Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Part 2, Chapter 8 : Can Capitalism Survive? (Monopolistic Practices) | Summary



Schumpeter endeavors to delve deeper into the question of monopoly, introducing and dealing with some criticisms that may not be obvious to the reader.

The impact of new things (like technologies) restricts the long-term importance of practices intended to "conserv[e] established positions and ... maximiz[e] profits accruing from them." These restrictive practices, in the process of creative destruction, "may do much to steady the ship" in periods of "temporary difficulties." Schumpeter notes the necessity of mechanisms for hedging or insuring against the long-term effects of technological or circumstantial change in risk-taking economic activities. These changes include instruments like patents. Such restrictions might seem predatory, but in reality they are temporary protections that are necessary in the "perennial gale" of creative destruction.

New entrants into an economy almost always improve total output in quality or quantity, through new methods and through the pressure their competition offers to other businesses. But these new entrants need "armor." Older businesses and newer ones live in the same "perennial gale." As a result, both require shelter from the storm at times, which might include trying to stop failing big businesses from "coming down with a crash." Schumpeter takes all these observations to mean that restraints of trade and "trust-busting" are not always necessary if they strip the "armor" from businesses.

Schumpeter responds to the idea that the "era of big business" leads entrepreneurial activity to prize the maintenance of the value of existing investment, halting progress. Instead, Schumpeter argues, big businesses are often engines of innovation.

Schumpeter takes issue with questions of "monopolistic practices." First, he claims that monopolies or single sellers are not that common in the long run. He blames loose use of the term monopoly for its primacy in contemporary talk. In the short run, monopolies may be more common. Indeed, they may be thought of as the "prizes" offered to entrepreneurs. Monopoly status is a powerful stimulus to entrepreneurs and a useful plateau from which long-term planning is possible.

Schumpeter again takes aim at perfect competition, in light of his preceding arguments in this chapter. At length, he claims that "perfect competition is not only impossible but inferior" and should not be used as a model of "ideal efficiency." He argues that government regulation should not force big business to conform with the model of an impossible "perfect competition."


Schumpeter expands on his previous comments about monopolistic practices at great length here. In this chapter, he argues against prevailing models of economic performance that stressed perfect competition and disdained monopolies. Schumpeter thought the very fact of the U.S. economic growth definitively showed that in real cases monopolistic practices had beneficial effects. As he has already established, this benefit is a result of innovation and creative destruction, the engines of capitalism. For Schumpeter, small businesses are not necessarily better equipped to innovate than large businesses. Schumpeter expresses commitment throughout the text to practical, observable realities. Contrary to the later preference for mathematical arguments and models in economics, Schumpeter does not appear to have been a fan of models, favoring linguistic exactitude and detailed argument.

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