Capitalism, Socialism and Democracy [Paperback]

The book is a classic. Joseph Schumpeter achieved immortality through his use of the words "creative destruction." However his seminal work, "Capitalism, Socialism and Democracy" is much more than a narrative of the process of creative destruction and of what that portends for the capitalist order. Indeed the author spends precious little print on that topic though he does bring it up in the context of the underlying forces of capitalism. Instead the author tries to paint his strokes on a vast canvas and lays out the historical developments of capitalism and socialism in this masterpiece, also taking care to explain the connections of each with democracy; hence the title of the book. The book is divided into five parts- three of which are on the topics I have alluded to above, and are titled "Can Capitalism Survive?," "Can Socialism Work?," and, "Socialism and Democracy." The first and last sections are less vast in their scope and focus instead on particular topics; the first being a description of the Marxian doctrine in its fullest ambit as they pertain to Marx's labor theory of value and his world vision of the impending collapse of capitalism, while the final section is a historical narrative of his times describing the growth of Socialist parties in Britain, Germany, France, Russia and the United States. One cannot fail to be impressed by Schumpeter's vast knowledge of history and of contemporary developments, not to mention, his ability to see the underlying causes that were driving these developments and what that might mean for human civilization during the road ahead.

To me, the biggest aha of the book is Schumpeter's assertion of capitalism's impending collapse. He points out that unlike Marx and the other socialists, who predicted that capitalism would collapse, because of its failures; he also predicts that capitalism would collapse but it would do so because of its success and not because of its failure. Seen in the light of the historical experience of the United States and other modern industrialized economies, it is hard to not notice how foresighted his comments were. For instance, he points to the fact that entrepreneurship which has been the driving locomotive of the capitalist system has now become institutionalized in a way that has taken away the romance from entrepreneurship. Indeed to maintain a large organization needs far less talent and skills as compared to the efforts required to initially set up such an organization. Thus over a period of time, with the ascent of the big business, entrepreneurship and with that, the social prestige which is accorded to the entrepreneur will fade away or at least, be a less prominent feature of the society than what it is today. Another underlying factor of the demise of capitalism would be the growth of distant and distributed ownership of the means of production, exemplified by the joint stock company. Indeed far from being the pinnacle achievement of capitalism, it may well prove to be its death knell because neither the executives running those mammoth organizations nor the share holders, would feel the same level of ownership that is felt by the owner-manager of a single proprietorship or a partnership. Lacking that sense of ownership, they would not put up a resistance to the incursion of the politicians in their domain and may turn out to be supporters of such a move. Thus, slowly but surely, there would be a transition from capitalism into socialism, and while that may not be the name with which many of its adherents chose to call it, that would simply be a reflection of the fact that the word socialism itself does not find a receptive audience in many of the countries, including the United States. There are other factors that he also lays out such as the inability of the entrepreneurial class to have a political class supportive of its interests and an intellectual class, which will be perennially opposed to capitalist order, similarities that cannot fail to strike the thinking reader of today.

If there is a complaint which I have against the book, it is the author's convoluted style of writing which demands the reader's fullest attention and frequent re-reading of the text. I present a sentence below from the work itself which illustrates my point: "These means are actually being used now- not without success- although, in the given circumstances, they cannot be used to full effect because no great surplus is possible as long as the food subsidies remain what they are, because the possibilities of taxation, so far as the higher income brackets are concerned, are exhausted- in England there are no longer any people who are "rich after taxes"- and because a higher interest rate meets with apparently invincible resistance." Beyond this single shortcoming, however I would whole-heartedly agree that it is a masterpiece and deserves to be read by anyone who is seriously interested in the uestions of "Can Capitalism Survive?" and "Can Socialism Work?"

"Capitalism, Socialism and Democracy" is a great book and anyone with serious interest in economics and government should read it. Of course the groundbreaking concept (or at least term) that came from this book was "creative destruction."

Having said that, there are some weaknesses. The book has a style that requires intense concentration.

And, the author made the mistake that so many other authors have made of assuming that it is possible to convince socialists that socialism is wrong by presenting rational arguments against socialism.

I don't think socialists will turn into capitalists from reading this. However, people who already understand capitalism (and therefore already are capitalists) will benefit.

John Christmas, author of "Democracy Society"

This classic blew the toupees off of economists of all schools, scrambling their papers, when it appeared in 1942. The strong analytical winds of "Capitalism, Socialism, and Democracy" have not died down.
Joseph Schumpeter (1883-1950), scion of the Austrian School of subjective economics although very much his own intellectual conscience, posited that capitalism tends toward self-destruction and socialism is heir apparent like it or not (Schumpeter didn't personally endorse socialism). Through this work and others, Schumpeter (although not Jewish himself) fulfills a teaching of one of the great sages of Israel - "Ben Zoma says: Who is wise? He who learns from every man..." (Ethics of the Fathers 4:1).
Like his teacher Eugen von Bohm-Bawerk, Professor Schumpeter gave Karl Marx his due, crediting Marx as one of the fathers of economic theory, following the line back to the Classical School. Many of the Reagan-era neoconservatives (the "neo" ought to stand for Not Educated Overall) that wore Adam Smith ties and imagined Marx to be the polar opposite of classical economics probably never read Marx or the writings of his greatest influence, the Classical School's David Ricardo. Bohm-Bawerk and Schumpeter, who both served as finance ministers for the nation of Austria, took time to study Marx.
Schumpeter holds that Marx was correct in his central observation that capitalism would break down but wrong in some of the reasons he (Marx) gave. Schumpeter credits one of the fathers of the German Historical School - Gustav von Schmoller - for the insight that what would replace capitalism is state socialism, marked by increased bureaucratization, as opposed to Marx's socialism run by the masses. The ever-realist Schumpeter rightly points out Marx is among those that assign "an altogether unrealistic degree of initiative" to the populace.
Speaking well of the Historical School may have provoked thoughts that Schumpeter had traveled further down the road of "apostasy" from Austrianism. Carl Menger, founder of the Austrian School, and Schmoller had debated publicly over the nature of economic science with the Germans insisting there were/are no universal laws of economics; history and culture being the only reliable guides. Menger didn't deny the importance of history but maintained that the Germans closed themselves off from important discoveries because of their refusal to theorize.
Ludwig von Mises, a University of Vienna contemporary of Schumpeter's and dean of the modern Austrian School, wrote biting criticisms of historicism, Marxism, and socialism. Schumpeter invokes Mises' powerful observation that a socialist economy would act in an uncoordinated manner without a set of competitive market prices. Yet three pages later, Schumpeter cites Friedrich von Wieser, one of the leaders of the early Austrian School and a father of opportunity-cost theory. Wieser's book "Natural Value" hints that the fundamental logic of economic behavior in capitalist and socialist societies is the same. It's almost as if Schumpeter is needling his old schoolmate by whispering between the lines - "remember what our teacher taught."
Wieser, also Bohm-Bawerk's brother-in-law, was a Fabian-style socialist (as opposed to the classical liberal Bohm-Bawerk. Imagine those family Christmas parties) so Mises, a leftist-interventionist-turned-thoroughgoing-libertarian, wasn't hearkening to Wieser any longer regardless of Schumpeter's nudging.
The logic described by Wieser and Schumpeter goes by the name of rationality. Since rationality plays the leading roles in both systems a move from capitalism to socialism need not be traumatic, Schumpeter wrote. Echoing cultural lessons learned from the German economists, Schumpeter maintains the "national character" of the people is crucial and "it is the kind and scope of rationality that makes the difference."
Our author acknowledges that socialism is unlikely to match capitalism's material abundance yet people might opt for socialism just the same. The longings of the hungry soul (and not the belly, Schumpeter notes), articulated by early socialist writers, may well reawaken man's desire for community, pushing things further toward socialism. Consider how TV, the Internet, and other gadgets of capitalism have fostered isolation and alienation. CEO pay, with its extravagance and waste, is another powerful ongoing commercial for socialism.
In bringing democracy into the puzzle, Schumpeter provides penetrating analysis of this much-misunderstood convention. Democracy is not universally workable, cannot be created in a hurry, and cannot be an end in itself (listen up, neocons, especially Jack Kemp who used to quote Schumpeter publicly yet would foolishly declare in the next breath that democratic entrepreneurial capitalism would come to all mankind. Very unSchumpeterian, Jack).
Democracy's functionality in the U.S. and Europe stems from the equalitarian link between Christianity (particularly the Protestant brand) and the classical theory of democracy. Yet this classic theory ("the rule of the people") has evolved into "the rule of the politician." Contemporary democracy, rightly understood, is the free competition of men for votes from the electorate, not the public deciding issues, our author wrote.
Schumpeter's views on democracy leads us to the heart of his philosophy of science - analyzing change and how it effects the interactions of things. The International Joseph A. Schumpeter Society publishes something called the Journal of Evolutionary Economics. Evolutionary is a good word to apply to Schumpeter's research but that shouldn't associate him with Darwinian biological evolution. Schumpeter stayed away from using terms associated with the theory of biological evolution because he was smart enough to see that man's physical makeup (the human body) has remained pretty much constant. It's man's surroundings that evolve.
Schumpeter greatly admired and was influenced by physicists and mathematicians including Vienna's Ernst Mach. Schumpeter called the Franco/Swiss Leon Walras, patriarch of modern mathematical economics, the "greatest" of all the theorists. Walras taught that markets are always trending toward general equilibrium but, in most cases, never actually get there. That said, my small mind puts Schumpeter's social analysis into a Walrasian framework - Capitalism will forever trend toward socialism yet never completely evolve into it - in most cases.
Men have been double-minded ("immature" in Schumpeter's language) since the Garden of Eden thus socialism and capitalism will never vanquish the other. Industrialized civilization seems stuck with a mixed system (interventionism) as far as the unchanging human eye can see.