Capitalism, Socialism and Democracy

“The history of society is the history of class struggles.”

Schumpeter quotes from Marx’s economic interpretation of history as outlined in the Communist Manifesto. Schumpeter admired Marx’s ambition in this statement and his foregrounding of the importance of economics in understanding historical and sociological development. However, he regarded Marx’s specific analysis of class as too simplistic and apocalyptic.

“There are no doubt some things available to the modern workman that Louis XIV himself would have been delighted to have yet was unable to.”

Schumpeter gives an account of the advantages that capitalism has brought humanity. Part of this has involved a massive expansion of the quantity of goods available to most people. It has also involved an expansion in the diversity and quality of goods. Modern workers enjoy certain products, such as cars, previously unavailable to kings.

“The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process.”

Here, Schumpeter shows his indebtedness to Marx. Like Marx, he sees capitalism not in terms of static market equilibriums but as a constantly changing process. This leads him to the conclusion that monopolies can be superior to competitive markets since monopolies allow for more innovation and dynamic development.

“Technological possibilities are an uncharted sea”

This refutes the argument that we are reaching a technological frontier where all possible new technologies will have been exhausted and hence that capitalist progress, and with it capitalism, will end. Schumpeter argues that the self-perpetuating nature of technology is such that it is simply impossible to make such a judgment. For example, few people even in the 1980s could have predicted the rise of the Internet. According to Schumpeter, capitalism will fall, but for different reasons.

“He is becoming just another office worker—and one who is not always difficult to replace.”

Capitalism operates by making more and more productive processes automated. Eventually this process will catch up with innovation and “progress” itself. At such a point teams of specialists backed up by technology will take over from individual innovators and entrepreneurs. Entrepreneurs will be relegated to being white-collar managers or administrators.

“The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property.”

As capitalism becomes more advanced, ownership becomes more abstract. This is as the individual factory owner is replaced by groups of distant shareholders who may not even live in the same country as the firm. Shareholders will be less willing to fight for abstract shares and this will, for Schumpeter, further hasten capitalism’s demise.

“The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.”

Schumpeter critiques the intellectual. The expansion of education facilitated by capitalism is likely to create a class of people educated enough to criticize capitalism but with few job prospects. This group’s resentment and involvement in radical politics will help foment further social hostility toward the capitalist order.

“…in private as in public life, tend to focus attention on ascertainable details of immediate utilitarian relevance and to sneer at the idea of hidden necessities of human nature or of the social organism.”

Schumpeter analyzes the decline of the bourgeois family. Bourgeois couples have increasingly adopted a self-interested, instrumental view toward having children, deciding not to. This will facilitate capitalism’s demise.

“Consciously or unconsciously they analyzed the behavior of the man whose views and motives are shaped by such a home and who means to work and to save primarily for wife and children.”

On the surface, the capitalist’s investment in his business is founded on rational self-interest. In actuality, it is based on a pseudo-rational desire to provide for a wife and children, for a home, and for future generations. Without the motivation of home, family, and children, the childless bourgeois individual will lose the will to save or invest, which are central to the continuation of capitalism.

“Only outright beefsteak socialism can be content with a goal such as this.” 

Schumpeter discusses the economic benefits of socialism. He argues that it might be more efficient in providing commodities for the masses than capitalism. However, he concedes that this is quite a materialistic and limited way of viewing the merits of socialism, and that it would not satisfy many socialists.

“the planning of progress […] would be incomparably more effective in preventing bursts at some times and depressive reactions at others.”

This is of the core economic arguments in favour of socialism. By being able to manage technological development, it could eliminate its negative effects. For example, a central agency could immediately reallocate workers in redundant areas of the economy to newly productive ones, rather than waiting years for these adjustments to happen through market forces.

“But surely this should not horrify anyone who realizes how far the bureaucratization of economic life—of life in general even—has gone already and who knows how to cut through the underbrush of phrases that has grown up around the subject.”

Schumpeter suggests that a future socialist society would inevitably contain a huge bureaucratic apparatus to manage the economy. Many consider bureaucracies to be a downside of socialism. However, Schumpeter claims that such arguments are anachronistic since the modern capitalist economy, and much of life, is already extremely bureaucratic and administered.

“Successful performers may conceivably be satisfied nearly as well with the privilege—if granted with judicious economy—of being allowed to stick a penny stamp on their trousers as they are by receiving a million a year.”

An oft-cited critique of socialism is that it would reduce or eliminate workers’ incentives to perform well. Schumpeter argues that what people really care about are observable symbols of social status, for which money is just a proxy. Socialism could easily provide these and maintain motivation in the absence of financial rewards.

“First, the socialist order presumably will command that moral allegiance which is being increasingly refused to capitalism.”

Schumpeter explains why worker discipline and performance might be better under socialism. Workers are likely to try harder for a system which they believe represents them rather than one which exploits them. A socialist manager will also have a greater ability to wield punishments than a capitalist manager.

“The realities of human behavior when under the influence of agglomeration—in particular the sudden disappearance, in a state of excitement, of moral restraints and civilized modes of thinking and feeling, the sudden eruption of primitive impulses, infantilisms and criminal propensities.”

Schumpeter discusses research into the psychology of crowds. In certain group situations, human morality and reason can break down. Schumpeter uses this point to criticize the classical theory of democracy and its notion that there can be a common, rational will of the people.

“He is a member of an unworkable committee, the committee of the whole nation, and this is why he expends less disciplined effort on mastering a political problem than he expends on a game of bridge.”

Schumpeter argues that the average voter’s ability to make meaningful political choices is limited. They feel that their vote makes relatively little difference to the immediate circumstances of their lives. As such, they invest minimal energy into understanding or engaging with political issues.

“The picture of the prettiest girl that ever lived will in the long run prove powerless to maintain the sales of a bad cigarette.”

In another argument against the rationality of voters, Schumpeter says that political parties and leaders do not use rational appeals and arguments. Instead, they operate more like advertisers of certain brands, linking political ideas and leaders to sub-rational associations and feelings. Politics is even worse than ordinary product advertising. Consumers can at least test the quality of a product, whereas it is difficult to discern the success or failure of a policy.

“The democratic method is that arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for the people’s vote.”

Schumpeter criticizes the limitations of the classical theory of democracy and presents his alternative. In his vision, the process of competing for votes, and voters choosing leaders, defines democracy. Schumpeter claims that this has the advantage of affording proper significance to the role of leaders, something that the classical theory does not.

“The point was not so much that many of their schemes were obviously freaks or otherwise below par intellectually, but that those schemes were essentially unimplemented and unimplementable.”

Schumpeter discusses the “utopian socialism” that existed before Marx. Its key weakness was not an inadequate vision for socialist societies. Rather, visions were not linked to any historical or social processes which might make them a reality.

“The further removed the actual situation was from the state of maturity which Marx visualized, the more ready were the Russian intellectuals—not only the professed socialists among them—to look to him for a solution of their problems.”

According to Schumpeter and classical Marxist doctrine, a capitalist society should only attempt a transition to socialism when its economic structures are fully “mature” and developed. The Russian intellectual class ignored this, holding up Marx as a prophet whose ideas could be immediately implemented in a semi-agrarian society. Schumpeter says this impatience and oversight was responsible for much of the subsequent violence and repression in Russia.

“It really appeals to the workman’s instincts—and not, like Marxism, to the intellectual’s idea of what the workman’s instincts ought to be—by promising him what he can understand, viz., the conquest of the shop he works in, conquest by physical violence, ultimately by the general strike.”

Schumpeter discusses French syndicalism. This movement rejected intellectuals and theories in favor of immediate and direct action. In some ways, Schumpeter admires its anti-intellectualism. On the other hand, he is highly suspicious of any moves toward direct worker democracy or the self-rule embodied in it.

“They rallied to their national causes with a readiness that was truly astounding.”

Prior to World War I, socialist parties across Europe, in keeping with Marx, had professed internationalism and anti-militarism. That made the eagerness with which they supported nationalist causes at the outbreak of the war shocking. It represented a “great betrayal” for many socialists. However, Schumpeter argues that this allowed them to gain respectability amongst the wider electorate and helped them get into power in the following decades.

“Unless success be quick or, at all events, striking and clearly associated with the performance of the ruling stratum […] exhaustion, economic, physical and psychological may well produce, even in the case of victory, effects on the relative position of classes, groups and parties that do not differ essentially from those of defeat.”

It may have seemed that victory for Britain and France in both World Wars would have bolstered the capitalist establishments there. However, the length and cost of both wars meant that it was more like a defeat for the elites in terms of public perception. Weariness with the existing order helped the Labour Party win power in Britain in 1945 and led to a substantial growth in the Communist Party in France.