From Elitist to Participatory: The Curious Evolution of Joseph Schumpeter’s Model of Socialism

Please cite the paper as:
John Willoughby, (2024), From Elitist to Participatory: The Curious Evolution of Joseph Schumpeter’s Model of Socialism, 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


Joseph Schumpeter’s Capitalism, Socialism and Democracy continues to provoke because of his analysis of the nature of capitalist evolution.(1) He claims that the rise of the modern corporation and the attendant bureaucratization of entrepreneurship will lead to a socialist future because of a growing cultural disdain for capitalism. He also breaks with his Austrian counterparts to assert flatly that socialism would function effectively enough even if the economy’s evolutionary dynamism and allegedly heroic qualities would fade.

While these arguments continue to attract commentary and criticism, less attention has been paid to the actual model of socialism which he proposes. Schumpeter clearly thinks that the Soviet socialism is unworkable and thus presents an alternative framework for socialist regulation which had been recently developed by the Polish heterodox economist, Oskar Lange. This paper will explore the evolving characteristics of Lange’s indicative pricing socialist proposal from Lange to Schumpeter to its most recent variant as a model for participatory socialism proposed by Robin Hahnel. Schumpeter always was attracted to irony, so perhaps he would have been amused by how his frankly elitist construction of socialism has become the framework for contemporary radical egalitarianism.

The original proposals by Oskar Lange and Fred Taylor focused on how to coordinate production in a socialist economy without price competition through the market. (2) Lange essentially adopted a Walrasian framework in which a planning board served as auctioneers to adjust supply and demand. Rather than ordering specific combinations of output through a material balances approach, Lange instead proposed that the planner raise or lower indicative prices for inputs and outputs and then instruct socialist managers of factories to organize production so that profits are maximized. This, Lange argued, would be more efficient than an unregulated market system since all enterprises would act as if they were perfectly competitive firms.

There were two initial reactions to this proposal. On the one hand, Lange was viewed as the ‘winner’ in the socialist calculation debate which had been launched by von Mises who had argued that socialism could not function because the absence of private property would mean there would be no prices for the means of production. (3) Lange introduces indicative or pseudo prices to solve this problem. On the other hand, Lange’s intervention motivated von Hayek to discuss more deeply information problems associated with economic regulation. (4)

It is not surprising that Schumpeter was attracted to Lange’s proposal for socialism. He was a champion of Walrasian theory, and here was the most talented Marxist economist of his era basically embracing the general equilibrium method of economic coordination. He and Lange discussed these ideas at Harvard, and there is little doubt that these interactions affected the type of socialism which Schumpeter proposed in Capitalism, Socialism, and Democracy even though he suggested no political vehicle which could lead to the establishment of such a system of regulation.

It is also not a shock that Schumpeter looked for a technocratic solution for the socialist regulation of the economy. According to him, the construction of socialism would be an elitist project. Workers might support the overcoming of the anarchic and unequal capitalist order, but, Schumpeter felt that they did not have the capability of actually making the day-to-day decisions of allocation and distribution.

It was not until the fall of Soviet-style socialism in the late 1990s that this idiosyncratic Schumpeterian model of socialism made a new appearance. The heterodox economist Robin Hahnel and his former co-author Michael Albert wrote a series of popular and academic books and pamphlets arguing that a coherent plan could be constructed by workers and citizens themselves with the help of technocrats in an Iteration Facilities Board, who basically serve as Walras’s auctioneers.

Hahnel made several innovations to the Langean system. He argued that households and enterprises would make consumption and production proposals that could be aggregated quickly to ensure that supplies and demands matched. If they did not, new indicative prices would be announced and marginal adjustments to the original proposals would be made. Each enterprise proposal must produce a surplus as measured by the indicative prices, and each household must stay within a budget constraint. As Hahnel has further developed his argument, he has included public consumption decisions made by neighborhood councils, and higher-level planning decisions made by worker and household representatives with the help of civil servants. (5)

This paper will argue that Hahnel has made several improvements to the Langean model. He has paid close attention to the problem of incentives, and he has also developed an intriguing system of work organization and income payments which would ensure much more egalitarian outcomes. Thus, it appears that Hahnel has turned Schumpeter’s technocratic, Walrasian socialist proposal on its head. Indicative price planning and coordination now represents a decentralized system of worker empowerment.

But does it? In the remainder of the paper, I will argue that Hahnel’s proposal, like those of Lange and Schumpeter, suffer from two related problems. First, is the problem of using prices as the single coordinating mechanism for the economy. Second, is the lack of flexibility of the system, which remains highly centralized even if it does not appear so. I endorse Hayek’s intuition that market competition helps reveal the appropriate prices. The evolution of the market generates information necessary for appropriate coordination. It is not, however, just that one needs real market competition to attain correct prices, one also needs competition to permit bilateral coordination over issues such as quality and trust. Getting the right prices is not sufficient for attaining the right ‘equilibrium’. The second problem is that of uncertainty. A plan cannot eliminate uncertainty because there will always be exogenous shocks which will disrupt the plan. An economy never exists in a vacuum and cannot regulate all disruptive human behavior let alone increasing ecological disturbances. Such shocks will quickly undermine the sort of planning system the indicative pricing model generates.


1. Joseph Schumpeter, Capitalism, Socialism, and Democracy, 3rd Edition (New York: Harper, 2008).

2. Oskar Lange and Fred Taylor, On the Economic Theory of Socialism (Minneapolis: University of Minnesota Press, 1964).

3. Ludwig von Mises, Socialism: An Economic and Sociological Analysis (Carmel Indiana: Liberty Fund, 1988.

4. Friedrich von Hayek, “The Use of Knowledge in Society”, American Economic Review 35(4) (September 1945): 519-30.

5. Robin Hahnel, Democratic Economic Planning (London: Routledge, 2021).

3 comment

  • Conference administrator says:

    Dear Author,

    Your paper is quite provocative, incorporating Hahnel’s contribution to the Langean model into the debate over socialism, particularly the issue of incentives, an innovative system of job structure, and income transfers.
    The analysis of Hahnel, Lange, and Schumpeter’s approaches refers to several interconnected concerns, including the use of price as the sole technique of organising the economy, the system’s rigidity, and the role of uncertainty.

    Please elaborate on eventual differences among Schumpeter, Lange, and Hahnel’s perspectives on time and uncertainty, and how these affect the economic dynamics of socialist economies.

    Maria Alejandra

  • John Willoughby says:

    Thanks for your comment, Maria.

    One of the most fruitful results of writing this paper is that it led me to actually read Oskar Lange’s articles which inspired Schumpeter’s model of socialism rather than just reading about his ideas. I learned that he was a quite innovative thinker who attempted to synthesize neoclassical insights with Marxist concerns about social justice and exploitation. He once quipped that Marxist economics was about the economics of capitalism, while neoclassical economics was about the economics of socialism. By that he meant that the dynamic, acquisitive properties of capitalism bred monopolization, inequality and greater uncertainty because of the lack of a clear coordinating mechanism. He also agreed with Hilferding’s claim that contemporary capitalism was characterized by the rise of finance capital but used Joan Robinson’s insights to make this argument more rigorous. He thought a socialist society could prevent enterprises from exploiting their monopolistic and monopsonistic power and thus price formation would generate efficiency as long as managers set prices to marginal cost. This assumes more knowledge than managers could reasonably be expected to have.

    Schumpeter was intrigued by Lange’s attempt to synthesize Marx and modern economic theory even though he clearly did not share Lange’s politics. Lange and Hahnel both think that uncertainty would be reduced under a socialist regime because algorithms or experts would make it easier to find the correct price. Schumpeter at one point agreed with this perspective in CSD, but he also warned that Walras’ tatonnement mechanism was an abstract model not a depiction of reality. I interpret Schumpeter as viewing socialism as more bureaucratic and less able to respond to shocks because it is centralized than capitalism. He and Lange share a managerial bias. They do not think workers are really capable of making effective decisions about the management of the enterprise. Hahnel clearly disagrees with this. Neither Schumpeter nor Lange address the issue of incentives. How does a socialist polity force managers to behave efficiently and dynamically? Hahnel introduces negative penalties on enterprises and households who fail to follow the rules, but it is not clear there are positive incentives to encourage experimentation. All three focus almost solely on prices as the chief coordinating mechanism. Hayek does as well, but his views on hidden and idiosyncratic information require negotiation to find the correct price not just responses to price signals.

    As for job structure and income transfers. Lange and Schumpeter believe that lump sum transfers to workers out of value-added will be an important part of income formation in a socialist economy. Hahnel doesn’t really discuss this possibility, and his income distribution system does not rely on markets at all but rather on the evaluation of fellow workers. I don’t think Hahnel appreciates how his task sharing system makes effective evaluation difficult. It is also not clear why workers would shift from low value added tasks to high value added tasks since there will be no income incentives.

    I hope this responds to your queries.

  • Arturo Hermann says:

    I agree with many aspects of your interesting analysis. In particular, Schumpeter seems to equate socialism with a totalitarian control of the economy, but this has the nature of a “dictatorship over the proletariat”, characterised, as happened in real experiences, by high differences in income and power. In order to have a “dictatorship of proletariat” a real participation of the citizens to collective decision making is needed.

Submit your own comment

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b>
<blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>