I have this hypothesis about works labeled ‘classics’; the hypothesis is that the only parts of ‘classic’ works that anyone bothers to quote are those from the beginning of the works, and that the reason for this is that that’s as far as most people read.
So it is with Schumpeter. All anyone ever quotes is the thing about ‘creative destruction’, which is indeed important, but which Schumpeter is done discussing by 1/3 of the way through Capitalism, Socialism and Democracy. So because I am expected to talk about creative destruction, even though it is not actually all that important to the book, I am now going to talk about creative destruction.
The real risk to corporations in a dynamic capitalist economy, says Schumpeter, is not that someone will come along and make the same product as they do, only cheaper. The real risk is that someone will come along and invent something that makes their entire business model irrelevant. Think the Internet displacing newspapers; think, indeed, of people who spent their entire lives training to work at printing presses and now find themselves in their fifties without skills that anyone is willing to pay for. Or think of record stores in the face of MP3s. Or think of train conductors in the era of the personal motorcar. Or think of secretaries in the era of Microsoft Word.
So that’s the bit about creative destruction that everyone bothers to discuss. Where they don’t go from there is where Schumpeter goes, namely to pointing out that in a world that is being creatively destroyed, much of economics is studying the wrong things and understanding the world in the wrong way. We need to stop thinking about a static world, where we have a static problem in front of us and entrepreneurs are expected to solve that static problem with a static solution. For instance, the problem isn’t just “how do I maximize my profit on widgets, given this set of competitors before me who are all trying to make the same widget, only cheaper?” The problem is “how do I fight off this set of competitors, and prepare for the possibility that my entire industry will be wiped out in 10 years?” As Schumpeter notes, this new framing makes “monopoly” look a lot less menacing than a static analysis alone would imply: the monopolist may just be saving money in preparation for being creatively destroyed.
Or the monopolist may not! It may just be good old-fashioned evil monopoly. But the point is that our entire mode of analysis has to get out of a static frame into a dynamic one, and that the dynamic frame is a lot more complicated than the static one.
Maybe 20 pages after the discussion of creative destruction, Schumpeter notes that capitalism won’t survive. And he spends the remainder of the book defending that point. The reader might spend a moment pondering why the latter argument gets less play from the likes of Thomas Friedman than do the creative-destruction parts.
Schumpeter’s reasons for believing that capitalism won’t survive look fairly questionable these days. First, he says that bourgeois rationality — the habit of rationally calculating costs and benefits for everything, in all spheres of life — inevitably removes the heroic, innovative potential from capitalism. Bourgeois capitalism inevitably leads to big business (here Schumpeter and Marx would agree), and big business trains us all to effectively be good little managers, counting our dollars and cents. This eventually works its way into our personal lives: in 1942, Schumpeter expected that fewer people would choose to have kids as their bourgeois worlds narrowed, and as child-rearing thereby became yet another institution subject to cost-benefit analysis. The scope for heroic capitalism would fade away under capitalism’s own tendencies. Not only that, but the decrease in the number of children would lead people to plan less for the future, which again would weaken one of capitalism’s motive pillars.
The outcome — capitalism destroying itself from within — agrees with Marx, to the extent that I understand Marx, but the mechanism is a little different: while Marx believed that increasing scale would lead to bigger and bigger business, with workers being repeatedly thrown out of work as machines replaced them, Schumpeter argues that capitalism as a cultural force would undermine the very creative-destructive underpinnings of capitalism. The system’s internal contradictions, in both cases, would cause it to burn out, but in the Schumpeterian world there is no reserve army of the unemployed to rise up and expropriate the expropriators; there’s just a slow exhaustion from within.
Secondly, there’s the New Deal. Schumpeter is annoyingly loath to criticize specific policies or specific people for at least the first 2/3 of Capitalism, Socialism and Democracy, but it’s fairly clear even before he turns explicit that he’s annoyed with Depression-era economic policies. Again, Schumpeter believes that the New Deal and friends are the self-contradictions of capitalism weakening it from within. Capitalism, he says, creates a class of out-of-work intellectuals who profit on critiquing the capitalist order. When I read this, I confess to you that I raised my left eyebrow in an “oh, come on” sort of way: this does seem to massively overstate the importance of intellectuals. In any case, if you hand-wave over the middle part of the argument, it goes like this: capitalism creates this critical caste of workers, who then somehow work their ideas into the corridors of power, thereby creating the New Deal and friends, thereby sapping capitalism of its vital powers, thereby (again) weakening it and eventually ending it.
This all seems awfully wrong in retrospect. I’d like to have the historical imagination to put myself back in Schumpeter’s shoes. Whatever the context around his thoughts was, he seems like very much an iconoclast. He was pretty clearly anti-Keynesian, anti-New Deal, and so forth. And he was maybe socialist, but maybe not; he’s reluctant throughout the book to tell us what he really feels, instead suggesting that all he’s doing is mapping out the world that would result if present trends stayed the course. He might well be a socialist, but if nothing else he understands his Marx. And he certainly understands why people are socialist; in this, you might say that he echoes Corey Robin: socialists aim to convert hysterical misery into ordinary unhappiness.
I would have liked Schumpeter to have expanded upon the analysis of capitalism’s social effects. In the full scope of his argument, the social analysis is mostly there as a building block toward the larger analysis of capitalism’s future. He’s less concerned about the effects that capitalism has, for instance, on the family as an institution. The family itself is just a building block toward the larger structure. This is unfortunate, because his analysis of capitalism’s social effects seems far and away the most prescient.
There’s much else that I can’t get into here, including a fine synopsis of Marxist thought and an analysis of what democracy actually is. Actually, maybe I’ll spend a moment on the latter. Schumpeter wants to know what democracy really is. In some vague sense, we would probably all say that it’s a system under which “the people [in some sense] rule [in some sense]“. Schumpeter picks this apart. What do we mean by “the people”? We can’t mean that democracy is a system under which every citizen has the right to vote: the modern U.S. won’t allow those under 18 to vote, and we’re clearly a democracy; the U.S. didn’t allow women to vote until the 20th century, and we were clearly a democracy then, too; Germany was a democracy in some sense when Hitler rose to power; etc. After quite a bit of arguing along similar lines, Schumpeter defines democracy as a system in which leaders compete in the market for power. … Here I’ve only sketched a few pages of argument, which Schumpeter then uses as the groundwork for still more analysis of whether socialism or democracy ought to give way when they come in conflict.
It’s intensely thoughtful and intricate, and I’ve not even unpacked half of it yet. The only critique I’d make is that the writing style seems to come from someone who spoke German natively; I lost the thread of many sentences by the time I reached the end. But it’s worth it, because Schumpeter is unorthodox and brilliant. Well worth your time and thought.