Part 1 of this essay can be found here. I’m sorry to have taken so long to finish, but the truth is that the latter half of Capitalism, Socialism and Democracy is much less impressive than the insight into “creative destruction” in the first part.
The latter part deals with a set of related questions.
1. Can capitalism survive? Schumpeter says it cannot. Corporations will grow larger; the entrepreneurial urge will become institutionalized; and advances will be made by and for the benefit of the large corporations. Meanwhile, the efficiency of capitalism will make material goods less costly, permitting the rise of an intelligentsia hostile to the bourgeois values that brought about the prosperity. The intelligentsia and their allies will dominate the government and use the power of the state to nationalize industry.
2. Can socialism work? Schumpeter employs an idiosyncratic definition of socialism. He restricts the meaning to the ownership of assets by the state, leaving out the leveling impulse and egalitarian ideal that accounts for most of socialism’s attraction. Restricted in this way, the agency problem is the same under capitalism and socialism. Schumpeter believes it can work, and is the likely successor to capitalism.
Upon finishing this book, I was immediately struck by Schumpeter’s unwillingness to extend his fundamental insight on creative destruction a little farther. Individual capitalists, seeking momentary competitive advantages, push the economy forward with innovations. Why would this not apply at the macro level as well? Is capitalism itself unable to evolve in response to competitive pressures? I would argue that it had done so in Schumpeter’s lifetime before the publication of Capitalism, Socialism, and Democracy in 1944. This was after the Securities Act of 1933, the Securities Exchange Act of 1934, the establishment of the SEC, the advent of Social Security and unemployment insurance, and bank reform with the FDIC as final guarantor. Nationalization was shortly to get underway in Europe, but was never a factor in the US. Part of the reason may have been that reforms in capitalism served to protect the economy from the episodes of panic and fraud that had characterized its early days. At the cost of some efficiency in the economy, the US had purchased a set of shock absorbers.
Schumpeter may also have failed to anticipate structural changes in national and international trade. The 20th century saw enormous advances in communication and transportation. Among other things, this lessened the geographic limitations on capital. It was once difficult to imagine that transatlantic air freight would ever be commercially viable, or that real-time communications with China would be an ordinary business practice. With information and goods traveling faster and cheaper, nations were thrown into competition with each other just as entrepreneurs were. Globalization would eventually require both capitalist and socialist states to evolve and adapt (China, India) or face ruin (Russia, Argentina). Nationalization was rolled back nearly everywhere it had been practiced. States may vary the mix of benefits, taxation, and economic freedom in response to their constituencies, but they face a test in the world market on the wisdom of those choices. Capital itself is portable and will migrate in response to relative changes in environment. While a ruler may maintain himself in a mismanaged economy by force of arms, his growing inability to purchase those arms limits his ability to resist rivals. Even tyrants are subject to market discipline. A weak president-for-life may find there is such a thing as term limits after all.
Finally, Schumpeter may have exaggerated the power of the intelligentsia. In the 2004 US elections, there may not have been much choice between a candidate who has had a mediocre record in preventing expansion of the state and one who frankly wanted to accelerate its growth. Still, the parties and the candidates favored by academics, the press, Hollywood, the music industry, the “helping professions,” public employees, transnationalists, and all the other groups in favor of expanding state control into the private sphere, particularly in economics, lost big. Even more significant than the margin of the loss was the degree to which the left had to disguise or deny its agenda of income redistribution, steeply progressive taxation, class enmity, price control (pharmaceuticals as a start), and nationalization (health care and insurance). The US has no tradition of a ruling class, and does not seem to wish to start one. Philosopher kings are still waiting for their big break.