Fritz Machlup on Alfred Müller-Armack’s Entwicklungsgesetze des Kapitalismus (1934)

Fritz Machlup’s scholarly book review examines Alfred Müller-Armack’s 1932 study of capitalism through its economic foundations, philosophy of history, and political sociology. Its organizing question is whether Schumpeter’s narrowly specified theory of economic development can sustain Müller-Armack’s much broader interpretation of historical change. Machlup recognizes incisive arguments against deterministic accounts of capitalism, but challenges the monetary mechanism underlying the book’s conception of a self-sustaining developmental process. His review distinguishes the usefulness of particular historical conclusions from the validity of their theoretical foundation.

The opening makes disagreements over capitalism’s future depend on a prior disagreement over its definition. Machlup contrasts Marx’s separation of workers from privately owned means of production, Sombart’s acquisitive economic mentality, Passow’s emphasis on large enterprises, Weber’s formally rational market order, and Schumpeter’s credit-driven development. Müller-Armack adopts the last conception and elevates it into a general account of social movement. The restriction built into this choice is crucial:

Es werden nur jene spezifischen Entwicklungsvorgänge, die durch Ausweitungen des Zahlungsmittelumlaufs, besonders durch Kreditinflation, verursacht sind, als Gegenstand der Dynamik betrachtet.

English translation: Only those specific processes of development that are caused by expansions in the circulation of means of payment, especially by credit inflation, are treated as the subject matter of dynamics.

Adjustment to changing circumstances, including population growth, consequently belongs to static theory. Müller-Armack transforms the special mechanism of credit-financed innovation into a principle of historical “self-realization.” Machlup’s objection concerns this enlargement of explanatory scope: Schumpeter’s influence does not establish the truth of the disputed propositions now supporting an encompassing social philosophy.

The first substantive criticism concerns interest. Müller-Armack excludes interest from the static economy because its function is to restrain demand for capital for new production methods, whereas static conditions exclude those innovations by definition. Machlup diagnoses circular reasoning:

Ein Schulbeispiel einer petitio principii: Der Zins dient dazu, kapitalerfordernde Produktionsausdehnungen zu verhindern, die Statik schließt solche Kapitalinvestitionen definitionsgemäß aus, ergo ist in der Statik der Zins überflüssig.

English translation: A textbook example of a petitio principii: interest serves to prevent expansions of production requiring capital, statics excludes such capital investments by definition, therefore interest is superfluous in statics.

For Machlup, the inference should run in the opposite direction. If lengthening production processes offers additional returns, an economy without development is conceivable only while interest restrains expansion. Müller-Armack himself must assume the productivity advantage of new combinations; otherwise cheap credit could not initiate development. The disagreement therefore concerns the conditions sustaining a stationary economy, not simply competing definitions of “static” and “dynamic.”

The review’s central monetary criticism follows from the relationship between investment and saving. Müller-Armack accepts the Mises–Hayek position that extending production beyond available savings can cause reversals, but argues that credit expansion generates entrepreneurial profits from which the necessary savings subsequently emerge. Machlup crystallizes the proposed reversal:

Die Investitionen werden also nicht durch vorhergehendes Sparen, sondern durch nachfolgendes Sparen getragen.

English translation: Investments are thus sustained not by prior saving, but by subsequent saving.

Machlup acknowledges that later saving can validate investments initially financed through additional credit; he had previously described this possibility himself. But a possible conjunction is not a general mechanism ensuring that expansion supplies its own conditions of permanence. Whereas Machlup treats sufficiently rapid subsequent saving as contingent, Müller-Armack makes saving dependent on credit creation and treats the ensuing downturn as theoretically accidental. On the latter’s own premises, Machlup argues, long-term savings cannot reliably catch up with short-term credit creation: additional credit cannot simply become saved entrepreneurial profits amounting to its entire value.

This criticism does not exhaust Machlup’s assessment. He explicitly preserves a distinction between the expansion theory and the book’s other findings:

Sagen wir aber gleich, daß nicht alle Resultate der vorliegenden Untersuchung mit Schumpeters Expansionstheorie stehen und fallen müssen.

English translation: Let us say at once, however, that not all the results of the present study need stand or fall with Schumpeter’s theory of expansion.

He praises Müller-Armack’s acute criticisms of socialist accounts of capitalism’s origins and development. Changing membership of the capitalist class complicates explanations based on an original act of coercion. Population growth, expanding needs, and scientific discoveries likewise fail to provide sufficient explanations of capitalism’s emergence. The book combines intellectual and social factors while rejecting supposedly necessary tendencies toward impoverishment, concentration, and accumulation. Structural changes in competition are instead related to historically shifting relations between politics and the economy.

Machlup then follows the argument into philosophical anthropology, where Müller-Armack seeks an alternative to historical determinism and historicism. Questions of spirit and drive, human historicity, and elite circulation lead back to self-realizing processes whose determining factors are themselves historically conditioned. Machlup’s compressed, somewhat sardonic account emphasizes the philosophical demands placed on the reader without supplying a comparably extended refutation.

The concluding political discussion concerns interventionism. Müller-Armack rejects both an inherent economic necessity driving capitalism’s transformation and the liberal explanation through autonomous political interference. Politics is intrinsic to human activity; interventionism need not culminate in socialism. An equilibrated intervention system might overcome its early defects through a national economic state that restores greater scope for individual initiative and responsibility. Machlup reports this prospect without endorsing it. The review’s lasting analytical point is the separation of contingent historical possibilities from necessary economic mechanisms: rejecting capitalism’s predetermined collapse does not establish that credit expansion can perpetually reproduce the savings it requires.