Schumpeter on Capitalism, Socialism and Democracy… Bottom line:
Wondering why there is so much fuss about capitalism at the moment? Time to get back to the basics. Don’t take risks, though. Go for a big name.
Today, my economics and society book suggestion is Capitalism, Socialism and Democracy by Joseph Schumpeter. And there are several reasons for that. First, Schumpeter is one of those names everyone’s heard of (without being able to say a thing about the guy). So, time to dig in and think smart. Second, Capitalism, Socialism and Democracy is a challenging book which contains key ideas you should know about.
For instance, does creative destruction ring a bell? Well, probably not. But it should. And, no, you have no excuse…
In short? This book is complex to read (at times), but it is challenging. In a good way. Worth your time if you want to try and understand today’s major challenges a little better!
Book suggestion: Capitalism, Socialism and Democracy – Joseph Schumpeter.
Schumpeter is one of those names we all know, somehow.
This is not surprising, though, considering that the man was one of the most famous economists of the early 20th century. Yet, most of us have never read any of his books. Have you?
I came across Schumpeter’s ideas lately while reading a great book on creativity. Originals, How Non-Conformists Move the World by Adam Grant, to be precise. Grant mentioned Schumpeter because both share an interest for creativity. Grant explores what it takes to be an original and change the world (as his book’s title suggests).
In contrast, Schumpeter focuses on the economic aspect of creativity. To the relationship between creativity, business and capitalism, in fact.
So when I bumped into Schumpeter’s book Capitalism, Socialism and Democracy in my favourite bookshop… I went for it.
As usual, here is what you get on this page:
- A brief overview of the book (that includes my SMART takes).
- A much more comprehensive commentary of what the book is about, with the author's main topics explained in detail.
- The book's main themes, questions and conclusions in bullet points.
- Why the book was worth my time, why it will be valuable to you, and additional reading suggestions if you are interested in the topic!
Schumpeter on Capitalism: a brief overview, for starters…
Let me try to make things simple. Schumpeter’s book Capitalism, Socialism and Democracy is one of those books that manages to explain things. Especially when it comes to understanding our current world. Yes, the book was written a long time ago. In the first half of the 20th century, in fact (note: I’m reviewing the 3rd and last edition here). Yet, the ideas he explores remain relevant. Very relevant.
Now, in a nutshell…
Joseph A. Schumpeter is one of the leading economists of the previous century. Schumpeter was once a financier but wrote this book when he was a professor at Harvard. In fact, the book’s preface summarizes the author’s career as follows: “no other economist of Schumpeter’s generation rose so far so fast”. Sounds promising to me.
Schumpeter discusses the main economic doctrines commonly followed nowadays. First, he explores what capitalism is and questions the model by commenting on Marx’s approach to the topic. Second, he discusses socialism as the alternative model. Third, he wonders whether democracy could actually work with those two concepts.
Let’s be objective, the style is complex. Obviously, this book isn’t a bedside table book you should read with one half-closed eye. The ideas are very interesting, but the style is dense, demanding, sometimes even difficult to follow. In short, there is a lot to chew here but there’s also room for selective reading so don’t panic.
I’m getting into the details with a much more comprehensive book review below (keep reading!), but in short, here is what the book says:
Schumpeter on Capitalism: the more comprehensive book review.
Capitalism, Socialism and Democracy explores divides into five major parts, but as the title suggests the three major themes here are capitalism, socialism, and democracy. Having said this, the author approaches the three issues by commenting on Marx’s famous ideas, by creating blueprints and by looking at interactions and contradictions.
As usual, this more comprehensive part of the book review starts with the main themes and questions considered in the book – in bullet points. I’ll then elaborate on the themes more extensively. Let’s dig in!
The book in bullet points
Schumpeter explores these major themes:
- How the main economics models interact
- Their blueprints, strengths, and weaknesses
- The ability of capitalism, socialism and democracy to work and survive
He also asks a variety of questions, including:
- What are the fundamental principles of capitalism and socialism?
- Who was Marx and what did he say about capitalism?
- What is the creative destruction concept?
- How do businesses and entrepreneurs contribute to capitalist societies?
- Can capitalism survive over time and… can socialism work better than capitalism?
- What are the limits of capitalism and socialism?
- Can democracy and socialism work together?
Capitalism, Socialism and Democracy – Theme #1: Capitalism.
Capitalism is (without surprise) the first and main theme of the book. Schumpeter approaches it in various ways.
The Marxian Doctrine.
The first method Schumpeter uses to discuss capitalism is an analysis of Marx’s economic and philosophic doctrines.
Schumpeter describes Marx as a sociologist, whose work towards analyzing capitalism was important – despite being questionable. But he more interestingly presents Marx as a communicator, as a teacher and as a “prophet” perceived as “a new ray of light” at a period of time where capitalism was questioned as an economic model.
For him, Marx managed to establish Marxism as a religion. The word might seem a little extreme, but Schumpeter explains his point: Marxism has become “a system of ultimate ends that embody the meaning of life”. It provides “absolute standards by which to judge events and actions”. And it implies “a plan of salvation” leading to a socialism-based paradise where classes do not exploit or feel exploited.
The theory of classes.
The discussion on the personality of Marx is anecdotic, though. The main interest of the discussion is to introduce economic theories.
In particular, Schumpeter comments on Marx’s theory of classes – to be found in Marx’s and Engel’s Communist Manifesto of 1848. In short? The capitalist society depends on a struggle between classes and on a division of labor from which ownership and production both depend. Capitalists on one side, workers on the others. But capitalists only exist because of their ability to exploit the workers… I’m sure the idea rings a bell.
To Schumpeter, however, Marx’s argument that capitalism is a matter of “owners” and “have-nots” is an “under-developed theory”. Instead, a proper analysis of capitalism ought to take into consideration more factors. Economic success, the talent to save, and the talent to invest. Hence, whilst Marx describes capitalism as primitive accumulation leading to the spoliation of the working class, Schumpeter talks about saving, investing and moving on as a guiding principle.
Schumpeter also comment’s on Marx’s theory of surplus value – which he describes as a “distinctively weak performance in the field of money”.
For Schumpeter, Marx’s position is weak because the value of a commodity cannot merely be a matter of quantity of labor. Value-creation also requires talking about competition, monopoly, and capital. Capital, in turn, is not a matter of exploitation but “a stock of means of production”. In sum? You may have labor, but without capital, you won’t manage to produce much. Why? Because capital is an unlimited “stock of potential”!
Now, Schumpeter does more than criticizing Marx. In fact, he has a major theory to offer.
One of the key arguments in Capitalism, Socialism and Democracy is that an economic model “cannot be stationary”. And there is a reason for that: economic progress depends on creativity, renewal, and the replacement of outdated methods and models.
In Schumpeter’s words, the capitalist mode “is incessantly being revolutionized from within by new enterprise, i.e. the intrusion of new commodities or new methods of production or new commercial opportunities into the industrial structure [so that] the conditions of doing business are always in a process of change”.
In other words? Capitalism isn’t about exploitation. Capitalism is a model based on innovation. It is a model that permanently nurtures innovation because “economic progress, in capitalist society, means turmoil” and depends on permanent change. By the same token, this theory of enterprise gives entrepreneurs and entrepreneurship a key role in the capitalist societies. Interesting, uh?
So, can capitalism work and survive?
Whether or not capitalism can work and survive is one of the big questions explored in Capitalism, Socialism and Democracy. And Schumpeter’s answer is… “no, I don’t think it can”.
Schumpeter formulates a second key argument here. While capitalism is about change and creative destruction, the model is not sustainable. In fact, it would “inevitably” lead to socialism. And the reason for this is… poker!
Yes, poker. Here’s why:
In order to be sustainable, capitalism would need to provide progress to the masses. On the long term. Without interruption. But betting on this would be poker game. In particular, competition amongst economic actors is to become an issue, and at some point, such competition would destroy the system.
There’s more. Another consequence of capitalism and mass production would most likely lead to an “evaporation of property”.
When goods become interchangeable, the very value of ownership changes. Why own a house when you can just rent and use one without a long-term commitment? This is what Schumpeter calls utilitarianism, and with it comes a variety of value or society changes.
The end of the entrepreneur?
Last but not least, Schumpeter argues that whilst entrepreneurs are the heart of capitalism, the model could well terminate them.
To him, creating value requires a skill that entrepreneurs share, i.e. getting things done. Yet, in reality, if capitalism creates mass production, it also fragilizes entrepreneurs by subjecting them to danger. In practical terms? Capital leads to automation, which leads to destroying competitors. In turn, the very idea of capitalism is damaged because creating value through innovation and change isn’t the goal anymore.
Hence, while capitalism is at best to generate progress through creative destruction, it is also capable of creating a decline and is at best to reduce its own contribution to the society…
Capitalism, Socialism and Democracy – Theme #2: Can socialism work?
The second question explored in Capitalism, Socialism and Democracy is that of whether socialism can work. Schumpeter argues that it can, but he also emphasizes a variety of limits.
To him, the core of socialist societies is not entrepreneurship and innovation but the preservation of the common good. This goal, in turn, requires a “central authority” responsible for monitoring and supervising the economy. Schumpeter does not talk about communism here. He actually rejects that idea clearly. He talks, however, about “a new cultural world” based on a form of equalitarianism – when, as a reminder, capitalism was a matter of utilitarianism.
As for capitalism, however, a major difficulty would be to establish a sustainable model. With a central authority, no need for economic rationality. But… how to invest and innovate where profit is unwanted? Why risk capital when no “inequalities of income” are allowed and when banks are undesirable?
>> Related reading: Books on making money and profits.
The socialist model implies that investment would become a matter of centralized decision-making. The common good would motivate decisions where financial incentives make things happen in the capitalist model.
For workers, though, Schumpeter sees less freedom. Central decisions based on the public interest mean that work and resource allocation are decided as necessary because it takes what it takes to satisfy the common good. But no individual freedoms, no individual expectations. There can be no rents either. No land ownership, no wages, but possibly an income for all.
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Human factors and bureaucracy.
The human factor is another weak point for socialism according to Schumpeter.
Simply put? Why would you accept to be ruled by a central authority which puts the common good above any sort of private or individual freedoms? How can societies progress if the model leaves no room fa personal success? What if working for the bureaucracy became the only way of standing out? The point raises even more questions! For instance, what to think of personal initiatives? Should allegiance be given more importance?
In fact, Schumpeter’s conclusion in Capitalism, Socialism and Democracy is that while capitalism is hardly sustainable in the long-run, socialism actually fails to “create a logic on its own”. To him, the model depends on “cartel authority” but lacks “economic rationality”.
To the opposite, Schumpeter notes that socialism fails when it comes to discussing the role of business when it comes to rational policymaking. Against all plausible expectations, socialist economies do not protect from “socially irrational allocations of resources”. Instead, they tend to provoke “excess capacity”… you see the drill.
Capitalism, Socialism and Democracy – Theme #3: Democracy?
Schumpeter elaborates on the shift from capitalism to socialism, and one of the ideas he explores is obviously the possibility of freedom and democracy. I (personally) found this part of the book less challenging so I’ll only mention it briefly here.
In the main, Schumpeter’s argument is that the idea of socialism and democracy is deceptive. While socialism (common good preservation) would seem very compatible with democracy, he finds that in reality socialist leaders have had “no objections to forcing the gates of the socialist paradise by violence or terror”.
Schumpeter reflects more broadly on what it takes to create a democracy. He writes about “human nature in politics”, deplores the inability of most to take decisions in the common interest, for real. He explores, alternatively, the role of people towards producing a government. The role of people in terms of voting or debating, that is. Schumpeter also discusses the need for compromises, comments on the potential tensions to be expected from such a model, so on and so forth. If you want more, get the book!
The main conclusions
Schumpeter comes to the following conclusions.
- Marx’s analysis of capitalism – based on a struggle of social classes – misses an important part of the discussion.
- Capitalism is not about exploitation but about innovation and permanent change towards economic progress. Indeed, creative destruction implies that change and replacing old methods is a key feature of the capitalist model.
- Hence, business and entrepreneurs have a major role to play in a capitalist society as they act as drivers for change.
- Capitalism would nonetheless have difficulties to survive over time because the model is not sustainable.
- Socialism could work, but the model lacks a genuine process and could lead to important derivations. In particular, the human factor and democracy expectations might not be compatible with the socialist ideal.
Food for Thought
As usual, let’s finish this book review with some food for thought! Capitalism, Socialism and Democracy is a very interesting book to read if you are interested in big picture politics, society, and economics.
The book is often complex and definitely deserves to be read with a backup pen. But it is worth your time. Especially if you really want to make constructive ideas on the matter. Or on what entrepreneurship is about.
There is a lot of skim-reading to do here, to be honest, but the main ideas are worth exploring and keeping in mind. If you have a chance to explore, go for it.
Schumpeter’s main insights
The book isn’t really a capitalist manifesto, in my opinion. Yes, Schumpeter appears to vouch for capitalism and writes that “operating socialist democracy would be a perfectly hopeless task”. Yet, he doesn’t just go for capitalism either. To the opposite, I’d say that Capitalism, Socialism and Democracy provides critical insights, on both sides.
On the one hand, Schumpeter explains what works with capitalism and the logic behind “creative destruction” is really worth a read. In fact, I found a lot of food for thought in there. On the other hand, you don’t need to agree with the capitalist mindset at all to read the book. In fact, Schumpeter does a great job of providing lots of opportunities to question the models.
Still relevant, decades after
Remember that the book dates from 1942, before the Second World War. Yet, Schumpeter was already talking about issues of competition. He was already talking about the evaporation of property… and he was also warning against the risks of automation.
His views on the relationship between capital, profit, and innovation are still discussed by today’s economists – see for instance Arnold Kling’s book on specialization in modern trade. Yet, reaching a consensus on the topic is still largely polemical!
Think about it. What would he write today if he had had a chance to look at the revolutions which make our future? What would he think of current competition and trade wars? How about robots, technologies, the internet or even the Blockchain? Schumpeter suggested that renting an apartment would replace the idea of owning one… but today isn’t this idea pushed to an extreme with Uber? Schumpeter would laugh, I say.
Anyway. The interesting thing is… Schumpeter’s critical thinking is decades old, but it still allows questioning today’s world. Remember his ideas on excess capacity (look at the U.S China trade war, you’ll see, it’s largely related to that), his ideas on freedom and the tendency of forcing socialism on people… Doesn’t it ring a bell too?
Now, let me make some reading suggestions.
If you’re into automation talks, don’t miss my book review of Martin Ford’s The Rise of the Robots. Oh, and more generally my book reviews on technology and society developments.
If you like economics and politics, read my book review of Arnold Kling’s Specialization and Trade. Do you find capitalism questionable? Have a look at my book review of Noam Chomsky’s book Who Rules the World? instead. There is some interesting food for thought there too. Just saying…
In my opinion...
… complex to read (skim-reading allowed) but the book provides real food for thought if you’re interested in economics and politics.
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That’s it for now, but don’t stop here! My reading notes are meant to give you a very comprehensive overview of the books I read and some food for thought for the month. That’s why I’ll Make You Think SMART is the Kick-Ass Book Reviews blog after all!
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