Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Part 2, Chapter 7 : Can Capitalism Survive? (The Process of Creative Destruction) | Summary

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Summary

Continuing where he left off, Schumpeter suggests that the theory of "monopolistic competition" means that reality might be unfavorable to "maximum performance in production." He suggests that this criticism is incorrect because it posits that capitalism existed in a more perfect earlier form but has been derailed by the growth of big business and monopolies. Schumpeter does not believe this "golden age" of perfect competition ever existed.

Schumpeter despairs of the economic profession for clinging to ideas of perfect competition. He thinks it is far too static a model of capitalism, which in reality has an "evolutionary character." He identifies the churn of innovation and competition as "creative destruction," which lies at the heart of capitalism itself. Because of that process of creative destruction, capitalism takes time to reveal "its true features and ultimate effects." A system that smooths out the rough edges in the short term might prove to be inferior in the long term. Also, because capitalism is an "organic process," looking at one part of it might not reveal much about the operation of the whole. For example, looking at a specific big business might not tell the observer anything about capitalism itself.

Schumpeter intends to change how competition is viewed. Price is not the only variable for competition; quality and "sales effort" matter also. Moreover, competition is always a factor, not only when another business exists. Whether another competing business exists or not, the fear of competition "enforces behavior very similar to the perfectly competitive pattern." Schumpeter discusses an objection to his view but believes it to be a fringe case.

Analysis

Schumpeter coined the term creative destruction in Capitalism, Socialism, and Democracy. The term is possibly the book's most lasting contribution to economics. Part of Schumpeter's distaste for the New Deal and similar policies stemmed from his understanding of capitalism. Interference with the "destruction" hampered the "creation," and this alone was enough to ring the death knell for capitalism in the long run (as Schumpeter will argue explicitly later). Schumpeter's argument again rests on a long-term perspective. A short-term downturn (or even a long one!) was a cost worth bearing if it delivered longer-term prosperity. Thus, Schumpeter would not have been a fan of a government bailout of an industry such as banking or automotive.

The most significant contradictory opinion was of John Maynard Keynes (1883–1946), the advocate of government involvement to recover from depressions, who argued famously that "in the long run we are all dead." Another of Schumpeter's big arguments with mainstream economics is in evidence here, namely his dismissal of the notion that "perfect competition" should be used to describe a real or even an ideal economy.

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