Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Part 2, Chapter 5 : Can Capitalism Survive? (The Rate of Increase of Total Output) | Summary



Schumpeter suggests that the "atmosphere of hostility to capitalism" that was present at the time made it difficult to "form a rational opinion about its economic and cultural performance." Nevertheless, he will try. The "first test of economic performance" is total output, which is the total goods and services produced in a given amount of time.

He notes that the data for the United States is good enough to analyze growth in total output over time, at least since the Civil War in the 1860s. From 1870 to 1930, the average annual rate of growth was 3.7 percent. What would the future look like if this trend continued for another 50 years after 1928? He knows some will object that this consideration is fanciful because of the depression of the 1930s, but he believes the depression represents an exception to the normal functioning of capitalism because of the greater state activity in the economy that followed.

Schumpeter describes the argument that such growth in total output might result in unequal distribution of incomes. In that case, "the rich get richer and the poor poorer" (which is, in fact, what happens in capitalism when the free market goes unchecked). However, Schumpeter thinks this outcome is unlikely if capitalism is "left to itself." Schumpeter moves on to praise the bounty that capitalist development has brought to the greater mass of humanity. The capitalist achievement lies in "providing more silk stockings," not for queens but for "factory girls," in return for "steadily decreasing amounts of effort."

He acknowledges that revolutions and "negative phases" and depressions occur within capitalist functioning. However, the price of such negative phases is worth it in the "avalanche of consumer's goods" that result. He considers capitalism's effects on politics, noting that social legislation apparently follows and tries to expand capitalism's successes. He acknowledges the "scourge" of unemployment but claims the problem of unemployment is not unemployment in itself. Instead, it is unemployment "plus the impossibility of providing for the unemployed without impairing the conditions of further economic development."


The "atmosphere of hostility" Schumpeter describes is the situation in which he found himself as an ardent defender of free-market capitalism in the Great Depression and New Deal era of the 1930s. He had argued that the depression should be allowed to run its course. In Chapter 5 he shows his reliance on long-term arguments to support his preference for capitalism.

Schumpeter chooses total output as a measure of performance for a couple of reasons. One is that it can be derived from available data. Another is that it serves Schumpeter's wider point, which is that in the long term, overall, capitalism outperforms other systems. Although he will define precisely why later, he is already previewing his argument about creative destruction when discussing the depressions that occur within capitalism.

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