Joseph A. Schumpeter: Can Capitalism Survive?

“Can capitalism survive? No. I do not think it can.” So begins Joseph Schumpeter’s classic essay, Can Capitalism Survive?, which constitutes the middle third of his 1942 book, Capitalism, Socialism and Democracy.

Schumpeter goes on to say,

The thesis I shall endeavor to establish is that the actual and prospective performance of the capitalist system is such as to negative the idea of its breaking down under the weight of economic failure, but that its very success undermines the social institutions which protect it, and “inevitably” creates conditions in which it will not be able to live and which strongly point to socialism as the heir apparent.

 

As brilliant and learned as Schumpeter’s analysis is, his prediction did not come to pass, and will not come to pass, at least as far as he envisioned it. Why?

Schumpeter’s thesis is another example of an “eroding foundations theory.” The common theme of these theses is that capitalism, to function properly, requires an appropriate social foundation upon which to work. Certain social virtues, such as a strong work ethic, self-discipline, or a willingness to delay gratification are seen as essential to the successful operation of a capitalist system. If these “foundations” erode the whole enterprise is put in jeopardy. Ultimately, the foundations crumble and the entire edifice crashes down.

As seductive as this analysis is it has been repeatedly proven wrong. The principle error lies in diagnosing the character of a society as establishing the foundation of the social structure. In contrast to this Marx’s analysis led him to describe society as consisting of two parts — the base and the superstructure. Marx believed that changes in the base of society would effect change in society generally.

The base, according to Marx, constitutes the material reality of society; its mode of production and exchange. Changes here necessitate changes elsewhere. The mode of production has two elements — the means of production and the relations of production. The means of production are the actual tools and technology that a society uses to produce its commodities. The relations of production are the social arrangements entered into to effectively operate those means. For example, a factory to manufacture automobiles is a means of production. The fact that the factory is owned by a class of private investors, managed by a class of executives, and manned by a class of employees (under a system of division of labor), reflects its relations of production. Put these elements together and you have a typical capitalist mode of production. The aggregate mode of production of a society constitutes what Marx referred to as its base.

This base needs a support system to ensure it operates effectively. Political and legal structures arise to define and protect the interests of the various parties involved in the relations of production. Ideologies coalesce around these interests. Legal precedents are established together with their philosophical justifications. All this, and more, constitutes the superstructure of society.

Thus, for Marx, real societal change originates within the base of society, specifically with its means of production. This triggers changes within the relations of production and ultimately within the superstructure of society, effectively transforming all of society.

Eroding foundations theories like Schumpeter’s place the locus of change within the superstructure of society; in its culture and values. Changes here can may affect a society’s ability to operate efficiently but they do not overthrow the base, thus they do not revolutionize the capitalist mode of production. The system merely adapts to survive the new conditions.

Schumpeter was very close to understanding the demise of the capitalist system. He was correct in stating that it is the success of capitalism which creates the conditions under which it can no longer exist, not internal inconsistencies. But he was in error in the notion that the relative prosperity of a capitalist society would give rise to a generation of disaffected intellectuals which would turn against the system which bred them and that the rise of these disaffected intellectuals would somehow effect the end of capitalism.

Somehow the man who gave us the principle of creative destruction, the idea that the defining characteristic of capitalism is its incessant need for improvement and innovation, missed the fact that this principle itself would transform the means of production and thus spearhead the revolution that his general thesis predicted.