Capitalism, Socialism, and Democracy | Study Guide

Joseph A. Schumpeter

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Capitalism, Socialism, and Democracy | Quotes

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1.

If Marx had not been more than a purveyor of phraseology, he would be dead.


Narrator, Part 1, Chapter 1

The death of Marx alluded to here is not a literal death, as German economist Karl Marx (1818–83) had already been dead for nearly 60 years when Joseph Schumpeter was writing Capitalism, Socialism, and Democracy. Schumpeter is really referring to the death of Marx as an intellectual figure of note and to the death of his ideas. At the time, Marx's ideas were in ascendance in the Soviet Union and among socialist parties across the world. Schumpeter wishes to take Marx seriously, as some of his fellow economists did not, which is also why he notes that he was "more than a purveyor of phraseology." This is also a cutting dismissal of many of the other promoters of socialism, who Schumpeter does not take nearly as seriously throughout the text.

2.

Capitalist economy ... cannot be stationary.... It is incessantly being revolutionized... by new enterprise.


Narrator, Part 1, Chapter 3

Here Schumpeter is arguing against the dominant theoretical model of an ideal capitalist economy, which exists in a "stable equilibrium" of perfect competition. Schumpeter instead emphasizes capitalism's vitality and the constant churn of change and innovation, stressing here new enterprise and the "incessant revolution" of business activity. This emphasis is important because Schumpeter's analysis of capitalism rests on the idea that the system is a constant churn of innovation and "creative destruction." This central process of creative destruction is why capitalism will eventually fail.

3.

It is essentially revolution in the fullness of time.


Narrator, Part 1, Chapter 4

Schumpeter sums up his assessment of Marx by both accepting and rejecting the latter's conclusions. Schumpeter believes Marx was right that capitalism would eventually give way to socialism. He points out that while many socialists earnestly hoped for a social revolution to bring this about, Marx himself believed that the transition would happen at some point in the future as a result of unavoidable historical processes. Thus, "revolution in the fullness of time," that is, revolution by steps and stages, given enough time, would lead the transition to socialism. Schumpeter agrees, although he disagrees with Marx about how and why that transition will happen.

4.

Can capitalism survive? No, I do not think it can.


Narrator, Part 2, Prologue

This provocative statement sets up the argument of Part 2. The phrasing of the question is a clear reference to the great debate of the age, after the Russian Revolution of 1917 in particular, about whether capitalism or socialism would become the dominant economic system. It is a question posed not only by actual people but, apparently, by the events of the period from World War I (1914–18) to Schumpeter's time of writing in the late 1930s and early 1940s. A reader might expect a capitalist economist to answer the question in the negative or to hedge his bets. Schumpeter does not because he wants to make a bold argument. He lays out why he feels this way in the rest of Part 2.

5.

The process of Creative Destruction is the essential fact about capitalism.


Narrator, Part 2, Chapter 7

Having established earlier his contention that capitalism does not exist in a static equilibrium, Schumpeter presents his contrasting view: that the essence of capitalism lay in "creative destruction." This seems to be a paradox, but it sums up a process. Old businesses are destroyed, making room for the innovation and entrepreneurship that Schumpeter thinks lays at the heart of capitalism.

By theorizing creative destruction at the heart of capitalism, Schumpeter shows that he actually agrees with critics of capitalism that unemployment, business failures, and recessions are an intrinsic part of the system. Because they are intrinsic to capitalism's function, Schumpeter implies that he does not think intervention in the economy to prevent or end recessions is useful. Such intervention undermines the creative destruction process. This point is critical to understanding why Schumpeter thinks socialism will win out over capitalism: the social costs of creative destruction will cause people to prefer socialism. Schumpeter, who deals in provocative absolutes throughout the text, does so very memorably here.

6.

Perfect competition is not only impossible but inferior, [certainly] ... no ... model of ideal efficiency.


Narrator, Part 2, Chapter 8

Perfect competition was (and still is) taken as a theoretical model of ideal efficiency in both practical and academic economics. Schumpeter thinks perfect competition is impossible and thus a poor reflection of real economies. Further, it diminishes the role of entrepreneurs and creative destruction, which Schumpeter believes are the heart of the capitalist system.

7.

The stock exchange is a poor substitute for the Holy Grail.


Narrator, Part 2, Chapter 12

Schumpeter makes a number of predictions about capitalism and socialism that rest on more theoretical grounds. Here he engages in a more poetic problem: capitalism replaces an age of heroes (symbolized by the mythic Holy Grail) with an age of bankers and financiers (the stock exchange). This is an argument popular among conservative thinkers who, even if they appreciate and defend the gains afforded by capitalist economics, lament the destruction of traditional institutions.

This lament is not limited to conservatives. Marx made a series of similar arguments about the ways capitalism had swept away the feudal order, although Marx was more approving of that than some conservatives are about the loss of traditional family forms, for example. This statement is an excellent example of Schumpeter's commitment to a lively and readable text. There is very little mathematics in his book about economics; instead, he wraps his arguments in elegant and entertaining phrasing.

8.

Political criticism cannot be met effectively by rational argument.


Narrator, Part 2, Chapter 13

Schumpeter's statement here sums up several of the themes of the book so far. He began by comparing Marxism to a religion, contrasting it with rationality. Indeed, he believes that rationalism is itself the same thing as "economic thinking," which is why it evolved alongside capitalism. In summary, he thinks most of the opponents of capitalism are irrational. But the main theme of the text is that rationalism and capitalism will lose the battle against socialism. Thus, "rational argument" is not enough in the face of "political criticism."

This statement implies, of course, that political criticism is not always rational, and Schumpeter says this elsewhere. He wants to point out that politics is not inherently rational. Rather, it works by the rules of politics, but these are distinct from the "rational" laws of economics. Thus, he implies that the defenders of capitalism will have to rely on making political arguments, not on simply pointing out the "factual" or "rational" basis of their system.

9.

The capitalist process ... destroys its own institutional framework [and] creates the conditions for another.


Narrator, Part 2, Chapter 14

Schumpeter summarizes the main reason he believes capitalism will lose its battle with socialism. It follows from the arguments Schumpeter has laid out about creative destruction resting at the heart of capitalism. This destruction, which swept away feudal society, will also sweep away the "institutional framework" that supported capitalism—elements such as the class of intellectuals. Schumpeter is not only making a theoretical argument. He believed this process was occurring in the United States and Europe, with President Franklin D. Roosevelt's New Deal in the 1930s and the rise of authoritarian states in Europe in the twenties and thirties. Schumpeter argues not only that capitalism will end; he agrees with Marx that it will lead to socialism. Again, this is a product of creative destruction, which causes people to seek the apparent security of a socialist system.

10.

Can socialism work? Of course it can.


Narrator, Part 3, Chapter 15

This question and answer is an echo of the statement Schumpeter made earlier about whether capitalism could survive. Again, it is a provocative statement and certainly an unexpected one from someone who defined himself as a capitalist and disdained socialism. Indeed, few of Schumpeter's fellow capitalists would have allowed themselves to consider that socialism could work.

In this way, Schumpeter establishes his commitment to rational inquiry, considering systems on their merits, and resisting the "religious" zeal he decried in Marxists at the beginning of the text. He does not want to take anything on faith alone. Again, he is setting up arguments that will follow. He thinks there is no reason why a socialist system cannot work. His argument is instead about whether this "working" is desirable or compatible with democracy, as he elaborates later.

11.

Instead we will keep in mind that socialism aims at higher goals than full bellies.


Narrator, Part 3, Chapter 15

Schumpeter does not wish to analyze socialism on purely economic grounds. As he notes here, socialism aspires to do more than just ensure the production of abundance. The "higher goals" are values such as justice, equality, and a revolution in culture to support and promote those ends. This is another example of Schumpeter's wishing to take socialism seriously and not simply dismiss it out of hand.

12.

Whether such a socialism is compatible with what we usually [call] democracy is another question.


Narrator, Part 3, Chapter 18

Schumpeter distinguishes between socialism and democracy, although he makes an important distinction—"what we usually [call] democracy." Socialism, as Schumpeter had noted earlier, was supposed to usher in a true form of democracy, as it did away with class society and social and economic competition. But the rise of Soviet authoritarianism brought up questions about socialism's claim to be a democratic system.

Those questions are the ones Schumpeter is calling to mind here. The first distinction illustrates Schumpeter's point in this section about whether socialism can work. He says yes; however, he looks forward to his argument about democracy by suggesting that whether socialism can "work" is a separate issue to that of whether it is democratic.

13.

Nothing is so treacherous as the obvious.


Narrator, Part 4, Chapter 20

With this pithy remark, Schumpeter cautions the reader against taking common sense, or "the obvious," for granted. Doing so is treacherous in that it is liable to fail or else be refuted by changing events. The specific obvious thing he is referring to here is the idea that socialism is a democratic system. As he noted, this idea had not been in question until the triumph of socialist parties in certain countries, chiefly Russia, at the beginning of the 20th century. More generally, Schumpeter wishes to warn his audience not to take anything for granted. This theme appears throughout the book, in which Schumpeter takes issue with a number of common assumptions about, for instance, the nature of capitalism, whether socialism can work, and so on.

14.

There are ultimate ideals and interests which the most ardent democrat will put above democracy.


Narrator, Part 4, Chapter 20

This observation makes an interesting distinction: between "democracy" as a system and people who advocate democratic systems and thus consider themselves democrats. Schumpeter wishes to point out that nobody is purely committed to a system if they claim to have ideals. Few who consider themselves democrats nevertheless wish to subject themselves to a tyrannical majority.

This concern was prevalent in Schumpeter's time, as it seemed that several democracies, such as those in Italy and Germany, had elected themselves out of existence and transitioned instead to authoritarian dictatorships. Schumpeter's point is that to be a democrat implied the holding of "ultimate" or overriding ideals like justice, fairness, and equality, which were separate from a given democratic system. So too does he distinguish capitalism and democracy, and socialism and democracy.

15.

The democratic method is ... arriving at political decisions ... [through] ... struggle for the people's vote.


Narrator, Part 4, Chapter 22

Having dismissed the commonplace definition of democracy as the representation of the "will of the people," Schumpeter offers his own. His definition is much more pragmatic, consisting of nothing more than a system of competition between potential leaders for the right to wield power. It is no accident that this competition for political power echoes the competition between economic actors in the marketplace of a capitalist system. In this manner Schumpeter argues for a deep association between capitalist economics and democratic political systems; they are alike in that they are both "rational." Schumpeter wishes to show that capitalism and democracy are much more closely aligned than socialism and democracy because the core mechanism—competition—is the same.

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