Capitalism, Socialism and Democracy

In 1946, when Schumpeter wrote the last chapter of Capitalism, Socialism and Democracy, many of Schumpeter’s predictions, and much of his analysis, seemed to be confirmed. Post-war there was the “acceleration of the existing trend toward a socialist organization of production” (377). The United States remained anomalously capitalist. Socialist parties had risen to power in many European nations. This was nowhere more significant than the Labour Party’s victory in the UK in 1945. The Labour Party introduced widespread nationalization of industry, including the Bank of England, and a national health service. They also did all this in an entirely peaceful and technocratic manner. This is in keeping with Schumpeter’s argument that socialism will emerge through a gradual process of societal bureaucratization rather than any crisis or revolution.

Schumpeter’s analysis was confirmed in other ways. European socialist parties had risen to power, not by opposing established elites but by integrating with them. They had abandoned their idealism and radicalism, evolving into administers of a new bureaucratic order. This process, as Schumpeter notes, was helped by their support for the First World War. They had “testified to the fact that the fate of their countries meant more to them than did the socialist goal” (354).  

The Second World War was important for the Labour Party. Joining the War Coalition with Churchill’s Conservatives, they were able to gain invaluable administrative competence. With Churchill and others focusing on the war, Labour ministers were able to concentrate on economic affairs and day-to-day administration. Indeed, as Schumpeter says, “the war economy will have realized some of their immediate aims” (375). The nature of war necessitated that industry be coordinated around a single national focus. And this meant the effective nationalization of many industries and a de facto planned economy. This suited Labour and normalized socialist-style planning in the eyes of the public and elites.

These were not the only reasons why Labour and other left-wing parties were able to succeed in the immediate post-war period. As Schumpeter says, “exhaustion, economic, physical and psychological may well produce, even in the case of victory, effects on the relative position of classes, groups and parties that do not differ essentially from those of defeat” (354). Even for the victorious powers there was a sense of weariness. The public were tired of war and crises and the system that had brought these things about. The horrors of the Great Depression were still very much in people’s minds. Conforming to Schumpeter’s analysis, elites had become weary with direct rule. The pre-war capitalist order did not seem worth defending. It even risked destroying, by revolution, what privileges were left. In this context, competent bureaucratic socialists “were the very people to administer the right dose of social reform, to carry it on the one hand, and to make the masses accept it on the other” (356). They could take responsibility for administering what was left of capitalism. Industry had become, or was transitioning toward and needed, socialization and central planning. The fact that this could help avoid cyclical economic crises was also advantageous.

However, Schumpeter’s predictions have proved less enduring into the later decades of the 20th century. In the three decades following the war, democratic socialism was integrated in most advanced economies. But it never transitioned into the wholescale abolition of capitalism or the total socialization of industry that Schumpeter predicted. In fact, societies started to move in the opposite direction. By the late 1970s, what is sometimes referred to as the “neo-liberal revolution” was taking place. Old capitalist elites reasserted themselves, and much of the post-war social democratic state was dismantled. This involved widespread privatization of publicly owned industries, deregulation, and tax cuts, paid for by cuts to socialist-style welfare provisions. At the same time, socialist parties transformed. They largely embraced the ideals of free market capitalism, abandoning commitments to socialist ideals. They saw their role as merely managers of the neoliberal order.

Societies and firms within capitalism have in many ways become more bureaucratic. But the capitalist order proved more resilient than Schumpeter had predicted.