Browse > Home / Liberal Philosophy / JOSEPH SCHUMPETER (1883-1950), CAPITALISM, SOCIALISM AND DEMOCRACY (1942)

| Subcribe via RSS


schumpeterAuthor: Barry Stocker

Schumpeter was an Austrian born in Moravia, now part of the Czech Republic, then part of the Habsburg Austro-Hungarian Empire. He studied economics and law in Vienna, attending the economics classes of Eugen Böhm-Bawerk and Friedrich von Wieser.

Böhm-Bawerk was a major critic of Marx and together with Wieser was a major figure in the Austrian School of Economics, which produced Ludwig von Mises and Friedrich Hayek and therefore a major component of classical liberal and libertarian thinking. Schumpeter was not a real member of the school, but had affinities with, and influence on it.

An extraordinarily complicated life led him from Vienna to a career at Harvard. On the way he practised law in Britain and Egypt, became an economics professor back in Austria-Hungary, advised the Emperor during World War One, was briefly Minister of Finance after the war, participated in the socialisation committee set up in Germany after the war (which did very little socialisation in practise), headed a bank which collapsed in 1924, taught economics in Germany, Japan and the USA.

In economics his best known contributions are the ideas of creative destruction and entrepreneurship. Creative destruction refers to the way that market economies constantly destroy the old in the economy so that new could emerge, and that connected with his theories of economic cycles.

In his theory of entrepreneurship he filled a gap in economic theory with regard to the role of individual initiative and innovation in founding economic enterprises. His interests in the behavioural and innovative sides of economic activity are where he influenced the development of Austrian School.

His best know book is Capitalism, Socialism and Democracy, which is not a work of economic theory, but rather combines observations on the sociological aspects of economics with thoughts about politics. The book argues that socialism was possible and even inevitable, but not very welcome.

His account of the feasibility of socialism makes him an unlikely liberal hero in one respect, but the book does argue for the superiority of capitalism to socialism and looks at the socialist future with foreboding, hoping to influence it to be as tolerable as possible. He looks at Marx’s theories with great empathy but also great critical insight, he offers an example of how the best criticism rests on the greatest understanding of the object of criticism, and a willingness to explain the stronger aspects of what is being criticised.

Schumpter argues for the success of capitalism in delivering constantly higher living standards to everyone, and in its civilising tendencies with regard to law, liberty and equality of respect. What he also argues is that capitalism has self-destructive tendencies. These tendencies include its respects for the rights of those who are against it, the creation of a group of intellectuals who cannot find employment as intellectuals at high salaries and then react against capitalism, monopolisation and decline of entrepreneurial spirit in capitalism. That last point refers to the growing size of capitalist enterprises which insulates them from short term economic problems, and turns them into institutions living off the innovation of the past. This builds up into the tendency of the whole of society to move away from entrepreneurial capitalism to statist socialism.

Trade unions, disaffected intellectuals and state bureaucrats have attitudes in common with monopolistic capitalists, attitudes favourable to planning and state control. This state dominated model can succeed economically but only because of the previous successes of capitalism. Only capitalism can move societies from widespread poverty to widespread prosperity. Once prosperity is attained, a society can move towards socialism if it is willing to accept economic stasis with no future growth. This can be achieved by evolutionary or revolutionary means, though the evolutionary approach tends to be more realistic about what can be achieved in socialism.

Socialism will not be able to achieve the purist egalitarian ends, and must accept some role for upper level ‘bourgeois’ managers and economic incentives. Such a system is compatible with democracy, if we understand the non-ideal ways democracy already works in capitalism. There can be no ‘will-of-the-people’ in practice, ideas of popular will emerge from struggle against monarchy and aristocracy, and have little application in practice.

Democracy is about selecting leadership, and there is no way that a leader can followed a unified will at all times; and even at any one moment public opinion is divided so that at most the leader can only apply the views of one part of the public. Similar considerations apply to any claims to be following very objective forms of calculating the welfare of the whole of society. This undermines any notion of ‘economic democracy’, or of the state being able to satisfy popular will by intervening everywhere.

Democracy tends to work as the maximisation of the economic interests of sections of the electorate, rather than as the formation of a unified rational will concerning the public interest. Schumpeter’s suggestion that socialism can work and that it is inevitable, may be unsettling, but looked at closely, he proves very realistic analyses of why capitalism tends to develop in a socialistic direction, and therefore indications of what needs to be done in order to prevent that. These factors make Capitalist, Socialism and Democracy essential reading for liberals in the original sense of the word, and a paradoxical classic of that kind of liberalism.