Updated: Mar 21, 2020
In 1942, an old economist predicted the end of capitalism...you'll never guess how wrong he was
Joseph Schumpeter is one of only five economists listed in Robert Heilbroner’s The Worldly
Philosophers. The Economist carried a Schumpeter column between 2009 and 2016. He is Alan Greenspan’s favorite economist (make of that what you will); and his theory on Creative Destruction is central to arguments on why Andrew Yang should stop worrying and learn to love the artificial intelligence revolution. But for formality, Joseph Schumpeter would hardly need an introduction.
He was born in Austria in 1883 to Johanna Schumpeter and a small business owner who gave him his name. Despite his humble origins, he was raised in refined privilege after his father died when he was four years old and his mother remarried an old general over twice her age. He sailed through the most rigorous education in economics, sociology, and law with an idealized aristocrat’s wit, tastes, and confidence. A humanitarian at heart, in World War I he had pleaded with the Austrian government to sever its alliance with Germany and accept peace with the Wilson administration to stop the killing of his countrymen. A pragmatist at heart, he served as the secretary of state of finance for the republic of what was left of Austria despite its socialist leanings of which he was opposed. After his lack of success as an administrator, and not seeing much more as a businessman, he returned to his home planet of academia where he taught at several prestigious universities as a renowned scholar, finally settling on Harvard.
Schumpeter’s life is rife with tragedy and privilege and a string of disappointments and failures redeemed by occasional but resounding victory. Despite his well-bred confidence, he was a man privately pained with uncertainty and occasional depression. Amusing for his sarcasm, if not for his subject matter, I’ve heard it said that he would burst into his classroom on opening day, knowing his reputation as a lenient grader, and declare with absurd seriousness: “There are only two kinds of students who pass my class: Catholics and everyone else.” I’m pretty sure that’s true. It would be in line with his character anyhow.
But I want to talk about the only book he ever wrote for public consumption: Capitalism, Socialism, and Democracy. Any summary on the book would be misleading considering it covers so much ground from an analysis on Karl Marx’s sociology and economic views, an overarching theory of history and democracy, and socialist movements in history. For the uninitiated, central to the book, but appearing before page 100, is a history over economic analysis on capitalism where, just as Kant did with justifying a belief in God, he shatters the old arguments only to replace them with fewer but stronger ones. This is where Schumpeter introduces Creative Destruction: the idea that a free-market society perpetuates itself through technological and systematic innovation that will destroy the old way of doing things (to the chagrin of people dependent on that system) but replace it with a more efficient way of doing things that will ultimately better everyone in society. Think Blockbuster to Netflix or, more soberly, farm life to factory life which began with overcrowding, child labor, and unconscionable hours of repetitive work six-days a week but ended with the overall better living conditions we see today. The masses may protest, and the old guard will decry the loss of the old ways, but this process must proceed unrestrained if humanity’s condition is to meaningfully improve.
I’ve read somewhere that Schumpeter was heavily influenced by Nietzsche. More relevantly, by his narrative of the “superman” brought low by the envious masses in demand of “equality” and “justice” and you definitely get that sense while reading Schumpeter with his condescending and biting attitude toward the advocates of socialism and people resentful of capitalism. In fact, this is what brings Schumpeter to his worst. He can be dismissive in the style of a house patriarch who has already decided that he knows what is fair and best and that those who tell him differently are squabbling and ungrateful. In short, he comes across as juvenile.
It’s really a shame to see him reduce himself when he does. In his critique of Marx, for instance, he shows himself to be a man of vast erudition, providing penetrating insight to the flaws of Marx’s thinking while fairly giving him abundant credit where it’s due. He even goes out of his way to elucidate where most of Marx’s critics miss the mark and unfairly characterize him (a rare quality even in his day).
His attitude is also dismissive of many other economists of his time (where at least he’s punching above the belt) and decades of rigorous scholarship arms him to convincingly tear down that woefully outdated assumption of economists that it is the maintenance of some elusive “equilibrium” that brings about great wealth and not (as he points out correctly) the vast and rapidly replicated innovations in technology and practices. He also brings about a refreshing reminder of the miraculous benefits that capitalism has brought modern society (a point not lost on Marx or historically sophisticated socialists) and how socialism (while conceivable) is not very likely to be the great miracle of welfare for society that its advocates hope (and often insists dogmatically) it will.
This is where Schumpeter shines strongest and it becomes easy to see why he is so well regarded in politically skewed academic and business circles. Unfortunately, he falls into some pitfalls not driven by intellectual laziness so much as by broad underlying assumptions that are common even today. The most prominent of these is taking improved general welfare as a given so long as there is technological innovation. The most obvious problem with this is that it neglects the other factors which were historically essential. It forgets the struggle of labor activists and policymakers who ensured that the benefits of wealth accumulation were passed to common workers through shorter workdays, shorter workweeks, job security, and redistribution policies.
There are also the awkward situations like Eli Whitney’s invention of the cotton gin actually expanding the market of slavery rather than reducing it (much to his horror). Schumpeter is not ignorant of these exceptions or circumstances so much as he believed in the overall benefit of innovative capitalism to bring the greatest good to the greatest many. Yet as Schumpeter said of Marx: “Such facts [he] did not overlook but he hardly realized all their implications” (Schumpeter, 2008).
Schumpeter was keen to point out that it is our relationship with capital that ultimately changes over time. But his old-fashioned morals and traditionalist disposition underestimated how much of this takes place outside of the realm of the marketplace and in the very social movements that he was weary of. To give an example: as Robert Gordon pointed out in his splendid tome, The Rise and Fall of American Growth, the washing machine shortened the time necessary for women to be washing clothes (a chore which usually took all week). He goes so far, at least by implication, as to say it was the washing machine that largely liberated women in the late 1800s. And yet, as Simone de Beauvoir pointed out in The Second Sex, the burden of women’s role at the home didn’t diminish so much as transfer over to other maintenance tasks around the home, like keeping a spotless house. And thus the fussy mother cliché of sitcom fame is born, scolding you again for wearing shoes in the house. In short, it wasn’t until the broad empowerment of women that the washing machine made a true difference.
Nonetheless, despite his clear advocacy of largely unfettered capitalism, Schumpeter is famous for predicting its downfall to be replaced by socialism. Unlike Marx, he thought this would happen not by the necessity of its own internal logic, but because it empowers people to be less inclined toward capitalism and more inclined to alternatives. For one thing, capitalism enriches people to question and do away with traditional values like child-rearing and owning a home (which lowers the motivation to keep working your soul-crushing job); it empowers its critics like the intellectual class (which he doesn’t refute so much as he straw mans); and it discourages its own managers and advocates who have become disenfranchised by what is essentially the alienation of their labor (which he oddly never ties back to Marx).
Part III and much of Part IV is Schumpeter trying to reconcile what a peaceful transition to socialism will (or should) look like and how such socialism could work.
He props his prediction by characterizing capitalism as a feeble way of life dependent on institutions that are historically hostile toward it and only occasionally tolerant. Disregarding how his historical analysis is not dynamic enough to be convincing, this view of capitalism as fragile and pathetically leaning on institutions to prop itself up is bizarre. While it obviously needs a functioning society with functioning and friendly institutions to maintain its existence, capitalism is clearly able to entice these institutions to feed its growth, stability, and development. Every piece of media consumed is in its throes (art must be commodified to make money) and politicians are often easily swayed by its promises of job creation and the campaign donations of big businesses. More sinisterly, there are the repeated acts of violence committed against workers and protestors to keep them in line, a fact of which Schumpeter is largely silent (presumably out of ignorance).
Some readers, including his respected historian Thomas McCraw, might excuse these weaknesses as mere irony or subversion. In fact, they argue that the whole book is a secret ploy to entice would-be socialists to be open minded to the arguments in a book not so indulgent as anything by Milton Friedman, Friedrich Hayek, or Robert Nozick, for instance. I can certainly see it having that effect, but when I read the book I get the impression of a man sincerely pleading for his readers to see reason but resigning himself to the fact that reason is rarely enough to inform decision. It’s important to remember that he was not writing in the dot-com bubble, when he became popular, but in an era where the atrocities of the Soviet Union were largely unknown and somewhere between 65% and 75% of all countries were either totalitarian, self-proclaimed socialist or both. Even the United States was accommodating an ever-growing leftist movement and the appalling Japanese internment camps; and Britain was still pursuing its imperialist agenda in Africa and Asia. The intellectual class, who one would think would know better, was not only complicit, but often encouraged many of these trends. Even when giving credit where it’s due, Schumpeter’s frustration oozes out in pained sarcasm. Unlike many Austrian economists, like Mises, he’s willing to honor the will of democratically elected officials wherever they take society, but he flourishes his erudition and paternalistic tone to make them feel a little stupid while he does.
With the validity of liberal democracy once again seriously challenged around the world, there’s something of a kindred spirit across time with the old economist, historian, and sociologist. Even though our modern liberal democracy is stronger now than then, largely because of the challenges it overcame, there’s a recognizable pathos in sympathizing with his measured, strained despair.
What the old-man-yelling-at-the-sky could not anticipate, however, was that he was well ahead of his time. In 1984, Herbert Giersch presciently foretold the Age of Keynes to be superseded by the Age of Schumpeter. But just as the Age of the former would lead to its founder’s bastardization, such is the case with the latter. Schumpeter’s argument relies on the premise that the commodification process that Marx obsessed over is less relevant in the long run than unleashed spontaneity from incentivized and unexpected places and people. History validates the unexpected; it’s hard to express how much of what is considered the Industrial Revolution was driven by barbers. Yet decision-making power (paralleled by compensation) has been greatly centralized in companies over the last few decades, lessening the opportunity for revolutionary ideas and change within the model most fit to bring them to fruition. A trend which Schumpeter largely anticipated, even if he did not realize all of its implications. Furthermore, champions of Schumpeter have smoothed over the more messy and inconvenient truths of the Creative Destruction narrative through specious reasoning. Robert Skidelsky helpfully said, “For Mr. Schumpeter, there was something both noble and tragic about the spirit of capitalism. But those sentiments are a world away from the pretty, polite techniques of his mathematical progeny” (Skidelsky, 2020).
But some of Schumpeter’s undoing is brought on by himself. I was talking to an administrator about the changes he wanted to make to his company. He summoned the classic business example of Henry Ford: “If Ford had been told that the assembly line ‘was not the way things are done here, you have to go back to making the cars the way we do wagons,’ we never would have seen the enriched productivity we see today. And that’s what I’m trying to accomplish here.” It’s technically an accurate analogy, and one welcome in the era of Schumpeter, but it’s an analogy born of paranoia of resistance from one’s own employees. What if one of Ford’s factory workers could have come up with ways to improve Ford’s idea even further? We never would have known because we keep coming back to assuming the worst of people who don’t bear specific titles and being suspicious enough of people to make their own decisions for them. This isn’t to say that the masses are always right, but that Schumpeter’s elitist upbringing could have sown the seeds of his own ultimate downfall. It’s as I said before, history often validates the unexpected, and few people are less prepared for the unexpected than people who have decided that everyone with a specific position in life have got this whole thing figured out.
But I think Schumpeter can be redeemed if most of us have been reading him the wrong way. What makes Capitalism, Socialism, and Democracy stand out is how much independence of interpretation it shrewdly requires of its readers. From a man with such conviction in such a seemingly simple idea as Creative Destruction, it’s telling that one of the most recurring interpretations in his most popular work comes down to “I can’t tell if he’s joking.” After years of failure trying to make his view of economics an exact science, even in a tome over 1,000 pages long which even economists say is unreadable and unreliable, I like to think he took another page from Nietzsche. He used his knowledge of economics to stop being an economist, and just giving readers the answer, and to be a philosopher by helping readers think more clearly on a subject that most would not even think to consider. If we’re going to keep reading Schumpeter, I think we should heed Zarathustra’s warning and remember that “One repays a teacher badly if one always remains nothing but a pupil.”
Schumpeter, J., 2008. Capitalism, Socialism And Democracy. New York: Harper Perennial Modern Thought.
Skidelsky, V., 2020. The Unreality Of The “Real” Business Cycle. [online] Robert Skidelsky. Available at: <https://robertskidelsky.com/2009/01/19/the-unreality-of-the-real-business-cycle/> [Accessed 21 March 2020].