Capitalism, Socialism and Democracy (Harper Torchbooks) [Paperback]

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.

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.

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.