Talk:Joseph Schumpeter (1883-1950)

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Contents 1 Study 1.1 Generative questions originating the article 1.2 Key points to make 1.3 Key resources to draw on 1.4 Scope and tone of coverage 2 Talk 2.1 Schumpeter, Capitalism, Socialism and Democracy 2.2 The Future of Capitalism 2.3 The Kernel of Democracy

Study

Generative questions originating the article

Key points to make

Key resources to draw on

• Creative Destruction's Reconstruction: Joseph Schumpeter Revisited by J. BRADFORD DELONG — discusses a new book about Schumpeter and argues that his view of economics makes a good match for the global economy of the late 20th and early 21st centuries.

Scope and tone of coverage

Talk

Schumpeter, Capitalism, Socialism and Democracy

The assigned parts of Capitalism, Socialism and Democracy present a peculiar combination of hard-nosed unrealism, detached sentimentalism and, with the benefit of hindsight, assertiveness sometimes bordering on the ridiculous. Schumpeter’s ambition is to understand nothing less than the social, economic, and political thrust of his time, a time of transformation of, or at least a dawning recognition of, capitalism as something quite different from what you find in your standard economics textbook. This involves understanding the economy, its developmental tendencies, its social embeddedness, and its political context in a work that has the ambition and breadth, if not the sympathies or profundities, of a mid-twentieth century Karl Marx.

The Future of Capitalism

First the hard-nosed unrealism, part II with its guiding question ’Can Capitalism Survive?’ – Something Schumpeter answers in the negative. The basic thrust of his argument is presented at the outset; he believes that capitalism’s ”very success undermines the social institutions which protects it” (CSD, p. 61). Schumpeter take as his premise that growth will continue at a net rate of roughly 2% for the half-century 1928-1978 with little change in distribution and without the production of serious negative externalities, and that this will create a kind of affluent society where only a very few are suffering from deprivation and economic hardship. This combination of growth and relative affluence will, Schumpeter argues, undermine the perpetuation of capitalism in three ways: (I) it will stifle innovation; (II) vaporizes investment opportunities, and (III) transform ’capitalist civilization’ into something else. Before turning to each aspect of his argument, it is worth noting the sad fact that his broad and synoptic take on what constitutes an economic system and its functioning is in it self a contribution that stands in contrast to most traditional economic thinking. That said, let us turn to the challenges Schumpeter think are facing capitalism.

(I) Schumpeter argues that capitalism is dependent on innovation. He understands this not as taking the form of peaceful evolution, but as process of ’creative destruction’ where old structures are broken down and replaced by different, new ones. He outlines how he thinks the bureaucratization of large business corporations and the lack of competition in many sectors will undermine the creative processes and create a condition of what he calls ”petrified capitalism” (CSD, p. 112), akin to a market taken hostage by a cartel of sunset industry players. Though his diagnosis seems to be a useful way of understanding how research on alternative fuels was obstructed from the 1960s till the end of the last millennium or how copyrights are managed today, the incredible feats of innovation produced by differently-organized but similarly large and market-dominant players like Microsoft and Intel suggests that large organizations can be innovative – Schumpeter is perhaps caught by a rather naive and individualistic conception of what innovation is and how it works. Innovation is not necessarily driven by so many individual Ben Franklins innovating away on their own.

(II) Partly intertwined with the expected slow-down in innovation, partly connected with what he perceives to be market saturation and problems of resource-shortage, Schumpeter points to a ”vanishing investment opportunity” (CSD, p.112ff) as burrowing away at the foundations of capitalism. Innovation and investment drives the kind of growth that is at the heart of capitalism, and if the opportunities of pursuing and profiting from these processes disappear, so does ultimately the system itself. Again, Schumpeter’s analysis seems a bit too much a child of its time, writing a decade before the telecommunications revolutions of the 1960s and the massive shift towards the service sector and a ’knowledge economy’, he neglected the possibility that immaterial goods and services could provide a whole new domain for capitalist expansion, both in terms of investment and innovation.

(III) Finally, Schumpeter argues that the social setting that made capitalism possible is crumbling. He points to changing legal forms of property and new conceptions of family relations as undermining the incentives that had hitherto “effectively chained the bourgeois stratum to its tasks” (CSD, p. 74). With less individual ownership and a more instrumental conception of relationships, including family relationships, the idea of creating something of value lasting beyond what one can consume in one’s own lifetime apparently evaporates, and lack of ambition and drive is the result. Tell that to Bill Gates. Little empirical evidence of the period since the book was written suggests that this has had much of an impact on the fundamental operations of capitalism. As a political appendix to the disintegration of the social conditions of capitalism, Schumpeter argues that capitalism has also failed to develop its own political class to replace the aristocracy it has gradually whittled away, and will fail to retain the loyalty of the petty bourgeoisie surviving in pre-capitalist ways (an allusion to the small shop keepers and unemployed war-veterans that formed that mass basis for fascism in Europe). On the contrary, Schumpeter describes the rise of a stratum of intellectuals who are dependent on political mobilization more or less directly against capitalism, people he sees as likely to move towards the labor movements and turn them against capitalism. Again, Schumpeter’s analysis seems premature and only partly right – while his analysis of the increasing professionalization of politics and the disappearance of the gentleman-politics of Tocqueville’s America and of pre-mass democracy in Europe is precise, his conclusion have been eclipsed by the simultaneous disintegration of actively capitalist, actively reactionary and actively anti-capitalist forces and their replacement by centrist politics as we have seen them on both sides of the Atlantic from the end of the second world war till the rise of the New Right in the 1980s.

The Kernel of Democracy

Then to the detached sentimentalism – part IV on ’Socialism and Democracy’, where I will focus on his discussion of democracy, and not the rather dated discussions of socialism. Schumpeter’s main aim here is to detach himself from what he calls the ’classical doctrine of democracy’, an understanding that is clearly too doctrinarian and too imprecise for his taste. The confusion he wants to cut through is the vast sediment surrounding and blurring the meaning of both parts of the vaunted word, demos (people) and kratein (rule/govern). Schumpeter asks, with some right, who are the people, what would it mean for them to govern, and how are they supposed to do it? Doctrine provides few intellectually satisfying answers to his questions, and he himself propose to recast democracy as ”a political method … a certain type of institutional arrangement for arriving at political – legislative and administrative – decisions” (CSD, p. 242). This method should, Schumpeter contends, be understood as being defined not as rule by the people, but as rule approved by the people (p. 246). This stands in sharp contrast to how he portrays the classical doctrine and its definition of democracy as the ”institutional arrangement for arriving at political decisions which realizes the common good by making the people itself decide issues through the election of individuals who are to assemble in order to carry out its will” (CSD, p. 250). The problem with this position, Schumpeter argues, is that it rests on the idea that ”there exists a Common Good, the obvious beacon light of policy, which is always simple to define and which every normal person can be made to see by means of rational argument” (CDS, p.250). This is one of the pages in the gospel of democracy that Schumpeter wants to tear out. He argues at length that the notion of a (capitalized) Common Good is a specter that should not blind us to the harsh fact that people have, and will almost always have, divergent interests. If one in the face of this wants to appeal to the altruism of good citizens prepared to postpone the pursuit of their own immediate interests for the sake of, well, the common good, Schumpeter lies in wait with another rebuttal ready: the broad basis of the electorate does not even think so far. Indeed, he claims, ”the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again” (CSD, p. 262). Schumpeter is merciless in this part of the book – classical democracy does not survive because of the validity of the notions of the ‘common good’ or the ‘good citizen’, but because is serves as a surrogate religion, predominantly produce policies the majority support, play into sentimental recollections of the supposedly democratic workings of smaller associations, and is strategically useful for politicians who through acquire the possibility of acting in the name of the people. So all of this happens, but for Schumpeter it is not a workable definition of democracy, because it is more or less unrelated to the purported constituent elements of the classical doctrine, the before mentioned common good and good citizen.

Instead, Schumpeter proposes an analytical theory of democracy, in the key chapter XXII. He operationalizes his move from government ’by the people’ to ’approved by the people’ through the idea of electoral competition for political leadership. According to this definition, ”the democratic method is that institutional arrangement for arriving at political decisions in which individuals acquire the power to decide by means of a competitive struggle for people’s vote” (CSD, p. 269). Schumpeter goes on to detail the advantages of this definition over the next few pages, something that need not detain us here. More interesting is the conditions he argues his kind of democracy can flourish under – this is where sentimentalism seems to sneak back in. Having precisely predicted the increasing professionalization of politics, Schumpeter goes on to stipulate (I) the quality of the politicians running, (II) the limitations of the areas subject to their rule (i.e. that central banks and the judiciary are kept independent), (III) the existence of a competent and loyal bureaucracy, (IV) ’democratic self-control’ amongst politicians and people, and (V) tolerance of differences of opinion, as the five preconditions for democracy’s perpetuation. I fail to understand what drove Schumpeter to go beyond his condition II, already a part of the division of powers that Montesquieu argued for, and the system of checks-and-balances that the founders put in place in this country. His remaining appeals to quality, competence, self-control, and tolerance seems to me unnecessary additions and a failure of realist nerve in the light of his professed ambition to look at this in a detached, rational, and minimalist way. Think of democracies from Belgium over Moldova nd Venezuela to India for specimens that have survived for decades without all five preconditions being present. It seems to embed his understanding of working democracies in precisely an idealization of the kind of political culture he earlier in the book argues is whittled away by the development and break-down of capitalism. Capitalism did not go the way he predicted, and maybe his minimally defined democracy is sturdier than he thinks too.

Rasmus