Capitalism, Socialism and Democracy in the XXI Century: Insights from Schumpeter’s Book and Other Heterodox Economics’ Contributions
Arturo Hermann
Please cite the paper as:
Arturo Hermann, (2024), Capitalism, Socialism and Democracy in the XXI Century: Insights from Schumpeter’s Book and Other Heterodox Economics’ Contributions, World Economics Association (WEA) Conferences, No. 1 2024, Capitalism, Socialism and Democracy 80 years later, Looking at capitalism today in light of its past and possible future
Abstract
As is known, Schumpeter’s book “Capitalism, Socialism and Democracy” constituted a significant point of reference in the debate on the different forms of economic organization. Even today, the problems raised in his text are very topical and, consequently, a rereading of it is very interesting for understanding the problems of our time.
Given the complexity and breadth of the topic, in our work we will try to highlight some aspects that can contribute to deepening the problems raised by Schumpeter. It is organized as follows: in the first part, we will outline the essential features of Schumpeter’s theses. In the second, we will highlight a number of problematic/debatable aspect of his arguments. In the third, we will consider contributions from original institutional economics (OIE) and various theories of socialism and social justice that can help to cast more light on these complex issues.
The Main Theses of Schumpeter’s Book
The Collapse of Capitalism
The central argument of Schumpeter’s text is that capitalism cannot survive its own development, in the sense that its development lays the foundations ― through the progressive bureaucratization of big firms and the parallel loss of importance of the role of the innovative entrepreneur ― for the destruction of the economic, sociological and psychological foundations on which capitalism rests and, as a rather direct consequence, for the transformation into socialism.
Considering that the last edition of the book was completed in 1949, it could however appear that, since capitalism is still alive, Schumpeter’s hypothesis has not come true and that, consequently, the validity of his analysis results in some way diminished. However, since Schumpeter has repeatedly clarified in the text that, first of all, (i) his hypothesis of the end of capitalism requires a sufficiently long period to unfold its effects and that, furthermore, (ii) it is in any case conditional on the occurrence of a series of circumstances, it is clear that his hypothesis still exists in all its “problematicity” and that, consequently, our interest in these issues is as lively as ever. Let us now see how Schumpeter’s hypothesis is articulated, in particular what are the factors that tend to determine the progressive bureaucratization of the capitalist system.
In his analysis, Schumpeter maintains that the progressive bureaucratization of economic life constitutes ─ also through its effects of change on the typical value scheme of capitalist society ─ the antechamber of socialism. But what are the factors that determine such trend, and which can therefore predict the inevitability of the “march towards socialism” hypothesized by Schumpeter?
Schumpeter is well aware of this problem, and therefore focuses his attention on the characteristics of the market forms of the capitalist economy. In this regard, the central core of his reasoning can be so summarized: (i) In the capitalist system, forms of monopolistic and oligopolistic markets linked to the rise of big corporations increasingly tend to prevail. Alongside with the possible advantages in terms of scale economies, the growing importance of big firms tends to reduce the economic space for the birth and growth of new businesses and thus undermine the basis on which, in Schumpeter’s analysis, the capitalist economy has developed: the role of the innovative entrepreneur and the related process of “creative destruction” which, in our time, is increasingly replaced by the managerial career within the organizational structures of large companies.
Which Socialism and Which Democracy?
Once it has been hypothesized that, based on the operation of these factors, the system will move, barring catastrophic wars caused by the same capitalist contradictions, slowly but surely towards socialism, Schumpeter addresses the second order of problems inherent in his analysis: what kind of socialism will prevail, and what will be its relationship with democracy?
In this regard, Schumpeter defines socialist an institutional framework in which economic affairs belong to the public sphere and are organized through a central authority. He defines this type of socialism as “centralist” and illustrates the possibility of its existence. With regard to the links between democracy and socialism, Schumpeter believes that socialism, in his definition, can exist even without democracy, which is defined by Schumpeter as competition for political leadership.
The reason why Schumpeter does not hypothesize a direct link between democracy and socialism is that he believes that democracy does not guarantee, in itself, that the choices made are intrinsically better than the choices made in a non-democratic way. Clearly, this may be true in some cases, but, as we will see later, it does not eliminate the problem of building institutions that can guarantee increasingly adequate participation in collective life.
Open Problems
As appears from this brief description, the issues raised by Schumpeter are of great interest, and, at the same time, of great complexity. They involve, in an explicitly interdisciplinary approach, the complex of social sciences, from economics to sociology, and from sociology to psychology. In his account, the intuition that capitalism based on the process of creative destruction triggered by individual entrepreneurs is a system gone for ever has proved to be, with some qualifications, extremely valid. In the same spirit, it is very centered the hypothesis that one of the reasons for the decline of individual capitalism has been its own success. In fact, in Schumpeter’s analysis, it was the accumulation of wealth related to this success that paved the way for the emergence of big firms which have largely substituted, with their internal R&D departments, the role of individual entrepreneur.
Along these aspects, there are other elements of Schumpeter’s book that are less developed and/or convincing. As can easily be observed, the examination of current economic systems shows a more complex picture and a less “linear” path than that hypothesized by Schumpeter. In particular, we can note:
(a) Small and medium-sized enterprises continue to play an important role both in terms of product and employment in all the most developed countries.
(b) The characteristics of competition across sectors differ significantly.
(c) the “value scheme” typical of capitalist society does not seem characterized by an unstoppable decline but by a complex co-evolutionary process with respect to the characteristics of the system.
(d) On that account, if it is true that the R&D departments of big firms have largely substituted the role of the innovative entrepreneur, this is true up to a point, as the case of Facebook, Google, Amazon and others ventures witness. However, it seems safe to note that, (i) these examples are more the exception than the rule and that (ii) the big firms and the institutional structure play a relevant role in orienting, controlling and even at times promoting the activities of these new firms.
(e) Large companies and public structures are not necessarily synonymous with rigidity and bureaucratization, since, in this regard, much depends on the type of organization adopted; in this regard, innovation and creativity can be promoted in these fields.
(f) The forms of competition tend to be separated from the characteristics of ownership and can therefore also be created in public and semi-public domains.
(g) In the analysis of the reasons leading to decline of capitalism, Schumpeter chiefly highlights the growing bureaucratization of big firms. However, there are also other factors pointing in that direction. We can mention, in particular, the growing importance of public action and public spending, and the circumstance that one important reason for this trend lies in the necessity to manage the imbalances of the economic system at micro and macroeconomic level.
(h) These aspects highlight that what Schumpeter indicates as a “march towards socialism” is in a reality largely a march towards a mixed economy or the concerted capitalism of our days. It remains then an open and interesting question the analysis of how such economies can evolve towards a socialistic and sustainable system based on substantial democracy and real participation of citizens to collective life.
(i) Schumpeter’s conception of socialism only as a centralized system which needs not be democratic is unconvincing for various aspects. The main reason is that, in the theories of Marx, Engels, Lenin and other authors, socialism and communism are needed in order to replace the only formal bourgeois democracy with the dictatorship of proletariat. Such system means that the real locus of decision-making should rest on the working class as a way to realise a substantial democracy. But if, as it came about in the former “socialist countries”, the power was concentrated in the political and bureaucratic elite of the single party, this means that the dictatorship of proletariat had been actually replaced by a dictatorship over the proletariat. But this being the case, such systems can hardly be defined socialist or communistic. In our view, it was the lack of substantial democracy (and hence of real socialism) of these systems that paved the way for their inefficiency and subsequent collapse.
In the analysis of these complex aspects, we will also consider contributions, in an interdisciplinary perspective, from original institutional economics (OIE) and various theories of democratic socialism and social justice. We will put particular attention to: (a) Thorstein Veblen’s analysis of capitalism, stressing the dichotomy between ceremonial and instrumental institutions and between production oriented to profit and to serviceability. (b) John Rogers Commons’s analysis of transactions, institutions and collective action, also in their relations with his analysis of the evolution of individual capitalism towards a mixed or “concerted” form. (c) John Dewey’s theory of “social liberalism” and democratic socialism. (d) The theories of reasonable value, instrumental value and democratic planning in the OIE’s perspective. (e) John Kenneth Galbraith’s analysis of the “affluent society”. (f) Rudolf Hilferding’s analysis of concreted capitalism. (g) Other theories of democratic and ecological socialism.
References
Commons, J.R. (1934), Institutional Economics: Its Place in Political Economy, New Brunswick (New Jersey, U.S.A.), Transaction Publishers, originally published by the Macmillan in 1934.
Dewey, J. (1999), Individualism, Old and New, Amherst, New York, Prometheus Books.
Dewey, J. (2000), Liberalism and Social Action, Amherst, New York, Prometheus Books. First published in 1935.
Dugger, W.M. (1988), “An Institutionalist Theory of Economic Planning”, in Evolutionary Economics, vol.II, edited by Marc.R.Tool, New York, Sharpe.
Galbraith, J.K. [1998 (1958)], The Affluent Society, second edition, New York: Mariner Books.
Hilferding, R. (1910). Das Finanzkapital. Eine Studie über die jüngste Entwicklung des Kapitalismus. Vienna: Wiener Volksbuchhandlung, 1910 (Marx-Studien, vol. III). Translated in English as Finance Capital. A Study of the Latest Phase of Capitalist Development. Edited by Tom Bottomore. London: Routledge and Kegan Paul: London, 1981.
Hilferding, R. (1924). Probleme der Zeit. In Die Gesellschaft. Internationale Revue für Sozialismus und Politik. Vol.I (1): 1-8.
Tool, M.R. (1986), Essays in Social Value Theory: A Neoinstitutionalist Contribution, New York, Sharpe.
Tool, M.R. (1988)(ed.), Evolutionary Economics, 2 volumes, New York, Sharpe.
Tugwell, R.G. (ed.)(1924), The Trend of Economics, New York, Knopf.
Veblen, T. [1990 (1914)], The Instinct of Workmanship and the State of the Industrial Arts, New Brunswick, Transaction Publishers. First published in 1914. Veblen, T. (1904), The Theory of Business Enterprise, New York, Charles Scribner’s Sons.
Dott. Hermann submitted a very inspiring paper. I have just one small remark. Dott. Hermann lists the points of Schumpeter’s book that, according to him, “are less developed and/or convincing”. On point k) the paper criticizes, as “very unrealistic”, Schumpeter’s idea “that a socialist economy works along the lines of Walrasian theory of general equilibrium, with a central authority ensuring that prices be equal to their marginal costs […]” (page 6). The point was demonstrated by the Italian economist E. Barone in 1908, recalled by Schumpeter. Theoretically that point is verified. But an abundant literature demonstrated that the Walrasian model is not workable in the real economic life, and I think that Schumpeter was aware of that point. In “History of Economic Analysis” he wrote: “The essential result of Barone’s […] means that so far as its pure logic is concerned the socialist plan makes sense and cannot be disposed of on the ground that it would necessarily spell chaos, waste, or irrationality.[…] [But] We must not forget that, just like the pure theory of the competitive economy, the pure theory of socialism moves on a very high level of abstraction […] it is quite possible to accept it and yet to hold that the socialist plan, owing to the administrative difficulties involved or for any other of a long list of reasons, is ‘practically unworkable’ (1986, Routledge, pp. 953-5).
Barone himself thought this method of socialist coordination while abstractly feasible was practically unworkable.
A very interesting paper. I haven’t done enough reading on this issue, but there might be a connection between the sociological analysis of Schumpeter on the formation of a socialist ethos among the educated professional classes and Veblen’s view on technocracy. For both, socialism is less a product of the working class and more a product of professionals rationalist visions. The increasing proletarianization of professional occupations, however, might still confirm Marxist intuitions about the need for working class mobilization to create a socialist polity.
I start with Giandomenico’s comments: true, we can have a socialist planning based on prices related to costs as these would emerge in a perfect competitive setting: however, the point is that, as also underlined by Walras himself in “Studies in Social Economics”, such system is definitely an exception especially in the stage of corporate capitalism. The same applies to socialist planning: in order for that planning to set prices (including the salaries of the political and bureaucratic elites) in a competitive-like setting, all the interest groups should be price taker, rather than price maker. The fulfilment of this condition requires a perfect democracy and accountability of the system. But real experiences went in the opposite directions with the result that real “socialist” countries were highly self-referential and based on huge disparities of income and power. Stalin once said that the idea that communism means equal or similar incomes between citizens is a “little bourgeoisie’s invention”. According to Stalin, income equality cannot exist because the structure of needs between the various groups of citizens is different. And, since the elite has higher needs, the remunerations for this group should increase accordingly. So, a substantial democracy constitutes the central aspect of a real socialist society.
Dear John, you raised a relevant aspect. Not sure what were Schumpeter’s ideas on this issue: perhaps he considered, for good or bad, the increasing bureaucratision of the system as the driving force of the “march into socialism”. And it is also true that he was influenced by Veblen’s perspective (in particular 1904, 1914). For Veblen, a central factor steering social progress is the rationalising role of technological improvements (and engineers, although instrumental to such progress, remain, at individual level, in the background in respect to the “impersonal and rationalising” force of the system). The idea is that promoting more useful and rational habits of life would also promote more rational habits of thought. This process, in turn, would help eliminate ceremonial habits based on predatory and acquisitive tendencies and create a better environment for the expression of the instincts of workmanship and parental bent. For Veblen, the progress of the “machine technology” of capitalism would have the power to disintegrate such system.
These insights, though interesting, demand a better analysis on whether, in fact, technological progress is sufficient, per se, to drive such a progressive course. In fact, what one can regularly witness in the course of human history (and more than a century after Veblen’s analysis the situation is not much better) is that technological progress has been largely monopolised by the interests of the stronger groups rather than oriented to instrumental objectives of public purpose. So, even if our societies seem more rational than older ones ─ in the sense that science and technology find a more widespread application to the solutions of human problems ─ this does not necessarily imply that the ceremonial, predatory and neurotic aspects play only a minor role in economic and social relations. Rather, the imbalances of mature capitalistic societies are still in the foreground.
In order to get a better light on these manifold issues, a broader conception of technological progress is needed, including all advances taking place in natural, social and psychological sciences. This implies a broader and humanistic conception of scientific enquiry in which qualitative phenomena are also amenable to scientific analysis (for instance, in assessing the proficiency of a musician).
Relatedly, Veblen’s theory also needs a reappraisal of its conception of institutions only as a locus of power and ceremonialism standing in the way of the affirmation of the instrumental values driven by technological progress. As shown by a vast literature, technological progress is itself an inherently social process. It is we who choose to follow different scientific/technological options (or none at all) and their related application to the society. Hence, in order to orient technology towards the objective of social serviceability, we need to foster policy action explicitly informed by the “instrumental value criterion” – a cornerstone of Veblen-Ayres’s approach to institutional economics, defined as (Tool 1986), “the continuity of human life and the non-invidious re-creation of community through the instrumental use of knowledge”. A definition much compatible with various forms of democratic socialism.
Veblen, T. (1904), “The Theory of Business Enterprise”, New York, Charles Scribner’s Sons.
Veblen, T. [1990 (1914)], “The Instinct of Workmanship and the State of the Industrial Arts”, New Brunswick, Transaction Publishers.
Tool, M.R. (1986), “Essays in Social Value Theory: A Neoinstitutionalist Contribution”, New York, Sharpe.