Capitalism, Socialism and Democracy

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Capitalism, Socialism and Democracy
First edition
AuthorJoseph Schumpeter
CountryUnited States
Published1942 (Harper & Brothers)

Capitalism, Socialism, and Democracy is a book on economics, sociology, and history by Joseph Schumpeter, arguably his most famous, controversial, and important work.[1][2][3][4] It's also one of the most famous, controversial, and important books on social theory, social sciences, and economics[5]—in which Schumpeter deals with capitalism, socialism, and creative destruction.

It is the third most cited book in the social sciences published before 1950, behind Marx's Capital and The Wealth of Nations by Adam Smith.[6]


Part I: The Marxian Doctrine[edit]

Schumpeter devotes the first 56 pages of the book to an analysis of Marxian thought and the place within it for entrepreneurs. Noteworthy is the way that Schumpeter points out the difference between the capitalist and the entrepreneur, a distinction that he claims Marx would have been better served to make (p. 52). The analysis of Marx is broken down into four roles that Schumpeter ascribes to the writer (prophet, sociologist, economist, and teacher). The section Marx the Prophet explains that if nothing else Marx would have been received well by people who needed a theory to explain what was happening in their society. The section Marx the Sociologist focuses on how Marx's theory of class fits in with the larger intellectual traditions of the day and how it superseded them in at least its ability to synthesize sociological thought. The section Marx the Economist focuses on Marx's economic theory and judges it excessively "stationary" (pp. 27, 31). He also deals with the concept of crisis and business cycle, two economic theories that Marx pioneered (p. 39). The last section, Marx the Teacher, evaluates the usefulness of Marx's thought to interpret the events of his time and those between his death and Schumpeter's time. Schumpeter claims that any theory of crisis gains support when crises occur, and points to some developments that Marx's theories have failed to predict. On page 53 he argues that Marx's theory better predicts English and Dutch colonial experiences in the tropics, but fails when applied to New England for example.

Part II: Can Capitalism Survive?[edit]

Schumpeter answers "no" in the prologue to this section. But he says, “If a doctor predicts that his patient will die presently,” he wrote, “this does not mean that he desires it.” The section consists of 100 pages with the following ten topics: The Rate of Increase of Total Output, Plausible Capitalism, The Process of Creative Destruction, Monopolistic Practices, Closed Season, The Vanishing of Investment Opportunity, The Civilization of Capitalism, Crumbling Walls, Growing Hostility, and Decomposition. Of these, creative destruction has been absorbed into standard economic theory. This section constructs a view of capitalism which ultimately tends toward corporatism[dubious ] which, he suggests, will be its own undoing.

Part III: Can Socialism Work?[edit]

In this section comparative analysis of known theories of socialism are explored. The five sections in this Part are: Clearing Decks, The Socialist Blueprint, Comparison of Blueprints, The Human Element, and Transition. Although some readers have expressed surprise at what they see as Schumpeter's excessively rosy appraisal of a hypothetical future socialist republic and its chances of success, others disagree. Thomas K. McCraw, Schumpeter's biographer, saw Schumpeter's analysis of socialism in this section as almost satirical, observing that Schumpeter stipulated so many unrealistic preconditions for the future success of socialism, that he was essentially saying that it couldn't possibly succeed under any circumstances.

Part IV: Socialism and Democracy[edit]

This section debates how well democracy and socialism will fit together. The four sections of this Part include, The Setting of the Problem, The Classical Doctrine of Democracy, Another Theory of Democracy, and The Inference.

Part V: A Historical Sketch of Socialist Parties[edit]

This part develops five periods of socialist thought. Before Marx, Marx's time, 1875 to 1914 (Prior to WWI), The interwar period, and Schumpeter's contemporary post-war period.

Capitalism and socialism[edit]

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism[dubious ] and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend for social democratic parties to be elected to parliaments as part of the democratic process. He argued that capitalism's collapse from within will come about as majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and eventually destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy (more precisely, he was engaging in political advocacy for the contrary).[7]

In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organise protest and develop critical ideas against free markets and private property, even though these institutions are necessary for their existence. This analysis is similar to that of the philosopher Robert Nozick, who argued that intellectuals were bitter that the skills so rewarded in school were less rewarded in the job market, and so turned against capitalism, even though they enjoyed vastly more enjoyable lives under it than under alternative systems.[8]

In Schumpeter's view, socialism will ensure that the production of goods and services is directed towards meeting the 'authentic needs' of the people of Hungary[9] and Albania[citation needed] and will overcome some innate tendencies of capitalism such as conjecture fluctuation, unemployment and waning acceptance of the system.[citation needed] According to some analysts, Schumpeter's theories of the transition of capitalism into socialism were ‘nearly right’[10] except that he did not anticipate the collapse of socialism in Eastern Europe nor the role of technology to foster innovation and entrepreneurship in Western society beginning in the 1980s. This was in contrast to Schumpeter's theory that technology would only serve to concentrate ownership and wealth towards large corporations.

Other prominent economists do not share this post-Cold war triumphalism. Amongst them is the Nobel Prize laureate Edmund Phelps, as well as his reviewer Arnold Kling, economist at MIT, have expressed that Schumpeter was right about corporatism.[dubious ] They echo an economic history of corporations steadily rising to ever more prominence and power since at least the 1970s to the 2010s. Phelps analysis of corporatism[dubious ] is pro-open market as he describes large corporations working in tandem with "corporatists"[dubious ] policies from the State, and its relationship to the congressional-banking complex. Thus it is corporatism,[dubious ] not socialism, which is the undoing of free-market capitalism.[citation needed]

Creative destruction[edit]

The book also popularized the term 'creative destruction' to describe innovative entry by entrepreneurs as the force that sustains long-term economic growth, even as it destroys the value of established companies that have enjoyed some degree of monopoly power. Because of the significant barriers to entry that monopolies enjoy, new entrants have to be radically different: ensuring fundamental improvement is achieved, not a mere difference of packaging. The threat of market entry keeps monopolists and oligopolists disciplined and competitive, ensuring they invest their profits in new products and ideas. Schumpeter believed that it is this innovative quality that makes capitalism the best economic system.[7]

See also[edit]


  1. ^ Schumpeter on the Economics of Innovation And the Development of Capitalism, Arnold Heertje, Jan Middendorp (Ed.), Edward Elgar Publishing, 2006, p. 41
  2. ^ Essays: On Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, Joseph Alois Schumpeter, Transaction Publishers, 1951, Classics in economics collection, in the introduction by editor Richard Vernon Clemence, p. xviii-xix
  3. ^ Capitalism and Democracy in the 21st Century: Proceedings of the International Joseph A. Schumpeter Society Conference, Vienna 1998 "Capitalism and Socialism in the 21st Century", (Ed.s) Dennis C. Mueller and Uwe Cantner, Springer, 2000, p. 2
  4. ^ Economics Broadly Considered: Essays in Honour of Warren J. Samuels, Jeff E. Biddle, Volume 48 de Routledge Studies in the History of Economics, Routledge, 2001, p. 125
  5. ^ About this book on Capitalism, Socialism and Democracy in Google books
  6. ^ Green, Elliott (12 May 2016). "What are the most-cited publications in the social sciences (according to Google Scholar)?". LSE Impact Blog. London School of Economics.
  7. ^ a b "Joseph Alois Schumpeter". Econlib. Archived from the original on 2020-11-14. Retrieved 2021-01-30.
  8. ^ Why Do Intellectuals Oppose Capitalism? by Robert Nozick
  9. ^ Schumpeter considered that had the Romanians not intervened in name of the Allies after the Béla Kun coup, the system could have gone on working economically indefinitely, see Capitalism, Socialism and Democracy, Routledge, 2006, p. 360
  10. ^ Where Schumpeter was Nearly Right - The Swedish Model and Capitalism, Socialism and Democracy Archived October 29, 2008, at the Wayback Machine, Magnus Henrekson, Ulf Jakobsson, S-WoPEc - Scandinavian Working Papers in Economics, Working Paper Series, April 3, 2000

External links[edit]