Excerpts from  

Capitalism, Socialism and Democracy,
Part I

By Joseph A. Schumpeter



Most of the creations of the intellect or fancy pass away for good after a time that varies between an after-dinner hour and a gen­eration. Some, however, do not. They suffer eclipses but they come back again,... These we may well call the great ones… this is undoubtedly the word to apply to the message of Marx.

We need not believe that a great achievement must necessarily be a source of light or faultless in either fundamental design or details. On the contrary, we may believe it to be a power of darkness; we may think it fundamentally wrong or disagree with it on any number of particular points. In the case of the Marxian system, such adverse judgment or even exact disproof, by its very failure to injure fatally, only serves to bring out the power of the structure.  



.. In one important sense, Marxism is a religion. To the believer it presents, first, a system of ultimate ends that embody the meaning of life end are absolute standards by which to judge events and actions; and, secondly, a guide to those ends which implies a plan of salvation and the indication of the evil from which mankind, or a chosen section of mankind, is to be saved. Marxist socialism also belongs to that subgroup which promises paradise on this side of the grave. …  

The religious quality of Marxism also explains a characteristic attitude of the orthodox Marxists  toward opponents.  To him, as to any believer in a Faith, the opponent is not merely in error but in sin. Dissent is disapproved of not only intellectually but also morally. There cannot be any excuse for it once the Message has been revealed .

Purely scientific achievement, had it even been much more perfect than it was in the case of Marx, would never have won the immortality in the historical sense which is his. Nor would his arsenal of party slogans have done it……. if Marx had not been more than a purveyor of phraseology, he would be dead by now. Mankind is not grateful for that sort of service and forgets quickly the names of the people who write the librettos for its political operas.  

But he was a prophet, and in order to understand the nature of this achievement we must visualize it in the setting of his own time. It was the zenith of bourgeois realization and the nadir of bourgeois civilization, the time of mechanistic materialism, of a cultural milieu which had as yet betrayed no sign that a new art and a new mode of life were in its womb, and which rioted in most repulsive banality..  

Now, to millions of human hearts the Marxian message of the terrestrial paradise of socialism meant a new ray of light and a new meaning of life. Call Marxist religion a counterfeit it you like, or a caricature of faith-there is plenty to be said for this view-but do not overlook or fail to admire the greatness of the achievement. Never mind that nearly all of those millions were unable to understand and appreciate the message in its true significance. That is the fate of all messages. The important thing is that the message was framed and conveyed in such a way as to be acceptable to the positivistic mind of its time-which was essentially bourgeois no doubt, but there is no paradox in saying that Marxism is essentially a product of the bourgeois mind.  

  Observe how supreme art here succeeds in weaving together those extra-rational cravings which receding religion had left running about like masterless dogs, and the rationalistic and materialistic tendencies of the time, ineluctable for the moment, which would not tolerate any creed that had no scientific or pseudo-scientific connotation. Preaching the goal would have been ineffectual; analyzing a social process would have interested only a few hundred specialists. But preaching in the garb of analysis and analyzing with a view to heartfelt needs, this is what conquered passionate allegiance and gave to the Marxist that supreme boon which consists in the conviction that what one is and stands for can never be defeated but must conquer victoriously in the end.

…. He did not weep any sentimental tears about the beauty of the socialist idea. This is one of his claims to superiority over what he called the Utopian  Socialists. Nor did he glorify the workmen into heroes of daily toil as bourgeois love to do when trembling for their dividends. He was perfectly free from any tendency, so conspicuous in some of his weaker followers, toward licking the workman's boots. He had probably a clear perception of what the masses are and he looked far above their heads toward social goals altogether beyond what they thought or wanted.  

As every true prophet styles himself the humble mouth­piece of his deity, so Marx pretended no more than to speak the logic of the dialectic process of history.  

 Marx was personally much too civilized to fall in with those vulgar professors of socialism who do not recognize a temple when they see it. He was perfectly able to understand a civilization and the "relatively absolute" value of its values, however far removed from it he may have felt himself to be. In this respect no better testimony to his broad-mindedness can be offered than the Communist Manifesto which is an account nothing short of glowing of the achievements of capitalism; and even in pronouncing pro futuro death sentence on it, he never failed to recognize its historical necessity.  

This may seem to be an exaggeration. But let us quote from the authorized English translation: "The bourgeoisie ... has been the first to show what man's activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals. The bourgeoisie draws all nations . . . into civilization. . . . It has created enormous cities and thus rescued a considerable part of the population from the idiocy [sic!] of rural life. . . . The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding gen­erations together.



Pure philosophy of the German kind was his starting point and the love of his youth. For a time he thought of it as his true vocation. He was a Neo-Hegelian, which roughly means that while accepting the master's fundamental attitudes and methods he and his group eliminated, and replaced by pretty much their opposites, the conservative interpretations put upon Hegel's philosophy by many of its other adherents.  

He retained his early love during the whole of his lifetime. He enjoyed certain formal analogies which may be found between his and Hegel's argument. He liked to testify to his Hegelianism and to use Hegelian phraseology. But this is all. Nowhere did he betray positive science to metaphysics. He says himself as much in the preface to the second edition of the first volume of Das Kapital, and that what he says there is true and no self-delusion can be proved by analyzing his argument, which everywhere rests upon social fact, and the true sources of his propositions none of which lies in the domain of philosophy. 

Marx the sociologist brought to bear on his task an equipment which consisted primarily of an extensive command over historical and contemporaneous fact. … hardly any historical work of his time that was of any general importance or scope escaped him, although much of the monographic literature did. …  facts he embraced with a glance that pierced through the random irregularities of the surface down to the grandiose logic of things historical.   …his attempt to formulate … the so-called Economic Interpretation of History, is doubtless one of the greatest individual achievements of sociology to this day.  

The economic interpretation of history does not mean that men are, consciously or unconsciously, wholly or primarily, actuated by economic motives. On the contrary, the explanation of the role and mechanism of non-economic motives and the analysis of the way in which social reality mirrors itself in the individual psyches is an essential  element of the theory and one of its most significant contributions.  He only tried to unveil the economic conditions which shape them and which account for their rise and fall. The whole of Max Weber's facts and arguments fits perfectly into Marx's system. Social groups and classes and the ways in which these groups or classes explain to themselves their own existence, location and behavior were of course what interested him most. He poured the vials of his most bilious wrath on the historians who took those attitudes and their verbalizations at their face value and who tried to interpret social reality by means of them.

 the economic interpretation of history has often been called the materialistic interpretation. It has been called so by Marx himself. This phrase …is entirely meaningless. Marx's philosophy is no more materialistic than is Hegel's, and his theory of history is not more materialistic than is any other attempt to account for the historic process by the means at the command of empirical science

What.the theory really says may be putt into two propositions:

(1) The forms or conditions of production are the fundamental determinant of social structures which in turn breed  attitudes and civilizations. Marx illustrates his meaning by the famous statement that the “hand-mill" creates feudal, and the "steam-mill," capitalist societies …

(2)  The forms of production themselves have a logic of their own; that is to say they change according to necessities inherent in them so as to produce their successors merely by their own working….. Here, then, we have the propeller which is responsible first of all for economic and, in consequence of this, for any other social change, a propeller the action of which does not itself require any impetus external to it.

Both propositions undoubtedly contain a large amount of truth and are, as we shall find at several turns of our way, invaluable working hypotheses. Most of the current objections completely fail, all those for instance which in refutation point to the influence of ethical or religious factors, or the one already raised by Eduard Bernstein, which with delightful simplicity asserts that "men have heads" and can hence act as they choose. After what has been said above, it is hardly necessary to dwell on the weakness of such arguments: of course men "choose" their course of action which is not directly enforced by the objective data of the environment; but they choose from standpoint, views and propensities that do not form another set of independent data, but are themselves molded by the objective set.  

Nevertheless, the question arises whether the economic interpretation of history is more than a convenient approximation which must be expected to work less satisfactorily in some cases than it does in others. An obvious qualification occurs at the outset. Social structures, types and attitudes are coins that do not readily melt. Once they are formed they persist, possibly for centuries, and since different structures and types display different degrees of this ability to survive, we almost always find that actual group and national behavior more or less departs from what we should expect it to be if we tried to infer it from the dominant forms of the productive process.  

To the faithful, of course, it is simply the master key to all the secrets of human history. And if we sometimes feel inclined to smile at rather naive applications of it, we should remember what sort of arguments it replaced. Even the crippled sister of the economic interpretation of history, the Marxian Theory of Social Classes, moves into a more favorable light as soon as we bear this in mind.  

Again, it is in the first place an important contribution that we have to record. Economists have been strangely slow in recognizing the phenomenon of social classes. Of course they always classified the agents whose interplay produced the processes they dealt with. But these classes were simply sets of individuals that displayed some common character: thus, some people were classed as landlords or workmen because they owned land or sold the services of their labor. Social classes, however, are not the creatures of the classifying observer but live entities that exist as such. And their existence entails consequences that are entirely missed by a schema which looks upon society as if it were an amorphous assemblage of individuals or families. It is fairly open to question precisely how important the phenomenon of social classes is for research in the field of purely economic theory. That it is very important for many practical applications and for all the broader aspects of the social process in general is beyond doubt.  

Clearly, success on the line of advance opened up by the principle of class struggle depends upon the validity of the particular theory of classes we make our own. ….   The basic idea is clear enough, however. The stratifying principle consists in the ownership, or the exclusion from ownership, of means of production such as factory buildings, machinery, raw materials and the consumers' goods that enter into the workman's budget. We have thus, fundamentally, two and only two classes, those owners, the capitalists, and those have-nots who are compelled to sell their labor, the laboring class or proletariat. The existence of intermediate groups, such as are formed by farmers or artisans who employ labor but also do manual work, by clerks and by the professions is of course not denied; but they are treated as anomalies which tend to disappear in the course of the capitalist process. The two fundamental classes are, by virtue of the logic of their position and quite independently of any individual volition, essentially antagonistic to each other. Rifts within each class and collisions between subgroups occur and may even have historically decisive importance. But in the last analysis, such rifts or collisions are incidental. The one antagonism that is not incidental but inherent in the basic design of capitalist society is founded upon the private control over the means to produce: the very nature of the relation between the capitalist class and the proletariat is strife-class war.  

 Marx tries to show how in that class war capitalists destroy each other and eventually will destroy the capitalist system too. He also tries to show how the ownership of capital leads to further accumulation. But this way of arguing as well as the very definition that makes the ownership of something the constituent characteristic of a social class only serves to increase the importance of the question of "primitive accumulation," that is to say, of the question how capitalists came to be capitalists in the first instance or how they acquired that stock of goods which according to the Marxian doctrine was necessary in order to enable them to start exploiting.  

   On this question Marx is much less explicit. He contemptuously rejects the bourgeois nursery tale (Kinderfibel) that some people rather than others became, and are still becoming every day, capitalists by superior intelligence and energy' in working and saving. … Nobody who looks at historical and contemporaneous fact with anything like an unbiased mind can fail to observe that this children's tale, while far from telling the whole truth, yet tells a good deal of it. Supernormal intelligence and energy' account for industrial success and in particular for the founding of in­dustrial positions in nine cases out of ten. And precisely in the initial stages of capitalism and of every individual industrial career, saving was and is an important element in the process though not quite as ex­plained in classic economics    

It is not superfluous, however, to consider the role which that theory plays within Marx's structure and to ask ourselves what analytic intention  as distinguished from its use as a piece of equipment for the agitator-he meant it to serve.  

There are, and always have been, some enthusiasts who admired the Marxian theory of social classes as such. But far more understandable are the feelings of all those who admire the force and grandeur of that synthesis as a whole to the point of being ready to condone almost any number of shortcomings in the component parts.

    CHAPTER III         


An economic theorist Marx was first of all a very learned man. It may seem strange that I should think it necessary to give such prominence to this element in the case of an author whom I have called a genius and a prophet. Yet it is important to appreciate it. Geniuses and prophets do not usually excel in professional learning, and their originality, if any, is often due precisely to the fact that they do not. But nothing in Marx's economics can be accounted for by any want of scholarship or training in the technique of theoretical analysis. He was a voracious reader and an indefatigable worker. He missed very few contributions of significance. …This incessant endeavor to school himself … went some way toward freeing him from prejudices and extra-scientific aims, though he certainly worked in order to verify a definite vision. To his powerful intellect, the interest in the problem as a problem was paramount in spite of himself; and however much he may have bent the import of his final results, while at work he was primarily concerned with sharpening the tools of analysis proffered by the science of his day, with straightening out logical difficulties and with building on the foundation thus acquired a theory that in nature and intent was truly scientific what­ever its shortcomings may have been.

Marx had a master then? Yes. Real understanding of his economics begins with recognizing that, as a theorist, he was a pupil of Ricardo He was his pupil not only in the sense that his own argument evidently starts from Ricardo's propositions but also in the much more significant sense that he had learned the art of theorizing from Ricardo

Ricardo's is not the only influence which acted on Marx's economics, …. Quesnay, from whom Marx derived his fun­damental conception of the economic process as a whole, …The group of English writers who between 18oo and 1840 tried to develop the labor theory of value may have furnished many suggestions and details, …Several authors, to some of whom Marx was unkind in inverse proportion to their distance from him and whose work ran in many points parallel to his (Sismondi, Rodbertus, John Stuart Mill),

Now for a desperately abbreviated outline of the Marxian argument, unavoidably unjust on many counts to the structure of Das Kapital which, partly unfinished, partly battered by successful attack, still stretches its mighty skyline before us!

(1.)… His theory of value is the Ricardian …. There is plenty of difference in wording, method of deduction and sociological implication, but there is none in the bare theorem, which alone matters to the theorist of today. Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the "socially necessary quantity of labor"). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard. Both encounter the threshold difficulties incident to this approach similarly (that is to say, Marx en­counters them as he had learned to do from Ricardo). Neither has anything useful to say about monopoly or what we now call imperfect competition. Both answer critics by the same arguments. Marx's arguments are merely less polite, more prolix and more "philosophical" in the worst sense of this word.

Everybody knows that  this theory of value is unsatisfactory, …The essential  point is not whether  labor is the true "source" or "cause" of economic value…., it is much more important to ask how the labor theory of value works as a tool of analysis and the real trouble  with it is …that it does so badly.

To begin with, it does not work at all outside of the case of perfect competition. Second, even with perfect competition it never works smoothly except if labor is the only factor of production and, more­over, if labor is all of one kind.  If either of these two conditions is not fulfilled, additional assumptions must be introduced and analytical difficulties increase to an extent that soon becomes unmanageable.  Reasoning on the lines of the labor theory of value is hence reasoning on a very special case without practical importance,

The labor theory of value may be able to deal with differences in quality of labor that are due to training (acquired skill): appropriate quota of the work that goes into the process of training would then have to be added to every hour of skilled work so that we might, without leaving the range of the principle. put the hour of work done by a skilled workman equal to a determined multiple of an hour of unskilled work. But this method fails in the case of "natural" differences in quality of work due to differences in intelligence, will power. physical strength or agility. Then recourse must be had to the difference in value of the hours respectively worked by the naturally inferior and the naturally superior workmen-a value that is not itself explainable on the labor quantity principle. In fact Ricardo does pre­cisely this: he simply says that those different qualities will somehow he put into their right relation by the play of the market mechanism so that we may after all speak of an hour's work done by workman A being equivalent to a definite multiple of the work done by workman B. But he completely overlooks that in arguing in this way he appeals to another principle of valuation and really surrenders the labor quantity principle which thus fails from the start, within its own pre­cincts, and before it has the chance to fail because of the presence of factors other than labor.


III  A state of perennial inflationary pressure will have, qualitatively, all the effects of weakening the social framework of society and of strengthening subversive tendencies (however carefully wrapped up in  "liberal" phrases) that every competent economist is in the habit of attributing to more spectacular inflations. But this is not all. In addition, some of the standard remedies for such situations will not mitigate, and may even aggravate, the present one. It seems to me that this is not being fully understood. Let us, therefore, in desperate brevity, discuss three types of such remedies.  

a) The most orthodox of all measures for the control of inflation is action upon the volume of borrowing through interest rates or credit rationing and the like. I fully understand, of course, that money rates must be freed from the grip of cheap-money policies if normalcy in the sense of a free-enterprise economy is to be attained, …. But this does not alter the fact that a restrictive credit policy would at present produce consequences quite different from those that the old theory of credit policy would lead us to expect. ... In such a world, an increase in interest rates was supposed to reduce the volume of operations, money wages, and employment. Surely these effects would not materialize at present and, if they did, they would immediately provoke government action to neutralize them. In other words, credit restrictions would at present achieve little beyond increasing the difficulties of business. Even restrictions of consumers' credit would have this effect to some extent, though something could no doubt be done in this field.  

b) Similar difficulties stand in the way of controlling inflation by means of increasing taxation-a no less orthodox remedy but which enjoys a popularity with modern economists …It is quite true that something might be accomplished by increasing taxes on consumption. ... But if it is the corporation tax and the higher-bracket income tax which is to be increased, the effect upon inflationary pressure would be small at best and might even be negative. …  

c) The third household remedy consists in direct controls: price fixing, priorities and the like, including subsidies…. For the bureaucracy in particular their reintroduction would spell reconquest of ground that has been lost; .., price control may result in a surrender of private enterprise to public authority; that is, in a big stride toward the perfectly planned economy.  

Perennial inflationary pressure can play an important part in the eventual conquest of the private-enterprise system by the bureaucracy -the resultant frictions and deadlocks being attributed to private enterprise and used as arguments for further restrictions and regulations. I do not say that any group follows this line with conscious purpose…A situation may well emerge in which most people will consider complete planning as the smallest of possible evils.  

Marx was wrong in his diagnosis of the manner in which capitalist society would break down; he was not wrong in the prediction that it would break down eventually. The stagnationists are wrong in their diagnosis of the reasons why the capitalist process should stagnate; they may still turn out to be right in their prognosis that it will stagnate -with sufficient help from the public sector.

The second part of Schumpeter’s objection to this separation of public from private is the notion of taxation, during which “revenue which was being produced in the private sphere for private purposes had to be deflected from these purposes by political force” (p.198). Schumpeter points to this relationship as one of resistance, where the apparatus of taxation solicits funds from the private firm or industry against its will, and the ensuing struggle between the two is a great waste of  efficiency and has only worked to produce protective measures on the part of the private sphere against the public sphere. Schumpeter argues that this would not occur in the socialist state “since it would control all sources of revenue, [and] taxes could vanish…” (p.198).   This makes sense when examining the system from Schumpeter’s point of view, for there would be no income in the socialist blueprint and “it would be clearly absurd for the central board to pay out incomes first and, after having done so, to run after the recipients in order to recover part of them” (p.199). Commercial society’s decentralization and resulting friction ensures decentralization of decision making as well as promotion of economic operation in an independent setting where firms can operate as they please, undirected. Schumpeter’s proposed socialist blueprint of coordination and unilateral effort towards economic productivity is an attempt to eliminate frictional losses associated with failure of ideas, conflicting policy, and taxation which he labels as “inevitably in the nature of an injury to the productive process” (p.198). Finally, Schumpeter labels taxation as “one of the most significant titles of superiority that can be advanced in favor of the socialist plan” (p.199).

Understandably, Schumpeter sees taxation, and the required apparatus created to carry it out, as a loss because it works simply to get revenue from individuals and firms who do not want to give it up to the state. And as a result a legal profession and institution has grown up around the struggle between the public and private spheres enabling and furthering the struggle, which he deems a waste of productivity. The question advanced by this writer is how can you include taxation within a construct of analysis of capitalism that doesn’t use social welfare as a measure? Of course without social welfare taxation appears to be a useless and hindering apparatus that generates revenue for the state. Taxation is an aspect of Schumpeter’s comparison of blueprints that is hard to include and understand without giving it a justifiable reason for being there, as is the question of democracy within socialism. And for this reason I reiterate that Schumpeter makes no case for socialist economy, merely for the idea of it based upon the assumptions and definitions included in the beginning of this paper.

Schumpeter’s construct of socialist society is fascinating, because under the presuppositions made by him, it is logical and possible. However, the assumptions within this construct raise problems that need to be addressed, namely that of motivation for economic agents. Schumpeter assumes a labor force that will become completely satiated by economic output and will eventually run into a proverbial wall of production which would “attract the brains and provide the adventure” (p.131) away from economic output. Given Schumpeter’s theory of creative destruction, it is safe to say that he believes in and understands the capitalist process, but guesses as to its destination when he proposes socialism as an evolutionary possibility. 

Within the Schumpeterian construct, or “socialist society blueprint”, there are several problems of major concern that are belittled by assumption. Organizational innovation, or coordination of progression, perfect competition, and private/public sphere interaction, all assume a society that will operate without some sort of motivation or incentive, and through some central coordination. Despite the many social questions of motivation, possibility, and welfare (even though left out of Schumpeter’s model), there are still efficiency questions to examine. Schumpeter reminds us that his examination restricts “economic efficiency of a system…to productive efficiency” (p.188). Schumpeter claims that socialist society could handle all of the problems faced by capitalist society, but in a more efficient manner through central coordination of decision making and innovation, and through reduction of friction between the public and private spheres that produce so much social loss within commercial society. The problem, as demonstrated above, is the driving force behind this socialist blueprint of Schumpeter’s. Capitalism is clearly driven by a volatile force of “creation and destruction” that allows the testing of new ideas and methods of production without screening. The screen is failure and eventually removal via financial insolvency. Schumpeter claims to be able to harness this volatility and spread it through decree among all members of the socialist society so that productive efficiency is always at maximum. Not only will this goal be possible through central communication of ideas and innovations planned to be implemented by individual firms, but through careful planning and execution of the innovations as they are released, all cyclical evils of commercial society can be not just combated, but averted through steadily planned growth.  Two questions arise when examining this: 1)If commercial society evolves to a state of economic bliss so satisfying that all people turn their attention from the pursuit of profit to the pursuit of “adventure” who would remain to work within this coordinated “bloodless perfect competition” with no incentive? And 2) Given this system could be implemented, what economic agent would report an innovation to a central board that would not only return it no reward, but would make public the advantage it had gained on fellow competitors? Schumpeter counters that people will do so for the greater good, but still the question of motivation persists within his construct. Capitalism accepts and utilizes human nature as it is, with consumers acting to maximize their own utility, it does not try to change that basic behavior which cannot be changed. Schumpeter argues that “human nature… a given set of propensities to feel and to act, may be altered by changes in the social environment… [and]…human nature is certainly malleable to some extent” (p.203). This is a large assumption, impossible to answer yes or no to, to base the socialist blueprint upon, and one that lends itself easily to criticism. 

 At the very center of commercial society is conflict that powers new innovation, and exists within all relationships public and private. The reason it succeeds is because conflict is generated in the pursuit of economic reward, an incentive returned to the person or agent that implements it through the taking of a risk. Schumpeter’s central board would have to select what ideas to try, and at the least coordinate their release to combat cyclical fluctuation of boom and bust which he proposes the central board would do. Can this be done in a way to reproduce the economic performance of capitalism? Would it be possible to predict the innovations and ideas that would attract consumers? Can Schumpeter’s social blueprint dictate consumer preference, the ruler within commercial society, and mold it to a socialist will of unilateral growth? Schumpeter’s model is clearly a very interesting examination of socialism and in some places offers very different and insightful looks at capitalist inefficiencies, but leaves questions to be asked. This paper does not presume to say outright that Schumpeter is wrong or arrived at his conclusions incorrectly, merely that there are many questions raised that provoke closer inspection of Schumpeter’s ideas and “blueprints”.