Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Part 1, Chapter 3 : The Marxian Doctrine (Marx the Economist) | Summary

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Summary

Schumpeter begins by praising Marx as a "very learned man" in the field of economic theory. He notes that Marx's "master" in the field of economics is British political economist David Ricardo (1772–1822), from whom Marx borrowed not only the foundations of his argument but also "the art of theorizing." It is from Ricardo and another economist, François Quesnay (1694–1774), that Marx borrowed the labor theory of value (the idea that the value of a product is determined by the labor used to produce it). Schumpeter summarizes Marx's arguments:

  1. Marx made the labor theory of value the "corner stone of his theoretical structure." Centralizing the labor theory of value in this way is a major flaw because "this theory of value is unsatisfactory."
  2. Marx, like Ricardo, believed that when capital goods are used in the production of commodities, the commodities will yield a net return to the owner of the capital goods. Marx recognized the inadequacy of Ricardo's framing of the issues, however.
  3. Marx improved upon Ricardo by postulating a "theory of exploitation" to explain how the net return accrues. This theory is based on the idea that capitalists exploit the "surplus" labor value of workers, who are induced to work "more actual hours of labor than [capitalists] have paid for." The proletariat is paid whatever wage is offered by the capitalist. They have no real power or bargaining chip. They have only their labor power to sell. The exploitation comes from paying a very low wage and selling the product at a higher price than it cost to make it.
  4. However, Marx's idea of "surplus value" does not solve the problem; the labor theory of value still does not actually reflect economic reality. Schumpeter notes that capitalist economies are "not and cannot be stationary." He points out that capitalist economies are "incessantly ... revolutionized from within by new enterprise." Schumpeter praises Marx for seeing this fact about capitalism, and especially for seeing it "more fully than any other economist of his time."
  5. Schumpeter considers Marx's theory of immiseration (the gradual reduction of the working class to greater and greater depths of misery and deprivation) a failure in both "analysis and vision." However, Marx's understanding of the trade cycle excels in both respects. Instead of immiseration, capitalist economies have improved the share of wealth and general wellbeing of their workers when wages increase with the cost of living. Schumpeter accuses Marx of replicating a series of Ricardo's mistakes.
  6. Marx's work on business cycles is "difficult to appraise." Schumpeter notes that Marx is in awe of the "tremendous power of capitalism" to expand productive capacity. However, Marx also insists upon "the growing misery of the masses."
  7. Marx predicted that capitalism will "out-grow" the institutions of capitalist society. Schumpeter thinks Marx's theory cannot adequately explain this prediction because it rests on "immiseration," which Schumpeter discredits as a precursor of alienation. Schumpeter does, however believe Marx's prediction that capitalism will destroy its own foundations.

In conclusion, Schumpeter ends with a negative verdict on Marx the economist. He qualifies this verdict by pointing out that Marx's critics themselves were "far from always being right." He praises Marx for seeing and teaching "how economic theory may be turned into historical analysis." Finally, he closes by noting that even though Marx's economic theory failed to implement his sociological setup, "in failing, it establishes both a goal and a method."

Analysis

Schumpeter the economist is most at home with Marx the economist. He shows his own depth and breadth of knowledge in a confident dissection of Marx's economic views. Although Schumpeter treats Marx's ideas on sociology and economics separately, his Chapter 2, about sociology, should be borne in mind when considering what is written in Chapter 3. According to Marxist ideology, the economic and the sociological are meant to be one. When the economics does not add up (or rests on old and outdated data and theory), many of the sociological analyses too will fall flat.

Schumpeter is frankly unimpressed with Marx's immiseration theory and expresses that feeling forcefully. To Schumpeter, the chief virtue of capitalism was that it had clearly brought so much to so many. This is just one of a number of examples where Schumpeter disagrees with an idea because it does not conform with his observations of the world (as opposed to a model or theory).

Even so, Schumpeter regularly points out the ways he agrees with Marx. Schumpeter too will argue that capitalism dooms itself. His point in this chapter is that Marx cannot back up his own argument, a prelude to Schumpeter's unveiling of his own, rival theory.

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