In this definitive third and final edition (1950) of his masterwork, Joseph A. Schumpeter introduced the world to the concept of “creative destruction,” which forever altered how global economics is approached and perceived. Now featuring a new introduction by Schumpeter biographer Thomas K. McCraw, Capitalism, Socialism and Democracy is essential reading for anyone who seeks to understand where the world economy is headed.
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“The great economist Joseph Schumpeter highlighted the role of innovation in powering the rise of new industries, the creative destruction of existing ones, and the growth in prosperity of economies.” (Richard Florida, Atlantic )
“The greatest defense of capitalist, European civilization ever penned. . . . Schumpeter did more than anyone to persuade American leaders to preserve the capitalist system” (American Conservative )
“The most influential economist of the 20th century.” (Peter Drucker, Fortune )
“Schumpeter gave us stunning insights into how the world really works. We are now living, it is said, in the Age of Schumpeter. . . . Schumpeter was a powerful prophet, and he now offers dazzling insights into everything from the rise of Wal-Mart to prosperity’s discontents.” (Robert J. Samuelson, Newsweek )
“Schumpeter was the most farsighted of twentieth-century economists. His focus on capitalism and creative destruction made him the prophet of globalization.” (The Nation )
“The 20th century’s foremost economist.” (Steve Forbes, Forbes )
“Schumpeter may well be the most important economist of the 21st century.” (J. Bradford DeLong, Chronicle of Higher Education )
“The greatest defense of capitalist, European civilization ever penned. . . . Schumpeter did more than anyone to persuade American leaders to preserve the capitalist system” (American Conservative )
“The most influential economist of the 20th century.” (Peter Drucker, Fortune )
“Schumpeter gave us stunning insights into how the world really works. We are now living, it is said, in the Age of Schumpeter. . . . Schumpeter was a powerful prophet, and he now offers dazzling insights into everything from the rise of Wal-Mart to prosperity’s discontents.” (Robert J. Samuelson, Newsweek )
“Schumpeter was the most farsighted of twentieth-century economists. His focus on capitalism and creative destruction made him the prophet of globalization.” (The Nation )
“The 20th century’s foremost economist.” (Steve Forbes, Forbes )
“Schumpeter may well be the most important economist of the 21st century.” (J. Bradford DeLong, Chronicle of Higher Education )
About the Author
Joseph A. Schumpeter (1883-1950) served as Austria's first finance minister, made and lost a fortune as an investment banker, and taught economics for many years at Harvard. Capitalism, Socialism and Democracy is his best-known work.
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8 of 8 people found the following review helpful:
4.0 out of 5 stars
The big picture,
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This review is from: Capitalism, Socialism, and Democracy: Third Edition (Paperback)
This is a theme which gives Schumpeter the opportunity to appear at his best. He approaches questions of institutions and economic tendencies from the standpoint of a lively and wide interest in human nature.
The book starts with a critical examination of Marxian doctrine -- Marx the Prophet succeeded in "weaving together those extra-rational cravings which receding religion had left running about like masterless dogs, and the rationalistic and materialistic tendencies of the time" (p. 6). Marx the Sociologist "linked the fate of the class phenomenon with the fate of capitalism " (p. 19). Marx the Economist was a follower of Ricardo (p. 22), but not merely a follower. His one truly great achievement was "to see and to teach systematically how economic theory may be turned into historical analysis, and how the historical narrative may be turned into histoire raisonnie", instead of assigning the facts of economic history "to a separate compartment" (p. 44). There follows Part II, "Can Capitalism Survive?" Schumpeter has his own individual view of the working of capitalism. The Marxian theory of exploitation, depending on the effect of a perpetual reserve of labor in keeping wages down to the subsistence level, is disproved by experience (pp. 34-7). He himself belongs to the school of thought which treats profit as an excrescence of the economic system, so that in the stationary state neither profit nor interest would exist. Profit in his view is derived from "innovations", and he uses the term "entrepreneur" for one who initiates an innovation. "The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation, that capitalist enterprise creates" (p. 83). "In dealing with capitalism, we are dealing with an evolutionary proces "; capitalism "is by nature a form or method of economic change, and not only never is but never can be stationary". Even monopoly profits are of slight significance, though "there is or may be an element of genuine monopoly gain in those entrepreneurial profits which are the prizes offered by capitalist society to the successful innovator" (p. 102). "Can capitalism survive?" Professor Schumpeter asks. "No, I do not think it can," he replies (p. 61). It might be supposed that, if innovation is "the fundamental impulse that sets and keeps the capitalist engine in motion", the end would come through an exhaustion of possible innovations. In Chapter X he turns to consider the prospect of a "vanishing of investment opportunity ". In his opinion "there is no reason to expect slackening of the rate of output through exhaustion of technological possibilities" (p. 118), even when "capital-saving" devices pre-dominate (pp. 119-20). But in Chapter XII he poses the possibility that "the economic wants of humanity might be so completely satisfied that little motive would be left to push productive effort still further ahead" (p. 131). If improvements in methods of production were also assumed to have reached their limit, "a more or less stationary state would ensue...There would be nothing left for entrepreneurs to do...Profits and, along with profits, the rate of interest would converge towards zero. The bourgeois strata that live on profits and interest would tend to disappear." "For the calculable future," Schumnpeter comments, "this vision is of no importance. But all the greater importance attaches to the fact that many of the effects...can also be expected from a development that is clearly observable already. Progress itself may be mechanised." For, he explains (p. 132), "innovation itself is being reduced to routine. Technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required and make it work in predictable ways...Thus economic progress tends to become depersonalised and automatised. Bureau and committee work tends to replace individual action" (p. 133). The part played by the capitalist entrepreneur ceases to be one of individual leadership, acting by virtue of personal force and personal responsibility for success, and this affects the entire bourgeois stratum which hitherto has been recruited and revitalized by absorbing the entrepreneurs and their families. The bourgeoisie "depends on the entrepreneur, and as a class lives and will die with him". "If capitalist evolution -- 'progress' -- either ceases, or becomes completely automatic, the economic basis of the industrial bourgeoisie will be reduced eventually to wages such as are paid for current administrative work, excepting remnants of quasi-rents and monopoloid gains that may be expected to linger on for some time" (p. 119). There is, no doubt, a tendency for the individual freelance innovator to be superseded by the big concern. The big concern can supply finance and organization for new departures outside its original scope. And the opportunities may be discovered by individuals in its own employment. But it is not clear that this portends a decay of capitalism. It may transform the character of the middle class, but Schumpeter maintains that the middle class hitherto evolved by capitalism has lacked the qualities essential for political leadership, and has depended on the remnants of feudalism to provide a governing class. May not the new middle class be better qualified not only to conduct economic activity but to animate a political community? In any case, if it is an approximation to a socialist middle class, presumably a completely socialist middle class will manage no better. His view of the future is shaped by his theory of profit. And his idea that without individual innovating enterprise profit will vanish or become unimportant is surely a profound miscalculation. Indeed, his theory is one more instance of the propensity of economists to explain away profit. Marx's theory of exploitation belongs to the fallacies of a past age. But the present age has its fallacies too. The profit-making which communism would suppress is not dependent on innovations or on monopolies. It arises, with all its anomalies and abuses, from the mechanism of competition and is the remuneration of selling power. It would persist therefore in the stationary state, or under conditions of depersonalized and automatized progress. Profit-making would still be the object of attack. In proportion as the profit-makers become fewer in numbers, they become more open to attack by the multitude, whether by revolutionary action or by the peaceful operation of democracy. Between socialism and democracy, as conceived by Schumpeter, there is no necessary connection, but there is no incompatibility (p. 284). He is skeptical of the classical doctrine of democracy, postulating a popular will (Chapter XXI). But his own definition of it, as a method "by which individuals acquire the power to decide [in the political field] by means of a competitive struggle for the people's vote", is surely not adequate. The competitive struggle, occurring when there is a cleavage of opinion, and parties offer alternative governments, is a frequent and lively development in democracies. But it often happens that there is no competition and no struggle; the preference of the electorate for a particular group of statesmen is recognized to be decisive, and oppositions are confined to occasional bodies of criticism. Moreover, the struggle for power, if it is to be democratic, must be one of persuasion. Actual democracies are imperfect, and persuasion is adulterated with intimidation or corruption. Schumpeter's attitude to democracy as well as to socialism and capitalism is that of a tolerant but ironic critic. Whoever is carried away by great issues, it will not be he. But that is a very salutary approach. His book is full of wisdom, even though of a detached and fatalistic kind.
5 of 6 people found the following review helpful:
5.0 out of 5 stars
The Glorious System,
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This review is from: Capitalism, Socialism, and Democracy: Third Edition (Paperback)
* This is a long review, if you would not like to read it all you may skip to the last paragraph *
** Additionally, the large strength of this book is its defense and description of modern capitalist development and progress. Part II of the book, that is. The rest is actually not very good. So, buy this book because 1. Capitalism's best description/defense in both a socioeconomic and political context 2. Schumpeter is one of the most important economists to know of if you want to take the subject matter seriously. ** Schumpeter opens part II of Capitalism, Socialism, and Democracy, after a lengthy bit pertaining to Karl Marx `the Prophet, the Sociologist, the Economist, the Teacher' wherein he graces us with his knowledge of Marx's major strengths and flaws (sometimes correct and incorrect himself, and sometimes degenerating into complete fiction), with an ominous sentence - `Can Capitalism survive? No, I do not think it can' (p. 61). Later, in part III of the book, he opens with another - `Can Socialism work? Of course it can.' (p. 167). To unravel these two seemingly complementary statements, we must first investigate the capitalist mode of production as according to Schumpeter, how it came to fruition, and investigate what processes, either endogenous or exogenous, he believes will be the cause of its purported demise and replacement by a `socialist' mode of production. Schumpeter believed that the most essential feature of the capitalist mode of production was to be found in the constant revolutionizing of the productive forces; a `perennial gale of creative destruction', as he said, that comes about through the introduction of new technologies and, with them, the obsolescence of the old. Without this feature, he claimed that Capitalism "would be like Hamlet without the Danish price" (p. 86). He was naturally highly critical of the neoclassical economic doctrine which purported to explain capitalist production through `perfect competition' paradigms. To Schumpeter, perfect competition was not only a myth but a dangerous one at that. For Schumpeter then, the idea that competition in capitalist production existed only as a quantitative relationship between firms, finding its vehicle in price, was fantasy. Atomistic competition, even if it ever had existed (which is in itself not so clear) would simply be unable to reach the level of accumulation needed to both survive the `perennial gale' and reproduce itself. An economy characterized by atomistic competition would be in a constant state of flux, with firms (or `individual producers') too rapidly exiting and entering the market and profit rates being driven down to the point that the negation of the crucial role of firms - the ability to accumulate to the point necessary for reinvestment - would be the ultimate cost of such `free' competition. This economy would in the short run be unstable and in the long run stagnant due to the lack of new methods and technologies being introduced for continual reinvestment. Instead, Schumpeter saw competition as a qualitative relationship - one which firms large enough to maintain a profit rate that allowed for reinvestment in strategic and technical improvements and competition in the sphere of research and development, in addition to being able to build up strong reserves for lifesaving mechanisms, would ultimately triumph. Schumpeter did not believe that capitalist production could be adequately defended on the grounds of short-run considerations. Within the economic system, as a byproduct of quality competition and strategic planning, was taking place a process which revealed itself only through intervals of time in quality improvements and the application of technological innovation. Therefore, holding time as a constant was in effect blinding one of this crucial aspect. This process drove innovations that contributed to higher productivity and lower costs, making the formerly inaccessible accessible to the masses. In this respect, efficiency for Schumpeter was a long run concept that was more related to efficiency of the system as a whole than to productive efficiency at a given point in time. This process took place, as Marx would have said, `behind our backs'. And, accordingly, focusing on short run resource utilization, or full employment as was becoming quite the trend in Keynesian economics, was for Schumpeter even more than what focusing on supply and demand was for Marx - not only misguided but ruinous to long term systemic efficiency. The kind of activity responsible for reoccurring technological revolutions and subsequent relative prosperity was not compatible with equilibrium. Indeed, it had a tendency toward, if not only functional with, a state of disequilibrium. Mature capitalist production, as depicted above, was for Schumpeter a product of a historically specific process. The main actor in this process was a specific group of people not belonging to any specific class in particular; entrepreneurs. The dynamic nature of the capitalist mode of production was simply a byproduct of the entrepreneur's thirst for individual achievement, which in turn created whole new industries through sheer force of will and determination, simultaneously sweeping away the old order of things (p. 132). These `movers' built the foundations of the mature capitalist system through individual achievement in innovation - the only way possible to rise to a bourgeois standing in a bourgeois world. This depiction of the entrepreneur has no regard for one's social class, standing, or means in determining who would rise to the challenge of fulfilling the entrepreneurial function. The siren call of wealth and the fostering of a culture of meritocracy thereby pulled people from all walks of life to fill the role of the entrepreneur. The rationalization of all elements of life, fostered by capitalist production, further spurred individuals of exceptional intelligence and drive from all strata to fill this role through the rejection of metaphysical explanations of events and extra worldly existence; furthermore, an atmosphere that imbued them with a belief in individual merit and achievement and an acceptance of the material world as final put individuals in the position to discard notions of heavenly intervention and design, replacing them with a conscience belief in their own abilities to do the same. In this regard, Schumpeter explained the huge leaps in technology and the masses of commodities being made available during and after the industrial revolution both by the growing relative freedom with which the entrepreneur was able to perform his or her social function and an atmosphere conducive to individual achievement. At its height, the Schumpeterian entrepreneur represented an extension of the notion that clusters of talented people have been the driving force behind history, thereby itself occupying a historic position in social organization quite similar to that held by the stratum formerly populated with owners and masters. The owner of men, whipping his lazy property towards production and progress; the feudal lord, so graciously giving the means to the lower classes of society to survive, not to mention provide for the landed class; and finally the entrepreneur rising to the bourgeois ranks, putting the toiling masses to productive work through the implementation of his or her `vision of things'. The belief in the inability of the masses of people to produce (to Schumpeter's liking) or to maintain political and social order (in Schumpeter's conception) runs straight through this in perfect sequence, with the difference being, of course, that the bourgeois way of imposing oneself in the middle of the production process is much less `physical' - As Marx would say, its true nature is concealed. This relation, however, is similar only to the extent that the entrepreneur is both an essential part of a specific mode of production - thereby in his or her present obtaining the status tied to this role - and bound to be replaced when that mode becomes outdated - thereby in the future being seen as the remnant of an outdated and forgotten past. The political stratum of elites, as mentioned earlier, was of an altogether different breed than the bourgeoisie - the bourgeoisie budded from merchant and middle classes of society whereas the political elite, or aristocracy, carried on from landed owners and nobility for centuries past. Unlike the former `movers' of society, who played an important ruling role in addition to others, Schumpeter's soon-to-be bourgeoisie had little interest in the heroic or romantic and little interest or skill in the leading and ruling of men 9. Their interest and ambition, according to Schumpeter, went as far as their pocketbooks could take them confined, of course, to bourgeois commercial and productive endeavors - what their `normal work and mentality fit into' (p. 128). It is of importance to note here what is lacking in Schumpeter's glorious conception of capitalist production. We have, I think, established that the system as a whole is akin to the machine and the budding bourgeois entrepreneur the engine, but we have not yet provided the fuel. Nor did Schumpeter feel inclined to dirty himself with this task. We must therefore turn to someone who was more at home in the industrial factories and coal mines of the world than the thin upper layer of social `movers' - As Marx would have reminded us, the fuel is of course the laborer. The toiling masses, however, could not be a part of this picture, less they would detract from its immutable splendor. Schumpeter offers an original solution to this problem. He simply erased the toiling masses, or, in effect, depicted their part in the `perennial... Read more ›
1 of 1 people found the following review helpful:
5.0 out of 5 stars
Something for everyone...,
This review is from: Capitalism, Socialism, and Democracy: Third Edition (Paperback)
Capitalism, Socialism, and Democracy is divided up into five main sections. The first section on Marx and the last section on the history of the socialist parties in Europe can be safely skipped by most readers. The three central sections on capitalism, socialism, and democracy are definitely the heart of the book and of the three central sections the section on capitalism is by far the most interesting.
In the section on capitalism Schumpeter really tries to do two things. First, he attempts to provide a defense for capitalism based on its dynamic nature. Schumpeter is critical of the defenses of capitalism which base themselves on the notion that under perfect competition "the profit interest of the producer tends to maximize production" (pg77). In two footnotes Schumpeter explains the problems he has with this standard defense of capitalism. In the first he writes, "The principle, as far as it can be proved at all, applies to a state of static equilibrium. Capitalist reality is first and last a process of change. In appraising performance of competitive enterprise, the question whether it would or would not tend to maximize production in a perfectly equilibrated stationary condition of the economic process is hence almost, though not quite, irrelevant" (pg77). The standard defense relies on the notion that under perfect competition (a state in which prices are parameters and not variables) production will take place up until the point that marginal cost just equals price. It is further argued that this is precisely "as much as it is in general `socially desirable' to produce" (pg78). But as Schumpeter points out in his footnote this only takes place when the economy is in a state of static equilibrium. Since a capitalist economic system is never in such a state the defense becomes (almost) irrelevant. In the second footnote Schumpeter is responding to a closely related theorem, namely, the theorem that competitive industry tends to produce a maximum satisfaction of wants. Schumpeter writes, "this theorem, even if we waive the serious objections to speaking of non-observable psychic magnitudes, is readily seen to boil down to the triviality that, whatever the data and in particular the institutional arrangements of a society may be, human action, as far as it is rational, will always try to make the best of any given situation. In fact it boils down to a definition of rational action and can hence be paralleled by analogous theorems for, say, a socialist society" (pg77). Utlimately the defense of capitalism which rests on the notion that perfect competition leads to a maximum satisfaction of wants boils down to the proposition that given any set of parameters (consumption preferences, capital allocations, technical levels, etc.) human beings will tend to make the most that they can with what they have. This applies to any institutional form and is not specific to capitalism. Schumpeter offers a different (and in my opinion a better) defense of capitalism by pointing to its dynamic character. Schumpeter argues that capitalism is a process which is constantly engaged in revolutionizing the means of production (creative destruction) as entrepeneurs seek `super profits'. This dramatically increases the total output of society and a huge share of this increased output winds up finding its way to the lower classes of society. As Schumpeter says, "There are no doubt some things available to the modern workman that Louis XIV would have been delighted to have yet was unable to have...On the whole, however, a budget on that level had little that really mattered to gain from capitalist achievement" (pg67). The Louis XIV's of the world are not primarily the ones who benefit from the dynamic of the capitalist system since the capitalist system is overwhelming geared towards mass production and so produces goods that can be consumed cheaply by the masses. This defense of capitalism does not rely on any theorems about maximizing utility under perfect competition and is a far more realistic defense of the advantages of a social system that is ruled by the profit motive. The second goal of Schumpeter's section on capitalism is to describe the ways in which the processes unleashed by capitalism tend, inexorably, to undermine its own foundations. The most interesting example of this is the way in which property comes to be redefined through the joint stock company. There is a separation of ownership and management. The role of the entrepreneur also begins to erode as the process of creative destruction becomes mechanized and standardized. Instead of the adventurous entrepreneur taking a chance on a new idea we have corporations and their programs of research and development. One of the great virtues of Schumpeter's work is that he manages to avoid viewing things from a restrictively economic standpoint and is able to see the importance of sociological factors in determining the behavior of the economic sphere. So Schumpeter also spends some time discussing sociological changes brought about by capitalism which in turn have an effect on the economic process (family relations for example) In the section on socialism Schumpeter attempts to work out a logical blueprint for a socialist society that would be capable of solving all the problems that a free-market is able to solve (the allocation of capital, provision for public goods, incentives and motivations for workers and managers, etc.). Schumpeter attempts to argue that there is at least no logical reason why socialism could not work. I am not sure he is entirely successful but this section is at least thought provoking and indicative of the problems that socialists necessarily face in constructing an alternative social arrangement for production and distribution. In the final section on democracy Schumpeter attempts to reconceive democracy as a competition for political leadership. Democracy is not the rule of the people for Schumpeter, rather, democracy is "the rule of the politician" (pg285). Public policy, on this view, becomes merely a by-product of political competition. This is probably a more realistic picture of how democracy really works then the standard view but it relies on the notion that human beings have far less awareness and knowledge in regard to affairs that do not concern them directly, or that they do not deal with on an everyday basis, and, therefore, do not have strong opinions one way or another. They can be swayed by politicians. In other words, this is not necessarily an analysis of the `eternal' nature of democracy. If human beings were to achieve a better grasp of social issues this vision of democracy might not apply. In summary, this book is definitely worth reading. Although the first and last sections can be skipped and if you are really in a hurry you can simply read the section on capitalism and you definitely will have read the most interesting and the most influential section of this work. -Brian
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