A review of Capitalism, Socialism and Democracy by Joseph A. Schumpeter; Harper Torchbooks, 1976; ISBN: 0061330086
Schumpeter wrote the book during the 1930s when he emigrated to the United States. It was first published in 1942.

The man of system... seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably and the society must be at all times in the highest degree of disorder.
--Adam Smith: The Theory of Moral Sentiments, Part 6, Chapter 2

Schumpeter is of course aware of this argument and acknowledges its validity, yet the kind of society he conceives in "Capitalism, Socialism and Democracy" will not, he predicts, have to contend with any such difficulties. This is of course easily demonstrated in Schumpeter's taxis. The socialist engine is clearly much more conducive to promoting authoritarian discipline, and this is, for Schumpeter, one of its great merits. Yet the ability of a command economy to increase production is one of the many claims Schumpeter makes that are questionable.

Schumpeter goes to great pains to demonstrate to us the great efficiency of the capitalist system. He is entirely convinced that capitalism is the sole explanation for us being where we are. With his characteristic candidness he dismisses all arguments that fail to bestow laurels on capitalism. Yet beginning from this conviction, Schumpeter goes on to indulge in a socio/psychological analysis and finally tells us that "... the ever-rising standards of life and particularly the leisure that modern capitalism provides for the fully employed workman... well, there is no need for me to finish the sentence or to elaborate one of the tritest, oldest and most stodgy of all arguments which unfortunately is but too true. Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest." (pg. 145) So, starting with an acute analysis of Marx and a piercing critique of Marxist economics, Schumpeter finally declares the Marxist prophecy to be true.

It would be quite futile to argue against any such theory, and to an extent the rest of this book is an elaboration of this pivotal statement. Schumpeter has reconciled himself with the inevitability of an ever-rising chorus demanding Socialism, and as he himself notes this is because "Political criticism cannot be met effectively by rational argument" (pg. 144). As the book progresses however, Schumpeter modifies his stance somewhat and we find various defences of Socialism that come rather unexpectedly after the first two sections of the book. This may be simply an attempt by an eternal optimist to see a half-full glass where there is nothing at all, but this is the portion of this tract that needs to be looked at most closely.

If there is one thing Schumpeter cannot be accused of, it is lack of thoroughness. He has challenged almost all, and answered many, criticisms of the socialist schema in this rather wide ranging book. Yet there are a few that he has shrugged off rather flippantly and it is here that we must focus our attention. Along with all the other dismissals that Schumpeter hands out to economists and social scientists of all persuasions, he has answered the Hayekian critique in a few sentences (pg. 185), and Mises's reservations concerning the socialist order with equal brevity (pg. 172-3). Schumpeter's responses do not do justice to their critique.

Unanswered questions

Schumpeter details an elaborate plan involving vouchers and price-fixing which a socialist state could adopt in order to make distribution a "distinct operation" that "in logic at least, is completely severed from production." (pg. 173) Schumpeter then goes on to claim that though this separation may become a determining factor as far as the society's attitudes are concerned, it is completely arbitrary from the economic standpoint. By separating distribution and production, however, Schumpeter's hypothetical socialist state is forced to find a replacement for the price system that will convey information regarding the market to those making production decisions. The tool that is readily available is of course an efficient bureaucracy infused with an adequate amount of espirit de corps. Schumpeter fails to realize however that a bureaucracy cannot but be less responsive than the price system. Renouncing the market price system entails giving up the most effective information dispersal mechanism we have chanced upon. Despite his claims to the contrary (pg. 185), this bureaucracy will not function as efficiently or rationally as the market does. Again contrary to Schumpeter's expectations, such a bureaucracy will not require less intelligent managers than a modern capitalist enterprise; at worst it would require omnipotent beings, and at best those with very different thinking capacities. Schumpeter fails to tackle the problem of gathering particular information for such a bureaucracy to process, and with rather irritating confidence declares that certain macroeconomic variables, and other production data would suffice. With surprising naiivete, Schumpeter assures us that it would be possible to set up a system of incentives to ensure that the bureaucracy makes the right decisions. Of course this only makes us ask the question of a higher authority, and in the socialist schema there is always a higher authority. So we finally have to put this question to those on the top. What are your criteria for making decisions? The answer can only be that there are no criteria, that there are no laws, no rules, that all decisions are made arbitrarily as the "needs of the moment" dictate. So much is implied in the Mises-Hayek doctrine.

Of course it is rather easy to see where Schumpeter has derived his vision of the "socialist engine" as a big enterprise from. After all it with St. Simon that the imagery of the "one workshop" originated (Friedrich von Hayek, The Counter-Revolution of Science, pg. 121). Curiously, Hayek is the one figure Schumpeter fails to denigrate, treats with positive veneration (pg. 307) and goes to the lengths of adopting an apologetic tone towards. Yet Schumpeter can hardly, at this juncture, defend this concept solely on the basis of its origins and he does not. Characteristicaly, Schumpeter has another surprise in store for us. In perfect harmony with the refined Marxist prophecy Schumpeter declares that the capitalist system has itself created an environment where individuals are being trained to accept the all-encompassing bureaucracy. Big business becomes for Schumpeter, the progenitor of the state economy. Ignoring all the problems such a claim presents, (the promiscuity of small businesses in new and emerging technologies, the phenomenon of consultants to provide small enterprises with the expertise they lack, the re-emergence of the self-employed entrepreneur in all fields...) it is rather amusing that Schumpeter informs us, countering Marx, of the white collar workers resistance to socialization. The driving force behind this almost unanimous clamour for the "socialization of the economy" is Schumpeter's (and in his view society's) thirst for stability. Writing in the post-depression moment, Schumpeter has perhaps been greatly shaken by, what appears to him to be, the naturally catastrophic undulations of the capitalist structure. So Schumpeter opts for a system that places direct control in the hands of a few authorities, and by his thinking, consequently involves less arbitrariness, more "rationality", less "creative destruction" and more stability. The irony of it all is that Schumpeter is forced to acknowledge the need for regular changes, or repairs, to be undertaken on the socialist engine and (considering the bureaucratic aversion towards change in the absence of a direct threat to its own survival) this can only increase the uncertainty and friction he wants so much to avoid.

Even if we do accept that socialism might provide us with more stability, it becomes necessary to ask: At what cost? Interestingly, Schumpeter has reversed Mises' argument somewhat and in a rather fiery response to Keynesian economics and other "half-way" socialist measures, condemns them as mere platitudes that will only serve to delay the inevitable socialization of society and must be opposed by all true socialists.

But the question remains; at what cost? Quite candidly, Schumpeter acknowledges that democracy becomes dispensable in a socialist environment. This argument is preceded by a rather incisive analysis of what democracy is commonly understood to be and its own inherent limitations. Yet, after concluding with this analysis Schumpeter does acknowledge that any form of democracy is quite incompatible with full-fledged socialism. Once we are done with destroying this cherished myth, Schumpeter goes on to applaud the virtues of the socialist engine embodied in its ability to "impose hardships" (pg. 210), "eradicate the bourgeois separation of powers", "empower social admonishment" (pg. 215, "insert the stock of the bourgeois extraction into its proper place within that machine" (pg. 207). Sadly, Schumpeter seems to have rationalized the loss of individual freedom this would entail. Paradoxically, he appears to be very concerned about rights abuses in Russia, yet even this concern is qualified by an elaboration on the uniqueness of the Russian situation, in that Russia was not a fully-evolved capitalist economy on the eve of the Bolshevik revolution. None of this detracts however, from the fact that Schumpeter does not protest the subjection of the individual in the interests of "society". Rather, he would go as far as to suggest that such subjection of the individual is rational and desireable in that it enables society to harness the abilities of each individual more effectively. The validity of that claim is highly questionable.

Despite all the reservations one may have about the thesis presented in the book, it is almost impossible to refuse to acknowledge Schumpeter's thoroughness. This book is a quite comprehensive discourse on socialism, and one can hardly accuse Schumpeter of setting his sights too low. It must also be said that the book is a delight to read, if only to taste Schumpeter's irreverence.


The was written in Fall 1995 as an assignment for Israel Kirzner's course at NYU on the Foundations of Capitalism

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