Originally published: 1942
425 pages
Chapter 38

CAPITALISM, SOCIALISM AND DEMOCRACY


Joseph A. Schumpeter
 
The ability of a specialist to keep in mind the big picture while concentrating on his smaller arena is crucial to the overall value of his work. Joseph Schumpeter had such a talent, even though the conflicts he faced in the larger world sometimes caused him to doubt the conclusions to which his work led. His individual field was the economics of business; however, to make sense in that domain he had to understand how the public economy and the body politic broadly adapted to one another and to myriad additional considerations. His ability to comprehend both perspectives and dissect them for the reader is what makes his works so valuable on the broad plain of social discourse.
     Schumpeter's discernment of business cycles and how they work-periods of stasis that alternate with growth or contraction-formed the basis of modern economic prediction and management. Though his ideas seem routine and even elementary today, in Schumpeter's era they were novel and untested. While developing his entrepreneurial economic paradigms, Schumpeter's talent for seeing the horizon led him to write Capitalism, Socialism, and Democracy. When he drafted his thesis, no one was sure, including Schumpeter himself, which economic system-capitalism or socialism-was more viable either practically or politically, and there was great debate within the social disciplines.
     Schumpeter begins his analysis with an investigation of communism as envisioned by Karl Marx (1818-1883). Marxism, explained in The Communist Manifesto (1848), was still evolving at mid-twentieth century and just being tested in the real world. Schumpeter concludes that

457 

the Marxist system is chimerical, dishonest, and dissociative. Sharing President Abraham Lincoln's belief in the impossibility of fooling all the people all the time Schumpeter asserts that the economic folly of communism would cause it ultimately to fail-wholly, and with great noise. His real query is the other side of the economic question; whether capitalism could succeed and if its adjunct, democracy, could meet the challenge of governing the world's many interrelated minorities (whether that be one and half billion Muslims spread among 40 nations or 4 million Zulus as a population fraction inside South Africa). These were legitimate questions in the first half of the twentieth century and they continue to remain relevant in the twenty-first where the fledgling economies of the Third World (including rapidly modernizing China and India) are just beginning to enter the free market and freedom itself is still largely miscomprehended.
     Schumpeter turns Marx and his economic predilections inside out; not just because it was easy to do but because it was necessary. Marx was venerated by the heirs of the Enlightenment-the newly minted socialist equalitarians of the twentieth century-but their veneration could not trump reality.
     Schumpeter explains part of his critique of Marx by means of Marx's personal background and social environment which he then uses to dissect Marx's political and economic import. Schumpeter notes that Marx had no country having been displaced from Germany to France to England. Marx thus thought that no one else needed a homeland, or really, even a home, and so his utopian vision
was largely a reflection of his myopian viewpoint. Yet Schumpeter finds that Marx felt unsettled in each country because of more than just personal experience. Marx was dissatisfied with the world because he, like Vladimir Ilyich Lenin after him (the leader of the 1917 Russian Revolution that resulted in the imposition of a communist state in the vast Russian landmass), found something wrong with everything. At the same time he quite incongruously insisted that perfection was possible, as seen in his idealized ordering of society by means of his communist fantasy. The disconnection between fact and fiction, their views and their goals, and the inherent futility of their means never seemed to bother either man.
     Schumpeter, after offering his own summary of Marx's economic theorizing, directs his most derisive scorn at Marx's contention that socialistic democracy was of a different ilk than bourgeois, capitalistic democracy. The fact that "democratic socialism" was an oxymoron-both by definition and as a philosophical precept-was

458 

but a beginning point to dismember Marx's political assertions. That democratic socialism achieves oxymoronic status can be demonstrated in syllogistic fashion: the foundation of a free society is based equally in the individual's natural right to own property and in his right to freedom of thought and action. A free society is one democratically controlled by the thoughts and actions of the people. Socialist theory denies the validity of both private property and the concurrent right of the people to govern themselves; thus a society cannot be democratic and socialistic simultaneously.
     The phrasing-democratic socialism-was a ruse to mislead and calm the public into thinking they actually had a hand in utopian constructions that would work in the real world. The ultimate proof of the anti-democratic nature of socialism was the fact that when elections did occur in a collectivist environment, only one name appeared on the ballot for each office, and that candidate was imposed on the people, not publicly selected. When this false democracy was offered it was purely and obviously a subterfuge, a means of deflecting reality. Of course, the fact that in a socialistic setting distribution of society's products must be controlled in a totalitarian fashion because public agreement on such matters is not possible (it must be remembered that individuals have opinions) deconstructs with finality any pretensions of freedom.
     Once Schumpeter dissects Marxism he turns to a consideration of capitalism. One of his goals is to encourage his readers to think horizontally and vertically; to consider, for example, that the economic and social opening of India or Japan, a political feat, is perhaps less important than the conquest of the air or the airwaves. He wonders, as well, if geographic frontiers are less of an impediment to progress than economic boundaries. For example, does the lack of free-markets hold back an economy more than the unavailability of natural resources? (The answer is yes, and for illustration look at what free markets have done for resource starved Japan, Hong Kong, Switzerland or Israel and what a lack of freedom has accomplished in resource rich nations such as those in southern Africa.)
     These were relatively sophisticated considerations that few economists up to that point had investigated. At the close of every great epoch, Schumpeter notes, it is rare that people can see the future, but the future is exactly where they should focus. His intention in this book is to expose the competing political and economic elements that he sees-the elements that define how the future will play out.

459

     In looking forward Schumpeter sees capitalism as the propelling force in the rationalization of human behavior. Think about that concept: the rationalization of human behavior. He steps back a
few centuries and observes that the commercial impetus to rational conduct was clearly operative in the Middle Ages when business transactions founded primarily but not exclusively in the division of labor were a key element in the demise of feudalism. The landed aristocracy slowly discerned they could make more money in "business," such as it was, than solely by overseeing their serfs' agricultural activities.
     In his investigation Schumpeter underscores how pragmatic economics always and everywhere influences all facets of human endeavor. (Ludwig von Mises's much expanded philosophical and practical examination of this concept can be found in Human Action [Chapter 40]. The theories of both men are extrapolations that have an unstated but basic foundation in mankind's quest to ensure self-preservation-i.e., food, shelter, etc.-that causes human beings to act in a rational manner.) Schumpeter maintains that the viability of the capitalistic process, including freedom of individual action, must be included in any assessment of how far and how successfully a culture has progressed toward both liberty and sound economic behavior. For Schumpeter the important effect for social progress wasn't just capitalism's mandate of fundamentally rational activity, it was also capitalism's demand to measure everything that was happening that was so valuable. For example, capitalism brought logic and math into the lexicon of the ordinary sixteenth-century peasant trying to determine if he should sell his cow, and if what he was being offered was at least equal to the value of the cow-to him. The element of judgment in this small example and also in every aspect of capitalistic enterprise is a valuable tool for a simple reason: it fosters progress across the spectrum of human activity through the use of discrimination and critical evaluation.
     After delineating his economic assessment of capitalism and socialism Schumpeter turns to the realities of practical politics and history's conventions. He hedges his denunciation of socialism's chance to become the world's dominant economic system. He does not equivocate with regard to socialism itself-he knows that it is not viable, but that simple fact in his view did not ensure that socialistic practice would soon die on the vine. (His temporizing on this subject led to his ambiguous standing among well-known economists for many decades.) As a result of the times (he was writing just after the Great Depression and during World War II) and the state of the public's less-than-benevolent

460 

perception of free enterprise because of the fiscal and social disaster that had transpired during the 1930s, he was concerned that even more government intervention in the economy would be seen as the answer to what had theoretically impeded economic recovery around the world during the twenty years prior to the publication of his book; i.e., too little intervention.
     Schumpeter knew bureaucratic or political intrusion wasn't what was needed in a situation such as the Depression, indeed, he understood these were decidedly what was not needed. Schumpeter was more than aware that government intervention-meaning high taxation, burdensome regulation, trade barriers, and deficit spending-had caused the Depression to last longer and affect the world's economies more deeply than would have been the case if the free market had been allowed to independently regain its footing. Many economists were led to accept the political thought that socialism, with its wholesale government control of all economic fundamentals, could be seen as the answer to what didn't work in the 30s.
     The fact that Schumpeter understood socialism's systemic failings, rooted primarily in the suppression of individual incentive and reward (and the obvious reasons for its political success-the free lunch it offered) did not, by default, make democracy the answer to the question: what system of government will achieve the dual goals of individual freedom and economic progress? In the real
world, Schumpeter sees democracy as less than wholly successful exactly because of what many of the world's democracies had experienced over the previous century (ubiquitous economic depressions, civil wars, capitalistic oppression, etc.). He is especially concerned about the viability of democratic rule in the context of a "mixed" population or when the times create highly confrontational divisions:

               Whenever . . . principles are called in question and issues arise that rend
               a nation into two hostile camps, democracy works at a disadvantage. And
               it may cease to work at all as soon as interests and ideals are involved on
               which people refuse to compromise.

     The extreme possibility of suggesting civil war or political division arises infrequently in a mostly homogenous society; but in a blended commonwealth war has occurred more often than those who believe in democracy's efficacy like to recall. Schumpeter's recognition of this

461 

potential, in 1942 in the middle of a worldwide military conflict, is not unexpected but may contain more pessimism than was warranted. Yet what Schumpeter felt the world faced was the possibility of one of two very unpleasant eventualities: democracy would lead to civil conflict because various (ethnic, cultural, social, language, tribal) minorities could not agree on fundamental choices and would rather fight than give in; or, totalitarianism would be seen as the way to avoid internecine conflict but would destroy humanity's individual freedoms. (The effects of the minority intransigence that worried Schumpeter are seen most starkly today in those countries cobbled together by the Great Powers as political acts after World Wars I and II. The Balkans and Iraq, of course, come quickly to mind, but many of the countries in Africa and Asia mired in a Third World mentality fit this profile as well.) Schumpeter thinks socialism, which is ultimately totalitarian, might look better in spite of its destruction of freedom than ever-present, ever-recurrent conflict. He thinks people might see this choice-security without freedom-as the eventual solution. Freedom without security-in light of both the Depression and World War II-Schumpeter thinks might be more than humanity could face.
     Time has shown that having faith in the upside of the human condition (its continued striving toward change for the better, in other words, its ability to discriminate between what is good and what is not, what will work and what will not) rather than certainty as to its downside (human perfidy, fear, or selfishness) is more than justified. The pessimism that Schumpeter offers is more a reflection of his very unsettled and difficult era-perhaps the most contentious of the twentieth century-than long-term political reality.
     What that observation refers to is this: throughout First Principles we have noted the negative effects of the human condition, how it can often work against well-intentioned and even good theoretical designs or some form of benevolent ordered liberty. We have done that only with the intention of explaining (in a somewhat shorthand fashion) why a mostly well-designed government doesn't always result in a well-oiled and smooth-functioning society. But in Schumpeter's case we also have to equally recall the beneficial potential of the human spirit-that it does covet order and freedom in a context of rationality. Conflict, confrontation, and war are sometimes necessary tools in an attempt to force rationality (recall Walter McDougall's observation in Promised Land, Crusader State [Chapter 20], "force sometimes precedes reason"), but are not conditions under which one can live permanently.

462 

Thus the upside of the human condition, the human spirit, incites a drive to resolution and ultimately peace-so long as such are ultimately achieved through voluntary agreement and not by force.
     At the end of World War II (which not only wasn't in sight when Schumpeter published his treatise but which was proceeding favorably for the Axis Powers [Germany, Italy, and Japan]) he expected the socialist order (or at least central planning if not centralized control of the economy) to be more entrenched than ever. Although he knew socialism's goals could not be achieved by socialism's methods, he bases his expectation of its ascendancy on the Great Depression's stimulus to enlarged government oversight and intervention in economic and social matters and the war-induced economic centralization in both the Allied and Axis camps. He sees the expansion of central planning and control that had begun in the 1930s as virtually unstoppable. Accordingly, he predicts the likely triumph of, at least, socialistic practices over capitalism-not because socialism was superior but because it was already in place to a considerable extent and because the times and personalities would allow its further entrenchment. In other words, Schumpeter comes to his conclusions based on practical expectations-a social or humanistic assessment-and foregoes his own well-argued faith in the demands of rationality in economic enterprise.
     Schumpeter believes that a docile population cannot prevail against those in power who would implement the peacetime conversion (no matter which side won), demand primary control, and justify their actions by claiming that what had worked in wartime would continue to work in peace. He also believes that such leaders would frighten people into thinking they knew what they were doing by suggesting that no one would want to return to the chaos and poverty of the 30s. The prediction of socialism's dominance was based on "extrapolating observable tendencies" not on a lack of faith in our ability to formulate intellectual and practical arguments against such a system of governance.
     Initially, certainly, Schumpeter's predictions were correct; at the end of the war Great Britain, the cradle of free democracy and market capitalism, not only installed a socialist government, but turned out of office Winston Churchill, their war-time prime minister, who was seen, literally, as the country's savior. Churchill had not only predicted the coming war as early as 1933, he had led England through its darkest hour; his exalted status achieved through respect for his prescient

463 

intellect and dogged determination in war should have been secure but he decried socialism in all its contortions-and the British public again ignored him and his advice as they had in 1933. At that point Schumpeter's expectations became reality.
     However, in spite of the British experience Schumpeter's fears were ultimately proven ephemeral. In his examination of "observable tendencies" he seems to have overlooked the fact or even the possibility that what the citizenry was willing to cede to the government during times of war was not necessarily that to which it would acquiesce over the long term in peacetime. He also seems to have erred by focusing on humankind's single-mindedness in war, a mental state that broadens to become expansive, multi-faceted imagination in times of peace. People tend not to countenance interventionism when it is not mandatory for survival. One is reminded particularly, when reviewing Schumpeter's reasoned concern about the future, of John Maynard Keynes's injunction regarding the force of ideas:

               The power of vested interests is vastly exaggerated compared with the
               gradual encroachment of ideas.


     Despite the sometimes pessimism and ultimate inaccuracy of his predictions, the breadth and depth of Schumpeter's investigations in this book and the supporting history he recounts are simply awesome. His exposition of socialism's weaknesses, and failures, laid a foundation for future writers and economists who studied the political centralization of public purposes in all its guises. Therein lay the continuing value of Schumpeter's investigations. It is not that widespread socialism is likely to revive anytime soon, but collectivism and totalitarianism are both still alive, and could gain acceptance-especially in the Islamic and Third Worlds where fundamentalist religious or social constructs are still the rule. With these possibilities extant, having knowledge of the past and pragmatically based counter-arguments prepared to stifle its repetition are necessary.
     Understanding that someone as incisive and brilliant as Schumpeter won't get everything right every time, while appreciating the incalculable value of those things that he does predict accurately, is useful in approaching the comprehensive explorations of the authors who helped shape the modern world. It is not easy to convince human beings that freedom is first among equals and more necessary than security, that without freedom there is no security. If a society does not have

464 

the ability and the will to change what goes wrong-and invariably something goes wrong-then that society can only become totalitarian or anarchic. Watching all of the theorists and philosophers presented throughout First Principles struggle in the attempt to not only make that case but prove it is seen in the writing of Joseph Schumpeter.
     For Schumpeter and others the seemingly overwhelming real-world facts of their times caused misjudgment of the capability of human striving. The long-term effect of distorted reality on human behavior and sound theory is still not as powerful as the human spirit. In spite of the fact that the real world is at intervals temporarily wrong, even insane, it generally rights itself although sometimes in devastating fashion. In other words, sometimes people die, and are willing to die, to recreate a rational world. And that is exactly what happened during the second half of the twentieth century. But that experience was not so clearly seen from the vantage point of 1942-thus Schumpeter's sometimes pessimism in Capitalism, Socialism and Democracy.
     Schumpeter's work has an intellectual reach that demands the reader engage in the debate on every level and with respect to all particulars. Understanding Schumpeter's dark view regarding the ascendancy of socialism-in spite of that system's inherent and fatal failings-and then viewing the course of history subsequent to Schumpeter's stated fears, where freedom and individuality again became the norm, offers continued hope in the ability of human society to right itself-but almost always with great effort, constant vigilance, and many unintended consequences.

About the Author
Having earned a doctorate at a young age, Joseph Schumpeter became known as "the genius without a knack for success." Born in 1883 in what is now Slovakia, he was only four when his father died. Schumpeter went on to a brilliant early career in academia yet, in spite of many opportunities to succeed, he was unable to turn them into palpable accomplishments. Regardless of the fact that Schumpeter was a polymath and fluent in six languages, his intellectual talents failed to prevent his real-world dismissal from his post as Finance Minister of Austria and later as a private banker, mostly because he was in the wrong place at the wrong time. Yet his books on economics
inspired others to investigate his subject matter on a broader scale than had been done before. During his career at Harvard University, where he

465 

began teaching in 1932, he formed the basis of his economic and more broadly theoretical works, thereby laying the groundwork for advanced investigations by him and others into economic theory and practice. Late in his career, when his academic accomplishments advanced his reputation, he served as president of both the Econometric Society, which he helped found, and the American Economic Association. Schumpeter died in 1950.

Available through:
Harper & Row Publishers, Inc.
10 E. 53rd St.
New York, NY 10022
www.harpercollins.com

466

 
Back to Top