Can Capitalism Survive? 80 Years After Schumpeter’s Answer

Reprinted from the Future of Freedom Foundation

Eighty years ago, in the midst of the Second World War, Austrian-born economist Joseph A. Schumpeter published one of his most famous books, Capitalism, Socialism, and Democracy (1942). A central question that he asked and tried to answer was, “Can Capitalism Survive?” His basic conclusion was, “No, I do not think it can” (p. 61). He was (forlornly) confident that a workable socialism would replace the market-based society. Now, eight decades after he drew this conclusion, what can we say about the future of capitalism, or, perhaps, better phrased, the free-market, liberal economic system?

Joseph Alois Schumpeter was born on February 8, 1883, in the old Austro-Hungarian Empire, in an area that is now a part of the Czech Republic. He attended the University of Vienna in the years before the First World War and was a classmate of another famous Austrian economist, Ludwig von Mises, in the graduate seminar of one of the early leaders of the Austrian School of Economics, Eugen von Böhm-Bawerk. During 1919, he briefly served as minister of finance in the postwar government of the new Republic of Austria. He took up a position at the University of Bonn in Germany in 1925 and moved to Harvard University in 1932, where he taught until his death on January 8, 1950, at the age of 66.

Entrepreneurial innovation and the process of creative destruction

Schumpeter made a mark for himself when he was 28 years old with the publication of his book The Theory of Economic Development (1911). He defined “the entrepreneur” as the central and dynamic figure of the market process who introduces transformative innovations that radically change the forms and directions of economic activity. The entrepreneur does so by bringing to market new or significantly improved products, or by better and less expensive ways of undertaking manufacturing, or by opening previously unavailable markets for resources or finished goods. The entrepreneur is the “disrupter” for positive economic change.

In Capitalism, Socialism, and Democracy, Schumpeter restated this argument, referring to the entrepreneur as the initiator of a process of creative destruction:

This process of Creative Destruction is the essential fact about capitalism…. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates…. Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary (pp. 82–83).

He also pointed out that the standard economics textbook models of “perfect competition” and “monopoly” were not only misplaced but essentially useless for understanding, evaluating, and judging the workings and significance of the market economy. These models assume a world without time or space and without changes in knowledge and expectations. They were “static” and artificially “mechanical” in that they did not leave any room for the types of innovative entrepreneurial changes that represent the working of “real-world” capitalism.

The dynamic, competitive market economy needed to be judged not by frozen moments in time but rather as a creative and innovative process through time, the full context of which can be best appreciated only when looked at over years and even decades. When this wider and more relevant perspective is taken, virtually all of the negative assessments and criticisms of the capitalist system fall to the ground, Schumpeter declared.

Economic and cultural achievements of capitalism

Looking over the nearly century and a half from the start of the nineteenth century to his own time in 1942 when his book appeared, Schumpeter pointed to the dramatic increase in the output of goods and services, including new and better goods that were not available to even the wealthiest of kings and princes in, say, 1790 or 1810. This outpouring of material largess had raised the standards of living of a much larger population, with the main beneficiaries being the lower and now growing middle classes of modern Western society and increasingly around the world.

In doing this, capitalism was also serving as a great “leveler” that was raising the economic well-being of all, while also narrowing the differences in the quality of life between “the rich” and the rest. The luxuries of the few a mere handful of years ago rapidly became the taken-for-granted essentials of everyday life for all through ever-improving mass production.

The “culture of capitalism,” Schumpeter said, also had eliminated political privileges and favoritism and had increasingly fostered equality before the law for all, including women and religious and ethnic minorities. Capitalism replaced primitive tribal and social collectivism with an ethic and a politics of individualism that established the ideal of individual rights, private property, and human association based on freedom of contract.

A year earlier, in March 1941, Schumpeter delivered a series of lectures at the Lowell Institute in Boston, Massachusetts, in which he concisely summarized the political and social successes of competitive capitalism during the period of what he considered its heyday, between 1870 and 1914:

The freedom of the individual to say, think, and do what he pleased was also within very wide limits, generally accepted. This freedom included freedom of economic action: private property and inheritance, free initiative and conduct were essential elements of that civilization. What they characteristically called government interference was held to be justified only within narrow limits. The state had to provide a minimum of framework for the lives of individuals and this framework it had to provide with a minimum of expenditure. The ideal of the cheap state had its natural complement in the postulate that taxation should be kept within such limits that business and private life should develop in much the same way as they would have done if there had been no taxation at all….

Free movement of commodities, restricted if at all only by custom tariffs; freedom, unquestioned in principle, of migration of people and of capital; all facilitated by unrestricted gold currencies and protected by a growing body of international law that on principle disapproved of force or compulsion of any kind and favored peaceful settlement of international conflicts.

He added that the liberal and competitive capitalist social ideal, therefore, was one of international peace and against war and conquest: “That civilization … was not favorable to cults of national glory, victory, and so on…. It counted the cost of war and did not back the glory as an asset.”

Will capitalism destroy itself?

And, yet, in spite of this wondrous world of expanding human freedom, individual rights, open competitive opportunity, rising standards of living, and growing equality before the law, Schumpeter was persuaded that “capitalism” was doomed. Schumpeter was often fond of paradoxes and ironies. In this instance, he was convinced that the very successes of capitalism had created the economic forces and social factors that would bring about its demise.

Schumpeter was fascinated by Karl Marx and devoted the first 60 pages of Capitalism, Socialism, and Democracy to an analysis of Marx as economist, sociologist, and prophesier of the future. He considered Marx to be wrong on many, if not most, things. But as a forecaster of the future, Schumpeter considered Marx to be right, but for the wrong reasons. Capitalism would pass away and be replaced by some type of socialism, but not due to growing immiseration of “the masses” or an exaggerated concentration of wealth in fewer and fewer hands.

As he saw it, the mass of the population became wealthier and more materially comfortable through the competitive engine of capitalist innovation and large-scale production. But the mass production methods with which large-scale output was made possible meant that entrepreneurially owned business was being replaced by the more bureaucratically managed corporate enterprise that undermined the spirit and drive and existence of the individual innovative enterpriser.

This would undermine the individualist culture of capitalism. The faceless private corporate managers easily could be transformed into the managers of state enterprises as governments took more responsibility for and direction of the clamored-for “social needs” of mass society. The bourgeois spirit of self-made men would disappear in the corporate environment, and with it those who would desire and be determined to preserve the private property order of a market economy.

The anti-capitalism of the intellectuals

But more important, in Schumpeter’s view, was the rise of a modern intellectual class, the second-hand dealers in ideas who were disconnected from and alien to the capitalist system, the very productivity of which made it possible for a sizable segment of the society to be freed from the direct world of commerce and work. Mass production made it possible for the wide and relatively inexpensive sharing and expressing of ideas through the written word. This, in turn, created an income-earning niche for those who specialize in the dissemination of ideas. Said Schumpeter:

We find intellectuals in thoroughly pre-capitalist conditions…. But they were few in number; they were clergymen, mostly monks, and their written performance was accessible to only an infinitesimal part of the population…. But if the monastery gave birth to the intellectual of the medieval world, it was capitalism that let him loose and presented him with the printing press….

The man who has gone through college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work…. They swell the host of intellectuals in the strict sense of the term whose numbers increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment.

And it often rationalizes itself into the social criticism which … is the intellectual spectator’s typical attitude toward men, classes and institutions…. The role of the intellectual group consists primarily in stimulating, energizing, verbalizing, and organizing this material [of anti-capitalist sentiments and resentments]…. The intellectual group cannot help nibbling  … at the foundations of capitalist society … because it lives on criticism and its whole position depends on criticism that stings … [and] this hostility increases, instead of diminishing, with every achievement of capitalist evolution….

Intellectuals rarely enter professional politics and still more rarely conquer responsible office. But they staff political bureaus, write party pamphlets and speeches, act as secretaries and advisers, make the individual politician’s newspaper reputation which, though it is not everything, few men can afford to neglect. In doing these things they to some extent impress their mentality on almost everything that is being done (pp. 151–154).

Schumpeter’s cynical pessimism — which he considered dispassionate, objective observation — led him to a famous passage in Capitalism, Socialism, and Democracy in which he concluded that, “Capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only thing a successful defense can possibly produce is a change in the indictment” (p. 144).

The case for capitalism and the short-run view of the citizenry

But what of the material betterment and social gains that a relatively free, competitive capitalism has provided to the wide and general citizenry? Surely, the general public, the beneficiaries of the largess made possible by the market economy, would see through the negative and critical rhetoric of the intellectuals and others who dislike a market society.

Alas, no, Schumpeter said. The very fact that a knowledge of economics and a perspective that takes the “longer-run” into serious consideration is needed for people to fully appreciate the benefits and, indeed, the goodness of the capitalist system, means that the case for capitalism is at a serious disadvantage. Said Schumpeter:

The case for capitalism … could never be made simple. People at large would have to be possessed of an insight and a power of analysis which is altogether beyond them. Why, practically every nonsense that has ever been said about capitalism has been championed by some professed economist.

But even if this is disregarded, rational recognition of the economic performance of capitalism and of the hopes it holds out for the future would require an almost impossible moral feat by the have-not. That performance stands out only if we take a long-run view; any pro-capitalist argument must rest on long-run consideration….

In order to identify himself with the capitalist system, the unemployed of today would have to completely forget his personal fate and the politician of today his personal ambition…. For the masses, it is the short-run view that counts. Like Louis XV, they feel après nous, le déluge [after us, the flood]…. Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest (pp. 144–145).

Schumpeter’s gloom did not mean defeatism

It had been well known since before the First World War that Schumpeter had no sympathies for socialism as either a political or economic system — very much to the contrary. Indeed, when friends of his had asked him in 1919 why he had agreed to participate with a government commission appointed to work out the “socialization” of German industry, Schumpeter was reported to have replied, “If someone is determined to commit suicide, then a physician at least should be present.”

Furthermore, when he wrote a new preface for a second edition of Capitalism, Socialism, and Democracy in 1946, he pointed out that he did not mean to create an impression of “defeatism” concerning the demise of capitalism and a triumph of socialism. He said:

Facts in themselves and inferences from them can never be defeatist or the opposite whatever that might be. The report that a given ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist. The crew can sit down and drink. But it can also rush to the pumps. If the men merely deny the report though it be carefully substantiated, then they are escapists…. What normal man will refuse to defend his life merely because he is quite convinced that sooner or later he will have to die anyhow?… Frank presentation of ominous facts was never more necessary than it is today because we seem to have developed escapism into a system of thought (p. xi).

For 50 of the 80 years that have followed the publication of Capitalism, Socialism, and Democracy in 1942, the Cold War and the realities of socialism-in-practice in such countries as the Soviet Union and Communist China made it a burning issue whether existing Soviet-style socialism might triumph over American-style “capitalism.” While Schumpeter also had argued that a form of “democratic” socialism with economic planning was conceivable, his implicit assumption was that some form of centralized and dictatorial political power would accompany postwar instances of socialism-in-practice. Thus, the future looked grim for anyone who was not a socialist and looked at the world through Schumpeterian eyes.

The “future” was not as dim as Schumpeter feared

However, with the market-oriented reforms that were being introduced in China in the years after Chairman Mao’s death in 1976 and with the disappearance of the Soviet Union in 1991, Schumpeter’s projections seemed to have been put to rest. Socialist central planning had been discredited, and the dangers from socialist dictatorship were plain to almost everyone. “Capitalism’s” vibrancy in creating material wealth, raising standards of living and ending poverty, and generating amazing entrepreneurial innovations seemed very much alive at the very time when the Soviet Union disappeared from the political map of the world.

So, what might we still say about Joseph Schumpeter’s projections, now, eight decades after Capitalism, Socialism, and Democracy? Schumpeter said in the book that if socialism could be fended off for another half-century from the 1940s, it would continue to produce the same wondrous economic betterment that it had created in the past. He warned however, that even if out-and-out socialism did not replace the market society, the capitalist system would be weakened and eaten away at by interventionist regulation and incentive-weakening taxation.

Fortunately, even in the face of the regulatory and redistributive state, the market economy has still possessed enough competitive openness and profit-earning opportunity that continuing prosperity has been a reality during these decades. Even most recently, in the face of government lockdowns and shutdowns as the political, paternalistic response to the coronavirus crisis, and a growing mountain of government debt due to trillions-of-dollars of annual deficits, the remaining degrees and forms of market competition and openness have resulted in restored and improving economic circumstances for many in the society. But enough regulatory and fiscal burdens can and will, no doubt, still “kill the (market) goose that lays the golden eggs.”

The intellectuals and the new indictment of capitalism

So, can and will “capitalism” survive? This gets us to the other factor in Schumpeter’s story, that being the role and influence of the intellectuals — the molders and shapers of ideas and public opinion. The socialist and political paternalist ideas, unfortunately, were not defeated with the fall of Soviet socialism. Instead, the “progressive” intellectuals in the United States and other countries merely retreated back to the halls of academia and similar places to lick their ideological wounds and reformulate their indictment of “capitalism.”

The public appeal of Marxist-style “class warfare” may have lost its edge. But the collectivist ideologues have rebranded their political message by accusing “capitalism” of destroying the planet through global warming and by creating and perpetuating a “systemic racism” of “white privilege” and “oppression of all people of color.”

Schumpeter had feared for the decay and destruction of the “culture of capitalism.” That is, both the market-based institutions of private property and free exchange, and the beliefs and attitudes without which capitalist “civilization,” as he put it, could not survive. The foundation of this culture was based on an individualism of personal choice and freedom of opportunity both inside and outside the marketplace, and a respect for and protection of an equal and impartial rule of law. This included freedom of thought and speech and tolerance for differences of opinion and values.

This is the very cultural foundation that socialist and “progressive” intellectuals have been “nibbling” away at for decades. And the latest variation not only continues the nibbling away but openly and frontally challenges the premises upon which the United States was founded by insisting that the ideas expressed in the Declaration of Independence are a sham and a lie, a mere “cover” for the inherent and inescapable racism on which the country, they say, has been built.

“Woke culture” is the explicit and aggressive new counter-revolution out to destroy the remnants of the classical-liberal and free-market understanding of “capitalism” that still exists in American society. We see it in the institutions of higher learning, in the mass media, and in a growing part of corporate America. The latter is due to corporate executives also being victims of the same ideological and educational currents and propaganda as the rest of us, or on the basis of trying to ride a new political wave to maintain or increase profit margins by minimizing reasons to be attacked and condemned by the identity politics warriors.

Do not be “defeatist” in the face of the new collectivisms

So, what is to be done? We need to take Schumpeter’s declaration seriously. If the capitalist “ship” seems to be “sinking” due to this latest anti-capitalist attack, we must not allow ourselves to be fatalistic and defeatist, sitting back and wringing our hands that there is nothing to be done. Instead, as Schumpeter said, we should appreciate the situation and “rush to the pumps” to shore up the case for capitalism and the classical liberal–based free society in general.

The last 100 years have seen more than one instance in which it seemed that the ideas and institutions of the free-market society were heading for inescapable defeat, but each time the collectivist forces have failed to achieve their full objectives. True enough, they have regrouped and reorganized their next ideological and political assault on the remaining elements of a free society. But their failure to gain full victory has been due to the resistance of the surviving ideas of market liberalism that have endured.

Our task is to do all in our power and ability to revive an understanding of and inspire a desire to preserve, restore, and extend the ideal and practice of the truly free society. But it will take a growing number of us to see the importance of the non-fatalistic willingness to “man the pumps” so the capitalist ship can not only stay afloat but also be philosophically and ideologically rebuilt even more firmly than it ever was before.