Wednesday, May 18, 2011

Capitalism Defined, Part VI: Schumpeter and the Origins of Socialism

While Joseph A. Schumpeter (1883-1950) was best known for the term "creative destruction," which he identified as one of the positive features of capitalist economies, that term (which he did not coin) only hints at the subtlety and power of his analysis of capitalism. I have defined capitalism so far in this series as an economic system in which investors commodify economic inputs and mobilize them through markets to generate a financial return on capital investments. Schumpeter's definition of capitalism was much more dynamic: he identified it as "a form or method of economic change" (82), driven by entrepreneurs who in their pursuit of profits invariably and radically transformed farm organization, transportation, materials technology, and living standards.

Schumpeter's initial economic research focused on the origins of business cycles, to which several previous economists had assigned regular periods of various lengths. He was particularly interested in the "long cycles" described by Russian economist Nikolai Kondratiev, who identified three sequential 55-year-long waves of economic boom and bust that began in 1790 and continued into the twentieth century. Kondratiev didn't specify the causes of these cycles, but Schumpeter argued they were the products of discrete industrial revolutions, caused by entrepreneurs' adoption of new technologies (like spinning jennies) or production of new goods and services (like rail transport). These revolutions produced not only profits for entrepreneurs but "avalanche[s] of consumer goods," which generally increased the purchasing power and improved the living standards of ordinary workers (67-68). Once the new methods of production had spread throughout the economy, however, markets became saturated with new goods and services, and firms which had borrowed heavily to expand or to adopt new technologies went bust. The result was growing unemployment and economic depression, which ended only when a new industrial revolution began and started the next cycle.

While the heroes of Schumpeter's economic narrative were individual entrepreneurs, he observed that it did not take long for the firms these innovators built to turn into monopolistic corporations. Nor did Schumpeter think this was a bad thing. Large corporations tended to be more efficient than small ones, because of their ability to employ economies of scale, and while critics of monopolies argued that they tended to stifle innovation, Schumpeter didn’t believe this was true. In the long term, he admitted, a monopolistic corporation might benefit by inhibiting technological change, thereby conserving its sunk costs in plant and equipment, but most corporations preferred the large short-term profits that came from adopting new technologies and productive techniques – as evidenced by the investments most 20th-century corporations made in research and development (96-97). Competition between firms thus might diminish over time, but competition between old and new productive methods remained constant.

Like Marx, Schumpeter believed that capitalism contained the seeds of its own destruction, though his explanation of how this occurred was subtler and more sociologically informed than Marx’s. Marx and Engels argued that capitalism would fall when an immiserated global proletariat discovered it had “nothing to lose but their chains.” Schumpeter countered that capitalism would fall when the bourgeoisie discovered they had nothing to fight for. He explained that the chief motives of capitalists were the drive to innovate – either to invent or to adopt others’ inventions – and the desire to accumulate capital. As capitalist economies became more dominated by large, “heavily bureaucratized” firms, however, entrepreneurs would encounter increasing constraints on their ability to innovate (134). Those who prospered would instead be those who could serve as cogs in a corporate machine or, at best, members of a corporate research team. Moreover, ownership of capital property would become less materially satisfying as the means of production came to be dominated by joint-stock companies, whose owners – shareholders – held their property in a highly “dematerialized and defunctionalized” way (142). Anyone who has worked for a large corporation or cast a proxy ballot in a shareholders’ election will recognize the truth of both of these observations. Essentially, Schumpeter concluded, the emergence of monopoly capitalism tended to prepare most people for life in a collectivist state, which offered the same amount of bureaucracy and greater economic security into the bargain.

Schumpeter added that the industrial-era bourgeoisie was a class singularly ill-suited to governance. They viewed the state as an impediment to their goals, and lacked the sense of responsibility that the European aristocracy had developed by the early modern era. At the same time, the bourgeoisie could not function without certain utilities, like roads and military protection, that the state provided, nor could it thrive without the existence of cities, which required considerable organization and political management to thrive. Capitalism, or rather capitalists, thus needed a "classe dirigiste" (136) to manage affairs of state. A.J.P. Taylor, in a quote I mentioned earlier in this blog, would confirm this statement with his observation on the post-Revolutionary French middle class. Schumpeter, who was more interested in the 20th than the 19th century, merely concluded that this was another reason capitalists would eventually give political ground to labor union leaders, urban reformers, democratic politicians, and (to use James Burnham's adjective) "managerial" types. This is largely what did happen in most of the world's industrial countries in the mid-twentieth century, at least until the Reagan-Thatcher revolution in the 1980s.

(Citations above are from Schumpeter's Capitalism, Socialism, and Democracy [New York, 1942].)

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