Review Form

You can say anything you like
But you can't touch the merchanidise
--The Tubes

Schumpeter's (1942) argument concerning the destruction of capitalism was outlined previously. While his theory has some appeal, there is much to contest. Let me humbly submit a few issues that I see with his argument.

Much of Schumpeter's argument depends on the presence, and persistence, of large firms that wear down capitalism by their rationalization efforts. Drives to improve efficiency, he argues, serve to standardize entrepreneurial processes, thus marginalizing capitalistic function. Scale also crowds out small firm proprietors thought by Schumpeter to be primary champions of property rights and free contracting. Such a proposition seems to contradict the very essence of the 'creative destruction' concept of capitalism that Schumpeter previously (and famously) emphasizes at great lengths. In free markets, it is difficult for large firms to persist. Opportunities evolve which favor new entrants over incumbants. As long as entry is not impeded (in which case we would not be talking about a truly free market system), then marginalization of capitalism by large firms seems unlikely in the long run. If capitalism is truly a process of creative destruction, then how can/do barriers that squelch this process come to exist?

Schumpeter posited that capitalism destroys many of the feudal institutions (e.g., villages, craft guilds, etc) that historically served to protect the capitalist class. The question here is why such institutional protection is necessary. If government was properly limited in scope to be the protectors of property rights (which is a necessary condition for capitalistic systems), then there is no need to fall back on socially-oriented mechanisms that were necessary when plunder was facilitated the state. Similar to the previous proposition, Schumpeter seems circular in his reasoning here (i.e., markets can't stay free because the mechanisms that support free markets are not in place--which bids the question how markets were ever free in the first place...).

Schumpeter argued that shareholders of large firms, and their managers, would decry private property and free contracting. It is difficult for me to comprehend how this could be. Shareholders, as owners, are likely to pursue firm grasp on their property and contracting rights. As for managers, Schumpeter seems to be evoking some variant of agency theory to suggest that managers have no perceived stake in the company thus they behave in an interested fashion. But large firm managers have personal property to protect--if not at their firms then at home. Moreover, these managers would surely want to preserve their freedom to contract in the market for talent. Schumpeter's arguments here are neither intuitive or convincing.

I do think Schumpeter scores with his argument about the intellectuals and their critical bent against capitlism. His propositions seems to garner a decent amount of support today via empirical observation. However, the effectiveness of anti-capitalist intellectuals depends on capacity of citizens to think critically themselves. An engaged citizenry would render propaganda efforts ineffective.

Assuming, for sake of argument, that all of Schumpeter's points are valid, the question remains whether these factors would be enough to drive capitalism to a socialist endgame. Schumpeter definitively says 'yes,' and Part III of his book provides rationale for why this should happen. Once again, I found his arguments unconvincing.

The obstacle that Schumpeter cannot convincingly overcome is how a system moving toward socialism compensates for the disappearance of a pricing system that in capitalistic systems serves to effectively allocate resources. Primarily, planners cannot easily make economic calculation (market prices don't exist), and bureaucratic processes are slow to adapt to a changing world, which ultimately renders central planning ineffective in resource allocation. Schumpeter's arguments do not pursuade otherwise. Because economic resources are likely to be misallocated, standard of living in a socialistic system is bound to be inferior. Morever, once enough people experience squalor, then further movement toward socialism is likely to be politically difficult.

We've experienced examples of this since Schumpeter's passing--the sad economic state of the Soviet Union upon its collapse being the highest profile flameout. In fact, a case may be made that burgeoning debt levels we currently observe worldwide are consequences of modern socialization efforts. One has to wonder whether borrowing from the future is merely a natural reaction by bureaucrats seeking to make socialistic systems 'work' today in the eyes of their citizens.

Such an illusion, of course, is not durable.

One more thought. Were I Schumpeter, I would have done more to elaborate conditions under which capitalism might convert to socialism. It is reasonable to believe that some contexts may be more or less friendly than others. It strikes me, for instance, that conditions of extreme environmental stability and certainty would be almost a necessity for socialist planners to have even a snowball's chance in **** of succeeding. Such conditions, of course, are in short supply today.

Path dependence might also matter. For example, a country that was founded on the principles of individual liberty and small government, such as the United States, would seem a more difficult hurdle for the capitalism->socialism progression than a country grounded in a history of despotism.

Reference

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