“In his 1942 book, Capitalism, Socialism and Democracy, Joseph Schumpeter asked the essential question: “Can capitalism survive?” His unsettling answer was, “No. I do not think it can.” Schumpeter’s words were in no way meant to denigrate capitalism, instead he felt “its very success undermines the social institutions which protect it.”
History in many ways proved his views prophetic. The success of capitalism means that many are allowed to do things that have nothing to do with productivity. And from government and academic elites that frequently seek to undermine the very system that enabled their cushy jobs, to foundations created by capitalist profits that often dismiss same, the commercial success wrought by the pursuit of profit has created an unproductive elite that lives off the very business profits that it regularly casts a skeptical eye on.
Schumpeter was of course talking about a United States that he envisioned post World War II, but his fears then don’t stray too far from the concerns of many today. Indeed, he worried that as wars usually accrue to the power of the state, that heavy government spending “would likely evolve into total government control over investment.” So far we’ve got the stratospheric spending to the tune of a $3.6 trillion budget, and from planned investment in everything from green energy to mortgage securities to autos, it seems that the alleged good that comes with government largesse will morph into the bad of government-directed investment.
On the business front, Schumpeter envisioned what would essentially be a two-tier system in which the government would largely stay out of the doings of retailers, laborers and clerks, all the while nationalizing what some call the “big business” parts of the economy. So while the hapless Fed Chairman Bernanke not long ago suggested that bank nationalization would not materialize, a few days later the federal government took an 80 percent ownership stake in Citigroup, the largest bank in the United States.
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Schumpeter may have been early in his suggestion that socialism would win out over capitalism, but this in no way detracts from his visionary predictions. In much the way that he foresaw, we’re on a slow march toward socialism; one that insures a more austere future for rich and poor alike.”
John Tamny, “Schumpeter, and the Slow March Toward Socialism?”, RealClearMarkets (19 March 2009).
John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics, and a senior economic advisor to Toreador Research and Trading.
Joseph Schumpeter is probably my favorite economist but he is not easy to understand. He had a magnificent "vision" of how economies worked and celebrated capitalism and the entrepreneur because of their dynamism and the way they transformed the world and raised the possibilities for mankind.
Schumpeter is said to be a conservative, anti-socialist Marxist because they shared the idea of a "grand vision" of how economies change over the course of time. In Marx's case, he thought (like Schumpeter) that capitalism was very productive but Marx also thought that as capitalism raised productivities the masses of workers would find their incomes falling to subsistence and the few remaining capitalists would have greater and greater incomes. In Marx’s view, the workers would become so many and so oppressed and the capitalists so few and so rich, that a revolution would take place and the workers would revolt and usher in socialism. Capitalism's failures would bring capitalism's demise.
Schumpeter's view was very different. He agreed that capitalism was very productive but said that instead of the distribution of income becoming increasingly unequal, the fruits of advance would be spread over the population. That is of course good. The hero of Schumpeter's story is the entrepreneur. The entrepreneur disturbs the smooth functioning of the economy through "a gale of creative destruction" in industry after industry where old products and old ways of doing things are replaced by the new. This, he tells us, is the cause of economic development, and it proceeds in a cyclical fashion along several time scales. Schumpeter believed that a highly developed capitalist banking system promoted growth and development by channeling bank credit to the entrepreneur and financing new projects. The process of bank-financed creative destruction would benefit the lower classes more than the rich because it would lower prices of all goods and services to everyone.
But the very act of raising everyone's income, in the mind of Schumpeter, would change the "social atmosphere" surrounding capitalism. The very success of capitalism, to his mind, will lead to the formation of large corporations and a fostering of values, especially among intellectuals, of hostility to capitalism. The intellectual and social climate needed to allow entrepreneurship to thrive will increasingly be eroded and capitalism will be succeeded by socialism of some form or another. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties and introduce social welfare policies, which will hobble entrepreneurs.
Thus, the very success of the capitalist, or entrepreneur, would make his role less and less important to society, and give rise to a critical frame of mind about everything business and economic. After all, if you have a high income and it seems to you natural and inevitable that it will continue, why do you care about the capitalist process that brought it into being?
So, capitalism and all its attributes will begin to be attacked. Schumpeter says, in particular, that "intellectuals" turn against the very system that supports them. ("Intellectuals", to Schumpeter, encompass all those who make a living with their head rather than their hands, specifically, college professors, lawyers, journalists, and writers.) Capitalism created the productivity on which a modern economy is based and on which all aspects of its society feed, especially the intellectual class. But people do not understand this, especially intellectuals, and they become hostile to the very social order which created them and sustains them. They increasingly attack capitalism and the function of the entrepreneur, and as they do so the entire system weakens and declines, intellectuals included.
To Schumpeter, capitalism creates a broad-based prosperity but that prosperity is unappreciated and its source is misunderstood. In their efforts to replace the entrepreneur as the most important group in society, intellectuals and politicians attack the very basis of a productive economy and it is lost. Capitalism's productivity creates the intellectual class, and the intellectual class destroys capitalism. In this sense, Capitalism's successes would bring about capitalism's decline.
Marx and Schumpeter see the same future for capitalism: It ends. But the reasons it ends are very different.
As to reality, the colleges and universities of America, not to mention the press, are full of so-called intellectuals that hate America and everything it stands for. The Great Schump would understand.
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