Capital Loss

You say you'll change the constitution
Well, you know
We all want to change your head
--The Beatles

Just completed Schumpeter (1942). Back in my grad school days, I read selections from this book--primarily to become familiar with Schumpeter's infamous 'creative destruction' concept of the capitalistic process.

As I'm presently engaged in acquiring a better understanding of socialism vis a vis capitalism, Schumpeter's (1942) work is interesting because he theorizes that capitalism as an economic and social system lacks durability and inevitably falls to socialism. Unlike Marx (1867), however, who posited that capitalism would be appropriated by socialist revolutionaries as a consequence of increasing class conflict, Schumpeter theorized that capitalism would transition more gradually into socialism as a number of factors peculiar to capitalism evolved.

The gist of his argument appears in Part II of the book and is entitled Can Capitalism Survive? In Chapter 12 entitled Crumbling Walls Schumpeter elaborates four factors that he posits will destroy capitalism over time:

1) The ceasing or standardization of capitalistic 'progress' which destroys incentive for entrepreneurial initiative. In particular, large scale operators, thru methods that promote rationalization (i.e., efficiency), serve to squelch the entrepreneurial (i.e., 'bourgeoisie') function.

2) Capitalism destroys institutional arrangements of the feudal world (e.g., the village, craft guilds, charismatic rulers) that historically offered protective cover to (not from) capitalists. Absence of this cover leaves the bourgeousie vulnerable to attack from other groups.

3) As scale of capitalistic enterprise grows, loss of small and medium sized firms leads to loss of respect for private property and free contracting--two anchors of free markets. Schumpeter posits that small business owner/managers typically champion these free market elements more than managers or shareholders of big business. As this class of champions disappears, private property and free contracting are more prone to be contested. Capitalism is rendered politically defenseless.

4) Insecurity from the 'creative destruction' process of capitalism breeds social unrest. Intellectuals, people who wield power of the written and spoken word but who have little direct responsibility for practical affairs, are primary instigators of this unrest. Intellectuals are motivated to rail against capitalism because, paradoxically, increased standards of living prompt more folks toward advanced education. Schumpeter suggests that supply of highly educated individuals is likely to exceed demand at some point, leaving a large group of underemployed intellectuals bitter and critical of capitalism--in fact, such criticism may provide a livelihood for the critics! Because, according to Schumpeter, most people are prone to blindly accept what others say rather than to think for themselves, a great many will fall in to the anti-capitalist creed. Two special interest groups particularly likely to be amenable to the intellectuals' siren song are labor and politicians.

In a speech just before his death in 1949, Schumpeter expressed confidence that these drivers were in motion and capitalistic systems worldwide were still marching toward socialism, although he thought that many observers were in denial of such a transition. In particular he observed the presence of government interventions in many markets, including the United States that, in his view, would have been unthinkable a few decades earlier. He also proposed that war and inflation were two vehicles that could accelerate movement toward socialism, as resulting bureaucracies wrap capitalism in an irreversible choke hold.

There is much here to contest, and many have (as will I in future posts). At the same time, however, one cannot marshall a huge batch of empirical evidence today to decisely refute Schumpeter's (1942) theory on 'real world' grounds. Indeed, objective observation might suggest that, in many ways, his theory is on track.

References

Marx, K. 1867. Das kapital, Vol. 1. Hamburg: O. Meissner.

Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper & Brothers.