Introduction By Richard Swedberg

Capitalism, Socialism and Democracy consists of around 400 pages of dense text and would take the average reader around twenty hours of concentrated reading. For those who can ill afford to invest this amount of time, the following selection is recommended: Chs. XI–XIV, which give the essence of the argument why capitalism cannot survive; Chs. XV– XVI, where Schumpeter explicates why socialism can indeed work; the important Chs. XX–XXIII in which different theories of democracy are discussed; and the famous chapters on the way that contemporary capitalism works (Ch. VII, “The Process of Contemporary Capitalism” and Ch. VIII, “Monopolistic Practices”).

Capitalism, Socialism and Democracy is divided into five distinct parts, which are loosely connected. In the preface to the first edition the author talks about “the heterogeneous material” of his book and describes its five parts as “almost self-contained pieces of material”, connected to one another through “links” and “bridges”. 18

The book starts with a long and brilliant section on Marx, which is instructive and enjoyable but not essential for the main argument of the book (Part I, “The Marxian Doctrine”). The basic innovation in Schumpeter’s analysis of Marx is the consistent manner in which he separates Marx’s thought into “sociology” and “economics”. Schumpeter admired Marx’s sociology very much (Ch. II), but was more sceptical of his economics (Ch. III). However, he credited Marx very highly for having tried to introduce a dynamic element into economic analysis—something that Schumpeter himself had tried to do through his theory of the entrepreneur.

The main argument of the book begins with Part II, entitled “Can Capitalism Survive?” The first chapters of this part are devoted to an analysis of the way that contemporary capitalism works, and the reader should pay especial attention to Chs. VII and VIII with their famous analysis of “creative destruction” and “monopolistic practices”. Woven through the first chapters of Part II also is an interesting critique of mainstream economics for being non-dynamic in general and for lacking a realistic concept of competition in particular. The last chapters of Part II are devoted to a discussion of why capitalism, in Schumpeter’s opinion, cannot survive (Chs. XI–XIII): capitalist civilization is falling apart, the bourgeoisie lacks faith in itself, and so on.

These chapters are witty and entertaining, though ultimately not very convincing, as many critics have pointed out. (See also later in this introduction). Part III (“Can Socialism Survive?”) is likewise entertaining. Schumpeter argues that socialism may be superior to capitalism in some aspects (Ch. XXVII); he discusses whether human nature precludes a socialist society (Ch. XXVIII); and he tries to establish when a transition from capitalism to socialism can take place (Ch. XXIX). Of particular interest is Ch. XXVI in which he explains why a socialist economy is a feasible proposition, which is in contrast to the arguments of Ludwig von Mises and others.

Part IV (“Socialism and Democracy”) represents one of the high points in Capitalism, Socialism and Democracy. All the chapters are succinctly argued and free from the excessive detours that mar some of the other parts of the book. Chs. XXI and XXII, in which Schumpeter presents and confronts two different theories of democracy, are especially brilliant (“The Classical Doctrine of Democracy” and “Another Theory of Democracy”). Part IV also contains an interesting sketch of what a socialist democracy might look like (Ch. XXIII, Section III).

The last part of Capitalism, Socialism and Democracy (Part V, “A Historical Sketch of Socialist Parties”) is clearly the most expendable. Schumpeter himself said that his history of socialist parties was only “a sketch” and “woefully incomplete”, both of which are true.19 The reader will find some interesting details on the Austrian Marxists (many of whom Schumpeter knew), the Bolshevik leaders, and so on—but not much more. Some editions of Capitalism, Socialism and Democracy (including this one) also contain an appended talk that Schumpeter gave in 1949, just before his death, entitled “The March into Socialism”. The talk shows that towards the end of his life Schumpeter was still convinced that the main thesis of Capitalism, Socialism and Democracy was correct: capitalism was about to be replaced by socialism.

3. The Current Relevance Of Schumpeter’S Book

All three editions of Capitalism, Socialism and Democracy (1942, 1947, 1950) that Schumpeter himself oversaw were very well received by the economics profession as well as elsewhere. It has been translated into more than a dozen languages, including Chinese and Japanese, and has spawned a huge number of articles and a couple of books. 20 Capitalism, Socialism and Democracy is clearly Schumpeter’s most popular book and there are no signs that interest in it is waning. Still, it was written more than fifty years ago and events have changed enormously since it was first published: socialism has collapsed—not capitalism, as Schumpeter predicted. Is Schumpeter’s analysis in Capitalism, Socialism and Democracy still relevant today?

There are, as I see it, a number of reasons why Schumpeter’s book deserves to be read as widely today as yesterday. Some of these can be stated in a few lines while others require more elaboration. Let me start with a simple case: Schumpeter’s analysis of Marx. The swing to conservatism during the 1980s, in combination with the dramatic collapse of socialism, has practically wiped out interest in Marxism and also threatens existing knowledge of it. This represents a major loss as Marx is one of the most important Western thinkers. Schumpeter’s analysis of Marx in Capitalism, Socialism and Democracy is important in this situation as it represents a well-balanced attempt to sort out what remains valuable in Marx’s thought. Part I of Schumpeter’s book (“The Marxian Doctrine”) can be recommended as an excellent introduction to Marxism. This section is also of interest to those who are familiar already with Marx since it contains a sophisticated and innovative interpretation of Marx’s ideas.

Schumpeter’s argument about capitalism is considerably more complex and contradictory than his reading of Marx. It consists principally of two parts which should be kept separate: an analysis of the way the capitalist economy works, and the argument that capitalism will fail due to its very success. Schumpeter’s analysis of the way the capitalist economy works consists of a sharp polemic with mainstream economics, which he considered lacking on a number of points. His main assertion was that mainstream economics had failed to understand that basically capitalism consists of change and cannot be analyzed in static terms. “Capitalist reality is first and last a process of change”, as he phrased it. 21 It is in this context that Schumpeter introduces his concept of “creative destruction”.

He was also very critical of the current (and present) tendency among economists to operate with a formalistic and non-realistic concept of competition. Schumpeter was convinced that perfect competition had never existed; that it never would exist; and that if it ever came into existence, it would be harmful to the economy. Big business and monopolies, he pointed out, are to a large extent responsible for the high standard of living. “Monopolistic practices” are healthy in that they facilitate expenses on research as well as huge investments. When Capitalism, Socialism and Democracy was published, Joan Robinson wrote that “Professor Schumpeter is at his most brilliant [when he discusses competition and monopoly], and his argument blows like a gale through the dreary pedentry of static analysis”.22 Quite a few economists, however, were deeply offended by Schumpeter’s defense of monopoly. 23

The situation is somewhat different with respect to Schumpeter’s famous argument that capitalism is bound to go under, due to a number of institutional changes: the entrepreneur is vanishing with the emergence of the modern corporation; intellectuals are always hostile to capitalism; the old sense of property is being eroded; and so on. The problem with Schumpeter’s analysis on this score is that he is contradicted by reality on most points. In short, in areas where Schumpeter perceived a threat to capitalism, there is no apparent threat at all or, alternatively, a very minor one. To illustrate this, let us look at two of the alleged causes for the demise of capitalism: the role of intellectuals in capitalist society and the relationship of property owners to their property. According to Schumpeter, as capitalism develops it gives rise to an increasing number of intellectuals who are basically resentful and hostile to capitalism. The argument, however, does not accord well with our observations; rather, most intellectuals appear fairly well integrated into the various institutions in which they work, and the vocal intelligentsia changes its political opinions at regular intervals, usually oscillating between pro-capitalism and indifference to economic questions, and only rarely lapsing into anti-capitalism. In any case, it is simply not correct to state that Western intellectuals in general have been hostile to capitalism and that they are likely to be hostile also in the future. Likewise the sense of property is not being eroded, as Schumpeter claimed, by the shift from owning physical property (say a factory building) to having shares in a corporation. Evidence indicates rather that shareholders are as eager to defend their property as owners of physical property. During the 1980s, for example, shareholders in the United States reasserted their right to control directly, and sometimes even to manage, various huge corporations through take-overs and similar maneouvres. The growth of institutional investors, which because of the very size of their holdings are more prone to “voice” than to “exit” in the stock market, is another indicator that Schumpeter was wrong in this matter. It is of course true that managers in a shareholding corporation have interests that are not identical to those of the owners. Owning shares, however, does not seem to change one’s attitude to property any more than having bills, as opposed to gold coins, changes one’s attitude to money.

Schumpeter’s analysis of socialism similarly has its strong and its weak points. Personally an inveterate foe of socialism, Schumpeter should be applauded for his objectivity in recognizing that socialism can be democratic. The part of Capitalism, Socialism and Democracy in which he outlines the structure of a socialist democracy, is usually forgotten but deserves a better fate (see Ch. XXIII, Part III). It should also be pointed out that Schumpeter thought that a socialist democracy might be inherently unstable since socialist society—as opposed to capitalist society—lacks a strong separation of powers. In socialist society, Schumpeter pointed out, it would be much easier for the politicians to seize power of the economy than in capitalist society with its independent private sector. “As a matter of practical necessity”, Schumpeter said, “socialist democracy may eventually turn out to be more of a sham than capitalist democracy ever was”.24

Schumpeter’s analysis of socialism is also dubious in other ways. Take, for example, his analysis of the workings of a socialist economy, as presented most fully in Ch. XVI. Schumpeter argues here that von Mises is wrong in asserting that socialism cannot have a rational economy since it lacks markets. The price mechanism can work in an equally efficient manner in a socialist society as in a capitalist society, Schumpeter says. This would be the case—theoretically—if all the citizens in a socialist society received vouchers (representing claims on the overall production of goods and services) and used these to shop in state- run shops. These shops, Schumpeter says, would then regulate the price in accordance with the demand of the consumers. Similarly, a central board would post “prices” in response to the demand by industrial boards for the various factors of production. A system of this type, Schumpeter states, would work perfectly well—in theory as well as in practice.

It is clear that Schumpeter’s model of the socialist economy differs from the way that the socialist economies of the Soviet Union and East-Central Europe operated. The latter failed to produce efficient prices and were plagued by constant political interference in the economy, by corruption among the managers and by general inefficiency in the labor force. One is tempted to pose the question as to whether Schumpeter’s model of the socialist economy would have worked more efficiently than the economies of the socialist states, could it ever have been implemented. A question of this type is, of course, impossible to answer. Since Schumpeter, however, does not even discuss a number of difficulties that are likely to beset his system—such as the failure of the central board to come up with correct prices and of the state-run shops to regulate their prices in response to consumer demand—one is justified in rejecting his proposal as utopian and naïve.

Finally, one part of Schumpeter’s book that is as much to the point today as when it was originally written, is the section on democracy (Part IV). This is where Schumpeter makes his famous distinction (borrowed from Weber) between, on the one hand, democracy as a supreme value in itself (“the Classical Doctrine of Democracy”), and, on the other hand, democracy as a method for the selection of leaders (“Democracy as Competition for Political Leadership”). While the former approach views democracy as a metaphysical value to be realized (“the Will of the People”), the latter sees it as a way for the citizenry to select its leaders. What is especially valuable with Schumpeter’s discussion of democracy as a value in itself, is the firmness with which he attacks various illusions, such as the notion that the only task of the politician is to carry out the alleged will of “the people”. For one thing, as Schumpeter makes clear, politicians have their own distinct interests, and these must be borne in mind in order to get a realistic picture of the way a democracy works. And, for another, the majority does not represent “the people”—only the majority.

Through his splendid discussion of democracy, Schumpeter joins the small number of thinkers who have made seminal contributions to its theory. Granted this, the question must nonetheless be raised if Schumpeter does not overdo his attack on “the Classical Doctrine of Democracy”, and end up with far too negative, not to say cynical, a view of democracy. He may well have been right to emphasize democracy as a means for the selection of leaders—but can it not simultaneously be recognized as a value in itself? Indeed, the more strongly democracy is valued in a population, the more eager, (one would presume), people would be to challenge the hierarchical and authoritarian kind of democracy that Schumpeter (again following Weber) had in mind. One also wonders how much Schumpeter’s attacks on “the Classical Doctrine of Democracy” had to do with his ill-concealed contempt for the masses. Is it, for example, true that the typical citizen “becomes a primitive again” as soon as “he enters the political field”?

Schumpeter’s analysis of democracy deserves a more thorough discussion than is possible here. Our final judgment of Schumpeter’s book, is that it always inspires discussion, whether one agrees or disagrees with the author’s point of view. Schumpeter’s main ambition in writing Capitalism, Socialism and Democracy, he says, was to shake up the reader and make him or her think. “We resent a call to thinking and hate unfamiliar argument that does not tally with what we already believe or would like to believe”, Schumpeter wrote in the preface to the second edition. “Now this is precisely where I wanted to serve the reader. I did want to make him think”.26

Richard Swedberg