Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Summary

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Part 1: The Marxian Doctrine

Joseph A. Schumpeter begins Capitalism, Socialism, and Democracy (1942) with a critical appraisal of the intellectual output and legacy of Karl Marx (1818–83), the greatest theorist of socialism. He considers Marx's contributions as divided into four thematic sections: Marx's work as a prophet, as a sociologist, as an economist, and as a teacher. Schumpeter finds much to criticize within Marx's work. In particular, Schumpeter dislikes Marx's work as the prophet of communism and as a teacher. He also finds much of Marx's work as an economist outdated, misinformed, or both.

Schumpeter disagrees with Marx's notion that capitalism produces greater and greater "immiseration" among the working classes. According to Marx's immiseration thesis, the capitalist system improves at the cost of individual workers. For evidence against that idea, Schumpeter points to the greater prosperity enjoyed by more and more of humanity since Marx's time. However, although everyone is brought up, the massive wealth gap persists between labor and capital, making inequality the issue, not poverty. Nevertheless, Schumpeter argues that Marx and his ideas, especially his sociological contributions, must be taken seriously. In fact, Schumpeter takes Marx more seriously than he does the majority of socialists, whom he dismisses for the most part as religious zealots. Schumpeter concludes that Marx was correct to predict the demise of capitalism, although he was wrong about how and why it would happen.

Part 2: Can Capitalism Survive?

Schumpeter opens his discussion of capitalism with the provocative statement that he thinks capitalism cannot survive. Nevertheless, his following argument is a vigorous defense of capitalism. He argues that capitalism has raised the quality of life of the majority of people in capitalist societies to previously unimagined heights. Capitalism also produces a number of other consequences, like the "rationalization" of society. Further, it encourages the development of "economic" modes of thinking, as people begin to internalize the need to compete with one another for advancement. It is this competition, or "creative destruction," that Schumpeter considers to be the heart of capitalism.

Creative destruction is the ongoing process of competitive pressures forcing a constant churn of business success and failure. Economic actors are forced always to evolve and innovate or perish. Schumpeter agrees with some of capitalism's critics that this process is essential to capitalism's functioning. He takes swipes at the dominant economic theories that monopoly is bad and that the ideal economy exists in an equilibrium. He argues instead that big businesses and monopolies are not immune to the pressure to innovate and may in fact be more able to foster innovation than smaller economic actors.

However, all of these factors and more will inevitably lead to capitalism's downfall and the rise of socialism because of sociological, not necessarily economic, causes. In summary, capitalism will destroy all the institutional and social frameworks that support it. By destroying the traditional social infrastructure like the nuclear family, creating a class of hostile intellectuals, and promising cycles of regular boom and bust, capitalism will cause people to prefer the alleged security and the higher virtues of socialism.

Part 3: Can Socialism Work?

In an echo of the previous part's opening, Schumpeter opens Part 3 with another provocative statement. "Of course" socialism can work. The problems socialism faces are nothing more than advancement of industrial capacity and the solution of the "transitional" problems from capitalism to socialism. A planned economy, in Schumpeter's view, would certainly be able to produce goods sufficient to meet the needs of the populace.

Moreover, because socialism aims at "higher goals than full bellies," it might offer psychological healing to the problems of capitalism. Socialism exhorts (strongly urges) citizens to build a new society based on lofty values like justice and equality. These psychological salves might make up for what Schumpeter identifies as the economic inefficiencies of a socialist system compared to a capitalist one.

Part 4: Socialism and Democracy

Schumpeter discusses a problem that arose with socialist societies like the Soviet Union: namely, whether socialism is compatible with democracy. He notes that this question was rarely asked and even more rarely answered as "yes" before the Russian Revolution of 1917. Before then, socialist parties often acted in undemocratic ways.

Schumpeter proceeds to the question of what democracy is. He rejects the "classical" definition of democracy as a system of discerning and reflecting the "will of the people" because the will of the people is often never realized in capitalism. Instead, he prefers a definition of democracy as a process: namely, the selection of leaders by competition for people's votes. Ultimately, he concludes that "between socialism ... and democracy ... there is no necessary relation." That is, according to his definitions, there is no need for a socialist society to be democratic or for a democracy to be socialist. On the other hand, there is not necessarily an "incompatibility." Still, Schumpeter's analysis is that a socialist society will possess a kind of democracy that will be more of a "sham" than capitalist democracy.

Part 5: A Historical Sketch of Socialist Parties

As further support for his ideas about socialism and democracy, Schumpeter provides a brief historical account of socialist parties. He takes them in chronological sequence. He begins with the pre-Marxist socialists such as Sir Thomas More (1478–1535), proceeds through Marx's era in the mid-19th century and the pre–World War I period of the early 20th century, and ends with the period between the two world wars (1918–39). He compares multiple parties from Europe and the United States and weighs their differences and respective fortunes.

Among other observations, Schumpeter notes that socialism could not take hold in America because it clashed too strongly with American values. Ultimately, he concludes that whatever the fortunes of the parties themselves, World War II, which was ongoing as Schumpeter wrote the book, would result in a stride "toward the socialist order." Schumpeter laments that the measures undertaken to recover from the Great Depression and the increased taxation and regulation will hamper capitalism and inexorably (relentlessly) pave the road to socialism.

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