Capitalism, Socialism and Democracy

Now the majority of the world’s countries either have a market economy or are trying to construct one. However, people could hardly imagine it in 1940s when Marxism was everywhere. In 1940s, 40% of the world population lived under socialism rule. Not to mention USSR, even in US, there was the Marxism fever. That was the state of the world when Joseph A. Schumpeter wrote his book “Capitalism, Socialism and Democracy”.

Having spent 50 pages for evaluating Marxism (because part of his intention of writing this book was to let Marxists read it), in the part “Can Capitalism Survive?”, Schumpeter said that it cannot. That, however, did not mean that the world would undergo the changes that Marx described. Schumpeter specified strength and the essence of Capitalism, then specified the change agents of the society, and then foresaw how the world would evolve eventually. 

Strength of Capitalism

Schumpeter pointed out the strength of market-based system, saying that it is the most effective way to allocate wealth and talent. He argued that Capitalism’s wealth allocation system is different from any preceding systems in that the commercial and industrial bourgeoisie rose solely by their business success. He argued that the competition and wealth allocation in capitalism societies are fair compared with the other societies and that the fortune entrepreneurs may get would be the driving force to bring about social progress.

“That social arrangement is, or at all events was, singularly effective. In part it appeals to, and in part It creates, a schema of motives that is unsurpassed in simplicity and force. The promises of wealth and the threats of destitution that it holds out, it redeems with ruthless promptitude.　…. They are not proffered at random; yet there is a sufficiently enticing admixture of chance: the game is not like roulete, it is more like poker. They are addressed to ability, energy and supernormal capacity for work; but if there were a way of measuring either that ability in general or the personal achievement that goes into any particular success, the premiums actually paid out would probably not be found proportional to either. Spectacular prizes much greater than would have been necessary to call for the the particular effort are thrown to a small minority of winners, thus propelling much more efficaciously than a more equal and more ‘just’ distribution would, the activity of that large majority of businessmen who receive in return very modest compensation or nothing or less than nothing, and yet do their utmost because they have the big prizes before their eyes and overrate their chances of doing equally well. Similarly, the threats are addressed to imcompetance. But though the incompetent men and the obsolete methods are in fact eliminated, sometimes very promptly, sometimes with a lag, failure also threatens or actually overtakes many an able man, thus whipping up everyone, again much more efficaciously than a more equal and more ‘just’ system of penalties would. Finally, both business success and business failure are ideally precise. Neither can be talked away. ” (page 73)

I don’t think his statement is totally fair, since the talent and competence of children are hugely depending upon where they’re born, and the fact that even able men/women are facing some risk would not justify the inequality at the original state. That said, I should say that that point cannot be the fundamental criticism toward his argument.

Essence of Capitalism

Schumpeter pointed out that the rate of increase in output did not decrease from the nineties, although there had been huge concentrations of mass-production. If Marx were right, there should be the rising gap between the social system and the productivity, the change force to topple down Capitalism.

Then what is the essence of Capitalism? Schumpeter introduced the popular concept of “Creative Destruction”, saying that it is the essence and driving force of Capitalism.

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation – if I may use that biological term – that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in. “ (page 83)

He treated Capitalism as the organic and evolutionally process, rather than the stationary one. This view implies that we need time to evaluate the true elements of change agents of the society and that we need take synthetic approaches to analyze social systems. 

“First, since we are dealing with a process whose every element takes considerable time in revealing its true features and ultimate effects, there is no point in appraising the performance of that process ex visu of a given point of time; we must judge its performance over time, as it unfolds through decades or centuries. … Second, since we are dealing with an organic process, analysis of what happens in any particular part of it – say, in an individual concern or industry – may indeed clarify details of mechanism but is inconclusive beyond that.” (page 83)

Ironically, the methodology and perspective he used seem to be quite similar to Marx and Hegel – the dialectic way of thinking.

Intellectuals as the change agents

Schumpeter thought that intellectuals have been the change agents of all the societies, and in Capitalism society they would take the enormous role to decompose the system.

According to him, intellectuals are people who wield the power of the spoken and the written word, and one of the touches that distinguish them from other people who do the same is the absence of direct responsibility for practical affairs. Historically, intellectuals such as scientists and philosophers have taken role to stimulate, energize, verbalize and organize people and their thought. One particular aspect of their role is to illustrate principle of social change (page 153). (In fact, Marx also said that “through the history, no ignorance had changed the world”)

Schumpeter thought that there would be more intellectuals in 20th century, thanks to technology advancement (e.g. the cheaper book and newspapers), expansion of the educational apparatus and particularly of the facilities for higher education, and the rationalist nature of capitalist civilization, which gives more opportunities to intellectuals.

All these factors would contribute to the increase of intellectuals and thus white collar workers. However, the society at that time would not be able to provide enough jobs for those white workers due to its mass-manufacturing based economy. Thus the situation creates unsatisfactory conditions of employment and eventually leads to the change of the society (page 152). Schumpeter said: “In that sense, Marx’s vision was right. We can also agree with him in linking the particular social transformation that goes on under our eyes with an economic process as its prime mover. What our analysis, if correct, disproves is after all of secondary importance, however essential the role may be which it plays in the socialist credo.” He called the next society “Socialism” and argued that the society should be compatible with democracy.

Now we live in the world that Schumpeter predicted. There had been no significant revolution to topple down Capitalism, and instead, Socialism countries were decomposed and now are aiming to construct market-based economy. Mass manufacturing-based economy is almost vanished in developed countries, moving most of its base to the emerging countries. Industries in advanced economies are now more knowledge intensive, where intellectuals create far more values than the precedent period.

Remarks

I’m very curious about why the great intelligence can predict the future, although we all face the limitation of time that flesh is heir to. It is easy to describe the current situation, but it’s far more difficult to see the future through the ongoing reality. Some smart people can forecast what will happen in 10 years, but only those with great intelligence can foresee the big change in the coming 100 years. I guess if Marx were living in early 20th century, he might have written the same kind of book as that of Schumpeter.

The implication to me is as follows: facts change as time goes on, but methodologies don’t. The great thinkers had their own methodologies to see the world, by which they not only just describe the situation but also find out essence, implications and the state of the future within it. Most of the books I introduced in this blog were full of those great methodologies. That is why I read classics and am trying to learn what they thought, instead of just what they said (that can be done by Wikipedia).

Reference

Joseph A. Schumpeter, “Capitalism, Socialism and Democracy” (Third Edition, published in 1950), Harper Perennial Modern Classics (2008/11/4)