Capitalism, Socialism and Democracy

Schumpeter raises the question, “can socialism work?” (167). He believes that capitalism inevitably gives way to socialism. At a minimum, socialism must be able to create prosperity and social stability. This is both so that post-capitalist society will not itself collapse and that Schumpeter’s evolutionary logic will hold. Schumpeter is optimistic. He claims that socialism will not only match capitalism’s economic achievements but will exceed them.

This is for several reasons. First, socialism “would be incomparably more effective in preventing bursts at some times and depressive reactions at others” (195). These are the “booms” and “busts” of economic cycles. According to Schumpeter, these are caused by adjustments to economic development which renders certain industries or parts of industries obsolete. Under capitalism, such adjustments are inevitably painful as the destruction of certain firms causes unemployment and periods of low demand and growth. At best, capitalism can partly “mitigate” (195) this process by manipulating interest rates or government spending, as advocated by economist John Maynard Keynes.

In contrast, socialism can eliminate the effects of these cycles altogether. In a planned economy, resources from obsolete firms can quickly be reallocated to more productive areas without any painful adjustment period. Consider, for example, a situation where new technology makes it unproductive to have more than 50% of workers in a given industry. With capitalism, the redundant workforce could take years to find new jobs, if at all. Under socialism, the “ministry of production will be in a position—whatever it may actually do—to redirect the men to other employments” (196). The ministry can immediately retrain the workers and find them work in newly expanding industries. This both eliminates the human cost of unemployment and avoids the economic cost of idle resources.

This is not the only economic advantage of socialism, Schumpeter says. The central authority controls all resources and can invest in new technology and innovation on levels surpassing capitalist economies. The rapid industrialization of the Soviet Union in the 1920s and 1930s demonstrates this point. More importantly, socialist regimes have the capacity to enhance worker productivity and discipline. Socialism “will command that moral allegiance which is being increasingly refused to capitalism” (211). The worker is less likely to try their hardest in a system which they believe is exploiting them, but likely to be conscientious in a system they feel has their interests at heart. They can feel that they are working toward a common goal rather than serving a private individual. On top of this, “socialist management will have at its disposal many more tools of authoritarian discipline than any capitalist management can ever have again” (215). With capitalism, the manager must rely on the threat of dismissal to instil worker discipline. This threat is often weak. Meanwhile, the socialist manager can threaten social disgrace to curb insubordination, and, if necessary, the repressive apparatus of the state.

That said, this must be set against “the removal of the disciplining influence exerted by the responsibility for one’s own economic fate” (211). This is the pressure to work hard—enforced under capitalism by the need to survive. In an economy of full employment and guaranteed income this pressure slackens. There is a trade-off between unemployment, relative poverty, and a competitive motivating force.