Capitalism, Socialism and Democracy.

• Author: McInnes, Neil

In 1947, Harper & Brothers published the second edition with a chapter added by Schumpeter. In 1950, a third edition was published by Harper & Brothers. It includes "The March Into Socialism," published previously as a paper for the American Economic Association's Papers and Proceedings, (December 1949). In 1952, the fourth edition of Capitalism, Socialism and Democracy was published in London by Alien and Unwin. Several editions of the book are still available.

Last summer, the university in Czernowitz (a city that after various name changes finds itself in Ukraine) held a Schumpeter summer school to celebrate the ideas of the Austrian who became associate professor of economics there, at age twenty-six, in 1909 (when Czernowitz was the easternmost bastion of the Austro-Hungarian Empire). So, a scholar widely known for predicting a painless transition from capitalism to socialism is today studied in the East for clues on how to get back from socialism to capitalism. The paradox has parallels in the West, where Schumpeter's Capitalism, Socialism and Democracy is still extensively read long after it became evident that its forecasts of "the march into socialism" were wide of the mark.

There is something of a puzzle about the perennation, in sixteen different languages including Hindi, Persian and Korean, of a book published in 1942 that is full of false prophecy and personal quirkiness. Schumpeter, after all, was the rich man's Karl Marx and by now his Capitalism, Socialism and Democracy ought to have gone the way of the Communist Manifesto. But Schumpeter was wrong for superior reasons, and in social theory it is the reasons, not the predictions, that count. Marx's prediction that capitalism would lead to socialism was founded on the supposed impoverishment of the majority by a dwindling minority, a falling rate of profit, and a class-conscious proletariat. Before the beginning of this century it was already obvious, notably to the Revisionists, that none of these things was happening, so Marxism has been dead at the roots for a hundred years. In contrast, Schumpeter's forecast that capitalism would pass away was grounded in the perception that business enterprise tends to gel lumpily into monopolies which seek to routinize research and development until they become unenterprising, unpopular and fettered by regulations. It is unimportant that Schumpeter drew the incorrect conclusion from this - that therefore business would end up being run by a few office workers appointed by the government. What is important is that his reasons for saying that still provide the best place to start understanding capitalism - a much better place than, say, models of pure competition and static equilibrium. So even when he gave the wrong answers Schumpeter was asking the right questions; as S.G. Winter said in 1984, "Today, as on any day in living memory, it is easy to admire Schumpeter's taste in problems."(1)

All the same, you would think that Capitalism, Socialism and Democracy (hereinafter CSD) would be coming to the end of its prodigious shelf-life if its importance derived, as Tom Bottomore said in his introduction to the 1976 edition, from "the great social transition of the present age, from capitalism to socialism." Few people other than Bottomore believed in such a transition in 1976, and yet even in 1992 in his book Between Marginalism and Marxism: The Economic Sociology of J. A. Schumpeter he was still of the view that "the confrontation between capitalism and socialism continues to be a major element in social and political conflicts." Bottomore's enduring engrossment with CSD because of this supposed central issue is somewhat pathetic, for he is precisely the sort of anti-capitalist, fellow-traveling, utopia-prone intellectual that Schumpeter pilloried in the book. No one would read it today for his reasons.

What has saved CSD is the revival of interest in Schumpeter's general economic system, a system in which CSD occupies an eccentric, marginal place - a parergon (or by-blow), he called it. The revival dates from the eclipse of Keynesianism in the 1970s' stagflation; it gathered pace with the formation in 1986 of the International Schumpeter Society and the subsequent launching of the Journal of Evolutionary Economics, devoted to lines of inquiry Schumpeter started as long ago as 1912, in his Theory of Economic Development. There is a lot of enthusiasm and maybe some exaggeration in this belated apotheosis. Peter Drucker in 1983 claimed:

It is becoming increasingly clear that it is Schumpeter who will shape the thinking and inform the questions on economic theory and economic policy for the rest of this century, if not for the next thirty or fifty years.

In 1984 H. Giersch, in the American Economic Review, hailed "The Age of Schumpeter," and in a 1988 miscellany on Evolutionary Economics: Applications of Schumpeter's Ideas, Gunnar Eliasson spoke of "the Schumpeterian revolution that currently appears to be replacing the Keynesian revolution in economics."

This revolution consists of a move away from the mainstream economist's analysis of maximization and equilibrium, rational expectations and stability toward a dynamic theory of economic development, which is found to be not incremental but disruptive, episodic, and disequilibrating because firms are not competing on price but on innovations. These new products, new ideas and new organizations are introduced in a gale of creative destruction, no matter whether by new-entrant entrepreneurs or by established big firms, so the economist's curiosity must be about the supply side of the micro level. What room is left for policy formulation will concern only the long term, "the climate not the weather." We thus move from the rarefied abstractions of neoclassical economics where, although technology is no longer a free good, it is assumed not to change; and we enter a jungle which bears an uncanny resemblance to the real world of business. There, Paul Samuelson said in 1982:

The countervailing power that runs Schumpeter's jungle is the competition of giant seller against giant seller. And even a pygmy can challenge a giant and hope to become a giant.

Now CSD does not contribute much to this theory, which Schumpeter had worked out thirty years before, except such colorful phrases as "the perennial gale of creative destruction." J.K. Galbraith reported in 1977 that Schumpeter had said CSD "inspired his special loathing. It lacked, he said, scientific depth and precision." What is true, as contributors to the 1988 volume on Evolutionary Economics noted, is that

CSD is of course sociological and does not proceed in terms of economic analysis. In addition, it is more in the nature of science fiction that does not discuss the actual capitalist economy, but the capitalism of the future.

Still, although professional economists nowadays tend to dismiss it sniffily as "more of a political tract than a work of economic theory," CSD is the easiest access to Schumpeter's economic ideas, some of which get a fresher, sharper definition there than elsewhere, notably the notion of "trustified capitalism."(2)

What it contains (for those who may have forgotten) is a section on Marx, which looks out of date because written before the rediscovery of the young Marx; a section on "Can Capitalism Survive?" (The answer: "No. I do not think it can"); a section on "Can Socialism Work?" (No surprise: "Of course it can"); a section on socialism and democracy, which argues that they are perfectly compatible; and finally a history of the socialist parties. It is the second, on the decay of capitalism, that is justly celebrated, not only for the economic material on the sources and processes of innovation and the role of market power ("monopoly") in protecting them, but rather for the dazzling combination of that material with sociological and frankly political analysis of social leadership, ideology, intellectuals, and the decline of the Buddenbrooks writ large in twentieth-century history.

This virtuoso combination of economic and sociological insights yields six main ideas. First, the entrepreneurial function is becoming obsolete because innovation increasingly comes from bureaucratized research and development and anyhow consumers no longer resist new products, so economic progress becomes depersonalized and automatic, thus robbing the business class of its social function and prestige. Second, capitalism has spread rationality which, in social matters, encourages skepticism about order and the family, on which capitalism is founded. Third, capitalism is destroying its own institutional framework by expropriating little businesses into bureaucratized behemoths that no one feels they own, and so no one defends them. Fourth, the case for capitalism, while no doubt excellent, is too complicated for the masses to understand, let alone turn into a faith or ideal. Fifth, businessmen are politically inept and cannot govern without the protection of those elites (e.g. aristocrats) whom they eliminated. Sixth, the intellectuals, who are ungrateful and hypocritical smart-alecks, attack a vulnerable bourgeoisie and capitalism.

Needless to say, the publication in the darkest days of the war, and by a Harvard professor who made no secret of his sympathy with the German and Japanese peoples, of a book calmly forecasting the eventual demise of capitalism and its succession by socialism provoked a succes de scandale, and yet no real hostility. One must remember that the essay, "Can Capitalism Survive?" was first drafted in...