Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Part 3, Chapter 16 : Can Socialism Work? (The Socialist Blueprint) | Summary



Schumpeter inquires whether there is anything wrong with "the pure logic of a socialist economy." If the idea of a socialist economy could be shown to be illogical, the whole system could be dismissed as absurd. He believes there is nothing wrong with the "pure logic" of socialism. Schumpeter thinks this obvious. In his opinion, only one person denies it with an argument of any merit: Austrian American economist Ludwig von Mises (1881–1973). Von Mises argued that without pricing mechanisms, economic decision makers would have no "beacon lights" to guide them. In a socialist economy, the distribution of goods is severed completely from their production. Schumpeter believes this criticism was answered by Italian economist Enrico Barone (1859–1924).

Schumpeter then considers how production can be organized rationally, that is, in a way that results in a maximum satisfaction to the consumer. Schumpeter has little problem answering how (at length). His answer is related to his belief that a large (and perhaps monopolistic) firm in capitalism can make rational decisions about production. Throughout his discussions Schumpeter notes the many mechanisms available to socialist planners that are not necessarily indicative of the persistence of capitalism, like "incomes," a substitute for capitalist "wages." Likewise, "prices" could be set and used in a socialist economy. Indeed, socialists of a certain stripe have adopted theories of perfect competition for their own ends.

Finally, Schumpeter discusses the practical rather than logical question of socialist economic planning. According to some critics, central planners would face more data than they could know what to do with, much less use as a basis for rational decisions. Schumpeter answers that his previous discussion explained exactly how central planners could use "prices" and "markets" and other ideas to guide their decisions. A central authority could in theory act as a "clearing-house" for information, in the manner of a cartel bureau.


Schumpeter's argument from "pure logic" is mostly an intellectual exercise. Little practical data existed at the time about how a socialist planned economy would be run. Schumpeter was unusual in that he, like Marx, thought it obvious that it could be successful. In typically backhanded fashion, he credits only von Mises with a worthwhile argument against the proposition. Many others are not even worthy of dismissal in Schumpeter's view.

A core of Schumpeter's argument here is that many of the tools of capitalist economics are not necessarily exclusive to a capitalist system. Instead, they could be modified for use by a socialist planner. Money, for instance, is far older than capitalism, though capitalism does have its own distinct conceptions and uses of money. A socialist system, Schumpeter wishes to remind us, would revolutionize society; it would of course institute new forms and uses of economic techniques to support its system of planning.

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