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Capitalism, Socialism, and Democracy

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This is one of the most important books on Capitalism ever written. Unlike most economists, Schumpeter's knowledge and understanding of the sociological & political sides of the capitalist process was just as profound as was his knowledge and understanding of the economic side. Consequently, he presents a more well-rounded view of Capitalism than we usually get from the typical one-dimensional type of economist.

Most economists commit the fatal error of regarding capitalism as a mere economic phenomenon, explicable by economic laws alone. But this view is palpably erroneous. Capitalism both influences and is influenced by political and sociological factors. Any account of the Capitalist system which ignores these non-economic factors must be regarded as short-sighted and incomplete.

This book is probably most famous (or most infamous, depending on your point of view) for its prediction (circa. 1942) that capitalism would eventually be replaced by some form of socialism. With the collapse of communism in Eastern Europe and the revival of market economics in East Asia and South America, it might appear that Schumpeter's prediction has been refuted. But this conclusion would be premature and superficial. Keep in mind Schumpeter's broad vision of capitalism. For Schumpeter, capitalism is much more than a free market acting under the guidance of supply and demand and consumer sovereignty. In Schumpeter's vision, capitalism is entire order of civilization, embracing the old-fashioned "bourgeois" code of ethics (see Thomas Mann's "Buddenbrooks" for a concrete illustration of bourgeois civilization) and entrepreneurial innovation (or "creative destruction," as Schumpeter calls it in his famous theory of the business cycle). When Schumpeter predicted that socialism would ultimately triumph over capitalism, he did not mean that a perfectly controlled economy would replace a perfectly free market, but that a "socialist" civilization would replace the capitalist civilization of the 19th century. His prediction, although not correct in all respects, is nevertheless prescient in a number of important ways. The social order prominent in the first world today is capitalist more in form than in substance. The corporation, which is regarded as a public institution by the law, is the dominant economic unit. Privately owned businesses have less and less power in the market. Regulation and state involvement in business are more and more common. Schumpeter once said that when socialism came to America, it would not be called socialism. This remark comes uncomfortably close to hitting the nail on the head.

Many summers ago while I was taking supplementary graduate courses in comparative literature, a classmate suggested that I read this book. I had not previously heard of it. It was somewhat tough going, in part because I lacked understanding of an appropriate frame-of-reference within which to absorb and digest Schumpeter's ideas. Recently, I re-read it. To paraphrase Mark Twain, it is amazing how much Schumpeter has learned over the years. I strongly recommend that Tom Bottemore's excellent Introduction be read and then re-read at least once more before anyone proceeds into the Schumpeter text. It certainly would have been very helpful to my first reading. The 28 chapters are organized as follows:

Part I: The Marxian Doctrine

Part II: Can Capitalism Survive?

Part III: Can Socialism Work

Part IV: Socialism and Democracy

Part V: A Historical Sketch of Socialist Parties

Obviously, the world which Schumpeter surveyed more than 50 years ago has undergone significant changes. (This book was first published in the US in 1942; a revised second edition appeared in 1957; and an expanded third edition appeared in 1950, the year in which he died.) Nonetheless, after a recent re-reading of the book, I am amazed at how stable its intellectual infrastructure remains. Bottomore explains the book's continuing appeal to readers "by the fact that it undertakes a serious and thorough examination of the great social transition of the present age, from capitalism to socialism, (and prefaces this with an illuminating critical appraisal of Marx's theory, as the only social analysis of the transition that merits attention) rather than by the kind of judgement that it makes about the consequences of this process of social transformation." Bottomore then quite correctly notes that, in this book, Schumpeter also examines "carefully and dispassionately" the difficulties and dangers presented by certain forms of socialism "which socialist thinkers themselves,,, after so many deceptions, can now more readily appreciate." Granted, at least some of Bottomore's discussion of Schumpeter is itself dated. Nonetheless, Schumpeter's ideas are carefully developed; moreover, he explores all manner of connections between and among those with other ideas, including those he rejects.

I wanted to read this book because I wanted to pursue the idea of "creative destruction" to its source. However, Schumpeter's Capitalism, Socialism, and Democracy (CS&D) was not what I expected. Though Schumpeter is frequently associated with the Austrian School of Economics, he left early on to pursue a different agenda.

CS&D is an extended defense of Marx's conclusion that capitalism would collapse on itself and be replaced with socialism, but without propagating Marx's errors. CS&D is written by someone with neoclassical economic training, including the marginalist revolution that refuted Ricardo's "Iron Law of Wages" which formed the basis of Marx's own system. Schumpeter states early on that the interesting part is not his conclusion, but rather the observations and arguments that support that conclusion.

In order to make his argument, Schumpeter introduces several ideas that will be at odds with common understanding. For example, many victims of one or two semesters of college economics will have noted that the atomistic theory of competition almost never holds true, so the seductive criticism that capitalism tends toward monopoly is easily accepted. Fortunately, Schumpeter makes a valiant early attempt at showing that this is not the easy argument that Marxists hoped it would be. Likewise, most of us have noted that democracy - except in Classical Greece and small towns in New England - is hardly ever practiced the way we were taught, where citizens guide public policy and politicians carry it out. Instead, Schumpeter reminds (or teaches) that democracy is commonly practiced as a competition among leaders for votes, and voters select the politician whose program most closely matches their idea of the "correct" mix of policies. Through arguments such as these, he both resists the worst errors of Marxism while assuring the doubtful that socialist central planning can be practiced without contradiction in a democratic society.

Unfortunately for Schumpeter, the events of history have overtaken this work (published in 1942). One of Schumpeter's main points for the end of capitalism is the decline of need for the entrepreneur. Apparently, there were no more innovations to be made in 1942. Given that, all that remained was deciding on the most rational method for organizing each industry without all the waste of competition, marketing, and of course profit. I always thought that Ayn Rand's claim that central planning advocates had made this assertion was a straw man, but here is a respected economist making the claim.

If you are looking for an introduction to Austrian School economics, this is not it. The Road To Serfdom by Hayek (1944), unlike CS&D, has been vindicated by history, and I would recommend it either in place of or in addition to CS&D. I would recommend CS&D only for people interested in a rational critique of Marx by a classically trained economist who arrived at the same conclusions without making the same mistakes, but I would caution them to read it critically. TS Ashton's critical essay in the collection "Capitalism and the Historians", ed. By Hayek, is also a good companion to this.

This classic book by economist Joseph Schumpeter originally came out in three editions in 1942, 1945, and 1950. The current 1984 edition begins with a helpful introduction by Tom Bottomore. The entire book is well worth reading if you have the time for some substantial thinking about economics, politics, and history on a grand scale. However, Schumpeter's half-century old tome has recently come back into vogue as everyone is picking up his term "creative destruction". Schumpeter, coming from the Austrian school of economics, focused on processes rather than states, making his thinking different from that of other economists of his time and for decades after. His notion of creative destruction perfectly fits as a description of what is happening in the new economy, as new technologies and business models and architectures are simultaneously destroying old sources of value while creating new opportunities for profit.

Economist Joseph A. Schumpeter's keen intellect makes some of today's scholarship sound like the spouting of ideology on talk shows. Some consider him the greatest economist of the twentieth century. Only an intellect of his towering stature would be able to present a case that while Marx was wrong about how capitalism would collapse, he was probably correct that it eventually would. Schumpeter also contends that socialism may eclipse free-market economies, news he feels society should greet with angst. He believed that capitalism's doom would proceed not from a revolution by an angry proletariat, but rather as a result of successes that would give rise to a class of elites who would gradually institute systems of central control. Fully understanding this complex, although non-mathematical, treatise may require some background; it is not a book for the novice. While this 1942 classic may seem dated in spots, those who conclude that it is time to tap dance on socialism's grave should consider that Schumpeter expected socialism's dominance to take a century or more. We recommend this classic to anyone seeking a deeper understanding of the historic, economic case for the rise of socialism.

In this book, first published in 1942, Joseph A. Schumpeter reached the conclusion that capitalism wouldn't be able to survive, due to diverse characteristics that were intrinsic to it. For example, he thought that monopolistic practices would only increase with time, thus damaging the capitalist process and not allowing it to function smoothly.

Obviously, by now we have realized that his conclusion was inexact, but that doesn't mean that we should overlook *Capitalism, Socialism, and Democracy*. Schumpeter's analysis of capitalism and socialism, his concept of *creative destruction* and his economic definition of democracy are only some of the things included in this book that should be taken into account. Perhaps reality didn't end up matching the premises the author adhered to, but all the same we are likely to learn a lot from the valid points he makes along the way.

Schumpeter's draws the arguments to support his ideas from different fields: Economy, Sociology, History, and even (sometimes) Psychology. Because of that his premises don't tend to be unidimensional, but rather take into account the different facets of reality. As a result, this book is much more interesting to read, even though it might seem somehow difficult at first to many readers.

The interesting ideas in *Capitalism, Socialism, and Democracy* are many, and I can't tell you about all of them without making this review impossibly long. Despite that, I can tell you at least something regarding the notions that I consider more interesting, for example the well-explained notion that *creative destruction* is the essence of capitalism. Also, I think that it is worthwhile to highlight Schumpeter's economic definition of the democratic method, as an *institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people's vote*.

On the whole, I think you will enormously appreciate this landmark book, if you enjoy a good and careful analysis and aren't easily scared by books that at first glance seem too difficult. Provided you persist, you will realize that this book is as easy to tackle as many others... The only difference is that after reading *Capitalism, Socialism, and Democracy* you will know a lot more, something that not so many other books can offer :)

Belen Alcat

This was the first book I read when I did my study political sience in the Netherlands. Schumpeter writes a brilliant explanation how politics works. The elites competes with each other for the votes of the public. He compares the economic market with the political market and analysis the trends with amazing relevance for our current system. Further his analysis of Kapitalism is so interesting and thought provocing. He states that Kaptialism is the most efficient and effective system of production but that it will go under by the lack of political, emotional and moral support of the masses once it is incredible succesfull. Now that Capitalism has won everywhere on this earth it is interesting if his theory will come to life. Very readable and billiant book.

CS+D is one of the greatest books on political economy in the twentieth century. Schumpeter wrote this book when his generation was about to reach a fork in the road. What would the postwar world look like? Could Capitalism survive? Can Socialism work well enough to replace Capitalism? Was the dictatorial socialism of the USSR the wave of the future or could we have some form of democratic socialism? Schumpeter offered concise general answers to these questions. No, Capitalism cannot survive, and yes socialism can work.

In retrospect we can see that Schumpeter was wrong. However, there is no denying the greatness of this book. While Schumpeter's prediction of the demise of Capitalism was exaggerated, this is to some extent an understandable error. Schumpeter was right about how Capitalism would be attacked, but he overestimated the chances for the success of this attack. Capitalism did come under attack from the carping criticism of intellectuals. Many of those who you might expect to defend Capitalism remained silent. Yet capitalism survived anyway. Schumpeter's assertion that socialism can work is less defensible. Schumpeter also erred in predicting the obsolescence of the entrepreneurial function.

We can now use 20-20 hindsight to criticize Schumpeter for his general predictions. Or we could recognize that many of his individual supporting arguments are thought provoking, if not correct. Schumpeter had some good insights into democracy. His ideas on creative destruction and monopoly are important. Schumpeter does a good job discussing Marx too.

The important thing to remember while reading CS+D, is that you can learn much from it even though its major predictions failed the test of time. The issues explored in CS+D are vastly complex and involve elements that are hard to measure, let alone predict. One can be right on nine out of ten supporting arguments and still get the wrong answer in the end.

CS+D stands along side Hayek's The Road to Serfdom and Keynes' The General Theory as one of the most important and influential books of this mid Twentieth Century. Aside from its historical importance CS+D has many good insights. Schumpeter is worth reading despite the fact that his major predictions have failed. Read CS+D for its detailed analysis of economic and political systems, not for its general predictions regarding the postwar world.

Like Marx, Schumpeter predicts the inevitable disintegration of the capitalist system. However, where Marx foresees the collapse as stemming from proletariat revolution, Schumpeter argues that the "actual and prospective performance" of capitalism is strong, and unlikely to fail. But, Schumpeter argues, it is these same successes which will ultimately destroy the social institutions, namely private property and free contracting, necessary for its continued survival. As such, new conditions will emerge which will not allow capitalism to continue and socialism will become the dominant economic system.

Capitalism is an evolutionary and dynamic process. This constant state of motion is driven by the emergence of new methods of production (and subsequently new consumer goods), the pursuit of new markets, and improved forms of industrial organization (83). As such, aspects of the internal capitalist system are constantly being revolutionized; old processes are being replaced with new processes in the name of progress and improvement. Schumpeter refers to this process as a state of creative destruction. "This process of creative destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has to live in" (83).

The theory of creative destruction is based on the classic feature of capitalism, competition. Traditionally, capitalism is characterized by competition stemming from price, methods of production, and organization. This competitive attributes help to ensure the market efficiency of firms. However, Schumpeter argues that the real feature of capitalism is destructive competition. Destructive competition includes the emergence of new commodities, technologies, sources of supply and new types of organizations (84). Where the traditional measures of competition allow for existing firms to evolve in a changing market, destructive competition tends to destroy those firms which become inefficient. It is this system of destructive competition that revolutionizes the internal capitalist structures.

Through the process of destructive competition, Schumpeter argues that the vital institutions of capitalism, ownership of property and freedom of choice in contracting, are destroyed. Schumpeter's sentiment is illustrated through a brief examination of the collapse of the feudal structure. During the feudal period, changes in production and mechanization overran and obliterated the artisan and small producer. Today, the same process can be observed in that larger, more efficient firms are eliminating their smaller, less efficient brethren. Stated simply, the capitalist process attacks its own institutional framework. The entrepreneurial class, which fuels the dynamic capitalist system, is being retarded, or as Schumpeter suggests, "economic progress tends to become depersonalized and automatized" (133).
This is exemplified by the emergence of mega-companies in which the firm is rarely owned by one individual but rather is composed of board members and stock holders. Schumpeter argues that none of these actors truly own the company and as such lack the drive of the entrepreneur who owns his or her company. What then emerges is capitalist stagnation. Individual choice is usurped by the interest of large corporations. Instead of relying on choice, corporations will come to agreements between themselves, thus creating a system of pseudo-monopoly. With this limited competition, laws and regulations are imposed on the corporations rather than left to individual firms (141). As such, we begin to see the emergence of socialist ideology in that competition and ownership are removed, and replaced by a centralized governmental system of control.

Of particular note, unlike Marx who sees the destruction of bourgeois entrepreneur as a necessary precondition to socialism, Schumpeter sees the same entrepreneur as integral to the success of the socialist transition. Socialism will only emerge when capitalism has reached its maturity, that point in time where capitalism has destroyed its own vital institutions of ownership and choice. Although these institutions are eliminated, socialism still reaps the benefits from the technology, knowledge, and resources developed by the entrepreneurial class in the earlier stages of capitalism. In order to be sustainable such inheritances are necessary condition for the success of socialism.

The book is really over my head. I'm much too uneducated for this read. Given the subject matter, I can understand some of the vocabulary is not going to be common every day language. But there is too many big words for me. I find the author much too pedantic.