Josh on Schumpeter

This afternoon, I finally finished Joseph Schumpeter’s magnum opus, Capitalism, Socialism and Democracy. It was one of the hardest reads I’ve ever finished; I even committed the nearly unpardonable sin of stopping halfway through to read another book, Kingsley Amis’ Lucky Jim. The book is dense and profound, and Schumpeter is not afraid to contradict (or seemingly contradict) a point made earlier in the book while he is advancing a new argument, often without much in the way of helpful explanation. He reminds me a lot of Plato, for this and other reasons. Fortunately, for otherwise I would probably stop reading things more complex than restaurant menus, the book is incredibly insightful, poignant and well-thought through; every time he advances an argument, he takes great care to consider all possible objections, always stating these objections in their strongest form and frankly admitting whenever he sees a potential objection that might prove quite harmful to his argument. I firmly believe that Schumpeter is the smartest person I’ve ever read.

The basic structure of the book is fairly sweeping. In part one, Schumpeter gives a thorough analysis of Marx, his life and the substance and subsequent influence of his ideas. Schumpeter sympathizes strongly with Marx’s conclusions, although he believes his economics is deeply flawed (damn you, labor theory of value). In part two, Schumpeter analyzes a number of factors in the modern (the original edition was published in 1942) capitalist society which he believes will lead to its downfall. Firstly, the entrepreneurial class tends to create an economic system in which they themselves are obsolete, and can be replaced by bureaucracies (think how research and development is made controlled, regulated thing). Secondly, capitalists are rational, and rationality destroys super-rational loyalties to communities or to the nation as a whole, which means that if the capitalist order as a whole is attacked, no one will feel strongly about defending it. Thirdly, capitalism tends to create a large number of disenfranchised intellectuals, against whom businessmen are incapable of defending themselves in the political realm. Fourthly, the basic values that are responsible for a capitalist society’s success will gradually lose their hold on the public mind and be supplanted.
In the third section of his book, Schumpeter lays out the foundation for a socialist society not through violent revolution but rather gradually, through the democratic process. He believes that people who say that such a system is inherently unstable are mistaken and that a socialist economy has several advantages over a capitalist society. In the fourth section of the book, Schumpeter examines the relationship between the democratic political process, capitalism and socialism, concluding that socialism and democracy are not inherently incompatible and that democracy is by no means the exclusive domain of capitalism. The final section of Schumpeter’s book, in the third edition, is occupied by a brief history of socialist parties across the world and his reflections on the book published in 1950, a few days before his death.

Throughout the book, Schumpeter stresses that he does not wish to criticize or advocate any of the developments that he discusses, but rather only to hold them up clearly to the light and allow his readers to draw their own conclusions. One of the most striking inconsistencies in the book lies between his argument that socialism is compatible with democracy and a high degree of personal freedom and his denouncement of communism and the atrocities perpetrated in Stalin’s Russia, even going so far as to question whether intervening in World War II on his side was justifiable. I have not in my own mind been able to reconcile approval of socialist theory with this denouncement of socialist practice; Schumpeter himself notes that the key thing to note about Stalin’s actions is that he was merely doing what was necessary to keep himself in power, in other words, that his actions were inevitable in the system he inhabited.

The argument I found most ‘relevant’ to modernity occurred in the appendix, in the text of an address Schumpeter gave the AEA just before his death. Schumpeter argues forcefully against the regulation of big business, price controls and other politically expedient ways of fighting inflation, and excessive taxation of high income brackets. Arguing that taxation and regulation of this kind creates immense waste through incentive distortion and the immense army of lawyers employed by both the private and public sector as the former attempts to protect itself against raids by the latter, Schumpeter states that either outright socialism or laissez-faire capitalism are both highly preferable to this state of over-regulated capitalism. As I look at our staggeringly ineffectual government and our private sector, so much of which seems incapable of operating at all without government assistance in the form of bailouts, subsidies, tariffs and other outrages against the free market, I cannot help agree with him.