The Death of Capitalism—Schumpeter’s prognosis coming true

Capitalism is doomed to be replaced by socialism. At least that’s the view of Joseph Schumpeter, the well-known Harvard economist responsible for his popularization of the term “creative destruction”—the process where new entrepreneurial innovations arise and subsequently cause the old way of doing things to disappear.

Somewhat ironically, despite Schumpeter being a staunch defender of capitalism and its long-run benefits, this view put him in agreement with the noted socialist writer, Karl Marx. While Marx believed the end of capitalism would come in the form of a working-class revolt due to capitalism’s failures, Schumpeter instead believed that capitalism’s successes would eventually destroy the system from within—a prediction that in many ways looks to be coming true at a more rapid rate than ever.

Schumpeter believed that the enormous productivity of capitalism would easily churn out the goods needed for basic consumption, freeing up labour from the fields and factories to enjoy a leisurely life in the new modern intellectual class of academics, journalists and bureaucrats. This class would be so separated and removed from the actual process of entrepreneurship and production, they would turn against the very philosophical foundations and institutions of the economic system that made their lives possible. Not understanding the roots of their own condition, they spend their daily efforts deliberately working to undermine the systems of private property, private contracting, decentralized decision-making, entrepreneurship and voluntary exchange. They condemn capitalism as a foregone conclusion and view any pro-capitalism position as crazy and anti-social.

To Schumpeter, discussion among the intellectuals would require the condemnation of capitalism as “virtually a requirement of the etiquette of discussion.” This is a prediction many believe has come true on university campuses in Canada and the United States.

Adding fuel to the fire, in Schumpeter’s view, the continual flow of product innovation becomes something people take for granted, entrenched in the routine operation of large firms. Progress is no longer so visibly attributed to innovative entrepreneurial individuals. The sizeable political and social class of small merchant entrepreneurs and their employees who once directly felt vested in the economic system of capitalism and property ownership are replaced by emotionally unattached employees, managers or shareholders of large bureaucratic firms. Thus, the entrepreneur falls from being on top of the pyramid of society. Children aspire to be doctors, teachers, bureaucrats or politicians, but no longer entrepreneurs.

Even at the time of his writings in the mid- to late-1900s, Schumpeter believed this transition to socialism was already underway. He cited as evidence the rapid growth of government regulations, controls on banking and labour markets, price controls, high levels of taxation and redistribution, calls for government takeovers of industries, and the growing influence of large business firms in the political process attempting to use the power of government to protect their interests from potential domestic and foreign competition. A system of crony capitalism in which the appearance of markets is outwardly maintained, but to a large degree the allocation of resources, and the profit and loss of businesses, are determined by political decision-making rather than consumer choices and market forces. Firms and individuals compete for government favours rather than consumer dollars in the marketplace.

Schumpeter believed the use of democracy to intervene in economic affairs would continue to march until personal and economic freedoms are greatly curtailed and regulated. Whether or not it’s called socialism, it will be to a large extent functionally.

Today, these same trends continue to progress as more and more individuals lose sight of capitalism as the true historical source of their wellbeing and of its long-run benefits. They instead focus on using expanded government control to alleviate short-run economic concerns and social shortcomings as they see them, without realizing the harmful long-run secondary effects of greater and greater government control and intervention.

While both Schumpeter and Marx agreed on the eventual transition from capitalism to socialism, there’s an important difference in their viewpoints. Marx personally desired socialism and believed it to be a superior economic system. But Schumpeter held the opposite view, believing in the power of private innovation and entrepreneurship and the benefits capitalism produced; ones he believed were far superior to the outcomes under socialism. Unlike Marx, Schumpeter did not want capitalism to be replaced by socialism, nor did he think this transition would be beneficial for the wellbeing of society. In fact, he thought it would result in major declines in living standards.

Until people once again celebrate and aspire to the creative genius of entrepreneurship and recognize that it’s precisely market-based exchanges and the systems of private property and market competition that have lifted them from the necessity of being poverty-stricken farm and factory workers just to survive, we remain solidly on the path Schumpeter predicted in his famous 1942 book, Capitalism, Socialism and Democracy.