Capitalism, Socialism and Democracy

Schumpeter argues that output, or the ability to produce goods and services, is one of the best ways of assessing an economic system. Capitalist economies, based on an average growth rate of 1.7% from 1928 onwards, would almost treble by 1978. This does not even take into account new products and commodities which enhance people’s quality of life, such as cars. Indeed, as Schumpeter points out, “there are no doubt some things available to the modern workman that Louis XIV himself would have been delighted to have yet was unable to” (67).

Schumpeter acknowledges that unemployment is a persistent problem with capitalism. However, output growth can mitigate this to some degree and enable societies to financially assist the unemployed.

Schumpeter addresses whether the profit motive, so central to capitalism, promotes the social good. Classical economists like Adam Smith argued that it does so under conditions of perfect competition. In a market with many sellers, producers have no control over the price of the commodity and are obliged to maximize production to increase profits. The social good is promoted by encouraging the maximal employment of resources. Unfortunately, such perfect competition is rare. Excepting agricultural mass production, most markets are either monopolistic or oligopolistic. That is, they are dominated by one or a handful of large firms, which have the power to increase prices by restricting output. When this happens, resources are not being maximally employed and the social good is thwarted.

Schumpeter argues that standard economic theory, which regards monopoly as bad, ignores the fact that “in dealing with capitalism we are dealing with an evolutionary process” (82). Capitalism is constantly changing with the pursuit and creation of new products, ways of producing, and markets. Monopoly or oligopoly, which seems harmful when viewed from a static perspective, can be efficient and productive when seen from a dynamic one. Monopolistic firms can be motivated by the threat of “creative destruction” (83). That is, they can be motivated by the potential, as well as actual, threat of some new technology or process rendering them obsolete.

Schumpeter argues that monopolies may actually be superior to purely competitive markets. First, they can increase prices beyond the level that would exist in pure competition and can generate excess profits. These profits give them the resources to invest in new technologies and methods of production not available to firms in perfect competition. Secondly, the excess profits under a monopoly provide a crucial incentive in an economy overall. Firms are motivated to risk resources and innovate to potentially reap profits. In contrast, under perfect competition, where new market entrants immediately whittle away profits, there is little incentive to make expensive or risky investment decisions.

Schumpeter looks at other possible reasons for the expansion of output under capitalism “not inherent in the business processes of capitalism” (107) itself. The first possible reason is the expansion of the world population. This, however, would not account for the increased per capita world income in the capitalist epoch. The second possible reason is new land in the US, with attendant new markets and resources. However, the discovery of new resources and land cannot be viewed as independent from capitalism, but rather integral to the capitalist process. For it is capitalism which provides incentives to discover new resources, land, and markets for exploitation as well as the means to do so.

Schumpeter assesses arguments which claim that capitalism will collapse due to a reduction or elimination of opportunities for capital investment, something essential to capitalism’s development. He says these arguments are unconvincing. Specifically, he looks at the claim that human society has reached a technological frontier which limits the possibility of further new demand, and hence investment. Rather, he says that “technological possibilities are an uncharted sea” (118). We simply cannot predict what new technologies, products and demands will emerge, just as those living in the 1750s could not have anticipated aircraft or atomic power.

This chapter outlines how capitalist culture has benefited humankind. Schumpeter argues that it has promoted rationality, as the process of bourgeois production requires continual and sober calculation of costs and benefits. It has eliminated or reduced much superstitious thinking and encouraged pacifism, as war is usually costly. At the same time, Schumpeter suggests that these benefits make no difference to whether capitalism will survive, or for how long. The demise of capitalism will be a result of economic and social processes which have a life and momentum of their own.

What will destroy capitalism, according to Schumpeter, is a process whereby economic progress and development becomes entirely mechanized. That is, economic innovation will cease to be the result of individual entrepreneurs and their efforts. Instead, it will be increasingly delegated to teams of administrators and specialists. This will be a result of the capitalist system’s success in mechanizing production. However, in the end it will destroy the bourgeoisie as a class by eliminating their core function as innovators.

There will also be, Schumpeter argues, growing hostility from the public toward capitalism that will precipitate its downfall. Ironically, this is related to its development and success. Increased leisure, educational opportunities, and easier access to books and newspapers, things created by capitalism, allow people to more readily criticize it. Increasing freedom given to intellectuals, whose role is to criticize, means that discontent can be easily organized and directed.

Schumpeter believes capitalism will also be undermined by the decline of the bourgeois family. This is precipitated by capitalism itself. As society becomes ever more rational, couples will start to question the rationality of having children. This will lead to the demise of the family and remove another cornerstone of bourgeois values.