Capitalism, Socialism and Democracy is a work of economics and political theory by Austrian born economist Joseph A. Schumpeter, originally published in 1942. Schumpeter argues that capitalism, where private, for-profit ownership controls a nation’s industry, will be eventually replaced by socialism, an economic system based on the public, state ownership of industry. However, he disagrees with German philosopher Karl Marx. Unlike Marx, Schumpeter does not believe the shift to socialism will come about due to profound economic crises or the increased immiseration of the working class. Rather, it will happen because of the bureaucratization of industry due to the rise of corporations, and the elimination of the entrepreneur as economic innovation becomes automatized.

Schumpeter argues that socialism can be effective. A socialist economy can be more efficient than capitalism by eliminating destructive trade cycles, provided it comes into being when capitalism has sufficiently matured. Lastly, Schumpeter argues that socialism is compatible with democracy. This guide uses the following edition of the text: Capitalism, Socialism and Democracy. London: Routledge. 1943.

Summary

Capitalism, Socialism and Democracy is divided into 28 chapters and five parts, each covering a core idea. In Part 1, Schumpeter gives an overview and assessment of Marx’s beliefs. He argues that they can be divided into prophetic and religious, sociological and economic. Schumpeter praises the ambition of Marx’s economic interpretation of history. This holds that societies can be understood in relation to how productive forces are organized and controlled. Schumpeter agrees with Marx that capitalism will destroy itself, but that it will not happen as Marx predicted. He finds Marx’s account of class and class antagonism exaggerated, and he believes it will not be sufficiently conflictual to destroy capitalism.

In Part 2, Schumpeter assesses contemporary capitalism and asks whether it will survive. He argues that capitalism has greatly benefited humankind. He believes it has enhanced the material quality of life for most people. It has also spread rationality. This a side-effect of the capitalist class’s focus on the costs and benefits of business decisions, the capitalist class meaning those who own the means of production. Capitalism, Schumpeter says, will perish. It will become so effective at mechanizing production that specialists and technicians will take over innovation, the core function of the capitalist. In addition, the very rationality which capitalism helped promote will mean the public is increasingly able and willing to criticize the capitalist system.

In Part 3, Schumpeter argues that socialism, an economic system based on the common rather than private ownership of industry, will replace capitalism. The increasingly bureaucratic and administered nature of capitalism will make the transition to a planned economy easy.

Schumpeter looks at familiar criticisms of socialism. One is that the price mechanism of capitalism is required to facilitate the efficient allocation of resources. This could be rectified by creating a system of “credits” under socialism which fulfils the function of price-signals. Likewise, workers could still be motivated in the absence of financial rewards. They could be galvanized by the possibility of higher social status. Lastly, Schumpeter tackles the question of the transition from capitalism to socialism. If capitalism has sufficiently matured, this process can be achieved relatively peacefully, as extensive bureaucratization would have prepared society, economically and psychologically. However, if capitalism was not mature, and the population was not prepared, violent revolution would be necessary to establish socialism.

In Part 4, Schumpeter asks whether socialism is compatible with democracy. He looks at two different theories of democracy. The first claims that democracy is about representing the people’s will. However, Schumpeter argues that this theory is flawed, as common will can never be adequately defined. Regimes which appeal to it can also be highly authoritarian. Instead, Schumpeter suggests, a better concept of democracy is one which emphasizes free competition for public endorsement by different leaders. Taking this second definition, Schumpeter argues that socialism is compatible with democracy.

In Part 5, Schumpeter gives a historical overview of the development of socialist parties across Europe. First, he looks at the “non-age” prior to Marx’s writings. This period was dominated by utopian socialism not rooted in effective social forces. By the late nineteenth and early twentieth centuries, socialist parties became much better established across Europe. Both the Social Democratic Party (SDP) and Labour Party formed governments in the interwar years. Lastly, Schumpeter discusses the consequences of World War II for socialist parties. These were favorable, with Labour winning a landslide election after the war, and other socialist parties with transformative policies gaining power across Europe.