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Capitalism, Socialism and Democracy is the most famous book by Joseph Schumpeter in which he deals with capitalism, socialism and creative destruction. First published in 1942, it is largely unmathematical, compared with neoclassical works, focusing on the unexpected, rapid spurts of entrepreneur-driven growth instead of static models[1].



The book is unusual insomuch as it was written to appear sympathetic to socialism, beginning with an account of Karl Marx, in order to encourage socialists to read it. Schumpeter hoped they would achieve self-recognition of the problems with socialism in the light of the book, without having to be explicitly told: if the book appeared to be favourable to capitalism, he feared socialists, his target audience, would not bother to read it.

The Book


Part I: The Marxian Doctrine

Schumpeter devotes the first 58 pages of the book to a flattering analysis of Marxian thought and the place within it for entrepreneurs. Noteworthy is the way that Schumpeter points out the difference between the capitalist and the entrepreneur a distinction that he claims Marx would have been better served to make (p. 52). The analysis of Marx is broken down into four roles that Schumpeter ascribes to the writer (prophet, sociologist, economist, and teacher). The section, Marx the Prophet, explains that if nothing else Marx would have been received well by people who needed a theory to explain what was happening in their society. The section, Marx the Sociologist, focuses on how Marx's theory of class fits in with the larger intellectual traditions of the day and how it superseded them in at least its ability to synthesize sociological thought. The section, Marx the Economist, focuses on Marx's economic theory and judges it excessively "stationary" (pp. 27, 31). He also deals with the concept of crisis and business cycle, two economic theories that Marx pioneered (p. 39). The last section, Marx the Teacher evaluates the usefulness of Marx's thought to interpret the events of his time and those between his death and Schumpeter's time. Schumpter claims that any theory of crisis gains support when crises occur, and points to some areas where Marx's theories have failed to predict. On page 53 he argues that the theory better predicts English and Dutch colonial experiences in the Tropics but fail when applied to New England for example.

Part II: Can Capitalism Survive?

Schumpter answers "no" in the prologue to this section. But he says, “If a doctor predicts that his patient will die presently,” he wrote, “this does not mean that he desires it.” The section consists of 100 pages with the following ten topics: The Rate of Increase of Total Output, Plausible Capitalism, The Process of Creative Destruction, Monopolistic Practices, Closed Season, The Vanishing of Investment Opportunity, The Civilization of Capitalism, Crumbling Walls, Growing Hostility, and Decomposition. Of these, Creative destruction has been absorbed into standard economic theory. This section constructs a view of capitalism which ultimately tends toward corporatism which, he suggests, will be its own undoing.

Part III: Can Socialism Work?

In this section comparative analysis of known theories of socialism are explored. The 5 sections in this part are: Clearing Decks, The socialist Blueprint, Comparison of Blueprints, The Human Element, and Transition.

Part IV: Socialism and Democracy

This section debates how well democracy and socialism will fit together. The 4 sections include, The Setting of the Problem, The Classical Doctrine of Democracy, Another Theory of Democracy, and The Inference.

Part V: A Historical Sketch of Socialist Parties

This part develops five periods of socialist thought. Before Marx, Marx's time, 1875 to 1914 (Prior to WWI), The interwar period, and Schumpeter's contemporary post-war period.

Capitalism and socialism

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and eventually destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy.

In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organise protest and develop critical ideas against free markets and private property, even though these institutions are necessary for their existence.[2] This analysis is similar to that of the philosopher Robert Nozick, who argued that intellectuals were bitter that the skills so rewarded in school were less rewarded in the job market, and so turned against capitalism, even though they enjoyed vastly more enjoyable lives under it than under alternative systems.[3]

In Schumpeter's view, socialism will ensure that the production of goods and services is directed towards meeting the 'authentic needs' of people and will overcome some innate tendencies of capitalism such as conjecture fluctuation, unemployment and waning acceptance of the system. It is interesting to note that Schumpeter's theories of the transition of capitalism into socialism is, according to some analysts, ‘nearly right’.[4]

Creative destruction

The book also introduced the term 'creative destruction' to describe innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power. Because of the significant barriers to entry that monopolies enjoyed, new entrants would have to be radically different: ensuring fundamental improvement was achieved, not a mere difference of packaging. The threat of market entry would keep monopolists and oligiopolists' disciplined and competitive, ensuring they invest their profits in new products and ideas. Schumpeter believed that it was this innovative quality that made Capitalism the best economic system.[5]

See also


External links


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