying to develop in The Theory of Economic Development. In the static type of theeconomy (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 italways has been in this type of economy: the same items are produced andconsumed over and over again, and there are no innovations. ‘Add successively asmany 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, inSchumpeter’s famous formulation, when the entrepreneur puts together ‘newcombinations’ (1934: 65–6, emphasis added). The entrepreneur does not inventanything new; he innovates, which means that he recombines already existingresources. According to a famous passage, entrepreneurship essentially covers thefollowing five situations: ‘(1) The introduction of a new good’, ‘(2) the introduc-tion of a new method of production’, ‘(3) the opening of a new market’, ‘(4) theconquest 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 creationof 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 newcombinations” ’ (1934: 77–8). Every businessman, however, typically has amoment when he is entrepreneurial, ‘however modest’ (1934: 78). In the circularflow it is possible to act in a rational manner, since everything has been donebefore and consequently can be calculated in advance. This, however, is not thecase when you are entrepreneurial, since by definition you are doing somethingnew. The entrepreneur mainly has to rely on ‘intuition’; and may only be courtingfailure if he is too rational and tries to figure everything out in advance (1934:


85). He also has to be prepared to meet with considerable resistance from hissurroundings; people are as set in their ways as ‘a railway embankment [is set] inthe earth’ (1934: 84). What drives the entrepreneur, to cite a well-known passagein Schumpeter’s book, are primarily ‘the dream and the will to found a privatekingdom’, ‘the will to conquer’ and ‘the joy of creating’ (1934: 93).

This account of the standard version of Chapter 2 in The Theory ofEconomic Development covers, to repeat, material that is already well known in theliterature. The original version of Chapter 2 from 1911 is, however, somewhatdifferent from the standard version from the 1930s, mainly in emphasis.11 As anexample of this, one can mention the parallels that are several times drawn in theoriginal edition between the artist and the entrepreneur, which tend to heightenthe irrational and individualistic dimension of the entrepreneur. But there is alsothe fact that some of the ideas that are only mentioned in passing in the standardversion of Chapter 2 are elaborated upon to such an extent in the original versionthat the overall picture of the entrepreneur becomes somewhat different. In thestandard version the entrepreneur is essentially a person who puts together newcombinations. In the original version of The Theory of Economic Development, onthe other hand, Schumpeter says that there are three elements – not just one – thatcharacterize the entrepreneur:

1. that he puts together new combinations (just as in the later edition);2. that the really difficult thing for the entrepreneur is not to conceive of

these new combinations but to translate them into reality; and3. 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, Schumpeteremphasizes very strongly that what is most remarkable about the entrepreneur isnot that he has figured out some new combination – good ideas are plentiful andcheap, we are told – but that it is extremely difficult to transform these ideas intoreality. ‘New combinations are easy to come by, but what is necessary and decisiveis the action and the force to act’ (1911: 163). The entrepreneur, Schumpeterrepeatedly states, is fundamentally a ‘man of action’ and always ready to leap into‘energetic action’ (‘Man der Tat’; 1911: 128, 133, emphasis added). It isconsequently in his ‘spiritual constitution’ that the entrepreneur differs from theordinary person (‘Geistesverfassung’; 1911: 163, cf. 142–3).

The second point on which the original edition differs in emphasis fromthe standard version has to do with the need of the entrepreneur to get otherpeople to assist him in realizing his venture. This point is of considerable interest,among other reasons because it contradicts the common notion that Schump-eter’s entrepreneur is some kind of a super-individualistic hero who carries out thewhole innovation by himself. What Schumpeter argues is rather that it is theentrepreneur who has the initial vision, but who also realizes that it is absolutely


imperative to get the support of other people, and that these people will not bythemselves turn into persons who are capable of carrying out new and creativetasks. Most people just want to do things the same way that they have always donethem, Schumpeter says, and change represents a threat to them. What theentrepreneur has to do in this situation is to buy them over to his side. This is theonly 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 Theoryof Economic Development, it is clear that one can find some differences betweenthese two works. Weber’s work is a study of a development that was set off in theEuropean economy in the 1500s and onwards, while Schumpeter’s work is a studyof 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 bothworks illustrate what was referred to in the introduction as a puzzle, namely thatthe key to a vigorous capitalist development is not exclusively to be found in theexistence of suitable economic institutions, but that something else is alsoneeded.

This something else is the spirit of modern capitalism in Weber’s case, andthe entrepreneur in Schumpeter’s case. Both of these forces appears pretty muchfrom nowhere, or in any case have little to do with the existing capitalistinstitutions. For Weber, the causality involved is a long chain of peculiar historicalcoincidences: some parts of a new religious orthodoxy (ascetic Protestantism),which was hostile to its mother religion (Catholicism), happened to set off a kindof behavior in the economy, which succeeded in breaking with economic tradi-tionalism. In Schumpeter’s case, the chain of events is not as long, but the originalimpulse also comes from outside the existing economic reality; and the entrepre-neur himself literally appears out of nowhere. Schumpeter says in The Theory ofEconomic Development that one can find a small number of entrepreneurs in anyhuman population. In other words, he takes recourse to ‘biology’ to explain theexistence of the entrepreneur.

Weber is quite insistent on the point that the change in capitalist mentalitythat 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 cameabout, he states very clearly, a number of important capitalist institutions had beenin operation for quite some time, such as the medieval firm, an early version of thebanking system, and so on. All of these institutions, however, operated ‘in atraditionalistic [economic] spirit’ (e.g. Weber, 1958a [1904–5]: 65). The qual-itative change in the economy, on the other hand, was set off by something else –the spirit of modern capitalism.12


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 intothat of economic theory; and The Theory of Economic Development is meant as astudy in economic theory (Schumpeter, 1934: 60). Secondly, and considerablymore important, no part of that which is studied by the economic theorist – someof which is clearly sociological in nature13 – can account for qualitative economicchange.14 Schumpeter, as we know, was very critical of Walras for his assumptionthat all sources of change come from outside the economic system, but Schumpeteressentially proceeds in the same way. His entrepreneur supposedly emerges frominside the system – but out of nowhere; he is suddenly just there, as a result ofbiological chance.

Finally, there exist some parallels between the cycle that economic changegoes through in Weber and Schumpeter. In Weber, the non-institutional force ofthe capitalist spirit comes into the world like a whirlwind and literally changeseverything – but only to end up itself as an institution that weighs heavily oneveryone. The ‘light cloak’ of Baxter, in Weber’s metaphor, became the heavy‘iron cage’ (Weber, 1958a [1904–5]: 181). The dynamic is quite similar inSchumpeter: the entrepreneur is born into ‘the circular flow’, where traditionrules supreme. In putting together his new combination, the entrepreneur has tofight people’s hostility and resistance to the new. His success in doing so is initiallyrewarded not by the population but by the mechanical forces of the economy,which supply him with ample entrepreneurial profit. This profit also tempts othersto imitate the novel behavior, but soon enough there is no more entrepreneurialprofit to be had, and tradition re-establishes itself – and we are back to the circularflow.

The Later Analysis by Weber and Schumpeter ofCapitalismWeber and Schumpeter knew each other quite well and also worked together, aseditors of Archiv fur Sozialwissenschaft und Sozialpolitik (1916–20), even if theynever 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) isstill around, and Schumpeter was an extremely avid reader of social science andwould not have missed Weber’s work. Weber and Schumpeter both kept writingon capitalism throughout their lives – which in Weber’s case came to an end in1920, when he was in his mid-50s, and in Schumpeter’s case in 1950, when hewas in his mid-60s. While Weber’s later works on capitalism were mainly producedin the 1910s in Germany, those of Schumpeter were primarily written in the1930s and the 1940s in the United States. Despite the fact that the works ofWeber and Schumpeter were written some years apart and on different continents,however, there do exist some interesting parallels between them.


Weber’s Later View of Capitalism

Weber’s production during his last 15 years was to a large extent centered oncapitalism. There is first and foremost Economy and Society, a giant study that hestarted to work on in 1908 but that he never completed. The current edition, inthe original German as well as in its English translation, consists of contributionsthat overlap and that have been tampered with (e.g. Mommsen, 2001). Only Part1 of Economy and Society (pp. 1–307) consists of texts that were intended for thiswork and that had been approved by Weber. The rest of this two-volume set wasadded after his death (Weber, 1978c [1922]: 308–1469). Weber addresses amultitude of issues of interest to economic sociology in Economy and Society,including modern capitalism and its key institutions. His project of exploring theorigin of capitalism, as announced in the last pages of The Protestant Ethic, is alsocarried out in his studies on the economic ethics of the world religions, which areprimarily known to the English-speaking world as The Religion of China, TheReligion 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 Munichentitled ‘Outline of Universal Social and Economic History’, which was laterreconstructed on the basis of students’ notes and published under the titleGeneral Economic History (Wirtschaftsgeschichte) (1981 [1923]). This work is ofparticular importance in our context, since it contains an analysis that melds theideas from The Protestant Ethic with a general history of capitalism. Finally, Weberwas intensely interested in the future of German capitalism as well as of Westerncapitalism 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 understandingof Weber’s later view of capitalism, I will focus on the following two: Economy andSociety and General Economic History. The former starts out with a chapter onsociology in general (‘Basic Sociological Terms’), where Weber presents the keyconcepts in his sociology. It is also in this part of Economy and Society that one canfind the fullest discussion of his notion of institution. According to Weber, themain focus of sociology should be on social action, defined as behavior investedwith meaning by the actor, which is oriented to some other actor(s). When theinteraction between actors ‘remains relatively constant’ and also appears as‘obligatory or exemplary’, other actors can ‘orient’ their behavior to it – some-thing 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 thenotion of ‘institution’ in Economy and Society.15 It should be noted, Weber alsoadds, that an order will become much more stable if it is adhered to because theactors believe in its legitimacy, than if it exists for purely customary reasons orbecause of some particular interest constellation. Throughout Chapter 1 ofEconomy and Society, Weber makes references to the subjective dimension of the


behavior of the actor (‘Verstehen’), but concepts such as ‘mentality’, ‘spirit’, andthe like, are not among his ‘basic sociological concepts’.

Chapter 2 of Economy and Society (‘Sociological Categories of EconomicAction’) contains a concentrated exposition of economic institutions. This chapteris about 150 pages long and covers an enormous amount of material, so aselection is necessary. The three institutions that I have chosen to briefly presenthere are the market, the firm and capitalism. Though a reference or two to ‘thespirit of capitalism’ can be found in Economy and Society, this notion is not amongthe ones that Weber chose to explicate in Chapter 2. To some extent this may bedue to the fact that it is too general in nature for his purposes in this work. Quitea bit of what is covered by the expression ‘spirit of capitalism’ in The ProtestantEthic can, for example, be found in his discussion of ‘economic motivation’ inEconomy and Society (1978c [1922]:110–11, 150–3).16 What motivates thosewho 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 labormarket or who own property typically depends on the degree to which they feelthat they have a ‘calling’, either for work of a certain type or for the acquisition ofproperty (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 whereexchange takes place, as is common among economists and sociologists, but as aplace that is characterized by two distinct forms of interaction: exchange andcompetition. Several actors typically compete for being the one who will do thebuying or the selling, and after this has been decided, the exchange (which has itsown 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. Theactors in a market may want to keep it open to outsiders, but may also want toclose it off under certain circumstances and turn it into a monopoly.

The capitalist firm is defined in Weber’s theoretical sociology as a specialtype 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 produc-tion. The entrepreneur is ‘the ‘moving spirit’’ of the firm and the only one whoknows as much as the professionals and can overrule them (‘der leitende Geist’;1978c [1922]: 1403). The professionals regard work as a ‘calling’ and obeyorders. The workers represent their own special category in Weber’s sociology andhave similarly their own social profile.


In modern capitalism, Weber emphasizes, the huge corporations areorganized along similar lines at state bureaucracies. ‘Bureaucracy . . . is fullydeveloped . . . only in the modern state and . . . in the most advanced institutionsof capitalism’ (1978c [1922]: 956; cf. 974). According to Weber’s classicdescription, this means that the corporation (minus the workers) is organized asfollows. The positions are organized in the form of a hierarchy and orders areobeyed.17 Each person has a special area of activity, for which he or she has beenespecially trained. The bureaucrats carry out their work in a spirit of duty, and theyare 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 thebureacrats to take the firm over since they control most of the importantinformation and think that they understand how to run things. This, however,would mean its end as a dynamic capitalist force, among other reasons becausebureaucrats are not very interested in profit-making.18 Just as the political leaderconstitutes the only effective counterweight to the bureaucrats in political life, theentrepreneur is the only effective counterweight to the bureaucrats in economiclife (1978c [1922]: 220–1, 956–7).

Weber does not speak of ‘capitalism’ in his theoretical economic sociologybut of several different capitalisms. He also emphasizes that these different typesof capitalism each consists of social action and are not to be seen as rigid socialsystems. In Chapter 2 of Economy and Society the key section on capitalism isentitled ‘The Principal Modes of Capitalistic Orientation of Profit-Making’(Section 31); and Weber distinguishes between six different types of theseorientations. There is, for example, ‘orientation to the profit possibilities incontinuous bying and selling on the market with free exchange’ as well asorientation 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 ofsocial action and, as a consequence of this, to discuss the different types ofcapitalism in terms of ‘modes of orientation of profit-making’. Nonetheless, healso 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 ‘themodern Western World’; and a type of capitalism that has ‘been common all overthe world for thousands of years’, but which is not politically oriented (1978c[1922]: 165–6). Political capitalism (as it is usually called) basically meanscapitalistic activity where it is the political authorities that in one way or anothercontrol or make possible the profit opportunities. In what can be called rationalcapitalism, the profit opportunities are to be found primarily in the free marketand are approached in a methodical fashion. In traditional commercial capitalism(as one may call the third form of capitalism), profit is produced through minortrade or currency deals. It can finally be noted that in his discussion of thedifferent types of capitalism and capitalistic orientation of profit-making, Weber


does not use the expression of ‘spirit’ or ‘mentality’, presumably because thesubjective dimension is already built into the concept of social action.

General Economic History is based on a lecture course given at about thesame time as Weber wrote Chapter 2 in Economy and Society, and we wouldtherefore expect the two accounts to be fairly similar. This is also the case. GeneralEconomic History, however, differs on the following two points: it is not centeredon sociological typologies, as Chapter 2 is, but provides instead a continuousaccount of the evolution of the economy; it also discusses the impact of otherfactors than economic ones, especially political and religious factors.

Weber’s economic history is divided into four sections, and the last ofthese, on which I shall concentrate in this article, is entitled ‘The Origin ofModern Capitalism’. In accounting for the economic factors that were importantin 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 moderncapitalism had pretty much come into being for good. Weber also discusses theimpact of the Industrial Revolution, but it is clear from his account that he doesnot see it as the decisive event in the history of Western capitalism, along the linesthat many economic historians do today. Nonetheless he stresses that it wasduring this period that the production of goods entered into ‘a union withscience’; 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 itsfull development’ (1981 [1923]: 306).

At several points in General Economic History Weber enumerates thefactors that in his view created modern capitalism. These fall into three categories:economic, political and religious. The economic factors essentially include institu-tions that are also discussed in Economy and Society, such as the rational firm, thefree market, modern accounting, and the like. A number of new and fascinatinghistorical 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 ofmodern capitalism, and General Economic History contains two full chaptersdevoted to this topic, one that is entitled ‘Citizenship’ and the other ‘TheRational State’. Together these chapters make up about a third of the spaceallotted to ‘the origin of modern capitalism’ in General Economic History; and thistestifies to the importance that Weber attached to political forces in the develop-ment of modern capitalism. Citizenship has primarily played a role in liberatingthe individual from the hold of the family and the clan, and in helping him or herto step forward as an autonomous actor. The rational state is absolutely essentialto modern capitalism; ‘in [it] alone modern capitalism can flourish’ (1981 [1923]:339). What Weber singled out as important in the rational state were its pro-capitalistic attitude and its predictability, based on expertise, in political and legalmatters.


But even if Weber towards the end of General Economic History felt that itwas necessary to include a long section on political forces, in order to give a fullaccount of how modern capitalism had come into being, there was more to thestory. The very last chapter of the work is entitled ‘The Evolution of theCapitalistic Spirit,19 and it here says:

In the last resort the factor which produced capitalism is the rationalpermanent enterprise, rational accounting, rational technology andrational law, but again not these alone. Necessary complementary factorswere 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 farback in history. Judaism, for example, helped to introduce a rational attitude intoWestern religion through its hostility to magic. Still, Weber’s account of the forcesthat created the rational spirit, the rationalization of the conduct of life, and arationalistic economic ethic peaks with his discussion of the impact of asceticProtestantism. Catholicism, he says, was deeply suspicious of capitalism, whileascetic Protestantism was positive to it. The latter not only helped to usher in anew type of attitude to the economy, but also shaped it, especially through itsdoctrine of calling. The idea of ‘vocation’, Weber specifies, turned rational activityin one’s work into ‘the fulfillment of a God-given task’ (1981 [1923]: 367). Thisdoctrine gave ‘a fabulously clean conscience’ to the entrepreneur and also suppliedhim with ‘industrious workers’, who were willing to put up with ‘ruthlessexploitation’ (1981 [1923]: 367).

General Economic History ends on a similar somber note as The ProtestantEthic. Whatever religious justifications for economic activities there may once havebeen, these had vanished by the 1800s.

Ascetic religiosity has been displaced by a pessimistic though by no meansascetic view of the world, such as that portrayed in Mandeville’s Fable ofthe Bees, which teaches that private vices may under certain conditions befor the good of the public.

(1981 [1923]: 369)

According to General Economic History, life in contemporary capitalist society isexperienced as a heavy burden by everyone.

Schumpeter’s Later View of Capitalism

Just as Weber, Schumpeter devoted a major part of his later scholarly productionto capitalism. After 1932, when Schumpeter moved to the United States forgood, he worked primarily on Business Cycles (1939), a giant two-volume work


that represents an attempt to analyze the economic history of capitalism inGermany, Great Britain and the United States between 1787 and 1938. A fewyears after the publication of Business Cycles, Schumpeter’s most popular workappeared: Capitalism, Socialism and Democracy (1975a [1942]). During the restof his life Schumpeter kept coming back to the issue of capitalism, and he gavenumerous talks on it. His very last public lecture – given in December 1949 at theAmerican Economic Association – was devoted to capitalism and its future(Schumpeter, 1975b [1949]).

While Business Cycles deserves an important place in an account ofSchumpeter’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 ofcapitalism, it does not include a discussion of its institutions. Schumpeter wantedto focus exclusively on the mechanism of the business cycle, and this was easier, heargued, if he kept institutions constant. He wrote in Business Cycles that he wantednot to span ‘the entire range of the economy and sociology of capitalism’; but topursue ‘a purely economic argument’ (1939: 86, 279; cf. 96–7, 144–5). InCapitalism, Socialism and Democracy, in contrast, institutions have not only beenincluded 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 becauseof its success.

Schumpeter was convinced that institutions play a key role in the economyand in principle should be part of the analysis.What he disliked about institutional-ists such as Veblen and company was not that they focused on institutions but thatthey did such a lousy job:

I have been referred to as the ‘arch-enemy’ of Institutionalism. I pleadguilty 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 tobe implied in its name, that is to say if institutionalists produced studiesabout social institutions, such as the family, private property and so on, Ishould not only not object, but welcome. But they do nothing of the sort.Instead, they criticize without understanding, what has been done and isbeing done, and they replace positive achievement by ambitious pro-grammes. Whatever of value has been written by any member of thatgroup could have been written by any other economist and does not implyany fundamental change in method and outlook. I reproach to the mostfamous of institutionalists, to Th. Veblen, bad workmanship and insuffi-cient scientific equipment, which made him take old err for new truth. Butthis whole movement is passing away. And that eminent economist, whofor some time showed some favour to it, Wesley C. Mitchell, has by hismost recent work proved that he is willing to lead towardsreconciliation.

(2000 [1931]: 23)


Capitalism, Socialism and Democracy does not deal very much with thehistory 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 abackground 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 capitalismand its history, I shall first say a few words about an article from 1946, entitled‘Capitalism’ and written for Encyclopaedia Britannica. In this article Schumpeterdefines capitalism in the following way: ‘a society is called capitalist if it entrusts itseconomic process to the guidance of the private businessman’ (1951a [1946]:184). The entrepreneur is the key figure in capitalism, and Schumpeter contrastshim to the bureaucrat or the manager: ‘the central figure on the capitalist stage,the entrepreneur, is concerned not with the administration of existing industrialplant 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 toview capitalism exclusively in economic terms, Schumpeter used this term in amuch broader sense:

It must be borne in mind that capitalism cannot, any more than any otherform of organization, be judged by economic results alone. Accounts mustalso be taken of the social and cultural achievements for which thecapitalist process provided both the means and the psychological requi-sites. Moreover, . . . any final appraisal really involves appraising an attitudetowards 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 thefollowing four phases: ‘Early Capitalism’, ‘Mercantilist Capitalism’, ‘Intact Capit-alism’ and ‘The Modern Phase’. Like Weber, Schumpeter believed that capitalismexisted long before the advent of modern, industrial capitalism, and what he callsEarly Capitalism roughly covers the period from Antiquity to the 16th century.He, however, firmly rejects Weber’s thesis about the role of ascetic Protestantismwith the argument that capitalism has always developed in a gradual way. ‘We findno sharp break anywhere’, he says, ‘but only slow and continuous transformation’(1951a [1946]: 184). Mercantilist Capitalism begins in the 16th century and endstowards the beginnings of the 18th century. A certain symbiosis between bour-geois strata and feudal strata characterizes this period, even if the bourgeois strataalways remained inferior to the prince and the aristocrats.

Intact Capitalism was set off by the Industrial Revolution but takes itsbeginnings 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 onethat he felt most sympathy for. Individuals, he says, were essentially left alone todo what they wanted, and this resulted in a good society. Liberalism, laissez-faire


and free trade all flourished during Intact Capitalism, even if counterforces alsoexisted and could be quite strong, as the example of imperialism shows. Duringthe Modern Phase of Capitalism (1898 and later) the economy has continued togrow in a healthy manner, but this has not resulted in peace, free trade and lowsocial expenses, as one could have expected. On the contrary, wars, protectionismand rising taxes have accompanied economic growth. Why this is so, Schumpeternotes, ‘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 futurethe most likely scenario is a movement towards ‘increasing bureaucratization ofeconomic 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 inCapitalism, Socialism and Democracy, it soon becomes clear that it has beenextremely successful, when it comes to both the economy and culture. TheUnited 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 couldnot repeat this ‘striking preformance’ also in the future (1975a [1942]: 107). Inthat case, poverty could be eliminated and the unemployed would have enough toget by on. The main reason for the success of capitalism in the past has to do withthe entrepreneur and the ‘creative destruction’ that he brings about, by startingup 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 factthat monopolistic practices have had a very positive impact on the economy. Ingeneral, Schumpeter argues, monopoly does not mean that a corporation cansimply raise its prices, sit back and collect the extra profit. ‘A monopoly position isin 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 componentof the capitalist economy’ (1975a [1942]: 121). Rationalism constitutes the heartof the capitalist culture and is crucial to modern life in general, according toSchumpeter. 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 mindprimarily from economic necessity; it is the everyday economic task towhich we as a race owe our elementary training in rational thought andbehavior. – I have no hesitation in saying that all logic is derived from thepattern of the economic decision or, to use a pet phrase of mine, that theeconomic pattern is the matrix for logic.

(1975a [1942]: 122–3)


While rationalism existed long before capitalism, the latter has nonethelesscontributed to its development in a powerful way. This has mainly been due to thecentrality of the monetary unit or the fact that much of human behavior can bemeasured and controlled with the help of money. There is also the fact thatcapitalism has increasingly attracted ‘the best brains’, who have added theircreativity and strength to the cause of rationalism (1975a [1942]: 125).

The capitalist process has helped to create magnificent cultural achieve-ments:

. . . not only the modern mechanized plant and the volume of the outputthat pours forth from it, not only modern technology and economicorganization, but all the features and achievements of modern civilizationare, directly or indirectly, the products of the capitalist process.

(1975a [1942]: 125)

More concretely, capitalism has created modern medicine, modern painting andthe modern novel. Schumpeter also includes what he calls ‘Individualist Democ-racy’ 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 isabout to disappear from the scene of history, Schumpeter says. There are a numberof reasons for this, each of which is elaborated upon in Capitalism, Socialism andDemocracy. The capitalist process is first and foremost undermining the role of thebourgeoisie by decreasing the role of the entrepreneur; it is also eliminating theprotective strata of capitalism as well as weakening such key institutions as propertyand the contract. To this should be added the general atmosphere of hostility thatcapitalism has helped to develop, and a general weakening of bourgeois motivation.‘Can capitalism survive?’, Schumpeter asks at one point in his book; and his famousanswer is, ‘No. I do not think it can’ (1975a [1942]: 61).

In modern capitalism, according to Schumpeter, entrepreneurship tends tobecome obsolescent. Modern capitalism has rationalized entrepreneurship invarious ways, something that has made it easier for everyone to understand it andaccept it. While people today may still be tied to the old order of things throughvarious interests and therefore fear the new, they are nevertheless ready to acceptnovelties in a way that is unprecedented in human history. This also means thatthere is less and less need for the heroic entrepreneur of former times; he is aboutas necessary as a general in a society without war. This whole development,Schumpeter suggests, has much to do with the emergence of the giant industrialenterprise:

The perfectly bureaucratized giant industrial unit not only ousts the smallor medium-sized firm and ‘expropriates’ its owners, but in the end it also


ousts the entrepreneur and expropriates the bourgeoisie as a class which inthe process stands to lose not only its income but also what is infinitelymore important, its function.

(1975a [1942]: 134)

Through its very success, capitalism is also about to eliminate the lastremnants of feudal society, which in many ways have helped to maintain capitalismby operating as its flying buttresses. Aristocrats have joined the bourgeoisie andsupplied it not only with experience and talent but also with a bit of that ‘mysticglamour’ that is so important for successful rule. ‘The stock exchange is a poorsubstitute 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 ittotally lacks the capacity to make itself liked among people. ‘Emotional attachmentto the social order’, according to Schumpeter, is ‘the very thing capitalism isconstitutionally unable to produce’ (1975a [1942]: 145).

Two of the key institutions of capitalism are also getting weaker. The firstis property, which is being hollowed out: the old-fashioned owner has disappearedfrom the scene of history and been replaced by managers and shareholders, whodo not have much of a feel for what property is. While the old type of owner knewhis factory inside-out, managers and shareholders only have an abstract concept ofproperty, symbolized by the share. What drives this whole development is, again,the giant capitalist firm. Similarly, the contract is losing ground. Originally it wasused to regulate a situation where real choices needed to be made, and whereentering into a contract was an act of importance. Today, however, contracts areimpersonal and bureaucratized. The labor contract exemplifies this trend, with itsrestricted and predictable meaning.

Schumpeter also speaks quite a bit about ‘the social atmosphere ofcapitalism’ and how capitalism has succeeded in creating ‘almost universal hostil-ity’ to itself (1975a [1942]: 143). A key factor in this development has been therational attitude, which not only was used to criticize feudalism but has also beenextended to capitalism. Everything is questioned; nothing is holy. Intellectualshave played a particularly important role in giving voice to this hostility and inamplifying it. Intellectuals live by being critical, according to Schumpeter, andusually see nothing positive in capitalism.

But capitalism is not only being attacked from the outside, it is alsodisintegrating from the inside; its will to live and to fight have been severelysapped. In general, the bourgeois is unheroic to the point of the comic and doesnot even dare to say ‘boo to a goose’ (1975a [1942]: 138). His lifestyle has alsoundermined much of his original vitality. While the bourgeois of the past lived ina large house, with a large family, and saw himself as the creator of a long-lastingdynasty, 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


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

Discussion

When one moves from the early works on capitalism by Weber and Schumpeter totheir later works, it is clear that quite a bit of the effervescence and vitalism hasdisappeared. During the later part of his life Weber developed his well-knowntheory of charisma, which can also be applied to his own theory of capitalism aswell as to that of Schumpeter. There is initially the creative entrepreneur of TheTheory of Economic Development and Weber’s spirit of capitalism that transforms awhole economic system. Then, however, the focus changes to the role ofinstitutions and how the creativity of the entrepreneur gets routinized – until theentrepreneur finally disappears for good.

It would not be entirely wrong to state that while the early Weber and theearly Schumpeter emphasized the role of non-institutional forces, they would laterstress the role of institutional factors. Still, it would probably be more correct tosay that there is a balance between the two in the later production of Weber andSchumpeter, or, more precisely, that institutional and non-institutional factorsenter into complex forms of interaction. While in The Protestant Ethic there is amovement from the spirit of modern capitalism to the iron cage of moderncapitalism, in General Economic History institutions that are of relevance tocapitalism emerge long before the advent of the spirit of modern capitalism, andare then followed by a long period when new capitalist institutions emerge as well.In Capitalism, Socialism and Democracy the general development is from aneconomy with plenty of room for the entrepreneurial spirit to one that does notneed it. Schumpeter’s analysis of the period of transition between these two is,however, full of interesting subtleties. There exist institutions whose spirit isslowly being hollowed out; institutions that are run by people whose motivation isbeing weakened; and so on.

One important parallel that exists between Weber’s and Schumpeter’s laterworks on capitalism is that both assign a key role to one actor that is not presentin their early works: the giant corporation. In Weber’s case this new actor is at thecenter of his theory of bureaucracy; it is also reflected in his argument that theentrepreneur is the only actor who can stand up to the bureaucrats. In Schump-eter’s case, it is the giant corporations that eliminate the entrepreneur and replacehim 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 thatAlfred Chandler has written so much about and in such glowing terms (‘manage-rial capitalism’) was much more ambivalent to Weber and Schumpeter (e.g.Chandler, 1984).


While Chandler saw the giant corporation as the motor for ever moreeconomic progress, it also represented something of a threat to capitalism andhumanity more generally, according to Weber and Schumpeter. Weber was afraidthat the giant corporations might let loose the forces of bureaucracy and set off adevelopment that would end up by pushing Western society back to the days ofancient Egypt. Schumpeter pretty much thought the same. Things would in hisopinion 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 permanentstage of ‘the circular flow’ in which nothing new would ever happen and wherehumankind would fall back into inertia and darkness.

The Puzzle – and Its Solution According to Weberand SchumpeterIn the introduction to this article I referred to a distinct puzzle in the works ofWeber and Schumpeter, namely that something more than the right type ofinstitutions are needed for there to be a vigorous and healthy capitalism. I notedthat many of today’s analyses of capitalism, by economists as well as by sociolo-gists, proceed on the assumption that it is sufficient to have good economicinstitutions for there to be a strong economic development. In order better tounderstand the views on this topic by Weber and Schumpeter, I will first discusstheir argument that something more than the institutions are needed for there tobe capitalism in general; and, after that, their parallel arguments for there to be avigorous 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 Ethicthat what he calls ‘traditional capitalism’ had its own distinct spirit – a traditionalspirit of capitalism; and from this we may conclude that all types of capitalism havetheir own spirit. What precisely does this spirit consist of? Weber enumerates thefollowing items as characteristic for the traditional spirit of capitalism:

. . . the traditional manner of life, the traditional rate of profit, thetraditional amount of work, the traditional manner of regulating therelationships with labor, and the essentially traditional circle of customersand the manner of attracting new ones. All these dominated the conductof the business, were at the basis, one may say, of the ethos of this group ofbusinessmen.

(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


‘mentality’ (‘Gesinnung’) as synonymous with ‘spirit’ (‘Geist’) and admits that thelatter is chosen a bit ‘ad hoc’ – presumably because he liked the association toreligion in the concept of ‘spirit’ (1978a [1907]:27, 36). In his later work,especially in Economy and Society, Weber translates spirit primarily into thesociological categories of ‘economic motivation’ and ‘economic ethic’. To theseone should add ‘lifestyle’ (‘Lebensstil ’, ‘Lebensfuhring ’) and ‘ethos’.

Also the early Schumpeter thinks that there is more to the existence ofcapitalism than institutions. The argument in The Theory of Economic Developmentis, however, a bit complex in this regard. In a situation of circular flow, thecapitalist economy consists of institutions and economic mechanisms; in a situa-tion where there is economic development there is, furthermore, the entrepre-neur, without whose activities there would be stagnation. As I see it, Schumpeteroverdoes the difference between the circular flow and economic development; inreality, there is always a bit of creativity and entrepreneurship in any economy.Hence, in Schumpeter’s early work, whatever there is beyond economic institu-tions is the entrepreneur, or the individual who even in adverse situations will tryout something new.

In Schumpeter’s later works, the situation is similarly complex, but forother reasons. First, in addition to the economic process itself (by whichSchumpeter more or less means economic mechanisms), there is what he calls ‘thecapitalist civilization’. This civilization consists of institutions as well as of anumber of items, such as ‘motivation’, ‘atmosphere’, ‘lifestyle’, ‘rationalism’, art,science, and so on. We note some similarity to Weber on this score, especiallywhen it comes to ‘motivation’ and ‘lifestyle’, even if Schumpeter interprets thesein a broader sense than does Weber.

If we now switch from the extra something that is needed for capitalism ingeneral to exist, to the extra something that is needed for vigorous capitalism toexist, the opinions of Weber and Schumpeter are as follows. According to the earlyWeber and The Protestant Ethic, vigorous capitalism came about through theintroduction of a modern capitalist spirit into the already existing economicinstitutions of traditional capitalism. This spirit can be characterized as an attitudethat energizes the individual in economic matters, making him or her more alertto profit opportunities and also making work more central to his or her life. All ofthese economic activities are carried out in a methodical manner.

In Weber’s later works, he carefully enumerates the economic institutionsthat are necessary to a vigorous modern capitalism; and these are, according toGeneral Economic History, the following: the rational enterprise, rational account-ing, the modern state (including rational or calculable law), the free market, freelabor, 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 moderncapitalism: the rational spirit, the rationalization of the conduct of life, and arationalistic economic ethic. Apart from references to the rationalistic economic


ethic and the element of vocation, there is little that helps to specify in what thecreativity of the spirit of modern capitalism exactly consists.

While Weber in General Economic History, as opposed to in The ProtestantEthic, very clearly states that no vigorous capitalism is possible without theappropriate institutions, there is the same emphasis on the creativity of the spiritof capitalism as an explanation for why modern capitalism came into being. Wealso find the same argument about modern capitalism turning into an iron cageonce the influence of the original spirit of capitalism wanes, that is, once it stopsbeing voluntary and is replaced by institutional demands. The novelty in relationto The Protestant Ethic has mainly to do with Weber’s account of what he calls arationalistic economic ethic – which he describes as a way of doing business wherea rational and alert approach in economic affairs characterizes one’s dealings withforeigners as well as with people from one’s own community.

The situation is quite different when it comes to The Theory of EconomicDevelopment, whose Chapter 2 can practically be read as a manual for how tomake capitalism dynamic. Individuals put together new combinations in theeconomy; they raise money to finance these; and they then translate their plansinto reality, despite strong resistance from the surroundings. What drives theindividual is the desire to found a dynasty, the wish to be creative, and the pleasureof getting things done. The section on the civilization of capitalism in Capitalism,Socialism and Democracy looks essentially at a situation where this no longer ispossible. As in The Protestant Ethic, the spirit dies out when instead of beingvoluntary it gets institutionalized and routinized.

What, then, is the solution to our puzzle: what is needed, beyond appro-priate 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 isstraightforward enough: you need a number of individuals who are driven to becreative in economic affairs by their own inner motivation – not by pressure from theoutside and from institutions. These individuals are driven, to phrase it a bitdifferently, to try out new approaches in economic life because this is perceived asdeeply meaningful to them. What you need can alternatively be characterized as arational capitalist spirit (Weber) or as a strong entrepreneurial drive, in the form ofa healthy capitalist civilization (Schumpeter). This spirit or drive must exist in theheart 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 entrepre-neurial spirit, the institutions will stifle a healthy capitalism and replace it withtraditional capitalism or some form of socialistic capitalism. On this last pointspecial attention should be paid to the fact that there exists one capitalistinstitution that may have a distinctly negative impact on the development of avigorous capitalism. This is the giant corporation; and it is possible to see thewritings of Weber and Schumpeter on capitalism – from their early emphasis on avigorous capitalism to their later worry about the future of capitalism – as a direct


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

• capitalist institutions are a necessary but not a sufficient condition to bringabout a healthy capitalism; and

• the key to a vigorous capitalism is to be sought in the structure of ‘the spirit ofcapitalism’ (Weber) or ‘the civilization of capitalism’ (Schumpeter). Thismeans that research of such items as ‘mentality’, ‘ethos’, ‘lifestyle’, ‘economicethic’, and the like, should be high on the current agenda of economicsociology.

NotesFor 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. Thepoint to make, however, is that also in these countries it is nearly always the second edition from1926 that is referred to.

2. I have not written ‘empirical example’, but ‘concrete example’, since Weber does not provide anyfigures or much concrete detail. Since there existed textile mills in Weber’s family, it is usuallyassumed in the Weber literature that Weber knew quite a bit about this type of industry when hewrote 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 reasonto make any chances in the description of the textile industry, to which the main text of this articlenow will return.

3. In these quotes Weber is speaking about religion – he is starting from ‘the subjective adaption ofan 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. Weber1958a [1904–5]: 49–57, 64–5).

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

6. Schumpeter always refers to qualitative and sudden change in Theorie, when he speaks aboutentrepreneurship. He admits that infinitesimal change is perfectly possible, but also notes that thistype of change is quantitative in nature and therefore differs from the type of change that histheory 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 [TheOverall Picture of the Economy]’. The other chapters have titles that have been kept in thetranslation of the second edition.


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

10. Schumpeter habitually refers to institutions as the surrounding framework of economic mecha-nisms (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 from1934 (cf. 1911: 103–98; 1934: 57–94). In quite a few cases the formulations are exactly the samein the two editions, even though both also contain interesting formulations that cannot be foundin the other. In some respects the later version is clearly preferable to the original one. The twofamous typologies of the five different types of innovations and of the three motives that drive theentrepreneur, for example, are only to be found in their well-known and distinct form in thesecond edition (cf. 1911: 138ff., 159; 1934: 66, 93–4). Schumpeter also decided not to includesome ethnocentric and pejorative references to Africans from the second edition. The closest thathe comes to a definition of the entrepreneur in the 1911 edition is the following statement: ‘Weconsequently assert that anyone is an entrepreneur who realizes a new combination, for which, aswe 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 thatincremental change is possible in a traditionalistic economy.

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

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

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 daytended to do.

16. Weber used the notion of ‘spirit of capitalism’ until his death, for example in his studies of theeconomic 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 earlyGerman 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 ‘Gesin-nung’ or ‘mentality’, not ‘Geist’ or ‘spirit’, is consistently used. Presumably this mirrors Weber’sterminology during his lectures.

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


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

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Richard Swedberg is Professor of Sociology at Cornell University. His main research areas are economicsociology, including the relationship of law and economy, and classical sociological theory. His booksinclude 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 seriesof 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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