The economist Joseph Schumpeter is one the most fascinating and, it is probably fair to say, underappreciated figures of the 20th century. He was a product of a remarkable multigenerational school of economic thought in the last decades of the Habsburg Empire.
Its first generation, comprised by figures such as Carl Menger, Friedrich von Wieser, and Eugen von Böhm-Bawerk, developed the theory of marginal utility, a conservative rejoinder to the labor theory of value. The second generation, led by Friedrich Hayek and Ludwig von Mises, translated it into an analytical and political orthodoxy. But Schumpeter was a dark horse, in both theoretical and political terms. A conservative who held a ministerial portfolio in a socialist government in Austria after World War I, a teacher of mathematical economics whose published works contain hardly a single equation, Schumpeter was a complex, protean figure whose most enduring quality was his contrarian brilliance.
Capitalism, Socialism, and Democracy, his best-known work, originally published in 1942, represents the zenith both of Schumpeter’s brilliance and of his idiosyncrasies. It combines one of the most remarkable advances in the sociology of capitalism, in the form of the concept of creative destruction, with the contention that capitalism itself was, in the long term, not viable. The origins of both are to be found in a reading of the work of Karl Marx, which, while problematic in some aspects, is remarkably sympathetic and subtle, particularly for a man with Schumpeter’s intellectual pedigree.
In its original incarnation, Schumpeter’s book was meant as an attempt to tease out the implications of the Great Depression and the rise of the war economies for the continuing development of the capitalist system. But, although the decades long postwar economic boom seemed to constitute an implicit refutation of Schumpeter’s ideas, the coming transformation of capitalism wrought by changes in the technical composition of capital may give them a new relevance.
Schumpeter began work on Capitalism, Socialism, and Democracy in the late 1930s. after completing the second volume his work on business cycles. That latter work was within the ambit of Austrian orthodoxy in terms of its prescriptions, if not in terms of the underlying diagnosis. In contrast to Keynes, who had argued in The General Theory that governments could combat economic downturns by engaging in countercyclical deficit spending, Schumpeter viewed business cycles as unavoidable consequence of patterns of innovation and ossification in the economy.
This approach differed from Austrians like Mises, who viewed business cycles as linked to the excessive expansion of bank credit, but neither Schumpeter nor Mises viewed government intervention as an appropriate response. However, in light of this difference, their underlying views of the operations of markets and the developmental processes of capitalism are much the same.
By the time that Schumpeter was fully engaged in work on his next book times had changed in ways that would have a pronounced impact on his thinking. The industrialized world had been lifted out of the Great Depression by the requirements of war production. The demands of military manufacturing transformed state and economic structures in all the major participants in the conflict. There was, at least to some degree, a structural convergence between liberal capitalist and fascist states, with planning and centralized direction of production becoming the norm in many segments of the economy, particularly (but not exclusively) those characterized by factory production.
But even before the major transformations of the war economies, there was a visible change in the structure of capitalism. Schumpeter had made his reputation in his Theory of Economic Development (1911). There had sung the praises of the entrepreneur, a sort of economic knight errant whose social role was to provide a dynamism that would revolutionize sectors of the economy that had grown stagnant. By the late 1930s it was less clear to Schumpeter that the classically conceived role of the entrepreneur could be maintained in the era of, massive, vertically integrated productive units.
Schumpeter was not alone in recognizing this. An extensive literature grew up in the early 1940s on the theme of the problems facing free market capitalism. Although disparate in political orientation and approach, writers such as James Burnham (The Managerial Revolution, 1941), Friedrich Hayek (The Road to Serfdom, 1943), and Karl Polanyi (The Great Transformation, 1944), saw free market capitalism as conceived by the like of Smith and Ricardo and subject to structural transformation (if not threatened with extinction).
Schumpeter had always been something of an iconoclast. Asked why he was assisting the work of the Socialization Commission in postwar Austria, his response was, “If one wishes to commit suicide, it is best to have a doctor’s help.” Further examples of Schumpeter’s tendency to insouciance and overstatement could be multiplied without end. His favored milieu was that of the Vienna coffee houses, and he never lost the propensity to argue and exaggerate in the way common to that scene. This had the positive effect of making it easier for him to adopt (or at least to try out) heterodox positions. But it also, at least at times, gave colleagues and opponents the impression that he wasn’t serious.
This capacity for heterodoxy is clearly in evidence in Capitalism, Socialism, and Democracy, which opens with a serious analysis of the economic and sociological views of Karl Marx. Schumpeter’s analysis is thorough, running to nearly 60 pages, and avoids the simplistic dismissiveness typical of Austrian School analyses of Marx (see for instance Böhm-Bawerk’s Zum Abschluss des Marxschen Systems).
Brutally simplified, Schumpeter argued that Marx had been right about the non-viability of capitalism in the long term, but for the wrong reason. It wasn’t class conflict that would bring about the transition to socialism but rather the processes of concentration of technology and capitalism itself that would cause this transition.
One of the (many) peculiarities of Capitalism, Socialism, and Democracy is that in the course of describing the downfall of dynamic, free market capitalism, Schumpeter coined the term “creative destruction,” now a perennial favorite in neoliberal circles, to describe the processes by which entrepreneurial innovation restructures segments of the economy. Although useful as a description of how capitalism (or at least a certain variety of capitalism) functions, creative destruction is oddly out of kilter with the larger message of Capitalism, Socialism, and Democracy.
There is an interesting homology between Marx’s and Schumpeter’s analyses of the long term developmental trajectories of capitalism: the expanding role of technology sounds the death knell for the dynamic market. In Marx’s case, it was a matter of the organic composition of capital, the tendency of fixed capital to constitute a progressively larger proportion of total capital. In Schumpeter’s case, it was a matter of technological (and capital) advantages closing off access to market sectors to new entrants. The long-term result in both cases was an ossification of capitalism. Marx also thought that this process would result in declining rates of profit, a view that Schumpeter did not hold. But, in other respects, their views were parallel.
The intellectual stock of both Marx and Schumpeter was rather low during the decades following World War II. Marx’s name was inextricably linked (with somewhat less justice than was commonly thought) with the monstrosity of Stalinism. This implied not only grotesque and inhumane political repression but also, especially in the latter decades of its existence, economic malaise running from stagnation to collapse.
At the same time, Schumpeter was viewed as a theoretical outlier. The rising influences of Keynesianism, beginning in the 1930s ,and the institutionally established in the Bretton Woods system, consigned Schumpeter’s thought to the margins. But even when the neoclassical approach began to regroup in the 1960s with the rise of freshwater economics, Schumpeter’s deviation from free market nostrums meant that the rising theoretical tide did not lift all boats.
Do Schumpeter’s ideas have anything to tell us, either about the current conjuncture or about how the increasing role of technology in the current economy will influence its long-term trajectory? The history of economic development in the postwar economies has been one of illusions.
For three decades after World War II, the dream of a middle class capitalism in which the top was taxed to prevent immiseration of the bottom persisted until it was overwhelmed by the dogmas of self-regulating markets and the real business cycle. Successive booms, first in internet technology then in housing, propped up rates of development and profit artificially, but the rise of the financialized version of capitalism dictates that long term rates of growth will be below 2%, and the overall structure of world markets persistently unstable.
But it is the influence of technology that will tell in the long term. Schumpeter (like Marx) foresaw massive concentrations of capital and technology, and one would be hard pressed to deny that this is occurring. The rise of automated production and the concentration of resources and expertise in large, vertically integrated productive units are accelerating. The entrepreneurs of today are less interested in building their own competitive enterprises than in creating something large enough to be bought out by Google or Facebook.
It is, at this moment, hard to imagine that production would at some point be determined by councils of experts, as Schumpeter thought it eventually would. But the increasingly oligopolistic structures of modern markets for everything from foodstuffs, to toothpaste, to industrial components means that productive decisions are made in ways that are very similar and may become virtually the same.
Whether automation has the effect of reducing profits though the elimination of human labor as a source of profits, or does so by reducing the pool of consumers, the overall outcome is likely to be roughly similar. Stripped of the need for productive workers, and confronting the concentration of purchasing power in ever-smaller circles, the days of rough and ready market capitalism seem numbered. But the mode of its passing is not unimportant.
If the relations of power underlying the system are not addressed, then what is likely is not the end of capitalism but simply a process of rebranding. In any case, Schumpeter provides an interesting way of looking at what will happen if capitalism dies not with a bang, but a whimper.
Photographs courtesy of Joel Schalit.