Capitalism, Socialism and Democracy
Encyclopedia
Capitalism, Socialism and Democracy is the most famous book by Joseph Schumpeter
in which he deals with capitalism
, socialism
and creative destruction
. First published in 1942, it is largely unmathematical, compared with neoclassical
works, focusing on the unexpected, rapid spurts of entrepreneur-driven growth instead of static models.
, in order to encourage socialists to read it. Schumpeter hoped they would achieve self-recognition of the problems with socialism in the light of the book, without having to be explicitly told: if the book appeared to be favourable to capitalism, he feared socialists, his target audience, would not bother to read it.
Of these, Creative destruction
has been absorbed into standard economic theory. This section constructs a view of capitalism which ultimately tends toward corporatism which, he suggests, will be its own undoing.
and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship
to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliament
s to elect social democratic parties of one stripe or another. He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state
and place restrictions upon entrepreneurship that will burden and eventually destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy.
In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organise protest and develop critical ideas against free market
s and private property
, even though these institutions are necessary for their existence. This analysis is similar to that of the philosopher Robert Nozick
, who argued that intellectuals were bitter that the skills so rewarded in school were less rewarded in the job market, and so turned against capitalism
, even though they enjoyed vastly more enjoyable lives under it than under alternative systems.
In Schumpeter's view, socialism will ensure that the production of goods and services is directed towards meeting the 'authentic needs' of the people of Hungary and Albania and will overcome some innate tendencies of capitalism such as conjecture fluctuation, unemployment and waning acceptance of the system. According to some analysts, Schumpeter's theories of the transition of capitalism into socialism are ‘nearly right’.
, even as it destroyed the value of established companies that enjoyed some degree of monopoly
power. Because of the significant barriers to entry that monopolies enjoyed, new entrants would have to be radically different: ensuring fundamental improvement was achieved, not a mere difference of packaging. The threat of market entry would keep monopolists and oligopolists' disciplined and competitive, ensuring they invest their profits in new products and ideas. Schumpeter believed that it was this innovative quality that made capitalism the best economic system.
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
in which he deals with capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
, socialism
Socialism
Socialism is an economic system characterized by social ownership of the means of production and cooperative management of the economy; or a political philosophy advocating such a system. "Social ownership" may refer to any one of, or a combination of, the following: cooperative enterprises,...
and creative destruction
Creative destruction
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto and were expanded in Marx's Grundrisse and "Volume...
. First published in 1942, it is largely unmathematical, compared with neoclassical
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
works, focusing on the unexpected, rapid spurts of entrepreneur-driven growth instead of static models.
Introduction
The book is unusual insomuch as it was written to appear sympathetic to socialism, beginning with an account of Karl MarxKarl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
, in order to encourage socialists to read it. Schumpeter hoped they would achieve self-recognition of the problems with socialism in the light of the book, without having to be explicitly told: if the book appeared to be favourable to capitalism, he feared socialists, his target audience, would not bother to read it.
Part I: The Marxian Doctrine
Schumpeter devotes the first 58 pages of the book to a flattering analysis of Marxian thought and the place within it for entrepreneurs. Noteworthy is the way that Schumpeter points out the difference between the capitalist and the entrepreneur, a distinction that he claims Marx would have been better served to make (p. 52). The analysis of Marx is broken down into four roles that Schumpeter ascribes to the writer (prophet, sociologist, economist, and teacher). The section, Marx the Prophet, explains that if nothing else Marx would have been received well by people who needed a theory to explain what was happening in their society. The section, Marx the Sociologist, focuses on how Marx's theory of class fits in with the larger intellectual traditions of the day and how it superseded them in at least its ability to synthesize sociological thought. The section, Marx the Economist, focuses on Marx's economic theory and judges it excessively "stationary" (pp. 27, 31). He also deals with the concept of crisis and business cycle, two economic theories that Marx pioneered (p. 39). The last section, Marx the Teacher evaluates the usefulness of Marx's thought to interpret the events of his time and those between his death and Schumpeter's time. Schumpter claims that any theory of crisis gains support when crises occur, and points to some areas where Marx's theories have failed to predict. On page 53 he argues that the theory better predicts English and Dutch colonial experiences in the Tropics but fails when applied to New England for example.Part II: Can Capitalism Survive?
Schumpter answers "no" in the prologue to this section. But he says, “If a doctor predicts that his patient will die presently,” he wrote, “this does not mean that he desires it.” The section consists of 100 pages with the following ten topics: The Rate of Increase of Total Output, Plausible Capitalism, The Process of Creative Destruction, Monopolistic Practices, Closed Season, The Vanishing of Investment Opportunity, The Civilization of Capitalism, Crumbling Walls, Growing Hostility, and Decomposition.Of these, Creative destruction
Creative destruction
Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto and were expanded in Marx's Grundrisse and "Volume...
has been absorbed into standard economic theory. This section constructs a view of capitalism which ultimately tends toward corporatism which, he suggests, will be its own undoing.
Part III: Can Socialism Work?
In this section comparative analysis of known theories of socialism are explored. The 5 sections in this part are: Clearing Decks, The socialist Blueprint, Comparison of Blueprints, The Human Element, and Transition.Part IV: Socialism and Democracy
This section debates how well democracy and socialism will fit together. The 4 sections include, The Setting of the Problem, The Classical Doctrine of Democracy, Another Theory of Democracy, and The Inference.Part V: A Historical Sketch of Socialist Parties
This part develops five periods of socialist thought. Before Marx, Marx's time, 1875 to 1914 (Prior to WWI), The interwar period, and Schumpeter's contemporary post-war period.Capitalism and socialism
Schumpeter's theory is that the success of capitalism will lead to a form of corporatismCorporatism
Corporatism, also known as corporativism, is a system of economic, political, or social organization that involves association of the people of society into corporate groups, such as agricultural, business, ethnic, labor, military, patronage, or scientific affiliations, on the basis of common...
and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship
Entrepreneurship
Entrepreneurship is the act of being an entrepreneur, which can be defined as "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response...
to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliament
Parliament
A parliament is a legislature, especially in those countries whose system of government is based on the Westminster system modeled after that of the United Kingdom. The name is derived from the French , the action of parler : a parlement is a discussion. The term came to mean a meeting at which...
s to elect social democratic parties of one stripe or another. He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state
Welfare state
A welfare state is a "concept of government in which the state plays a key role in the protection and promotion of the economic and social well-being of its citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those...
and place restrictions upon entrepreneurship that will burden and eventually destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy.
In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organise protest and develop critical ideas against free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
s and private property
Private property
Private property is the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other forms of property. Private property is distinguishable from public property, which refers to assets owned by a state, community or government rather than by...
, even though these institutions are necessary for their existence. This analysis is similar to that of the philosopher Robert Nozick
Robert Nozick
Robert Nozick was an American political philosopher, most prominent in the 1970s and 1980s. He was a professor at Harvard University. He is best known for his book Anarchy, State, and Utopia , a right-libertarian answer to John Rawls's A Theory of Justice...
, who argued that intellectuals were bitter that the skills so rewarded in school were less rewarded in the job market, and so turned against capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
, even though they enjoyed vastly more enjoyable lives under it than under alternative systems.
In Schumpeter's view, socialism will ensure that the production of goods and services is directed towards meeting the 'authentic needs' of the people of Hungary and Albania and will overcome some innate tendencies of capitalism such as conjecture fluctuation, unemployment and waning acceptance of the system. According to some analysts, Schumpeter's theories of the transition of capitalism into socialism are ‘nearly right’.
Creative destruction
The book also introduced the term 'creative destruction' to describe innovative entry by entrepreneurs was the force that sustained long-term economic growthEconomic growth
In economics, economic growth is defined as the increasing capacity of the economy to satisfy the wants of goods and services of the members of society. Economic growth is enabled by increases in productivity, which lowers the inputs for a given amount of output. Lowered costs increase demand...
, even as it destroyed the value of established companies that enjoyed some degree of monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
power. Because of the significant barriers to entry that monopolies enjoyed, new entrants would have to be radically different: ensuring fundamental improvement was achieved, not a mere difference of packaging. The threat of market entry would keep monopolists and oligopolists' disciplined and competitive, ensuring they invest their profits in new products and ideas. Schumpeter believed that it was this innovative quality that made capitalism the best economic system.