Notes on: Schumpeter and his critics on the Future of Capitalism

While researching Joseph Schumpeter, I came across a paper: "Schumpeter and his critics on the Future of Capitalism" by Anne Wortham (1988)(Working Papers on Economics E-88-27; The Hoover Institution, Stanford University)

Her paper contrasts Schumpeter's view on the future of Capitalism, with that of "Austrians" like von Mises. The following are notes I made on Wortham's paper. I do not vouch for Wortham's interpretation of Schumpeter, since I have read the original.

Introduction: Marx predicted that Capitalism would be overthrown by Socialism when the workers finally overthrew the system. Schumpeter agreed that Capitalism would likely give way to Socialism, but he predicted a gradual, non-violent transition. Unlike Marx, Schumpeter was a fan of "vital Capitalism"; but, he thought it would not last.

Schumpeter predicted these Trends:

1. Capitalism stresses rationality over emotion, convention, family and church. Therefore, property rights can no longer be defended by an appeal to conventional morality, but have to be defended as being rational and practical.
   
2. The rational arguments for leaving businessmen (and others) free to rise and fall by their decisions, require a long-term perspective. Unfortunately, voting masses have a shorter-term focus, rather than looking at longer-term societal benefits. Without the conventional morality even businessmen too fall prey to a short-term focus asking for government intervention now, at the cost of supporting a principle that might undermine them decades later. Further, arguments about long-term benefits are not so easy to make to the typical voter.
   
3. Rather than being oppressed, workers will become increasingly comfortable, and will have the leisure to find a voice. Where the old monarchical regime would have silenced them, the new-found ideas about freedom-of-expression will encourage them. In fact, with the breakdown of class solidarity, some businessmen will probably harbor and fund their own critics. It is not the struggling worker, but the intellectuals in businessmen-funded universities who will lead the destruction of Capitalism.

Some, like Hayek and von Mises, said that these processes were not inevitable. People had volition; people could be got to see long-term. Instead of lamenting the death of Capitalism, one ought to fight for it. Yet, these Austrians did not spot an important aspect of the intellectual battle: the importance of the underlying moral creed. Schumpeter obviously assumes a morality that upholds some form of "common good" and altruism. That is his context. He correctly sees this as a shaky foundation for Capitalism. The Austrian attempt to prove the long-term practicality of Capitalism was a valiant one; but, without a moral basis, it would always be under intellectual attack in exactly the ways Schumpeter predicted.

The Dwindling Advantage of Capitalism: Schumpeter thought that the biggest advantage of Capitalism was that it allowed innovators to thrive. However, as economies become more developed and organizations grow larger, the relative impact of innovators is lower. Businessmen become more focused on process-optimization rather than innovation. Thus, the success of Capitalism reduces the relevance of its main advantage.

The Austrians said that Schumpeter was conceptualizing innovation incorrectly. He was talking about large and visible "game-changing" innovations. Actually, under Capitalism, all sorts of little innovations happen all the time, across the economy. Capitalism would always retain a huge advantage over Socialism in this area.

Of course, human beings will really never be done with game-changing innovations either. This seems like an odd failure of imagination on the part of Schumpeter. (Unresolved questions to self: Was it hard see this in the period of two World Wars and the Great Depression? Does Wortham correctly represent his views?)

The Practicality of Socialism: von Mises made an excellent argument about the "impossibility of calculation" under Socialism. (Aside: Even some of his students who later led socialist countries were so impressed with his argument, that they tried to institute ways to counteract it.) However, Schumpeter did not appear too impressed by this argument. He saw no insurmountable reason why Socialism would be hampered by "an impossibility of calculation".

Viewing the continuum from "Capitalism" through "fettered Capitalism" and on the "Socialism", the Austrian would predict ever-increasing impracticality (less wealth); but while Schumpeter agreed that Socialism was not as practical as "vital Capitalism", he thought it might be more practical than "fettered Capitalism". History is on the side of the Austrians here.

Summary: The Austrians were right that innovation would always be required, and that socialism would always be less practical than socialism. However, they failed to understand that the intellectual effort to save Capitalism would be very difficult on practical grounds, that it would need an intellectual fight in the arena of morality.

Yet, Schumpeter too under-estimated the the ability of people to "wake up" and reverse a trend toward socialism, even where they only did this piece-meal and without a grand, long-term intellectual direction.

Today, there seems to be a broad realization of that Capitalism is generally more practical than Socialism; yet, there is also a broad acceptance that an altruist morality requires government control of businessmen. The net result is a view that a mixed-economy is the best, and trends toward increasing Capitalism and increasing Socialism must both be fought, on moral and practical grounds respectively. This will not change until altruism retreats.