John Kilcullen
Copyright (c) 1996, R.J. Kilcullen.
This book was first published in 1942 in U.S.A. -- i.e. during the war, not long after the great depression and Roosevelt's New Deal.
Open the Readings on p.217 and look through the table of contents. Part I is an appreciation and critique of Marx. Schumpeter argues that Marx's argument to show that Capitalism will eventually destroy itself is unsound. Nevertheless, Schumpeter himself thinks that Capitalism contains the seeds of its one destruction. Hence Part II: Can Capitalism Survive? The answer he gives is No. But at first, Chapters 5-8, he explains the strengths and virtues of Capitalism. Then he explains why it will eventually be transformed into socialism. Notice Chapter XIII, which is the first of the extracts we will read.
Well, if it is true that Capitalism will be replaced by Socialism, the question then is whether Socialism will work? This is the topic of part III. In America in 1942 many people would have said that socialism demands too much idealism for human beings, that it can't work in practice. Schumpeter argues that it can work. Note Ch.XVI, which is the second extract we will read.
The next question is whether a socialist society can be a democracy? Will the change for capitalism to socialism mean the end of democracy? This is the topic of Part IV. Many Americans in 1942 would have said that Capitalism and democracy go together, that a socialist state cannot be democratic--look at the Soviet Union. Schumpeter replies that the answer to the question depends on what you mean by democracy. Democracy is one sense is simply impossible in any society, capitalist or socialist. This is the argument of Chapter XXI, which is reminiscent of Weber and Michels. But in another sense democracy is possible, and in that sense a socialist society can be a democracy. This second sense is the topic of Chapter XXII, which is the third extract we will read. Part V of the book is something of an appendix: the main argument of the book is complete at the end of Part IV.
To recapitulate, the argument is that Marx's reasons for expecting the replacement of capitalism with socialism are wrong, and yet this replacement will occur, as a result of the inner dynamic of the capitalist system; that a socialist society will be quite workable, and there is no reason why it should not be a democracy, at least in one sense of the word (the only sense in which democracy is possible no matter what the economic system).
Turn now to Readings, p.219, to Chapter XIII, in which Schumpeter explains how capitalism will eventually destroy itself.
Read the first half page. There are some links to earlier parts of the book that need to be explained. Lines 4-5 speaks of "the almost universal hostility to its own social order to which I have referred at the threshold of this part". This is a back reference to p.63:
The public mind has by now so thoroughly grown out of humour with it as to make condemnation of capitalism and all its works and foregone conclusion--almost a requirement of the etiquette of discussion. Whatever his political preference, every writer or speaker hastens to conform to this code and to emphasise his critical attitude, his freedom from "complacency", his belief in the inadequacies of capital achievement, his aversion to capitalist and his sympathy with anti-capitalist interests. Any other attitude is voted not only foolish but anti-social and is looked upon as an indicator of immoral servitude.Schumpeter was writing not long after the Great Depression, which was cured only by the outbreak of war.
Returning to p.143, second paragraph, which begins "The capitalist process, so we have seen" etc. This paragraph summarises material in chapter 12. The first point, the decrease in the importance of the capitalists' function, refers to something like Weber's routinisation of charisma. The commercial equivalent of the charismatic leader is the entrepreneur. An entrepreneur in recent Australian usage means something like a pirate, but it also has a more respectable meaning: the entrepreneur sees some new commercial opportunity and organises economic activity to meet that opportunity. The capitalist's managerial function was long ago taken over by professional managers. According the Schumpeter the capitalists entrepreneurial function has now also been taken over by sections of the business bureaucracy in large firms: there are planners and strategists who look for new opportunities and move to exploit them. As he says (p.132), innovation itself is being reduced to routine. Technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required and make it work in predictable ways. The romance of earlier commercial adventure is rapidly wearing away, because so many things can be strictly calculated that had of old to be visualised in a flash of genius. Weber would perhaps be sceptical about this. Remember his contrast between the politician and the bureaucrat, and his thesis that at the top of every bureaucracy there is needed someone who is not merely a bureaucrat. Schumpeter is saying that the top of the business can be occupied by a bureaucrat. "The leading man...is becoming just another office worker" (p.133)
Anyway, this is what he means when he says on p.143 that the capitalist process eventually decreases the importance of the entrepreneurial function of the capitalist. The next point is the wearing away of protective state. Schumpeter suggests that capitalism has benefited from the survival of older, feudal, social classes, which provided political support. Schumpeter here is drawing upon Webers notion of a status group. The old aristocracy lent their prestige to capitalist enterprise, for example as members of the boards of directors, but also, and more importantly, as proving the personnel and culture of government, the diplomatic service, the magistrates and judges, the army. He is perhaps thinking of the British conservative party,
The bourgeois class is ill equipped to face the problems, both domestic and international, that have normally to be faced by a country of any importance....without protection by some non-bourgeois groups, the bourgeoisie is politically helpless and unable not only to lead its nation but even to take care of its own .... class interest... (p.138)However, capitalism breaks down these status groups--concern for money undermines their prestige.
In breaking down the pre-capitalist framework of society, capitalism thus broke not only barriers that impeded its progress, but also flying buttresses that prevented its collapse. (p.139)Returning to p.143, he says that "we have finally seen that capitalism creates a critical frame of mind" etc. This is another Weberian theme. Compare Readings p.189, the essay "Science as a Vocation", p.139. This is the topic of Schumpeter's chapter XI, "The Civilisation of Capitalism". he defines what he means by rational thought: 1) thinking for oneself, 2)thinking consistently and logically, and 3) making as few assumptions as possible, and assumptions that can be tested by experience. He argues that the rational attitude, so defined, first forces itself upon profile in matters of economic necessity, matters of physical survival; and it spreads from there to other parts of life. Capitalism gives an impetus to this development. Capitalist practice depends on rational cost-profit calculations by way of double-entry bookkeeping (cf. here). Capitalist success gave prestige to the calculating habit, and the process of capitalism encouraged the development of science and rational methods. Schumpeter suggests that all the features and achievements of modern civilisation are the products of this process.
Although the modern hospital is not as a rule operated for profit...capitalist rationality supported the habits of mind that evolved the methods used in these hospitals. (p.125-6)
The capitalists process rationalises behaviour and ideas and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts. Thus it reshapes not only our methods of attaining our ends but also these ultimate ends themselves. (p.127)Utilitarianism is an application of the rationalist calculating habit to ethical and social questions. Well, this should be enough to explain the links to the earlier argument. How return to p.143, and re-read from the top of the page to the end of section I, p.145. This is clear enough. The top of p.145, the remark that the long-term interests of society are lodged with the upper strata, may remind you of Macaulay's remarks in his review of Mill on Government, that the "higher and middling orders are the natural representatives of the human race" (POL162 Readings, p.363).
Now read section II, "The Sociology of the Intellectual" to the end of sub-sections (pp.145-147-1/2). On p.146, 4-5 lines down, note: "capitalism...creates...a vested interest in social unrest". What he said in Ch.XI was that capitalism favours the growth of a rationalistic critical spirit. Here he suggests that the intellectuals are especially those who turn this spirit into social unrest. By intellectuals he means people who wish to talk, and especially teach, about social matters without having political or economic power or responsibility; people like me, for example.
Now read to the end of sub-section 3, p.150. The central example here is perhaps Voltaire. On p.149, 11 lines down, underline "collection patron, the bourgeois public", and on the next line "Voltaire".
Now read what is perhaps the main point of this chapter, sub-section 4, pp.150-151. On p.150, 3 quarters of the way down, underline "the freedom it disapproves cannot be omitted without also omitting the freedom it approves". He is assuming bourgeois support for the rule of law, the principle that governments cannot act except as authorised by laws framed in general terms, applying in the same way to all similar cases. This makes it difficult to attack unorthodox intellectuals without also authorising attacks on others.
The unemployed or underemployed university graduate, he suggests, is especially likely to become resentful and make trouble for the capitalist system. Read sub-section, to near the bottom of p.153.
The last section is about the relationships between intellectuals and the labour movement. On p.154, 13 lines down, underline "he must flatter" down to "ready to obey" and three lines into the next paragraph underline "refuse ... to take account". Now read sub-section 6, the rest of the chapter.
Obviously he is thinking of conditions in the 1930s and 1940s, when intellectuals, often communists, tried to lead the labour movement against capitalism. Marx and Engels themselves were intellectuals. Neither was himself a member of the proletariat.
So looking back, Schumpeter's argument is that Capitalism favours the growth of critical rationalism and the growth of an anti-capitalist intellectual class (or status group) which bourgeois governments cannot control; given the bureaucratisation of capitalist firms (especially. the bureaucratisation of the entrepreneurial function) and given the weakening by capitalism itself of the surviving aristocratic groups which provided the bourgeoisie with political and military protection, and given the increasing hostility to capitalism of the intellectuals and of the labour movement they lead, the system will eventually be transformed into socialism. What he expects is not a revolution but the sort of process the Fabian socialists advocated--a gradual, piecemeal take over of private sector activity by various levels of government, and a gradual increase in government regulation of the remaining private sector. You might ask yourself how plausible this story is. Has it happened? Did it happen to some extent and then get reversed? How necessary and inevitable are the processes Schumpeter describes-- is he perhaps simply describing in abstract universal form what was contingently happening in his own time and place?
In the next chapter, XIV "Decomposition", he takes the story further. There is what he calls an Evaporation of the substance of Property. Marx's capitalist could look at the physical factory he owned and say this is mine, the modern capitalist would have to pull out a folder of share certificates or the like, and it is not the same thing. "The modern corporation...socialises the bourgeois mind; it relentlessly narrows the scope of capitalist motivation; ...it will eventually kill its roots." p.156. Another factor is the disintegration of the bourgeois family. This is a result of the spread of calculating rationalism.
As soon as men and women...acquire the habit of weighing the individual advantages and disadvantages of any prospective course of action--or, as we might also put it, as soon as they introduce into their private life a sort of inarticulate system of cost accounting--they cannot fail to become aware of the heavy personal sacrifices that family ties and especially parenthood entail under modern conditions. (p.157)But the family and the family home used to be the mainspring of the typically bourgeois kind of profit motive (p.160). "With the decline of the driving power supplied by the family motive, the businessman's time living on shrinks, roughly, to his life expectation." p.161. Thus the same process (essentially the spread of rationalisation, to which Weber drew attention--the habit of calculating costs and establishing efficient practices)--the same process
that undermines the position of the bourgeoisie by decreasing the importance of the functions of entrepreneurs and capitalists, by breaking up protective state and institutions [aristocratic survivals], by creating an atmosphere of hostility, also decomposes the motor forces of capitalism from within...the capitalist order not only rests on props made of non extra-capitalist material but also derives its energy from extra-capitalist patterns of behaviour which at the same time it is bound to destroy. We have rediscovered what, from different standpoints (and, so I believe, on inadequate grounds [he is referring to Marx]), has often been discovered before: there is inherent in the capitalist system a tendency toward self-destruction (p.162).So Schumpeter has come to a Marxian conclusion, but in a Weberian way. Weber never said whether capitalism would be replaced by Socialism; he thought that the safest prediction was of increasing bureaucratisation, in both private and public sectors. The survival of capitalism was desirable, for Weber, as helping to keep some openness by balancing one bureaucracy against the other--private firms balancing government. Schumpeter has been arguing that capitalism will be replaced by Socialism, partly because of the bureaucratisation of private business, but also because of political and cultural changes and changes in motivation due to the trend Weber had also noticed, toward increasing rationalisation. Look again at Readings p.189.
Now we come to Schumpeter on Socialism. Will socialism work? Is it a practically feasible system? This is the topic of chapter XVI, "The Socialist Blueprint". Schumpeter's answer is that socialism will work. Chapter XVI is difficult--Schumpeter is writing here as an economist. It may help if you consider first the contrast between two versions of how socialism might work. One is what I think was the original socialist idea: (1) that it is fairly obvious what needs to be produced, and (2) there will be (except perhaps in the short term) no great difficulty about producing it. On (2): Marx assumed that socialism followed capitalism, and that the socialist society would have at its disposal the tremendously productive technology that capitalism had developed, and also the infrastructure of railways, ports, factories and so on. As for (1), that it is fairly obvious what needs to be produced--any 19th century socialist could draw up the shopping list: proper food, decent housing, warm clothing, a reasonable amount of leisure. So once socialism came, the central organising body would simply place orders for the necessary things, and the economy would have the capacity to produce them. People wouldn't mind working their 8 hour day because of the manifest fairness and reasonableness of the arrangements, and because of the satisfactory standard of living that they would easily achieve.
As things turned out, the revolution took place in a backward and underdeveloped country, Russia, in the middle of a world war, in fact when Russia had just suffered a massive defeat, and the new regime was subjected to fifty years of hostility from powerful nations. The comrades discovered that there was not enough productive capacity to fill easily the orders for a reasonable shopping list: they had to establish priorities, to decide which needs cover most urgent, because they couldn't all be satisfied.
Also, as capitalism went on, the shopping list of simple necessities had added to it lots of items that were hardly necessities, but which people wanted anyway: TV sets, motor vehicles, computer games, and the rest of modern civilisation. The mere provision of simple necessities, even if it had been accomplished, would have produced a way of life that seemed drab and austere.
Hence the other version of socialism, toward which Russia and Eastern Europe were moving when they ran out of time, and which seems to be the current idea of socialism in China, namely market socialism. The basic idea here is that the determination of priorities, of the relative urgencies of needs or wants that cannot all be satisfied, is to be done by the mechanism of the market. The factories or workplaces in each industry could be organised as separate firms which would compete with one another on a market. Instead of there being one standard product produced in every factory and sold at one fixed price, the different firms would be free to produce their own brand and free to fix their own price. This sort of socialism looks like capitalism, but there are important differences: (1) The ownership of the means of production is vested in the whole community, not in private individuals: there are no shareholders, there is no difference between profit and tax, and (2) The income of ordinary people does not, or need not, depend entirely on the marketability of their labour power. In fact they could all get the same basic income as of right, whether they worked or not, with only a smaller additional income depending on their selling their services in a labour market. (In fact even under capitalism we have something like this: people who can't work get something from the department of social services, and progressive taxation and subsidised government services can be used to reduce the inequalities that would develop if everything were left to the market.)
So market socialism is a way of determining priorities, given that choices have to be made. There are other ways. For example, the members of the central committee could just impose their own preferences: everyone needs a pair of good strong work boots, no one needs high heeled shoes--they're bad for the feet. Everyone needs some ballet, no one needs jazz. Or it could be done by democratic vote: everyone gets what most people want. The advantage of the market mechanism over majority vote is that it can satisfy minority tastes as well, as long as the minorities are willing to pay (i.e. sacrifice something that they want less and other people want more--which is a pretty fair bargain).
To return to Schumpeter. The question of this chapter is whether a socialist system can rationally determine priorities, given that it is not possible to give everyone everything they want. Schumpeter's answer is yes--the market mechanism can be used to set the priorities. Read the first two paragraphs of p.173 (Readings p.226) "Uniquely determine decisions as to what and how to produce" is equivalent to a definite order of priorities, given that relative scarcity exists, i.e. given that it is not possible to produce everything anyone might want. The reference to "how" reminds us that there are more and less economical methods of producing a given product: in a situation of relative scarcely we must also be able to decide which is the preferable method.
Read sub-section 1 (pp.172--1/3 way down 174). On p.173, 13 lines down, "In a commercial society...individual incomes...emerge in this very process of buying or living". But in a socialist system no one's income will depend, at least not entirely, on what they can get in the market. This is true in our system too. "Distribution is severed from production"--people could get a fixed money income, or a voucher entitling them to a share in what was produced, irrespective of their contribution to production. As Schumpeter points out, the shares need not be equal--they would reflect whatever value system or ethical ideas the society had.
Read subsection 3, pp.174-5. This should be clear enough. Notice that the ethical ideas of the society put constraints on what can be done in the market. In fact, there is an ethical question whether there should be a market at all. At the beginning of this subsection underline "ethical persuasion...prescribes that comrades should be free to choose". We can imagine a society, like ancient Sparta or Plato's Republic, where the population, or at least some parts of it, would not practice private consumption at all--they would live in a community in which everything was for everybody. But if individual preferences are allowed to be satisfied, then there is the precondition for a market. Note the prescription, 12 lines down this paragraph, that "all vouchers to become valueless at the end of the period." This requirement will be relaxed later in the argument. At this stage Schumpeter doesn't want to deal with long-term investment decisions: it is just a question of distributing what at present means production can produce. On p.175, nines lines down, underline majority vote: a market can meet minority or individual preferences, i.e. it can deal with differing orders of priorities as between different individuals, by allowing X to exchange with Y something X doesn't want as much as Y does for something Y doesn't want as much as X does, so that after the exchange they are both better satisfied.
Read sub-section 3(pp.177-8). Notice the three rules for the managers of firms (pp.175-6), and the two rules for the central board (or as Schumpeter puts it one rule with two clauses (p.177)).
The first rule for the firms, to produce as economically as possible, is equivalent to saying that they must operate as profitably as possible (though this profit, at this stage of the argument, is only notional--no one gets to take it home to spend). The second means that they must pay for the productive resources they use. The third means that they must not produce so much that they sell some of it at less than what it costs to produce. (In a capitalist system firms sometimes "dump", as it is called in international trade, to destroy competitors and for other reasons.) Notice this paragraph at the top of p.177: a socialist market economy would function just as a capitalist market economy does, apart from the fact that no one would take home any profits.
On p.177, note the explanation given of the 2nd clause of the rule for the central board--especially the sentence "Proof follows...." etc.
At the beginning of sub-section 3, Schumpeter made the assumption that the means of production are given. Now he changes that assumption and deals with progress and change. Read sub-section 4, pp.178-181. In this section Schumpeter "relaxes" some of the conditions imposed in the earlier stages of the argument. This method of starting out with certain rules and restrictions and then modifying them is to show exactly why each of the features of the final stage has been adopted--each change is made to deal with some matter originally set aside, or with some aspect of the one matter originally set aside, namely change or development of an economy.
At the bottom of p.178 underline "where the available resources of the society are fully employed": any extra activity for the sake of investment will have to be achieved either by consuming less or by working harder. Hence premiums for overtime and savings--in our terms, wage differentials and interest.
In the next paragraph, he envisages relaxation of the rule against actually making profit--not so that managers can take it home and spend it on private consumption, but so that it can be invested. In the next paragraph he envisages another change: premiums can be offered not only for extra work but for working at all, i.e. wages. These are changes the society might or might not make--it would depend on their value system. Schumpeter's point is that they could be made if the comrades chose without affecting the effectiveness of the economic decision-making system. If such changes were made, the market socialism and capitalism would become very similar economic systems: the remaining difference is that under socialism there would be no individuals who could decide whether to consume the firm's profits or invest them. Profit making for private consumption would not be an option--unless the comrades decided to offer premiums to managers to encourage them to make the firm more efficient. Perhaps the remaining difference would be that such a decision would be taken by the whole society, or by some organ of the whole society, and not by shareholders of one firm. If a market socialist society went in for privatisation, I suppose it would cease to be a socialist.
Read now sub-section 5, pp.181-184. On p.181 note the point about rent. If, for example, oil will eventually run out, the central board must charge for oil at a higher rate than mere cost of production to discourage waste. (Compare my lecture on the marginalist theory, Vol.2 Articles, Chapters and Lectures, p.246.)
On p.182 in the middle underline "perfectly general logic of choice". The logic of choice in the use of relatively scarce resources is in fact the marginalist theory. While that theory is generally explained in reference to commercial society, it need not be: it applies also the Robinson Crusoe alone on his island, or to the socialist economy. Re-read the lecture on Marginalism and ask yourself at each point whether it makes any difference to the logic of the theory whether the factors of production are privately or publicly owned. For a clear discussion of this issue see G.B. Richardson, Economic Theory (HB171.5.R42), pp.79-92, 114-120.
I won't comment of further details Read the rest of the chapter. Schumpeter was not the inventor of market socialism (see his acknowledgment on p.173), but his chapter is an excellent exposition of a theory that was being adopted in the European communist would before its collapse, also in China, and perhaps it has also had some influence over democratic socialist thought in our part of the world. Notice that as many points Schumpeter acknowledges that the ethical views of the society may well impose constraints on the markets: he is not suggesting that rationality ceases if such constraints are imposed. It may be that the political process will set up a general framework and allow the market to make the decisions within their framework.
Now let's turn to what Schumpeter says about the political process. Turn back to p.217 of the Readings book and look again at the table of contents. The next extract will be ch.XXII, but let me tell you a bit about the argument of Ch.21, "The Classical Doctrine of Democracy".
At the beginning of the chapter Schumpeter defines what he calls the "eighteenth-century" concept of democracy (I suppose he is thinking of Rousseau) as: that institutional arrangement for arriving at political decisions which realises the common good by making the people itself decide issues through the election of individuals who are to assemble in order to carry out its will. There are perhaps three key terms here: the common good, the will of the people, and the notion that the people itself decides issues. Michels has attacked the third point--the people itself won't decide, its leaders will. Schumpeter attacks the other two, the notion of a common good and the notion of the will of the people. He says that there is no such thing as a uniquely determined common good that all people could be brought by rational argument to agree on. "To different individuals and groups the common good is bound to mean different things". "Ultimate values are beyond the range of mere logic". But without a common good there is nothing that can be called the will of the people, or if there is a common will it has no sanction--it is merely arbitrary concordance. there is no reason to respect will as such: we respect it only because we believe it wills something good: if there is no common good, any common will would be without authority. Next he argues that citizens do not make political decisions in the rational way the classical theory supposes.
When we move...away from the private concerns of the family and the business office into those regions of national and international affairs that lack a direct and unmistakable link with those private concerns, individual volition, command of facts and rational inference soon cease to fulfil the requirements of the classical doctrine...the sense of reality is so completely lost. (p.261)
Thus the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. (p.262)There is much more interesting material in this chapter, but we must move on. So read the beginning of the next chapter, section 5. pp.269-273.
A few comments. First on the definition (end of paragraph 2): by voting the people not only choose who is to decide, but also themselves decide, since the competitive struggle is partly in terms of rival policy proposals. Second, the distinction between parliamentary and constitutional monarchy, near the top of p.270. Usually the British monarchy is called constitutional, but here he calls it parliamentary. By constitutional monarchy he means the regime of the Kaiser in pre-World War I Germany, where the ministers had to have the Kaiser's confidence but did not need the confidence of the Reichstag. Finally, a comment on his remark on proportional representation. The function of elections may not be merely to choose a government, it may also be to choose a parliament to debate government measures and perhaps to send the government out to another election, short-of-term (see Democracy in Australia). For the performance of these functions the parliament needs to represent different shades of opinion, different sections of the population; for these reasons proportional representation may be appropriate. Schumpeter's definition. of democracy would be satisfied by a constitution in which there was no debating assembly at all and no possibility of short of term elections. Now read section II, pp.273 to the end of the chapter.
It is noteworthy that although he was writing in America, Schumpeter takes the British system as his example. It does in fact fit his theory much better than the American system does. Notice footnote 10 on p.273. The American president is not equivalent to a prime minister. He is not virtually the government in the way a prime minister is: for example, if the President is a Democrat and the Congress is controlled by the Republicans, there are in effect two conflicting governments with no simple way of resolving the conflict. Even when both Presidency and Congress are controlled by the same party, they may pull in different directions. As Schumpeter notes, the President cannot dissolve Congress and does not have to have the confidence of a congressional majority: both these points are essential to the position of a Prime Minister.
Another noteworthy point is that Schumpeter's examples mostly come from a period of British politics when Britain was not a democracy. Note in footnote 16 (p.276) that he says "we do not define democracy by the extent of the franchise" Surely it is in part of the meaning of democracy that everyone has the right to vote.
The point of Gladstone example is to show that it is not Parliament but the electorate that chooses the Prime Minister.
I don't think I need make any further comment. You might read my lecture "Democracy in Australia" in the POL167 course materials. Read also the lecture on Schumpeter in Vol.2, Articles, Chapters and Lectures, p.275ff.
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