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Joseph Schumpeter gives a penetrating, critical review of both capitalism and socialism. I daresay he provides the most useful analysis of Karl Marx, Marxism, and Marxists I have ever read. His grasp of economic realities gives the lie to Friedrich Hayek’s claim that “If socialists understood economics they wouldn’t be socialists,” because, in fact, Schumpeter considered himself an “orthodox socialist” (as opposed to a communist or any other sort). What astounded me was that, in spite of his clear-eyed perception of the realities of both systems and his own rigorous analysis in terms of what could be expected of them, that he proceeded to conclude, in good orthodox socialist manner, the inevitability of not only the collapse of capitalism, but its transformation into socialism. The collapse of capitalism he makes a good case for, and has ample empirical historical evidence from which to draw, but the inability for socialism to actually take its place for more than a brief transition period he both foresaw and overlooked.
Schumpeter notes that “capitalism is being killed by its achievements.” (location 168) In this, he need not look further than the harbinger of modern liberalism, Holland. It briefly rose to power and wealth through the application of a more liberal system than had been seen up to that point or employed by its contemporary peers. But those who gained under the system of relative freedom sought to protect those gains from the vagaries of such a system and quickly fettered the goose laying the golden eggs. In many respects, more modern capitalist countries have been doing the same thing in slower motion, through adopting socialist principles or opting for a “mixed” system, the welfare state.
So why shouldn’t socialism be expected to replace capitalism? Schumpeter correctly understood that the “true psychology of the workman…centers in the wish to become a small bourgeois and to be helped to that status by political force.” (location 259) In the small addendum Schumpeter wrote after World War II, he even expressed the fear that American laborers would be so well off as to supersede the need to turn to socialism. Fast forward to my own childhood, growing up among men who worked at General Motors in Detroit—they owned their own homes, perhaps modest, but not bad, typically had two cars, and at least one of them was usually a Suburban, had a boat for fishing and/or skiing, and often had a cabin “up north” (in northern Michigan) to which they could vacation, summer and winter. Marx would not have recognized these people or the lives they lived as proletariat. They were bourgeois through and through.
For all his excellence in economic analysis, Schumpeter seems to adopt a few small errors. First, he seems to uncritically accept the notion of economies of scale, pretty much without limit. Therefore, he saw capitalism as inevitably producing ever larger factories owned by ever larger companies with ever more capital, etc. Yes his own conclusion about the creative destruction associated with capitalism, the fact that capitalism is never static, should have warned him off the idea that stodgy oversized publicly-traded corporations would crowd out the innovators and entrepreneurs. On that last point, Schumpeter overestimated the tendency for capitalism to answer all needs and wants so exactly as to squeeze out new ideas, not to mention reach a standard of living that was “enough” and that people would be disincentivized from seeking more than that. So while capitalism still contained seeds aplenty for its own destruction, Mark Zuckerberg, Jeff Bezos, Bill Gates, Steve Jobs and many others are testament that innovation would not cease and people would not stop seeking to become ever more prosperous.
While Schumpeter’s analysis of capitalism and socialism is clear-eyed and hard-nosed, his analysis of democracy comes off as disingenuous at best. By focusing on the “democracy” (representative government) part of it alone and divorcing it from the larger liberal system (one of negative individual rights), he has a field day criticizing it and its proponents. But America’s founders, for instance, did not set about founding “democracy” as such in and of itself. They were more concerned with defending their individual rights, maintaining a system of liberty, than any particular government form, evidenced by their wide disagreements as to that final form and adopting the Articles of Confederation prior to reassembling and putting together today’s Constitution.
His grossest straw man with respect to democracy is that there is an agreed-upon Common Good that democracy is used to obtain. In fact, representative government accepts the inability of people to agree even upon this, but provides a peaceful means for disagreements about this to be aired and for at least provisional solutions to be tried. It is socialism that presumes much more as to the obvious nature of the Common Good and the ability for one or a few to impose it upon the many.
Schumpeter’s confidence that socialism is compatible with democracy is questionable at best. When the ruling clique controls the airwaves, the press, the internet, all the public space to demonstrate or assemble in, etc., how can any loyal opposition ever hope to prevail? Furthermore, the ruling clique is responsible for employing everyone and allocating necessary resources. A person who risked losing her job in a place with only one employer risks a lot indeed.
His more useful contribution to the understanding of the political situation with capitalism is the fact that the main drivers and beneficiaries of capitalism are skeptical of government and government intervention. They are not themselves the charismatic, swashbuckling sorts to lead the masses or influence public opinion in bold strokes. Therefore, capitalism grew up comfortably in the ashes of the old system, with enough of a skeleton left of the old guard to do the necessary ruling, while permitting the businesspeople the latitude to cause the explosive growth of food supply, industrial production, consumer goods, scientific discoveries, the expansion of human knowledge, etc. Once that old guard expired, those from the capitalist set were unfit or uninterested in taking up their own protection, and they found themselves in a world full of would-be rulers who fully intended on the destruction of the capitalist order. Hence the political problem. Schumpeter does not really consider the possibility of establishing a sufficiently liberal system with a large enough body of adherents that it could survive through representative government, etc. Given the rise of Stalin, Hitler, and Mussolini around the time Schumpeter was writing this, perhaps one cannot blame him.
As to the transition to socialism. Schumpeter saw the devolution from free market capitalism to fettered big business capitalism as inevitable, which is unsurprising given his unquestioning faith in the economies of scale. Inevitable or not, it certainly described the historical context in most capitalist countries. Schumpeter mocks the executives of such big businesses as being little more effective than government bureaucrats. Then he turns around and, with a straight face, assures the reader how socialist bureaucrats will be so much better than any of those businessmen who were almost as bad as they were… In his post-WWII addendum, he admits the most atrocious mismanagement in the United States comes not from the fettered big business sector, but government. (see location 8462) But at least dissent will quiet, once everyone is socialist, all those socialist agitators will go away, and there will be nobody making everybody unhappy with the current situation. Except that Schumpeter allows that socialists don’t agree with one another and, in fact, for many socialists, they don’t care about the ideas or practices so much as whether or not they are personally in charge:
the individual socialist looks upon the advent of socialism, naively but naturally, as synonymous with his advent to power…in conversing with militant socialists I have often felt some doubt as to whether some or even most of them would care for a socialist regime, however perfect in other respects, if it were to be run by other people. (location 4534)
So how is it we’re to expect a lack of discontent, after all…?
Schumpeter breaks from communists and more radical socialists in expecting most of the transition from capitalism to socialism to be almost a non-event, vice violent revolution. He used especially post-World War I England as his chief example, and followed up in his post-WWII note to say that all was proceeding exactly as he had foreseen. And so England continued until it had practically devolved into a third world country in the 1970s, at which point it did a radical jump back toward liberalism, even taking the Labour Party with it, in terms of the evolution of “New Labour.”
Which focuses on the real problem of socialism actually replacing capitalism. As Schumpeter and so many others, proponents and opponents alike, have pointed out ad nauseum, the vast expansion in population and production since circa 1800 onward was the product of capitalism. No other system yet tried has even come marginally close. Schumpeter did not have the advantage of 1990 to see the collapse of socialism globally, nor to look back from that vantage to see how badly served those formerly socialist populations had been between WWII and the final collapse. As Isabel Paterson correctly noted, those socialist systems only went on that long based on the surpluses produced by the capitalist countries, often in direct aid as “credits” or similar support, shocking considering the lethal confrontation of the Cold War. Should there be a large movement away from capitalism, one can only expect starvation, privation, and want, as any replacement would be unable to maintain the present standard of life, much less continue to push back the boundaries. I would forecast a return to tribalism and systems far less organized and artificial as either capitalism or socialism. See Jonah Goldberg’s Suicide of the West: How the Rebirth of Tribalism, Populism, Nationalism, and Identity Politics Is Destroying American Democracy for a much more compelling alternative to Schumpeter’s (by-now) quaint-looking one.
After all, the collapse of socialism did not spell The End of History and the Last Man. Schumpeter in his own time noted that “As regards economic performance, it does not follow that men are ‘happier’ or even ‘better off’ in the industrial society of today than they were in a medieval manor or village.” (location 2927) Rutger Bregman develops this same idea with some acuity in his Utopia for Realists: How We Can Build the Ideal World: “To the good life, where almost everyone is rich, safe, and healthy. Where there’s only one thing we lack: a reason to get out of bed in the morning” (location p 10) and, “But the real crisis of our times, of my generation, is not that we don’t have it good, or even that we might be worse off later on. No, the real crisis is that we can’t come up with anything better.” (p 11) The decomposition of bourgeois family and values that Schumpeter perceived, apart from the contentment with a fixed standard of life (how could a man who brought us creative destruction really fall for this?!), certainly has come about in many ways, although not evenly: “the bourgeois order no longer makes any sense to the bourgeoisie itself.” (location 3635)
Which raises the question of how did a person of Schumpeter’s perception and intelligence, whose own analytic constructs correctly highlighted the problems, contradictions, and fallacies of socialism itself, not see the inability of socialism to replace capitalism long-term? For one, he appears to have accepted a good deal of Soviet propaganda uncritically. He vastly overestimated the ability of a handful of “experts” to rationally order an entire economy. He also reduced the running of “socialism” to be almost indistinguishable from the fettered big business capitalism he saw it replacing. He turned a tin ear toward the atrocities, at least some of which he was aware of, that came part-and-parcel with socialism. For instance, “The cruelties to individuals and whole groups are largely attributable to the unripeness of the situation,” (location 4787) “A strike would be mutiny,” (location 4737) and “threat of dismissal by the socialist management may mean the threat of withholding sustenance that cannot be secured by an alternative employment.” (location 4729) Or how about, “the really terrible point about the Stalin regime is not what it did to millions of victims but the fact that it had to do it if it wished to survive. In other words, those principles and that practice are inseparable.” (location 8261) How could he really believe that “the socialist order presumably will command that moral allegiance which is being increasingly refused to capitalism”? (location 4656)
Schumpeter accidentally stumbles into something when he muses that the future socialism “is much more likely to present fascist features.” (location 8209) In fact, it was the increasing intervention of government in terms of legislation, regulation, and taxation, without the overt abolition of private property, ala fascism’s corporatism, that led to the rise and sustainment of fettered big business capitalism. And Schumpeter’s rationalized socialism looked little different from that reality. It seems far more likely that people around the world would embrace the comfort of socialist promises without having to (openly) pay the price of losing their cherished private property, even should the very term “private property” be rendered nearly meaningless through ever-increasing government control.
Really the only suggestion I have is to read Jacques EllulPropaganda: The Formation of Men's Attitudes for an understanding of how a person of Schumpeter’s abilities continued to swallow the socialist historical inevitability bit in spite of himself.
There are a handful of people, no matter how often you see them referenced, or how many summaries or critiques of their works by others you may have read, that you still need to go back and read them in their own words. Schumpeter is clearly one of these. His examination of both capitalism and socialism is as penetrating as it is provocative. Even when you don’t find yourself agreeing with everything he says, he will have your mental juices flowing and will inspire no end of your own thoughts. He gets a little technical here and there, but in the main, it is very readable. For all of its flaws, it really is a must-read.