Simply Schumpeter

An Annotated Outline of “Capitalism, Socialism, and Democracy” (CSD.)

Hello fellow (and budding) Schumpeterians!

Thanks for taking the time to look at this annotated outline of Joseph Schumpeter’s “Capitalism, Socialism, and Democracy” (CSD.)

I am convinced that the ideas presented in CSD are profound and prophetic, but few people these days will have the time or patience to wade through the entire book.  Accordingly, I put together this annotated outline in the hope it might help to provide easier access to his ideas. 

I would greatly appreciate any comments or corrections you might have, especially in those cases where I may have missed Schumpeter’s point (not a difficult thing to do.)

If you are interested, I have numerous posts on my Substack site, mostly relating to economic and banking issues. "Basel: Faulty" which I wrote in July, makes the case that US bank regulation has gone off the rails due to our policymakers’ failure to understand that bad regulation caused the 2007-2008 financial crisis.

Many thanks and best regards,

Charlie Cranmer

charlescranmer@gmail.com

BACKGROUND ON JOSEPH SCHUMPETER AND CAPITALISM, SOCIALISM, AND DEMOCRACY (CSD)

Joseph Schumpeter published CSD in 1942 - 80 years ago.  I found that I constantly had to remind myself of this.  Sometimes it seems as if he is writing about the world today and one is tempted to judge him according to this standard.  But he was writing at a very unique historical moment to a unique audience.

As he began writing this book, the world was still mired in the Great Depression.  The unemployment rate lingered around 18% (turns out the New Deal was a bit of a dud.)  When he finished it, we were already in the middle of WWII and the economy was racing ahead due to War spending.

The Great Depression had caused many to become disillusioned with Capitalism.  Marxist ideas were prevalent in the United States and even more so in Europe, especially among intellectuals.  Socialist parties had great influence, and to many it seemed that Socialism was the only viable alternative to the Fascism that had taken hold in Germany, Italy, and Japan (and, more than is widely recognized,  in the UK and the United States.)

Meanwhile, the centrally planned Soviet Union grew mightily.   This further reinforced Socialism’s appeal. Western admirers  were oblivious to or, more often, were in deep denial regarding the atrocities committed in the name of Communism.

Hence, to many, world events and economic trends seemed to validate Marxist-Leninist ideas.  Economic crises were becoming ever more serious, industry was consolidating, profits were shrinking, the “reserve army of the unemployed” was becoming ever larger, imperialist war had erupted (Lenin, not Marx) and thus Capitalism’s future seemed greatly in doubt.

This is the world in which Schumpeter published CSD.  In it, he attempts to present the truth regarding the legacy of Capitalism and tries to forecast what the future might hold.  In a nutshell, he observes that Capitalism has generated untold wealth and vastly improved living standards for everyone in the West (and, by 2022, the entire world).  Having said this, he agrees with Marx that Capitalism is doomed.   But it is doomed for very different reasons than those Marx postulated. Schumpeter says that Capitalism will be ruined by its own success and will inevitably be succeeded by Socialism at some future date.

To paraphrase Marc Antony, he aims to “Bury Capitalism, not to praise it.”  

But is this what he really means?

One of the keys to CSD, and one of the things that makes it such an infuriatingly difficult book to read, is that it is written in a highly “ironic” (i.e. sarcastic) style.  It wouldn’t be so bad if Schumpeter were consistently ironic, but he slips unexpectedly into and out of this mode.  One is never quite sure if he means what he is saying.  Plus, even when one is fairly certain he is being ironic, his meaning can be difficult to parse.  The book can also be repetitive and contradictory.  I have excised some of the more glaring instances of these, but most remain in the interest of presenting as accurate a representation of the book as possible.

In his introduction to the most recent edition of CSD, Schumpeter’s biographer Thomas K. McCraw argues that Schumpeter employed this “ironic” style to avoid alienating socialist-leaning readers with a full frontal assault. Schumpeter hoped his method would enable him to hold on to readers long enough for them to perceive Socialism’s inherent flaws for themselves.

Schumpeter starts his book with a critique of Karl Marx’s theories.  There was no one better qualified than Schumpeter for this task.  He came of age in Vienna and was briefly the Austrian finance minister during the post-WWI revolutions and inflation.  He was well acquainted with the most prominent German socialists: Bauer, Hilferding, Kautsky.  He was certainly a proponent of Capitalism. But he was never really a member of the libertarian “Austrian School” of Von Mises and Hayek.

So what was Schumpeter’s intention in writing CSD?

My view (and I am certainly open to differing views) is that, in 1942, Schumpeter was despondent.  He was genuinely convinced that Capitalism was, if not on its last legs, at least very much weakened.  While he was not fully convinced of Capitalism’s demise, and despised Socialism, he could see that countries around the world were heading in a Socialist direction.  He also could see that the growing bureaucratization of society – both public and private — was already sapping Capitalism’s dynamism and insidiously “Socializing” the culture.

I believe that CSD was Schumpeter’s attempt to make the best of a bad situation.  On a literal plane, he presents his vision of how Capitalism will “inevitably” wind down and provides some guidance as to how the transition to Socialism might be managed effectively.  (Not in 1942; maybe in 100 years.)  But underneath this surface is his ironic subtext: how profoundly stupid and tragic it is for humanity to allow this to happen.

Frankly, I’m not 100% sure whether this is really Schumpeter’s view, or if I am projecting my own convictions on to him.  

CSD was probably also a response to the extraordinary success of Keynes’ “General Theory” (and, more personally, to Keynes’ growing fame and influence on the economic discipline. Unlike Schumpeter, Keynes was a gifted popularizer and self-promoter.)  Schumpeter disagreed with Keynes on most issues, although not as strongly as did the Austrians. 

Since 1945, Keynesian economics (broadly defined) has been in the ascendancy.  Most of the prominent post war economists (Samuelson, Tobin, Solow, Heller, Galbraith) were Keynesians.   Many had worked for the US war effort.  Because WWII was successfully prosecuted and because the war brought us out of the Great Depression, these economists concluded that central management  (by superior intellects like themselves) could effectively manage the economy and eliminate the business cycle.  In other words, it appeared to confirm Keynes’ theories.  (In 1970, Nixon famously said “we are all Keynesians now.”) 

Briefly — from 1945 to 1970 — these economists looked like geniuses: the American economy steamed ahead.  But none of them appreciated that this success was importantly due to the wartime obliteration of the overseas industrial base.  So for 25 years, the US had no competition.  We could lead the world with our shoddy products, coddled unions, and smug managements.  Then, as foreign economies started coming on line in the ‘60s, we faced foreign competition for the first time.   The result was a ‘70’s decade of stagflation.  Yet despite these failures, orthodox Keynesian economics has remained dominant.

Schumpeter surely would have appreciated the irony that many of the above-named Keynesian economists were former students of his and held him in the highest regard.  Schumpeter was the doctoral advisor for both Paul Samuelson and James Tobin.  That’s what makes it especially puzzling that so little of Schumpeter’s thought was developed after his death.  He was pretty much forgotten. 

I think that there are two principal reasons for the neglect of Schumpeter.  First, he did not believe in the central planning and micromanagement that made these economists postwar celebrities.  Second, as McCraw points out, his ideas did not lend themselves to mathematical analysis, whereas Keynes’ did.  Today, one’s economic creds depend exclusively on one’s mathematical acrobatics.  The search for new and practical economic ideas – e.g., the truth — is pretty much an afterthought.   

I should also mention that in 1944 Friedrich Hayek published “The Road to Serfdom.”  Addressing many of the same issues as CSD, Hayek’s book was much more  accessible and reached a huge popular audience (it was one of the first condensed books published by Readers Digest.)  It quickly overshadowed CSD and received many highly favorable reviews, including from Keynes (while they were rivals and disagreed on most economics matters, Keynes and Hayek were friends.) 

As difficult as it is to read, CSD rewarded my effort many times over.  Every page is so densely packed with ideas, historical vignettes and little known (but critical) information that it can make one’s head spin. CSD provides much of what one needs to know about the history of modern European politics, economic theory, “fin de siècle” philosophy, and the ideas of Karl Marx.  If you read “CSD”, you won’t need to read “Das Kapital.”  That in itself justifies the effort.

It is my hope that this outline will serve as a helpful guide through CSD for those who resolve to read the book, and will elicit comments and criticisms that will help further refine the outline.  For those who don’t have the time or patience to read CSD, the outline should provide a pretty good summary of its themes and arguments.  My ultimate goal is to interest many more people in Schumpeter’s profound and prophetic ideas.

My own additions are in italic. I would prefer to depict them in red but I can’t seem to do that in Substack. See my post in cantercap.wordpress.com.

I have made more comments than I initially expected to.  Apologies.  I hope I haven’t been too self-indulgent.  There are also some references to secondary sources..  In particular, I would like to acknowledge my debt to Thomas K. McCraw, and especially his biography “Joseph Schumpeter: Prophet of Capitalism.”

Note: This outline is based on the third edition of CSD, originally published in 1950, published in 2008 by Harper Collins with an introduction by Thomas K McCraw. 

Abbreviations:

S = Schumpeter

Cap = Capitalism

Soc = Socialism

Bourg = Bourgeoisie 

Econ = Economics

CD = Creative Destruction

Gov’t = Government

Table of Contents

PART 1; THE MARXIAN DOCTRINE         page 5 in the book

In which Schumpeter acknowledges Marx’s astounding intellectual achievement but points out that he was wrong about just about everything.  What Marx really did was establish a religion, which Marx himself would have found mortifying.

1. Marx the Prophet

2. Marx the Sociologist

3. Marx the Economist

4. Marx the Teacher

Part 2: Can Capitalism Survive?                Page 61 in the book

In which Schumpeter argues that Capitalism cannot survive.  It contains the seeds of its own destruction.  Increasing regulation and bureaucracy will diminish the force of “creative destruction.”  The Capitalist values of open society and education will foster an opposing class of intellectuals that will degrade Capitalist values.

1. The Rate of Increase of Total Output

2. Plausible Capitalism

3. The Process of Creative Destruction

4. Monopolistic Practices

5. Closed Season

6. The Vanishing of Investment Opportunity

7. The Civilization of Capitalism

8. Crumbling Walls

9. Growing Hostility / The Sociology of the Intellectual

10. Decomposition

    CAN SOCIALISM WORK?                     Page 167 in the book

In which the master argues (Ironically?) that Socialism can, indeed, work.  But it can work only under several impossibly restrictive conditions and when Capitalism is on its last legs.

1. Clearing the Decks

2. The Socialist Blueprint

3. Comparison of Blueprints

4. The Human Element / Bureaucracy

5. Transition

   SOCIALISM AND DEMOCRACY Page 235 in the book

In which Schumpeter examines the nature of Democracy, concluding that traditional views of Democracy are off base.  Specifically, Democracy tends not to be a bottom-up system that enacts the popular will.  Rather, it is a process by which politicians “sell” their policies to the public and the best salesman wins.

1. The Setting of the Problem

2. The Classical Model of Democracy

3. Another Theory of Democracy

4. The Inference

Part 5: A HISTORICAL SKETCH OF SOCIALIST PARTIES P 305 in the book

In which Schumpeter considers the record of Socialist parties in various Western nations.  There is a wide variety of Socialist parties which have met with varying degrees of success.

1. The Nonage

2. The Situation that Marx Faced

3. From 1875 to 1914

4. From the First to the Second World War.

5. The Consequences of the Second World War: Stalin is the Real Winner, but Fortunately, the US is Triumphant

The Text:

CAPITALISM, SOCIALISM, AND DEMOCRACY (CSD)

By Joseph Schumpeter

An annotated outline

PROLOGUE

Page 3.  The persistence of belief in Marxist theory in the face of contrary evidence is a testament to its power.

• Its resilience in Europe and the USSR is not unexpected. 

• But its growing popularity in the US is more surprising

Chapter 1:   MARX THE PROPHET

Page 5. Above all, Marx was a prophet who unintentionally established a religion.

• “Marxism presents to the believer ultimate ends that embody the meaning of life . . . . absolute standards . . .  a plan of salvation, and an evil from which mankind, or chosen section of mankind is to be saved.” 

• It provides an eschatology: an ultimate, inevitable (though poorly defined) paradise on earth for the select

• Dissenters are not just wrong, but evil heretics

Corroboration for this view can be seen in the reaction of those accused in the Stalin show trials, notably Bukharin.  Most remained steadfast Bolsheviks to the last, and most who died remained true believers in the Soviet mission.

A terrific book — “The House of Government” — presents a trenchant consideration of Marxism as religion  The book centers on the opulent apartment building (which became increasingly decrepit over the years) in Moscow in which Bolshevik honchos were required to reside.

See also the film “Death of Stalin”, the greatest movie of the century so far.  At Stalin’s death, the only senior apparatchiks remaining alive were amoral, incompetent, sycophantic toadies.  Except for one (at least, according to the movie.)  Probably not that dissimilar to Russian leadership today.  Here is one of Schumpeter’s rare aphorisms: “The trouble with Russia is not that she is Socialist, but that she is Russia.”

Marxism has parallels to other religions and sects.  When Christ died before the predicted arrival of God’s kingdom, his followers refashioned their beliefs to account for this and sustain their practice.  Similarly, when the world did not end in 1850 as expected by the Millerites, they did not disband and go home.  They morphed into the Seventh Day Adventist church.  Acolytes believe that Donald Trump was cheated of his rightful victory by the elite masters of a rigged system and will soon return to wreak vengeance.  Eschatology, it seems, can be a very powerful motivator. 

p. 6.  Marxism arose at a time when traditional religion was waning

• In the maw of capitalism, ancient traditions were destroyed.

  • Jerry Muller says “This “clears the decks” for the Socialist faith

• Urbanization of populations meant cheap labor for Industry 

• In the UK, enclosures for centuries had been driving the yeomen into cities

• Marx was right at first. In 1848,

  • Most worker’s lives were barely subsistence

  • Marx offered “ray of light” to masses 

  • It was “Scientific proof” of their unfair subjugation  

  • Marx himself lived in destitution, supported by Engels         

• But the condition of the masses soon changed, a change not perceived by Marx

  • The  bargaining position shifted more in worker’s favor

  • Labor organized into unions, many of them Socialist

    • In Germany, Bismarck instituted state pensions in the 1870’s

    • Unions were permitted, but not Socialist Unions or parties

p 7.   “Class Consciousness” was not the true dream of proletarians as Marx alleged

• Their true dream was a comfortable life and a pathway to becoming bourgeois

• Marx himself had total absence of spirituality, sentimentality

• Marx famously (and perhaps apocryphally) said on his deathbed “I am not a Marxist.”

• His program, or at least its intent, was above all hyper-rational

  • Marx called it “scientific.”  

  • As Newton had discovered the forces underlying physics, so Marx (building on Hegel) believed he had discovered the hidden forces driving history

• Most prophets say they are merely mouthpieces for the deity

  • Marx’s deity was “Dialectical Materialism” – based on Hegel’s ideas

  • Marx acknowledged, even praised, the success of Capitalism

  • Communist Manifesto included a glowing tribute to Capitalism’s achievements

MARX THE SOCIOLOGIST

• Most true believers object to analyzing Marxism in pieces

  • They contend that their religion can only be understood as an organic whole

• Marx was a Neo Hegelian

  • Hegel said that history was driven by twin forces of dialectics and human will

  • He was “Whiggish.”  That is; history is driven by inevitable progress.

  • Marx accepted Hegel’s determinism, but rejected his conservatism

  • Most Marxist faithful exaggerate Hegel’s importance to Marx.

  • They wrongly impute philosophy (metaphysics) to Marx’s scientific effort

  • Marx did not fully keep abreast of Sociological thought

    • Yet his “economic Interpretation of history is doubtless one of the greatest individual achievements of Sociology to this day.”  (ironic?)

    • It is irrelevant whether some credit must be given to preceding thinkers

I wonder if this is a swipe at Edmund Wilson, whose book To the Finland Station was published in 1940 and traced Marx’s debt to earlier thinkers. It was quite popular, especially in intellectual circles.  (Unlike Schumpeter, Wilson is a terrific writer.)  Regardless, Wilson was a poster boy for the sort of anti-Capitalist intellectual that S derides in CSD.  Western Marxist intellectuals at this time were in denial of Stalin’s atrocities in the USSR.  Lenin dubbed such folks “useful idiots.”

11.  Marx did not think that economics was the only force that motivates humans

• Most of his followers were far more reductionist than he

• What Marx meant was that the “forms and conditions of production” determine society’s structure

  • The water wheel will produce a social structure different from the steam engine.

  • It is society’s daily work that forms our minds and values.

• There are many problems with Historical Materialism

  • For instance, social norms will not change immediately as the mode of production changes

  • There are inevitable leads and lags and feedback effects.

• Still, these flaws don’t diminish Marx’s achievement.

Marx’s theory of social and economic “classes” was a great achievement

• Ironically? In the previous paragraph he called it the “crippled sister” of Marxist theory.

• Communist Manifesto introduces the idea: “all history is the history of class struggle”

• Marx never precisely defines what he means by “class”

• But it’s clear the dividing line is ownership of productive property, or lack thereof.

• 16.  Here S shows his hand for the first time: “Supernormal intelligence and energy account for industrial success . . . .in nine cases out of ten.”  

• Savings and thrift (deferral of gratification) play a central role in bourgeois accumulation

• These savings often come from someone other than the Capitalist (a bank or investor)

But where did the savings come from in the first place?

• 17. Marx posits that “primitive accumulation” gave capitalists their head start.

• Wealth was stolen by aristocracy from peasants in the dim feudal past.

  • “For Marx, it is essential for the logic of capitalism, and not only a matter of fact, that it grew out of a feudal state of society.”

  • Much of this stolen wealth was “invested” in wars: mercenaries

• Marx replaced the feudal exploiter with the Capitalist exploiter

• Marx ignores the fact that unlike Feudal times, classes today are quite fluid

  • At least, not hereditary

Neither Schumpeter nor Marx, as far as I know, mentions the role of the church in pre-Capitalist capital accumulation. Prior to 1500, much excess savings went to the church to support non-productive projects such as wars, cathedral building, extravagant Vatican lifestyles and, every now and then, charity. On the positive side, the church underwrote universities, which brought together great minds and encouraged the growth of cities. Moreover, many monasteries were mini industrial centers that drove local economies and learning. Peter Brown’s fascinating book “Through the Eye of a Needle” details the immense wealth that surged into church coffers from Roman notables in the centuries following 312 C.E.

Thus, as Max Weber noted for different reasons, the Protestant Reformation was a lynchpin of the Capitalist revolution. Gradually, in Protestant regions, excess savings were diverted from the church to more productive purposes. Sometimes not so gradually. The expropriation of Catholic Church properties by England’s Henry XIII bailed out Henry’s government and greatly enhanced the Nobility’s wealth and power.

There is another way in which the Reformation may have sparked the capitalist and scientific revolutions.  Prior to the Reformation, education, knowledge, and career advancement were tightly controlled by Catholic universities and their obscurantist “Scholastic” pedagogy.  Original ideas could lead to thwarted careers or worse.  Even Saint Thomas Aquinas was nearly excommunicated for his ideas.  (He wasn’t a saint yet.)

The flip side of Scholastics were the even more obscurantist Alchemists and others like them.  By necessity (church authority and the difficulty of communication) these men kept their discoveries strictly private.

The reformation allowed, probably even encouraged thinkers to reject scholasticism and adopt new modes of thought.  No one personified this change more than Francis Bacon.  He believed knowledge was based on experience and that knowledge should not be jealously guarded but shared among scholars.  The printing press made this possible. 

Having said that, I should emphasize that the line between science, alchemy, and superstition was never a bright one. Isaac Newton spent far more time on alchemy and obscure bible study than he ever did on science.

Lastly, Protestantism drove a surge in literacy among its adherents.  Protestants believed that salvation was achieved not through the intercession of the church, but by faith alone. Thus, it was essential for everyone to become familiar with the Gospel. Luther translated the Bible into vernacular German. In England, Anglicanism centered on Thomas Cranmer’s “Book of Common Prayer.” This stands in stark contrast to the Catholic Church, which still conducted mass in Latin and, if anything, discouraged literacy among lay folks. Thomas Wycliffe, who died int 1384, wrote an English translation of the Bible. After his death, the Pope ordered his remains be dug up and burned. But lay Catholic education improved after the 1563 Council of Trent unleashed the Jesuits.

A great introduction to the origins of Capitalism debate is “How the World Became Rich”, by Mark Koyama and Jared Rubin. They summarize the most prominent theories and provide excellent empirical evidence.

19.  Marx grossly exaggerates the antipathy between workers and Caps.

• “To any mind not warped by the fingering of the Marxian rosary, it should be obvious that their relation is, in normal times, one of cooperation. . . “

• But for Marx’s system to work, and for its logic to hold, society MUST consist of two and only two mutually antagonistic classes, regardless of the facts.

• 20.  Many admire Marx’s overall vision to such a degree that “they are willing to condone almost any number of shortcomings in the component parts.”

MARX THE ECONOMIST

S begins this section by reminding us of Marx’s genius and vision and reminding us that he was also a very learned man (Much as Brutus was an honorable man?)  

• He “thus acquired a theory that in nature and intent was truly scientific whatever its shortcomings may have been.”

• 22.  Marx’s rhetoric often overshadows his analysis

• Most of the faithful prefer his “prophecy” to his economics

• So they never examine it critically

Marx adopted David Ricardo’s (and Adam Smith’s) “Labor Theory of Value (LTV)

• S says Ricardo was Marx’s “master”

• The LTV was orthodox economics at the time

• The LTV was the foundation of Marx’s economics, and also its Achilles heel

  • S says “Everybody knows that the LTV is unsatisfactory.”

  • In the late 1800’s, LTV was supplanted by “marginal utility” theory

Capital goods pose a particular problem for LTV, especially real estate

• The price of real estate is based on the rental yield it will return to investor

• Has nothing to do with labor employed.

Marx needs LTV to build his theory of “Exploitation of Labor”

• 26.  Capitalists extract “surplus value” from labor

• Workers are paid only enough for subsistence

• But they are forced to work more hours than the labor value they contribute.

• This creates a surplus which is profit to the capitalist

27.  Marx calls this surplus exploitation, and, to him, it is the source of Capitalist profits

• Most of the surplus is reinvested in new capital.

• Competition among Capitalists forces them over time to use more capital and less labor

• This reduces corporate profits, and produces business failures.

• Industry becomes more concentrated

• “Reserve army of unemployed” builds – increasing immiseration of masses

• Revolution ensues

• Bear in mind that all of this does not happen because Capitalists are evil, though they may be.  Capitalists have no choice in the matter; they are slaves to historical law. 

It is Marxist “Law” that profits will inexorably fall

• In fact, there is no empirical evidence of a long term decline in profits

• S cites some examples demonstrating that even under Marx’s own assumptions, “Surplus Value is untenable.”

• Unlike many classical economists, Marx recognized that Capitalism was a dynamic system

• Although he drew the wrong conclusions

33.  Persistent crises and declining profits cause industry to become increasingly concentrated.

• Marx does not mention economies of scale

• Marx is not concerned with the issue of monopoly

• In fact, workers (in 1940, but also in 1880) clearly have not become more immiserated.

• But Marx needs this to be true for his model to work

In 1939, the US unemployment rate was still 18%, so there appeared to be a huge reserve army of immiserated workers.  Business had become much more concentrated.  Profits had fallen.  Moreover, the centrally planned economies of Italy, Germany and the USSR looked like rousing successes.  Socialism looked like the only viable alternative to Fascism.

38.  S includes in full a classic quote from Das Kapital: 

• “Hand in hand . . . . the expropriators are expropriated.”

  • Subtlety was not Marx’s strong suit.

• Marx has no good theory of business cycle

  • Other than sporadic crises which facilitate consolidation of business

  • Schumpeter spends several pages considering what Marx might have thought caused business cycles.

• S gives Marx credit for being one of the first to at least recognize the existence of business cycles even if he did not understand them.

• 42. Marx never really explains why capitalism’s final collapse is inevitable or how it develops

Later Socialists like Hilferding believed that the increasing concentration of industry  would make Capitalism more stable

• “Though Marx was often – sometimes hopelessly – wrong, his critics were far from being always right.”

• Finally, S lauds Marx (NOT ironically, I think) for being the first economist to create a systematic, rational and comprehensive theory of the economy that not only explains the present but makes some bold predictions about the future. 

• In effect, Marx set the terms for the debate that economists had been responding to for the next 70 years.

MARX THE TEACHER

45.  Above all, Marx’s theory offers an all-encompassing vision to the faithful

• And the only halfway plausible alternative to Capitalism

• Faithful consider it an organic whole to be believed or rejected in full

• Rational analysis of particulars is secondary

• Appears to explain things beyond economics – war, political change, social movements.

• Marx offers a synthesis to those who seek a grand explanation for world events.

• Despite Marx’s best efforts, Marxism is not scientific

• In Karl Popper’s framework, it is not falsifiable.

49.  Marx is no help in understanding the Great Depression

• S says the Great Depression was no different from previous downturns

• Except government intervention made things worse.

Milton Friedman argued (proved, to my satisfaction) that misguided monetary policy made the Great Depression far worse than it should have been.  In particular, allowing banks to fail and savings to vanish

50.  To Marx’s heirs (Lenin, Luxemburg, Hobson) Imperialism was the product of late stage Capitalism.

Their reasoning:

• Late Capitalism results in shrinking profits as firms use less labor

• This forces firms to exploit cheaper workers and create markets overseas

• Government, controlled by the bourg, gladly complies

• Similarly, all other “sins of the West” are attributed to Capitalism

• Slavery, genocide of Indians, etc. , etc.

This is basically Chomsky’s schtick. Unfortunately, Chomsky never offers any solutions. Linguistics aside, Chomsky’s thought is pure “nuisance.”  (See page 142 below)

S argues that Imperialism was not a Capitalist phenomenon        

• Imperial expansion was well under way prior to 1800.

• If anything, it was related to early, not late, Capitalism.

  • In particular, the extraordinarily profitable spice trade.

• It is more a legacy of state building in the 1600’s and 1700’s

56.  In summation, Marxist theory aligns poorly with today’s (1940’s) world

• Increased immiseration of worker is just plain wrong

• Even after the Great Depression, workers were far better off than in 1865

• Workers do not seem united or organized, especially across nationalities 

We may indeed be shlepping toward socialism, but shlepping was not the master’s forecast.

• The forecast was revolution.

• Marxism, if it proves anything, proves “revolution in the fullness of time.”

• Revolution does not in any way follow logically from his schema

• Marx invokes revolution as a “Deus ex machina” 

• 57.  Marx had little to say about post-revolution society.

PART II: CAN CAPITALISM SURVIVE?

THE RATE OF INCREASE OF TOTAL OUTPUT

61  Query: Can Capitalism Survive?

Schumpeter answers: “No, I do not think it can.”

S says that analysis can only tell us what is likely to happen, given certain conditions

• Not what will happen

• But we are limited to the analytical tools we’ve got

• It is worth quoting S in full:

“The thesis I shall attempt 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 be unable to live and which point to socialism as its heir apparent.”

• “Many socialists today will agree with me.”

61.  S says that the prevailing (in the late 1930’s and early 40’s) hostility to Capitalism complicates any dispassionate analysis of the system

• Pro-Capitalist thinkers are vilified, or dismissed as naïve.

• Just as early Christians would have dismissed any defense of Roman culture.

So how can we best approach an analysis of  Capitalism’s achievement (or failure)?

• The best way to evaluate an economic system is its total output to consumers over time

• Given available statistics, it is probably the only measure we can use

Remember that there was no measure of “Gross National Product” (GNP) until 1937 when Simon Kuznets (who taught with Schumpeter at Harvard) developed one.  Before that, economists and policymakers were forced to cobble together an assortment of other metrics to estimate aggregate economic growth.

To paraphrase Hayek: “Economics measures what it can measure, not necessarily what needs to be measured nor what is important.”

• S estimates annual economic growth from 1870 to 1930 at about 1.7%

S does not point out that this followed many millennia of stagnation going back to human origins.  Something miraculous occurred in Europe between 1400 and 1800.  In his terrific book “The WEIRDest People in the World ” anthropologist Joseph Henrich argues convincingly that this “something” was the gradual weakening of kinship ties in the West over two millennia; the mostly unintended consequence of church policies.

The Great Depression did not significantly interrupt this trend.

• New Deal programs made the Depression worse than it otherwise would have been

• Without the New Deal, it would have been a normal downturn

66.  If we assume that the 2% growth of the prior century continues from 1928 to 1978, per capita output will have doubled.  

• This period, of course, includes the Great Depression.

• There is no reason to believe that inequality will increase.

As it turned out, S was right about this.  From 1928 to 1978, US society grew far more equal by any measure.  

Since 1978, of course, the United States has become less equal.  The reasons for this are widely debated.  In my opinion, there are six key reasons for widening American inequality over the past 4 decades:

1. Around 1970, the US began to encounter foreign competition from nations whose industrial capacity had been obliterated in World War II.

2. Technology eliminated many low skill jobs and rewarded educated workers.

3. Many low skill jobs moved to foreign countries. In combination with technological advances, this eliminated jobs in several industries (e.g. furniture, textiles, steel). While the burden mainly fell on a minority of workers, the benefits were spread among all consumers (including the rich.)

4. The average age of marriage for Americans jumped sharply. In 1960, the average woman got married when she was 20 years old. The quarterback married the prettiest cheerleader no matter what her daddy did for a living. Today that age is 29. Since people tend to find spouses among their educational and professional peers, this has tended to concentrate wealth in a smaller cohort. (See “Coming Apart” by Charles Murray.)

5. A bull market in assets (stocks, bonds, housing) rewarded wealthier people (but not at the expense of the non-rich.)

6. The “Super-Rich” benefitted from technological advances that have driven the consolidation of many industries.  In effect, Jeff Bezos and the Walton family now receive the salaries that used to go to thousands of small bookstore owners and grocers.  But their good fortune is mostly offset by lower prices and greater convenience for all of us.

But crucially, even as inequality worsened in the US, inequality diminished worldwide to an extent that can only be described as miraculous.   As US middle class incomes stagnated, billions upon billions of humans worldwide were raised out of lives of bare subsistence.  Per capita income in China rose by a factor of ten; in India by a factor of five. These worldwide trends overwhelm local trends in the US.  

• S asserts that most poverty (by 1942 standards) will be eliminated.

• Advances in technology will improve quality of life

• Most of the benefits will accrue to workers

“Queen Elizabeth owned silk stockings.  The Capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

Capitalism is characterized by intersecting waves of technological advance and decline

• These waves are poorly understood.

• The long waves are associated with Kondratieff

• Over time, these waves produce an increasing supply of innovative goods to the masses

Capitalism is certainly cyclical, with cycles driven by the availability of credit and over / under investment in capital projects (e.g. housing and inventory).  But “waves” in the sense used by S and Kondratieff have not been proven despite the best efforts of many.

69.  Social legislation presupposes Capitalist success

• Cap generates excess wealth that can be distributed to the needy

• But such redistribution is likely to harm the Cap machine and welfare overall

• Unemployment is certainly a scourge

• The question is, how to provide for unemployed without permanently damaging Cap.

• New Deal policies both damaged Cap and amplified unemployment

• Cap has already resolved many of its problems over the last century

  • Child labor, slavery, starvation, many diseases, etc.

• As it matures, Capitalism will resolve unemployment.

S seems to be suggesting that Cap is a self-correcting mechanism.  He does not mention that legislation was necessary for most of these changes, which implies countervailing forces that drove reforms.  I think that Democracy is the (deeply imperfect) self-correcting mechanism that perpetuates Cap and allows it to drive forward by mitigating its flaws.  Unfortunately, as S emphasizes, these mitigation efforts inevitably grind down the Cap machine.

PLAUSIBLE CAPITALISM

How can we in good conscience project 2% growth forward into the future?

Schumpeter asserts that Cap has produced 2% annual growth for the previous 150 years

• In the past, Cap was relatively “unfettered” 

• How can we assert that Cap was responsible for this growth?

• S doesn’t really address this until CLOSED SEASON several sections further on

73.  Capitalism is indeed ruthless, as many critics allege

• “The promises of wealth and the threats of destitution that it holds out, it redeems with ruthless promptitude.”

• Bourgeoisie is motivated by money and staying in business

• The seemingly extravagant rewards to “winners” often appear unjust

• But today’s winners can be ruined with the slightest misstep

• And for every winner dozens fall by the wayside.

Entrepreneurs constantly produce new technologies and production methods

• Cap identifies and rewards talented, energetic, innovative, risk-taking people

• S says, “maximum performance of an optimally selected group.”

  • Not all people of that type rise to the top

  • Luck and birth also play important roles

  • But at least it is more of a  meritocracy than any alternative

• Socialism only rewards party cadres who toe the line

• Also Cap identifies and punishes the unsuccessful (and unlucky.)

Both Jerry Muller and Robert Heilbroner argue that S believed that entrepreneurs constituted an elite class that rises above more ordinary citizens.  They see this belief as essentially Nietzschean.  That is, humanity is divided into two groups: superior, creative “ubermenschen” on the one hand and, on the other, the common rabble that seeks to drag them down.  I can certainly understand why they come to this conclusion, but I am unconvinced. 

If this was, indeed, S’ belief, I think he was mistaken.  In my experience, three personality traits tend to define entrepreneurs: self-belief, aversion to taking orders from others, and willingness to take risk.  Other than that, they tend to be pretty ordinary people.    Certainly, among people who become entrepreneurs, there is a subset that is exceptionally gifted and changes the world.  Usually for the better, although technological advance is seldom unequivocally “good.”

One concept that S certainly inherited from Nietzsche was  “ressentiment”; the envy that disgruntled losers feel toward the successful few. 

“Ressentiment” pervades American society today. 

But isn’t it bad that entrepreneurs are motivated by “profit” and not “social welfare?”

• That is, don’t Cap. profits merely extort rents from innocent consumers?

• Classical economists (Smith, Hamilton, Ricardo, Mandeville, Mill) were convinced that Capitalist pursuit of self-interest automatically produces Social Welfare 

  • S says that most of these economists wore “English Blinkers”

  • They were addressing issues in a specific nation at a specific time

  • They opposed landed interests and mercantile regulation

• Most of their conclusions were valid, but they did not offer proofs

77.  Marshall and Wicksell proved that under perfect competition, the classics were right

• Unfortunately, perfect competition almost never exists outside agriculture.

• Under monopoly or oligopoly, Marshall’s proofs don’t work

  • In instances of monopoly, “equilibrium” can be consistent with high unemployment and less than optimal utilization of resources.  (This is also one of Keynes’ big points.)

THE PROCESS OF CREATIVE DESTRUCTION

81.  Some people deny that Cap is responsible for economic growth since 1600.

• Others say that Cap was once productive but has now devolved into monopoly.

  • Thus, they say that past growth cannot be sustained

• They do not understand that Cap is never static

• Change and evolution – turmoil – are inherent and necessary

• Whatever conditions are today, they will be different tomorrow

Much orthodox economics hinges on equilibrium theory (including the simplifying assumptions of perfect competition, perfect information, and homo economicus.)  Equilibrium theory is essentially a static model that made economics readily amenable to mathematical analysis. The reality is vastly different.  While S recognized the value of equilibrium theory as a tool, he believed passionately (and, I think, rightly) that Cap as a system could not be understood this way.

Capitalism is above all a system of economic change

• Marx saw this though he drew faulty conclusions 

• Cap is indeed revolutionary, but the revolution is internal and constant

• “Creative Destruction” is the defining feature of Cap.

• It is a dynamic system – disruption is inherent

• At any particular point of time, it is rife with flaws that will soon change to other flaws

85.  We must search for a correct definition of competition 

• Orthodox economists see competition as based exclusively on price

• This facilitates mathematical analysis

• Actual competition is based at least as much on technology, quality, dependability, convenience, customer service, and marketing as it is on price

• Competition comes less from existing companies than from new firms and technologies

Sears, Blockbuster, Borders, and Tower Records did not compete each other out of business

• They were destroyed by entirely new technologies: Amazon, Spotify etc.

  • Amazon barely existed 20 years ago.  Spotify did not exist at all.

  • OK, and by Wal Mart, Home Depot, Costco, etc.

  • But these, too, were new technologies.

Consider the impact that Uber and Lyft are having on the taxi business.

Digitization destroyed an entire industry: photography  – Kodak, Polaroid, Xerox.

• Plus, it destroyed an entire city: Rochester, NY

Competition “acts even when it is merely an ever-present threat. It disciplines before it attacks”.

            To me, this is one of Schumpeter’s most profound insights.

He is saying that the main thing that motivates entrepreneurs is a fear of failure that amounts to abject terror.  Keynes’ “radical uncertainty” does not only apply to the future, but also to the competition.  One never knows what the competition is up to.

As Andy Grove, co-founder of Intel, understood (and every entrepreneur knows), “Only the paranoid survive.”

Actually, Intel is a perfect example of the “Creative Destruction” process.  25 years ago Intel commanded a virtual monopoly in semiconductors.  Now it is struggling badly, overtaken by Samsung, Nvidia, Taiwan Semi, etc.  In the ‘50’s, AT&T (the legendary Bell Labs) invented and was the only manufacturer of transistors.  Now look at them.   Of course, today’s AT&T is largely the product of regulation, for better or worse.

• Instances of monopoly are generally transitory: constantly opening up and closing.

• Competition is constantly squeezing out rents, but rents are replenished by new firms, technologies and products

• “Perfect competition” can never be achieved in a growing economy, and is a false God for economic policy

MONOPOLISTIC PRACTICES

“Big business” is far more a benefit to society than a problem

• Yes, restrictive practices can increase profits at consumer expense

  • But these profits are generally temporary

  • Plus these profits often fund investment

• Long range investing is highly uncertain

• 88.   There is minimal difference between practices that are considered legitimate (patents) and “monopoly” practices considered verboten – e.g. predatory pricing

• Exceptional “monopoly” profits (i.e. rents) attract entrepreneurs into business

• During the 1920’s, half of businesses operated at break even or at a loss.

I think S is saying that monopolies are much more likely to generate investment and increase long term output than they are to squelch competition.  Interestingly, JK Galbraith, that most liberal (in the modern US sense) of all economists, argued exactly the same thing.

91.  Monopoly can sometimes constitute a real problem

• There may be a need for targeted regulation in specific instances

• But there is “No general case for indiscriminate ‘trust busting’”

• Our understanding of Capitalism is limited: we must have humility about the constraints we impose upon it

“Price rigidity” is not a significant problem under Cap

• Price rigidity was a concern of many during the Depression who thought Monopoly power enabled firms to keep prices – and profits – artificially high.

• Ironically, the only really rigid price is wages, especially if labor is unionized

94.  Are firms really “hoarding capital” as they were accused of doing in the Depression?

• That is, are they avoiding new investments to preserve capital?

• Historically, there are no major instances of long term rigidity of prices

• A firm that tries to hold back innovation might succeed in short term, not in long term

Keynes: businessmen confront “radical uncertainty”

• In a crisis like the Depression, they may just hunker down and cease investing

• This produces over saving and insufficient demand

• At times like that, he said, the gov’t must step in and invest in their stead.

What is a Monopoly?

• The word “monopoly” is today (that is, in 1940, though it’s no different in 2022) applied indiscriminately to any large scale US business

• It is a term of opprobrium

• Monopolies are the whipping boys of capitalism

• The important thing is not the number of firms competing in an industry, but the ease with which competitor firms can enter the industry

  • This is often determined by gov’t; licenses, permits 

  • The sheer cost of compliance gives large firms an advantage

What we typically mean by monopoly is: A single seller who can control price in a protected market

• Such cases are vanishingly rare (again, except in the very short term.)

• Thus broadly defined, “the good humor man is a monopolist if he’s the only one on your street.”

• 102.  Short term monopolies are common but do not last.

• Most new products and technologies produce temporary monopolies

• Monopoly profits are reward for entrepreneurship

103.  Every year there is a new econ theory that shows “Perfect Competition” to be a faulty assumption

• “Behavioral Economics”  is just the most recent and most eye-opening

• Perfect Competition may actually be a false god.

• It is not just impossible but may be inferior

• And “Perfect Competition” is a false God for anti-trust regulatory policy

• “It is wrong to base regulation on the principal that big business should be made to work as the industry would work in perfect competition.”

CLOSED SEASON

One cannot run an experiment to prove that Cap caused modern econ growth 

108.  We must examine alternative explanations and see if they suffice.

1. Was it Government?  1870-1914 is perfect test case.

   1. In this period, policies were “Laissez Faire”: regulation was minimal. 

   1. Answer: no, government did not cause the growth.

2. Was it the Gold Standard?  Gold was scarce until 1890, then influx of new gold. No

3. Was it population increase (especially in US).  No.

4. Was it new land?  Since the 1870’s, we have seen steadily lower food prices, bad times for farmers. No.

5. Was it technological advances?  Yes . . . But technological progress was not an independent factor; it could not have taken place without Capitalism.

I’m not entirely clear on what S is saying here.  One could certainly argue that falling food prices post-1870 supported industrial growth by improving terms of trade for industry vs. agriculture.  Plus, it produced an exodus of workers from the farm.  (At least in the USA.)

VANISHING INVESTMENT OPPORTUNITIES

Can the achievements of Cap be sustained?

• Socialists and some Keynesians believe Great Depression was a symptom of end stage Capitalism

• That is, consistent with Marx, Industry is consolidating and profits are shrinking

• They think that investment opportunities are vanishing 

Some contemporary economists, notably Robert Gordon, argue that innovation is suffering from decreasing marginal returns; the great inventions – steam power, flight, electricity, most vaccines – have already been made.  This certainly makes intuitive sense until one considers more modern innovations like shipping containerization, grain hybridization, and the internet which have proven revolutionary.  See all of Matt Ridley’s books.  

S reviews a number of arguments being made to support the “vanishing opportunities” argument: declining population growth, dearth of new lands, no new technology, the need for public, not private investment.

• Most of these he dismisses peremptorily.

• Lack of new technological innovation would be a problem, but as long as we have the Capitalist system, this is no concern

Much of the “vanishing opportunities” argument has a hidden agenda; expansion of government reach

• Some argue that opportunities today are suited only to the public sector.

THE CIVILIZATION OF CAPITALISM

121.  Capitalism spawned modern society and culture

• Rationality and logic arose from accounting and enterprise

• Cap “exalts the monetary unit . . . . into a unit of account.”

• Science was a product of Capitalism: rational pursuit of truth

• The successful pursuit of profit required rational choice, not magic 

• Under Capitalism, the masses became increasingly literate 

127.  Cap is anti-heroic

• This is certainly not a Nietzschean point of view

• Tends toward tolerance and pacifism

• Stability is good for business

• Capitalism destroyed Feudal society

S won’t try to convince opponents that Cap is superior

• Most people can’t be persuaded; they are misinformed, afraid of freedom

• Imprisoned by their beliefs

I found this section (and the following section) very difficult to follow but the broad meaning is pretty clear: all of the benefits of modern society– literacy, longer lifespans, personal freedom, rational thought, democracy, science, etc., are the product of the Capitalist mode of production.  All of this is stated by S with little of the irony that suffuses other sections. 

131.  CRUMBLING WALLS

Entrepreneurial Culture is fading 

• The entrepreneur is being replaced by professional managers and committees

• Production has become increasingly “automatized.”

• 134. Profit motive has become secondary to other incentives

• Firms are becoming more risk-averse

Competition is hollowing out the strata of smaller businesses – merchants and artisans

• Just as it eliminated pre-capitalist (Feudal) interests

• This reduces popular support for Capitalism

As hostility to Cap rises, Bourgeoisie becomes relatively less influential politically

• Capitalists focus exclusively on business 

• Instead, they should focus more on politics to counterbalance hostility

• This seems like the ultimate irony in today’s world in which managements are laser focused on politics and regulation

GROWING HOSTILITY

Cap has alienated many groups that have not benefitted as much as bourgeoisie

• As S  noted earlier, society never appreciates the long run benefits of Cap.  It focuses obsessively on short term flaws

• The rationality engendered by Cap is now used against it (Marx was the first.)

• Everyone who is not rich has grievances.

“There is nothing more disturbing to one’s well-being and judgment than to see a friend get rich.”  Charles Kindleberger

Envy plays a central role – others want (or feel entitled to) what the bourgeoisie has. (Ressentiment.)

• Or, many believe, what the Bourg has stolen in a rigged system

• “Political criticism cannot be met effectively by rational argument.”

• The case in favor of Cap is complex and is not obvious to most

• Short term grievances overwhelm long term benefits of Cap

• To grasp this, “People at large would have to be possessed of an insight and a power of analysis which is totally beyond them.”

THE SOCIOLOGY OF THE INTELLECTUAL

For a general atmosphere of anti-Capitalist hostility to develop “it is necessary that there be groups in whose interest it is to work up and organize resentment, to nurse it, to voice it and to lead it.  The mass of people never develops opinions on its own initiative.”

This group is the intellectual class

This is the first instance of S’ insights into how public opinion is formed and how Democracy really works.  I think these insights are extraordinarily prescient in anticipating the challenges we face today, especially regarding social media.  It was bad enough in S’ day when misguided socialist intellectuals were driving public opinion.  But no matter how misguided these intellectuals may have been, at least they did not intend to divide; their objective was to persuade.  Today our opinion leaders are typically on-line: ignorant, odious, often anonymous, and sometimes downright evil.  On both sides of the political divide.

“unlike any other type of society, capitalism inevitably and by virtue of the very logic of its civilization creates, educates, and subsidizes a vested interest in social unrest.”

Literacy, education, and free speech are central Cap values

• But these endowments can become powerful and potentially destructive weapons  in the hands of palcontents.

It is difficult to define exactly what makes someone an intellectual.

• Here is Schumpeter’s offering, evidently borrowing from the Duke of Wellington:

142. “Intellectuals are in fact people who wield the power of the spoken and written word, and one of the touches that distinguishes them from other people who do the same is the absence of direct responsibility for practical affairs.  This touch in general accounts for another – the absence of that first-hand knowledge of them which only practical experience can give. . . . his main chance of asserting himself lies in his actual or potential nuisance value.”

Prior to Capitalism, few were literate, let alone educated

• Any critical intellectuals kept their mouths shut

• Alchemists (proto-scientists) operated in secret

• Recalcitrant priests did not get positions

• Heretics were burned (e.g. Giordano Bruno)

• The Inquisition kept a lid on new, unorthodox ideas

The Influence of intellectuals rose in the Enlightenment (Philosophes, Salons)

• Cap government (Democracy) is ill-equipped to control intellectuals

• “Free Speech” is a central pillar of avowed Dem values

• News media has been cheapened.  A fascinating footnote on 151 elaborates on this theme and has implications for today’s world of social media.

Thinkers from Plato to Karl Popper have puzzled over the degree of toleration that an open society can afford.  Should a Democracy allow free reign to authoritarian movements that seek to subvert it?  They don’t come up with firm answers, but at least their questions are the right ones.  I am a big fan of Karl Popper, a philosopher of science and author of “The Open Society and its Enemies.”  He was an Austrian like Schumpeter.  

If I may digress just a bit, I can only marvel at the intellectual ferment of “fin de siècle” Vienna (1890-1914) and what a magical a place it must have been for someone like Schumpeter.  Just listing the names of a few of the artists, economists, scientists and revolutionaries living in Vienna at the time is sufficient to provide a sense of the “zeitgeist.”  Mahler, Schoenberg, Klimt, Popper, Hayek, Gropius, Von Mises, Lenin, Trotsky, Wittgenstein, Musil, Zweig, Roth, Schnitzler, and, of course, Hitler.  Rilke must have lived in Vienna at least briefly; his long-time partner Lou Salome trained as a psychoanalyst with Sigmund Freud.  All of these folks seemed to know each other and hang out in coffee houses and argue all day.

World War One put an abrupt end to this halcyon interlude.  The Austrian Empire was broken apart and descended into revolution, inflation, depression, and ultimately racist fascism.  It is impossible to appreciate the profound sense of loss this imparted to Schumpeter and his peers, many of them Jewish.  Stephan Zweig’s postwar work is suffused with this overwhelming sense of melancholy.  Wes Anderson’s movie “Grand Budapest Hotel” is loosely based on Zweig’s work and captures some of this feeling.  

Joseph Roth’s “Radetzky March” also revolves around the decline of the Austro Hungarian Empire.  Robert Musil’s “Man Without Qualities” is regarded by many as one of the greatest 20^th century novels, but I found it tough going.

152.  Late capitalist society produces an explosion of  educational facilities, notably universities

• This results in a surfeit of highly educated people who cannot find appropriate jobs.

• They become discontented

• “Discontent breeds resentment, which rationalizes itself into social criticism”

Throughout history, one of the great dangers to the established order has been a large class of  educated people who are under-employed.  This clearly exists in the US today and even more so in Europe.  

Read Dostoevsky’s “The Possessed.”  It depicts a Russia unmoored from her traditions and her religion. Rationalist values and materialism are increasingly prevalent. As is, inevitably, nihilism; Russians are grasping for a sense of groundedness and meaning in their lives. A group of educated, mostly young people who are nominally devoted to vague socialist ideas commit a series of crimes. No external morality constrains their actions, which makes them susceptible to banal ideas and the influence of powerful personalities.

Cap produced a labor movement, which is the business owner’s  natural adversary

• Although their long term interests are aligned.

• Labor has been greatly influenced by intellectuals

• Even though Labor tends to be highly suspicious of them

Intellectuals patronize and flatter workers to maintain influence with “ordinary people” (and to maximize their own “nuisance value” vis a vis the bourgeoisie.)

This pretty well accounts for “Critical Race Theory” and “Social Justice Theory.”

“The social atmosphere. . . . explains why public policy grows more and more hostile to capitalist interests, eventually so much so as to refuse on principal to take account of the requirements of the capitalist engine and to become a serious impediment to its functioning.”

I think that S may be ascribing too much intentionality to the intellectual class.  As the Iron Duke suggested, much of this opposition stems not from conviction, but from the sheer ignorance of people who have never held “real jobs” and have no clue how the real world works.  In the words of my father (himself an economics professor) those who: 

“never need to interact with grown-ups.  Who spend their days with worshipful adolescents and pampered professorial peers.” 

Today’s universities provide perfect “confirmation bias” echo chambers in which dissenting voices are cancelled.  Anyone who has spent any time in Washington, DC, will recognize this phenomenon.

155.  Intellectuals have great influence on politics.

• They often staff political parties

• They often staff government bureaucracies

  • Although they often resent these jobs as beneath them

• Government bureaucracy has never identified with the bourg.

• As bureaucracies grow, so does the anti-Cap antipathy

DECOMPOSITION

Here is an extended quote from S that kind of sums up the whole book:

“Faced by the increasing hostility of the environment and by the legislative, administrative, and judicial practice born of that hostility, entrepreneurs and capitalists – in fact the whole stratum that accepts the bourgeois scheme of life – will eventually cease to function.  Their standard aims are rapidly becoming unattainable, their efforts futile.”  

Both management and shareholders are increasingly estranged from entrepreneurial values

• S calls this “Evaporation of the substance of property”

• Bureaucratization of the firm

• Professional managers have different incentives from entrepreneurs

• They are minimally accountable to the actual owners of the business

Today, most managers of publicly-held companies are accountable only to the board of directors, which is nominated by management and ninety-nine times out of a hundred gets rubber stamped. The actual owners (shareholders) have little influence.  Management is also responsive to the relevant regulatory bodies.  

In the case of banking, which is the industry I know best, regulatory accountability (since Dodd Frank and Basel III) amounts to back door nationalization.  In my opinion, this is exactly what S means by “the socialization of society.”  Management’s prime objective has become avoiding regulatory scrutiny.

Today’s “passive investing” craze has further sapped management’s accountability to shareholders.  Not only do Index Funds and ETF’s not understand how the businesses whose shares they own are managed, they don’t care.  Today, in fact, most public companies are controlled by three or four giant money managers and pension funds: Dimensional, Blackrock, Vanguard,  CalPERS, and a few others.  These institutions mostly vote their shares indirectly through consultants like ISI.

Firms have become more risk averse, more focused on short term performance

• The “bourgeois family” disintegrates

• Less sense of duty to family business

• More ostentatious spending (Veblen).  Less thrift.

How will Socialism arrive?

“Not with a bang, but a whimper” – T.S. Eliot

• Increased bureaucratization of everything

• Transformation and weakening of Cap spirit.

• But at the last moment S reassures us that this process might be avoidable in some nations.       

PART III: CAN SOCIALISM WORK?

CLEARING THE DECKS

167.  “Of Course” Socialism can work says S (at least somewhat ironically.)

• IFF:

• The requisite stage of industrial production has been reached (i.e. Mature Cap.)

• And transitional problems have been resolved

• Doesn’t really specify what these problems are (at least, not yet)

• We are not there yet, and to attempt to impose Soc prematurely will spell disaster.

In my opinion, most of what S says regarding Socialism in this and later sections is just a big setup.  He develops a paradigm for Socialism that proves Socialism can work.  But it can work only if one accepts numerous impossibly restrictive conditions.  The straw man he sets up will eventually knock himself down.  

I emphasize that this is just my provisional opinion.  I’d love to hear differing views.

Two kinds of Society exist in 1940: “Commercial” and “Socialist”

• Commercial society is characterized by private property, private contracts

• Capitalist Society is subset of commercial, but includes a credit system

• Commercial societies are almost always Capitalist

Socialist Society centrally controls the means of production

• Through a central committee, for instance

• 168.  Under Soc, economic affairs belong to public, not private sphere.

• Sectional issues do not exist under Soc.

• Definition excludes syndicalist, anarchist with no central authority

• Communism is included in Soc, — basically similar goals, values

Under Socialism, managers “on the ground” will make rational and efficient decisions

In my opinion, none of his assumptions is more transparently ludicrous than that Socialist managers will automatically make efficient decisions. 

169.   S abjures the terms “state ownership” and “production”

• Socialism will end the division between citizens and gov’t 

• Soc will mean the end of the state

• I’m not entirely sure why he says this.  Maybe because the state and the private sector are merged for all intents and purposes.

There will be no intermediate class between gov’t and masses such as the bourgeoisie

• S does not mention “the Party.”  Won’t that inevitably become a separate class?

• 170.  S’ definition of Soc., he sez, is purely economic

• S recognizes that human motives are not entirely economic

• Thus, Soc may be a very different cultural world vs. cap.

  • One in which comrades may happily sacrifice wealth for the cause

  • Perhaps incentives will change to working for the benefit of others, rather than raw self-interest.

171.  Socialists differ widely regarding their cultural goals and values.

• Socialism is theoretically compatible with any form of gov’t or culture.

• This seems contrary to Marx who says the economy determines culture and political superstructure

• In these paragraphs I think S is saying that Soc is not absolutely determinative of the culture or the political system, even if it may tend to produce certain culture and politics over others.

THE SOCIALIST BLUEPRINT 

Here S claims to address the “LOGIC” not the “reality” of Soc

172.  A key challenge for Soc. Is: Can it get the information it requires to make rational economic decisions?

• In the absence of an effective market price mechanism.

• S’ answer: Yes, the logic of Soc is not an insuperable barrier.

Again, hard to know what he truly believes.  Is he saying that under Soc economic efficiency is not impossible?  Or is he saying it is likely or probable?

Von Mises (and Hayek and all Austrians) said emphatically NO.

• They thought there were many reasons why Soc could not work

• Most importantly, in a centrally planned economy, a central committee will arbitrarily  determine prices.

  • Thus, prices will have none of the “information content” of market-determined prices.  It will be impossible to efficiently allocate resources.

• This is the famous “Socialist Calculation Debate.”

Post-war Socialist industrial managers in the Eastern Bloc recognized this as a huge problem. They twisted themselves into pretzels trying to find work arounds like “shadow prices” and other schemes..  But this “Pretzel Logic” (apologies to Donald Fagen) did not allow them to permit private markets to develop (except small scale at the local level.)

The need for market information was also the main driver for the USSR’s liberalizing “New Economic Policy” in the early 1920’s.

Here is an anecdote that underscores the problems inherent in central planning.  It comes from my professor Werner Hochwald, who served as a consultant to several Soviet Bloc countries:

“Socialist central planners in Czechoslovakia were puzzled.  They needed foreign exchange and, to get it, they had targeted farm equipment as an export sector.  But exports were not forthcoming even though they had achieved their production goal – 200,000 tons.  Hochwald suggested that they consider setting a new goal: make better tractors, not heavier tractors. “ 

173.  S then asserts that Enrico Barone solved the “calculation” problem 

Following is my best effort to summarize Barone’s ideas as presented by S.  I do not think I fully follow them.  Again, I think S is saying that these ideas are logically possible and COULD work.

I don’t see how Barone’s ideas PROVE anything, as S seems to conclude (ironically?)  Clearly, given the struggles of Socialist economies through to 1989, Barone’s” solution” left much to be desired. 

Barone sez that in any system, production is simply an assembly of resources (including labor), constrained by the technological (and presumably the managerial) status quo

• In commercial society, production and income are two sides to same coin

• 174.   Under socialism, production and income are independently managed

• Distribution is a “political decision . . . completely arbitrary”, divorced from production.

• Central planners may distribute based on perceived effort of workers

• Or may distribute mainly to party members and starve the rest.

Here S examines a “special case” of egalitarian society (thought experiment)

• 175.  Govt can distribute product effectively if they are certain what production will be.

• (Production will be whatever the plan says it will be. If they are lucky)

• All they need to do is hand out vouchers equally to everyone

• Comrades can choose what products to allocate their vouchers to

• This is effectively what the USSR did.  The result was that prices did not adjust to allocate supply.  Rather, shortages allocated supply and Party members got first dibs.

In part 3, S presents a model that purports to show how production can be efficient

• Again, his assumptions seem unrealistic.  But maybe that’s the point.

• Cap assumes that actors are motivated by rational self interest

• This is oversimple, but at least it seems roughly realistic

• Soc requires that all actors are selfless and altruistic  – clearly not the case

177.  Given these assumptions, Soc. can be as efficient as “perfectly competitive Cap industry”

• This seems to contradict S’ earlier assertion that Cap is never perfectly competitive.

• “The planning board has simply to set a single price for every kind and quality of producer’s goods. . . . and to see that this price ‘clears the market.’”  

• He cannot possibly believe this is can work in the real world

178.   S asserts he (along with Barone) has proven that Soc economy can be rational “when everything is completely foreseen. And repeats itself with no changes”

• Again, not an entirely realistic constraint

Now S proceeds to demonstrate that Soc can handle change and innovation.

• “So far as economic logic is concerned . . . . it cannot be held that Socialism . . . . would necessarily fail in the solution of the problem presented by ‘progress’”

• Not exactly a rousing endorsement.

• It is critically important that society advance to socialism only when Cap is “mature.”

• Once Capitalism is mostly wound down, bureaucratic managers will have supplanted entrepreneurs, govt bureaucracy will be experienced

• I think he means that late-stage Cap will provide a Socialist government with a bureaucracy sufficiently skilled to manage the economy efficiently.  By this time, Capitalism will pretty much be dead anyway, so the transformation is unlikely to be violent.

In the case of new innovation, Socialist firms’ management will automatically adopt it (?!?)

• This is because of our assumption that firms always “operate efficiently”

• The result will be that a Socialist firm, in effect, will generate a PROFIT. ( I’m not really sure why he says this.)

179.  If there is full employment and the planning board needs to undertake a new project, workers will demand overtime   

• Plus, we will need to dispense with many of our assumptions. 

• But Even if Soc tolerates significant inequality, Soc will never generate the rate of investment that Cap does.

• To get funds for investment, govt will need to get funds from company “profits.”

I’m surprised that Schumpeter does not mention “forced savings”.  This is the time-honored method by which Socialist nations source funds to invest.  In the USSR, Stalin starved Ukrainians and stole their grain to feed the cities and sell internationally for foreign exchange.  In China, much of the population still lives at near subsistence levels and are prohibited from moving to cities.  Uighur forced-labor camps also generate funds.  Perhaps this phenomenon was not evident when S was writing CSD.

But now we must relax yet another condition

• 180.   That is, we must offer inducements to workers for various jobs

• Perfect equality goes by the wayside.

181. As we relax conditions, Socialism comes to look increasingly like Cap.

I suspect that  this is where S has been leading us all along.  Human economic behavior is constant regardless of the economic system. All that changes is the incentives. Perhaps he sincerely believes that both systems are inevitably converging anyway, which is a bad thing but should be managed as effectively as possible.  This view was widespread among economists in the ’70, though most did not view it as a bad thing.

Real estate rent presents another problem 

• Productive use of land must be constantly allocated to most efficient use

• Gov’t will not have prices with which to make these decisions 

• This is the same thing dollar rent does, but it is dictated unilaterally

Soc “Wages” are just bookkeeping at central board of relative values of  kinds of labor

• 182.  Incomes under Soc could be allocated based on “standard hours of work”

• Rational behavior has its own rules whether system is  Soc or Cap.

183.  What is S saying here?  At first he seems to be saying that Soc approaches “perfect competition” Then he says “our blueprint is the very opposite of perfect competition.” It is closer to monopoly capitalism

184  Soc can approximate consumer wants.  

• But “there is no more democratic institution than a market”

• If we jettison markets, do we also get rid of “rationality and determinateness?”

• ”’The answer is obvious.” (I presume he means that it would not be impossible for a central authority to allocate resources rationally.)

185.  “Any kind of centralist Soc can successfully clear the first hurdle – i.e. logical definiteness and consistency of socialist planning.” 

• Our “blueprint” demonstrates that.

• But what about the “practical impossibility” alleged by anti-Socialist economists like the Austrians?

• That is, the criticism that actual management of a Soc economy would be impossibly complex.

• Not surprisingly, having set up another straw man, S tears him down.

• Soc will require an extensive bureaucracy to succeed

• And only “mature” Cap can provide it

186.  Finally, S asserts that Socialism will eliminate a major category of business risk

• Cap producers must constantly respond to competition to determine  consumers wants

• Socialist producers will decide unilaterally what and how much to produce.

• Thus, Soc will largely eliminate business uncertainty.

• “This suffices to establish our proposition.”

  • Well, not to my satisfaction.

COMPARISON OF BLUEPRINTS

188   Cap is a meritocracy.  Provides advancement to talent.

• It tends to identify and “send up” the talented individual and especially, families

• Economic considerations are secondary.  

• There is much reason to believe in the superior Economic efficiency of Soc.

189   Socialism will inherit large scale enterprise and gov’t bureaucracy from Cap

• Today’s Cap is much more efficient than ever in the past

• Plus, perfect comp has never existed, so its use as comparison with Soc is irrelevant 

• Socialism is inherently monopolistic  

• Doesn’t this contradict what he said earlier when he compared Soc to Cap under perfect competition?

190  Let’s consider a comparison between Socialism and Monopoly Capitalism

• The measure of efficiency is: which system can generate the most LONG TERM production of consumer goods per unit of time?

• It might well be Soc, since end-stage Cap will have lost its mojo

• We are considering production, not welfare or consumer satisfaction.

• This is subjective; a Socialist true believer will value equality more than goods (!?!)

• 191.  Greater equality of incomes will foster greater efficiency.

  • To me he doesn’t adequately explain this.

• 192.  Soc. will eliminate the “idle rich” (And all the rest of the rich in the bargain.)

193  THE CASE FOR THE SUPERIORITY OF THE SOCIALIST BLUEPRINT

Most arguments for Soc. fail when we consider Capitalist progress.

• 194.   Apparent “waste” of Cap is a necessary component of “creative destruction”

• BUT Cap will inevitably run out of steam

• When Cap force subsides, Soc may emerge as a superior system

• No friction between production and consumption ( we’ll get rid of all the lawyers, investment bankers etc.)

• S seems to be saying that Creative Destruction produces waste in pursuit of innovation and increased production.  Soc will produce less waste because there will be no innovation

As waste is reduced under Soc, progress will also decline

• Soc will eliminate the business cycle`

• Example: Under Cap, a collapse in cotton prices will produce a decline in other sectors such as housing.  There are many feedbacks and correlations 

• Under Soc, this is not necessarily the case

• For example, in the 2008 crisis, when China’s exports weakened, they simply ordered the construction of more ghost cities to shore up the economy. Today, the chickens are coming home to roost.  In Texas in the mid-‘80’s, when oil prices slumped, the entire economy collapsed.  Especially real estate.  Nearly all of the banks failed.

196.  S’ disclaimer: “These are just blueprints.  It has been proven to be POSSIBLE.” 

• (But not necessarily inevitable?.)

• His argument, he says is “pure logic.”

• It proves nothing about practical implementation

S emphasizes “superior rationality” of Soc;

• Innovation is not a problem because govt can force firms to update methods.  (?!?)

• Under Soc, competition will not drive out laggards.  

• Underperforming firms never go out of business

• It eliminates the waste of Creative Destruction. 

S has not yet addressed what I believe to be the central problem of Socialism; incentives will shift from the bourgeoisie (making money) to bureaucratic incentives like minimizing risk, protecting jobs, and expanding fiefdoms (in addition to more direct forms of corruption.)  The bureaucratic urge is to repress change. Of course, the government may force “innovation” but this is a fool’s errand except in cases where it is copying existing innovation (China).

197  In Cap, there is deep antagonism between public and private spheres

• This creates waste and inefficiency , suppresses production

• Under Soc, this conflict will disappear.

• e.g. Need for lawyers and compliance greatly reduced.

• Soc makes better use of talented brains (?)

198  Commercial Society relies on profit principal for success

• But government does its best to constrain profit

• For instance through tax policy, ant-trust regulation

• Taxation is not necessary under Soc. 

• I’m not sure I follow his reasoning here.  Maybe because all profits go to the state in the first place.

THE HUMAN ELEMENT

200  Can Soc. work if we relax our assumptions and allow for ACTUAL HUMAN BEINGS?

• 201.  Every historical period employs the mode of production appropriate for its time

• The feudal mode was appropriate for the middle ages

• S does not explore the historical context that may have made feudalism THE ONLY mode that could have existed at the time.  (“Feudal” systems differed widely in different places.)

• 202.  In the “early capitalist period” up to 1850, Socialism was impossible

• In our own age, “Capitalism in fetters” makes Soc more possible and viable.

DEMIGODS AND ARCHANGELS

“If men were Angels, no government would be necessary.”  James Madison: Federalist 51

Human nature is not necessarily a barrier to Socialism

• Many assert that impossibly high moral standards are required for Soc to succeed

• Whereas Cap “harnesses” some of humanity’s lowest traits: avarice, greed.

• Under Soc, most social groups would not see much change at all

• Farmers’, clerks’, laborers’, bureaucrats’ lives would not need to change

203.   Question is, can the bourgeoisie be harnessed to support Soc

• S says “yes”, IF we have reached the final stage of mature Cap.

• AND if Socialists allow this to happen

  • (i.e. if they don’t liquidate the Bourgeoisie)

Here is a wonderful, (interminable) sentence concerning the fate of the bourgeoisie under Socialism that provides a glimpse into Schumpeter’s sparkling prose: 

“It cannot be settled according to that hallowed doctrine which has become an article of faith much beyond the Socialist camp, viz., the doctrine that this stratum [the Bourgeoisie] consists of nothing but overfed beasts of prey whose presence in their economic and social positions is explicable only by luck and ruthlessness and who fill no other “function” than to withhold from the working masses – or consumers, as the case may be – the fruits of their toil; that these beasts of prey, moreover, bungle their own game by incompetence and (to add a more modern touch) produce depressions by their habit of hoarding the greater part of their loot; and that the socialist community need not bother with them beyond seeing that they are promptly ousted from those positions and prevented from committing acts of sabotage.”

“End stage Capitalism” will make the bourgeoisie more amenable to conversion into Socialism

• They will already have become bureaucrats rather than entrepreneurs.

• 206  Soc will result in “a huge and all-embracing bureaucratic apparatus.”

• Late stage “fettered” Cap will already be heavily bureaucratized.

• Separation of ownership and management

207. Bourg can be readily incorporated into Soc bureaucracy, and loyalties redirected 

• Obviously, humans are at least partly motivated by self interest

• This is more deep seated even than Cap

• So presumably, Soc will be no different

• 208.  But Soc is in a good position to channel this urge positively

• Because under Soc, desire for wealth will morph into desire for prestige, status.

As usual, it is hard to tell if S really believes this.  Interestingly, this is very similar to Adam Smith in Moral Sentiments, who thought humans above all sought the regard of others.

209. But even so, Soc must figure out how to provide material incentives for achievement

• In USSR, this meant preferential access to goods, housing, vacations, health care

• If Soc transition occurs in our late stage of Cap, this will not be necessary

• 213.   Soc will command an allegiance that Cap has lost.

_{A LESSON FROM RUSSIA} 

Authoritarian rule can be more easily imposed in Soc

• S does not say that Soc is inherently authoritarian

• A big challenge is the “free rider” problem and how to deal with it.

• 214.   Some vested interest in social unrest will remain – “Vestiges” as per Marx

When Cap first arose, Bourg could dominate workers because of feudal legacy

• They inherited the prestige of nobility.  Many were nobles.

• They retained much of their political authority

• Plus, they held real power by controlling  job opportunities

• Over time, mainly through institution of Democracy, the bourg lost much of its status and power.

215.  Under Soc, gov’t will not tolerate dissension, unions will be eliminated

• Capitalist gov’ts are counterweight to business.

• Soc govts will be allies of business against labor.

• 217.   Strikes will be treason, protest of any kind will be treason

• 1917 Bolsheviks succeeded in totally dominating unions

• USSR is sinister story, but that need not transfer to current times

218.  Again, sez S “We are talking of possibilities only.” 

• Soc can succeed given S’ blueprint, S’ predicates, and assuming end-stage Cap

• Under other conditions, it will probably be a dismal failure.

• Soc does not have the self-correcting mechanisms that Cap. does

• S says finally that it is an open question whether Socialism is compatible with democracy  

TRANSITION

219.  Any transition from Cap to Soc will present problems

• S will examine 2 scenarios

• Both assume transition from mature “fettered” Cap. 

• Which is the only viable condition

• As Marx says, Capitalist economic process will “socialize itself”

This is what Cap must look like BEFORE the transition to Soc

• Production must be controlled by a few large bureaucratized corporations

• Growth (innovation) must have slackened, is planned centrally (by the firms, I presume.)

• Limited investment opportunities.  No incentive to invest

• Interest rates trend to zero.  (little investment demand.)

• Firm managements have effectively become civil servants

• “Capitalist motivations and standards have all but wilted away.”

220.  Movement of Cap to Soc is inherent in Cap

• There is no “bright line”

• Transition to Soc may be imperceptible.

Even if necessary preconditions are met, serious challenges might arise

• It will at least require constitutional changes for most gov’ts

• 221  But In “mature cap” case, at least citizens will be prepared

• Bourg will not offer much resistance but will retain influence

• Cap class will be bigger than expected.

• Farmers must be left alone.

It is important that private property holders be compensated for any expropriation

• 222.  Private banks can readily be folded into central bank

• Forcing Socialism on “immature Cap” (as S believed characterized 1942) might be a disaster

• Citizens will be badly unprepared

224.  In 1932, the US forced “bureaucratic Socialism” on an immature economy.

• This is S’ read on New Deal

• The nation still needed much capital investment which gov’t squelched

• The problem was too many small businesses, not monopoly

• Farmers hated Soc more than they hated big business.

225.  Orthodox Socialists would prefer a violent revolution

• This is more consistent with Marxist Gospel

• But if society is unready, that would spell mayhem

• We must strive to preserve the benefits of Cap

226.  If Soc is imposed from the top (Bolshevism), chaos will result

• First, Inflation will arise and will destroy anyone with savings

• “Inflation is in itself an excellent means of smoothing certain transitional difficulties and of effecting partial expropriation.”

• Lenin: “To destroy the bourgeoisie, you must debauch the money.”

In top down case, Socialism must be imposed immediately and aggressively

• Oppression and violent force are inevitable.

• “The only people who benefit are the revolutionaries.”

PART IV:  SOCIALISM AND DEMOCRACY

THE SETTING OF THE PROBLEM

235.  Until 1914, few doubted European Socialism’s allegiance to Democracy

• Socialist parties had become mainstream           

• Socialists claimed they were the only true Dems

  • They considered Cap. inherently anti-Democratic

  • Democracy was just a tool for Capitalists to oppress the masses

Soviets were anti-Democratic

• Which raised the question; How sincere are other socialists?

• 236.   Socialism’s founding documents are all about revolution and dictatorship, not democratic elections or plebiscites 

• Marx would probably have chosen Authoritarian Socialism over Cap. Democracy

• Anyway, Marx believed that Capitalist Democracy was an oxymoron

• The record of Dem among Socialists is, to put it mildly, mixed.

• Most European Soc parties must work within the system.  Who knows what might happen if they were given free rein.

Once in power post-WWI, UK and German Socialists remained supporters of Dem

• Although in Germany, Communists split off in the ‘20’s

240.  Soc are certainly Democratic when it serves their purposes

• Thought experiment:

  • Suppose a democracy voted in favor of religious persecution

  • This would be a classic case of tyranny of the majority

• Would we approve?  No.

• This is how Socialists feel when Democracy chooses Capitalism

Democracy is a method, not an end in itself.

• Its implementation is only as good as we make it.

• This method can produce results we detest

• 243.   Dem’s success depends on a particular time and place.

We need a definition of “Democracy”

• Dem is not “Rule by the people”.

• Some residents have always been excluded from rank of  voters.

• Young people, slaves, criminals, aliens, women.

Except in primitive societies, individuals do not directly make decisions

• They choose representatives to do that.

• But representatives do not automatically execute the will of constituents

248  Democracy is predicated on rationalist, “hedonist” individualist values

• By “hedonist” he means “focused on our current existence” not self-indulgent

• Derives from Locke, Bentham, JS Mill, US Constitution

• It derives from “Utilitarian” thought

• Democratic institutions provide continuity and stability to the entrepreneur.

• In theory, it guarantees a peaceful transfer of power

Social contract; Hobbes – Man exchanges his autonomy for protection of the state

• “A state is a human community that (successfully) claims the monopoly of the legitimate use of physical force within a given territory.”  (Max Weber)

• Without the state, man’s life is “solitary, poor, nasty, brutish and short”

• Hobbes assumed gov’t would be an authoritarian “Leviathan” 

• Locke softened Hobbes – state authority derives from the people. “Educate the people and let them vote freely.”

Most governments today and throughout history are and have been autocracies

• They are oppressive and arbitrary by definition

• Transfer of power is often violent

• Policies change on the whim of the autocrat

• Autocracies are inherently conservative; opposed to change.

A great example of this is the Chinese Admiral Zheng He.  In the early 1400’s he led Chinese “Treasure Fleets” on a series of expeditions to lands as far away as West Africa.  In ships many times the size of Columbus’ puny crafts, each of his voyages carried thousands of soldiers, diplomats, merchants, and foreign officials.  But after a new Ming emperor took the throne and Zheng He passed away the voyages ended and the Navy was effectively shut down.   By 1500, it was a crime in China to build a ship with more than two masts.

99% of humanity has always lived subsistence lives

• Superstition (religion, magic, ancestors, promise of the afterlife) ruled their lives

• People believed (hoped) that rituals could be “compelling on the universe”

Question arises: Are people really aware of their own self-interest?           

• Are we even capable of being rational?  (See Tversky and Kahneman)

• Education for mass of voters is essential

Following the Enlightenment, the Romantic movement emphasized the weaknesses in the rationalist Dem agenda

• Romantics were reacting importantly to the failure of the French Revolution.

• S says that Romantics “certainly conveyed a deeper understanding of traditional, pre- Capitalist society.”

• They stressed our non-rational nature.

• This would be a focus of 19^th century thinkers who S discusses later

THE CLASSICAL DOCTRINE OF DEMOCRACY

250.   Here is S’ definition of the classical doctrine of democracy:

“the democratic method is that institutional arrangement for arriving at political decisions which realizes the common good by making the people itself decide issues through the election of individuals who are to assemble in order to carry out its will.”

Classical Democratic theory holds that there is a “common good” that can be perceived by any rational individual

• In fact, the Common Good means different things to different people and groups

• Even “rational” people are often driven by non-rational urges

• 252  The Common Good is the average of vastly differing wants among individuals. Perhaps the lowest common denominator.

The “Utilitarian” view must be rejected: self-knowledge is too limited

• Not everyone accurately perceives his self-interest 

• Democracy is a “lesser evil” relative to alternatives

• Democratic society is not unified.

• Rather, it is an amalgamation of conflicting interests.

Madison believed (or, at least, argued) that this could be a source of strength: conflicting interests will balance, no single interest will dominate

I think S overstates the naivety of 18^th century  advocates of democracy.  In particular, the Framers were acutely aware of a Republic’s potential flaws and tried to build the constitution around them.  It has taken 250 years for many of these flaws to appear.

The stability of Democracy depends critically on acceptance of the process and tolerance of disputed legislation by the “loyal opposition”

• Perception of fairness is essential

• “Common Good” must be founded on a commitment to sustain and improve the system

254  In Dem, there is a feeling that “One man’s opinion is as good as another’s”

• This parallels Tocqueville

• Regardless of her level of expertise

• Resentment of “the elite” is American as apple pie

Many Americans  are proudly ignorant and see all expertise as elitist. It has always been thus.  See Hofstadter’s “Anti-Intellectualism in American Life.”  See also several books by Woody Holton and the incomparable Gordon Wood (both of whom are quite liberal).

There is a truly wonderful book “A Colony Forged in Hell” which chronicles the anarchic history of colonial western Pennsylvania up to the Whiskey Rebellion.  Whatever the revolution may have meant to our Founding Fathers (e.g. establishing “A Nation of Virtue”) it meant something completely different in Pittsburgh.

Consider also the opposition to the “Society of Cincinnati,” a club for veteran Revolutionary military officers that was derided as an aristocratic conspiracy to re-establish a Monarchy.  Washington essentially shut it down. 

Democracy is more likely to work in a smaller, homogeneous nation (Scandinavia)

• 255. Autocracy can be more effective than Dem if leadership is rational.

• Leader has much more autonomy, no need to build consensus

• Much easier to enforce decisions

• He uses the fascinating case of Napoleon

  • He accomplished positive things that Dem never could have

256.  Increasingly, in the late 1800’s, human rationality was being questioned

• This turn began with the Romantic movement following the failure of French Revolution and France’s descent into Napoleon’s dictatorship and imperialism  

• Turned out that the Enlightenment overstated its case for human rationality

S discusses several “fin de siècle” thinkers who investigated humanity’s non-rational impulses.  

• They are included in this list:

Freud – Individuals are ruled by the subconscious

Nietzsche – God is dead. The will to power (does anyone really get him?)

LeBon – When part of a crowd or tribe, humans lose rationality 

Pareto – Brilliant classical Economist. “Pareto Optimality” is standard for econ efficiency

Sorel – People are motivated by myths, not policies: “Myth of the General Strike”

Durkheim – Analysis of suicide across cultures

Weber – Protestant origins of Capitalism, the behavior of bureaucracies

Veblen – Irrational “Conspicuous Consumption” of the wealthy

From the 1830’s, McKay; “Extraordinary Popular Delusions and the Madness of Crowds.”

Alfred Jarry (my personal favorite) who wrote the Ubu plays.

Kafka and Dostoyevsky were both geniuses and prophets

These thinkers all presaged Nazism and Bolshevism

They examined the dangers that our Founding Fathers feared most – mob rule, tyranny of the majority, demagogues.

• TODAY THE INTERNET AND SOCIAL MEDIA GREATLY AMPLIFY THESE FORCES in ways that are only dimly understood.

258.  The “rational consumer” and “rational voter” are myths

• Advertising and propaganda manipulate preferences

One of Woodrow Wilson’s public relations experts was Edward Bernays.  Bernays is widely regarded as the father of advertising and propaganda. He became a legendary public relations / advertising executive and wrote several books.  Joseph Goebbels was a great admirer of Bernays and applied his ideas.  Goebbels presumably did not realize that Bernays was Sigmund Freud’s nephew.

259.  For humans, old habits die hard.

• S does not speculate about what behaviors might be genetically  determined

• It took millennia to associate hygiene with disease and infection.

At local, “pocketbook” level, citizens are capable of rational decisions

• Personal finances, taxes, fire protection, schools, street cleaning

• On most “non-local” issues, Interest groups collectively exert influence

• !% of population may have an existential interest in an issue

• 99% do not care

  • E.g. US sugar subsidies

262.  On larger issues, the mass of citizens have “a completely lost sense of reality.”

• Irrationality rules; voter decisions are based on prejudice, symbol and myth

• Bigger problems seem distant, low probability, not worth effort

• On these questions, people default to “primitive”, tribal urges

• They don’t make the effort to analyze rationally.

• Most are not sufficiently educated

• Opinions are based on prejudice and tribe or the persuasion of a politician

• Demagogues can whip up their followers

Opinions of individuals are generally “MANUFACTURED” by politicians

• Today, I think it is more often the case that opinions are “manufactured” by interest groups (universities, media, think tanks, non-profit organizations) and then SOLD to politicians who cravenly retail them to the public.

• S says of the voter “His thinking becomes “associative and affective.”

• Two important “ominous” implications

• On bigger political issues, the voter may react viscerally, driven by “dark urges that the conditions of private life help him to repress.”

• Logic, reason are rejected

Throughout this and later sections concerning Democracy, Schumpeter seems to anticipate the “Public Choice” economic school of James Buchanan.  Buchanan stressed something that Keynesian economists studiously ignored; government actors (both elected politicians and bureaucrats) are motivated more by self-interest than by the public good.  Plus, even if they are well-intentioned, they tend to be much less knowledgeable about the entities they regulate than are the owners of these entities.  Since the future is uncertain, government actions tend to produce unanticipated consequences, which tend to be negative.

Thus, even if we can prove that a monopoly is harming consumers, there is no guarantee that government intervention will make things better..

The best example of the potentially calamitous unintended consequences of government regulation is the 1988 Basel capital standard for banks.  Intended as a measure to unify international bank regulations, Basel ended up causing the subprime lending bubble of the mid-2000’s which culminated in the 2008 financial crisis.  (See “Basel: Faulty” )

This leaves the population vulnerable to “groups with an axe to grind.”

• Who “manufacture the will of the people” and pervert the Common Good

• They try to shanghai the collective subconscious by alleging victimization and providing scapegoats

So why do we cling to the classical doctrine of Democracy?  

Four reasons:

1. This allegiance is deep seated in Christian belief.

 Christianity at its core is radically egalitarian.

• Patriotism: National identities revolve around it (especially the USA)

It is an essential component of our founding myth.

• Sometimes the doctrine works effectively, mainly in small homogeneous nations like those in Scandinavia which have shared values.

• It is a useful political myth.  S: “politicians appreciate a phraseology that flatters the masses and offers an excellent opportunity not only for evading responsibility but also for crushing opponents in the name of the people”

Or, maybe Democracy is just the best we have come up with so far.  “Don’t shoot the                   piano player; he’s doing the best he can.”

ANOTHER THEORY OF DEMOCRACY

269  S offers an alternative Theory of Democracy

• Democracy is a competition for political leadership

• S’ def.: “Individuals compete for power to decide based on people’s votes”

• This “greatly improves the theory of Democratic process.”

Classic Dem theory assumed representatives simply execute the public will

• Politicians do not execute “The Public Will” even if they perceive it

• Rather, they will peddle whatever policies will sell with constituents

• They will also fabricate issues out of whole cloth.

• By tapping into the Public’s visceral fears and prejudices.

S’ theory says explicitly that the public will is “manufactured” by leaders

• S’ model says democracy is “free competition for a free vote”

• This seems unrealistic in a party system

• It is the job of citizens to produce a government, not to evaluate policy

• And there is the perennial problem of tyranny of the majority

  • “The will of the majority is not the will of the people.”

Frankly, I don’t see how S’ model is much different from the classical model except that it highlights the illusion of consensus at the heart of democracy.  From a functional standpoint, it doesn’t seem to offer any concrete solutions.  

273.   For the next several pages S reviews certain examples of parliamentary government.  It is not clear to me what his eventual point is, except to demonstrate that political leaders pretty much manufacture the public will and sell it to the voters, not the other way round.

THE INFERENCE

284.  “Socialism can be compatible with Democracy.”

• Meaning, I presume, given any number of restrictive conditions.

• Many don’t recognize that a politician is a professional with a personal agenda.

• Democracy produces legislation as a by-product of elections

• Legislation is the product that the politician is selling

• We don’t know of a system superior to democracy, so we must make the best of it

290.  What are the conditions for democratic success?

• To succeed, a Democracy must have highly qualified candidates.

• Gov’t must command a well-trained bureaucracy.

• Gov’t leaders must not seek to undermine gov’t institutions

• Opposition must exercise self-restraint.

  • Must not gratuitously embarrass gov’t in power

  • Be “loyal opposition.”

• Tolerance for difference of opinion is essential

• Even those who disagree must accept legislation as law.

To paraphrase an ominous quote: 

“Democracy will work only if all interests are united not only in their allegiance to their country, but also in their allegiance to the structural principles of the existing society. But if these principles are called into question and the nation becomes divided into two hostile camps, democracy is at a disadvantage and may cease to work at all.”  

Ruh-ro.    This cuts a little too close to the bone.

Modern Democracy evolved from Capitalist values

• Undergirded by the rationalist “Enlightenment Project”

  • Rule of law, freedom of the individual, private property, empirical investigation, rational thought, rejection of superstition

• The bourg has a vested interest in limiting government’s role

• 298.   For the most part, the bourg just wants to be left alone

• This is preferable to having the most powerful group seeking to live off of the state

• Socialism has no class equivalent to the bourg with stable traditions and an interest in change or innovation.

Almost by definition, under Socialism, the most powerful interest groups (the bureaucracy and the party) “live off the state”.  There is no interest group with sufficient influence or motivation to counterbalance the state’s power; no “checks or balances.”  In the Federalist, Madison stresses that for Democracy to function effectively, there must be interest groups that counterbalance each other.  Especially in a large Democracy.

Socialism evolved from Bourg values 

• For transition to Soc to succeed, Cap must be at its most mature stage

• When most of the country no longer accepts Cap values; opposition is limited

• This will fulfill S’ rule that  “The vast majority of people of all classes are resolved to     abide by the rules of the Democratic game.”

• Democracy under Soc will be a very delicate balance.

“As a matter of necessity, Socialist democracy may eventually turn out to be more of a sham than Capitalist democracy ever was”.  This pronouncement seems to come out of nowhere.

It certainly will not mean increased personal freedom for the worker.

PART V: A HISTORICAL SKETCH OF SOCIALIST PARTIES

THE NONAGE

305.  S will focus on the Marxist Socialist parties

• Marxists, at least, have a rationalist structure underpinning their beliefs

• Pre-Marx Socialists were dreamers

• Thomas More – “Utopia”

• Robert Owen and Charles Fourier attempted “practical” socialist projects, but failed

• Many religious sects were nominally socialist

• Quakers and Shakers saw men (and women) as equal in the sight of God.

Anarchists are dangerous, but not to be taken seriously

• No program, no ideology, just nihilism

• e.g. Proudhon, Bakunin

Marx made laboring class the hinge of revolution

• Socialism meant “liberation of labor from exploitation.”

• But in real life the working class mostly rejected Socialists 

• Turns out most really weren’t that keen on dying in a revolution

• They were far more keen on improving quality of life for themselves and their families

• That is, they preferred unions: tangible, incremental advances

• In fact, the bureaucracy and legislation were more likely vehicles for realizing Soc.

THE SITUATION THAT MARX FACED

312.  Marx rejected his native country (Germany, from which he was exiled) and all nationalism

• Marx assumed that the working class was similarly uprooted 

• This was self-deception

• Proles were not on board with internationalist Marxist class movement

• In WWI, they mostly rallied around their respective nations

But Western Values like Dem were “in his blood.”

• He implicitly believed in “Democracy”

• He thought Capitalist Democracy was a fraud

• Socialism was the only true Dem

Unlike Marx, LaSalle in Germany organized workers into unions

• Willing to negotiate, compromise, work with Bismarck, etc.

• Actually got his hands dirty

• Marx was far too cerebral for such mundane pursuits

315.  There is a “Fundamental Antagonism” between Soc. Intellectuals and labor

• Intellectuals want revolution, preferably in the near term

• Labor wants immediate improvement in living standards

• And a path to entry into bourgeois class

• Labor obstinately refuses to fulfill its historical role

• This frustrates Soc. Intellectuals

This section reminds me of my college years in the ‘70’s.  Back then, many students were self-styled revolutionaries who were uniformly in despair over American labor’s deplorable lack of class consciousness.  Clearly, the masses were too stupid to understand the depth of their subjugation and were rudely ungrateful for the efforts of “radical” students to guide them to their historical destiny.

Marx thought labor should not participate in bourgeois Dem.

• They should concentrate in fostering class consciousness

• 318.  In practice Marx was sometimes willing to make concessions 

FROM 1875 to 1914

S examines socialist trends in different countries:

In the UK, Fabians were opposites of Marx

• Emerged in 1883 from tradition of Mill and Bentham

• Led by Beatrice and Sidney Webb

• Mostly upper class, dedicated to tangibly improving worker’s lives

• Committed to incrementalism, compromise, working within system

• They were “Better Marxists than Marx.”

In the UK, as in other countries, there was a long tradition of quasi socialist movements. The Lollards were a proto-Protestant movement founded by John Wycliffe in the 14th century to oppose orthodox church policies. Wycliffe was the first writer to translate the bible into a vernacular language. Primarily religious in nature, the Lollards preached radical equality of humans and their ideas helped spark a peasant revolt.

The Leveler and Digger movements emerged during the English civil war in the 17th century and advocated universal suffrage (for males) and equality before the law. The Diggers also called for common ownership of property. Like the Lollards and Diggers, the Chartists, from roughly 1830 to 1860, demanded universal male suffrage as well as other political reforms. While the Chartist objective was democratic reform, many Chartists evolved into Socialists.

325.  Sweden is a special case

• It has “an exceptionally balanced social structure.”

• Homogeneous culturally and ethnically

• Very highly educated, even labor – little antagonism with intellectuals

• Little Marxist influence

• Small (10 million residents in 2020. About the size of Michigan.)

• “. . . . it is absurd for other nations to try to copy Swedish examples; the only effective way of doing so would be to import the Swedes and put them in charge.”

Russian Soc. claimed to be thoroughly Marxist 

• But Russia did not fit Marx’s model at all.

• It was overwhelmingly agricultural.

• The “Communist Manifesto” inveighs against the “idiocy of rural life.”

Pre-WWI, Russian social structure was actually quite stable.

• 1905 “Revolution” was an exception

I think that S may be overstating Russia’s pre-war stability.  The monarchy may have been stable, but the country was so extremely decentralized that actions undertaken in St. Petersburg made little difference to those living in Ukraine or Siberia.  Moreover, internal dissention was common.  Jews suffered from pogroms, driving mass emigration.  Anarchist violence was a constant threat.  

• This stability enabled Bolshies to impose rule at the top

• This had little effect on most Russians – initially

• (Stalin waited until the late 1920’s and early ‘30’s to forcibly collectivize private farms, liquidate the Kulaks, starve Ukraine, murder army officers, etc., etc..)

• Bolshies represented “Radicalism of Impotence.”

  • Meaning that their lack of popular support demanded strategy of violence.

  • The empire was already so divided that it could easily be conquered

  • Resistance in rural areas was disorganized

  • Authority readily imposed if methods were merciless

Marxism gave Russian intellectuals “Religion” and purpose

• Relief from nihilism.

Again, read “The Possessed.”

• This was especially true of those, like Lenin, who had suffered Tsarist punishment

• Lenin cloaked himself in Marxism, although his program was anything but Marxist

334.  In the US, there was little ground for mass Socialist movement

• Most Americans bought into national founding myth of free enterprise

• The country was still largely rural

• Most early US union movements were neither socialist nor Marxist

  • e.g. Molly Maguires, Knights of Labor

  • Many were agrarian movements: Grange, Populists, WJ Bryan.

  • Many of these groups were deeply ANTI-Socialist – American Kulaks

• Some union movements gradually acquired a Socialist character

  • For instance, the IWW

  • The Socialist Party under Eugene Debs achieved some local electoral success, but was never a revolutionary force. Debs himself was a pacifist.

An interesting and highly idiosyncratic feature of the American economic landscape at the turn of the century was the immense popular influence of Henry George.  George was a latter day physiocrat, which is to say he believed that all wealth derived from the land, and thought that land ownership by the rentier class was the source of all inequality.  He recommended a single large tax on landowners and monopolists to redistribute income away from the unproductive rich to the working man.

While Henry George’s name has been largely forgotten, his ideas remain a leitmotif of American attitudes toward economic policy, especially among progressives.  Some of his ideas could be considered socialist, but he never advocated an end to private property and was a vocal advocate of free trade.

France had a strong anarcho-syndicalist tradition

• That is, “revolutionary unionism”

  • Each factory was supposed to be its own city-state

• S has no patience for syndicalism

  • At its core, it was irrational and proto-fascist – a rejection of Marxist hyper rationalism

  • “Syndicalist anti-intellectualism of the fist.”

340 .  If it had any intellectual underpinnings, they came from Georges Sorel

• “Myth of the general strike.”

• To S, it was a “Mongrel creed”

• If Mussolini had any program it was syndicalist

  • Power for its own sake.

In Germany, social policy was way ahead of other nations

• In spite of it being a monarchy (albeit with Dem. characteristics)

• Bismarck saw that gov’t could hold off socialism by offering social services

  • This also built solidarity and a more loyal military

  • Offered universal male suffrage

  • Non-Socialist unions were set free

  • Strikes were mostly tolerated

• Socialists pursued quasi-Fabian strategies

  • Germany had a highly competent bureaucracy, excellent education, numerous universities

So why did Marxism take hold in Germany?

• 343  S’ REASON: In 1878, Bismarck moved to suppress Soc.

  • This forced fierce loyalty and organization

  • As in Russia, many Soc. Leaders had first-hand experience with prison, exile

  • They were deeply resentful

• Also, Socialists were mostly internationalist and anti-military.

  • In a deeply military regime

• Non-Marxist reform parties (e.g. Catholics) were divided and could not compete

• Socialist leaders were extremely competent and willing to compromise

  • While adeptly playing lip service to Marxist orthodoxy

  • Bernstein, Kautsky, Adler were leading Marxist theoreticians, although they advocated working within system while waiting for revolution.

FIRST WORLD WAR TO WWII

352  Many socialists were radicalized by WWI.

• Much radicalism also came from unemployed veterans (e.g. Hitler)

• Most of this radicalism was not Soc, but proto-Fascist

• Freikorps were roving, semi-organized gangs of veterans

• Violent revolutions throughout Europe 

  • Munich (Kurt Eisner, Hitler), 

  • Hungary (Bela Kun), 

  • Berlin (Spartacists, Karl Liebknecht, Rosa Luxemburg)

  • Rise of Mussolini in Italy

• All of these were viewed through the lens of the Bolshevik upheaval in Russia

  • This terrified just about everyone, especially property holders

  • Political and social divisions were greatly amplified

  • Increasingly, political choice seemed binary; socialist revolution or anything else.

German socialists assumed postwar political power at an impossible time

• Under political attack from all sides

• Economy was in shambles

• Huge reparation obligations which were often restructured

• When French occupied Rhineland, hyperinflation ensued

• This destroyed the middle class, also alienated veterans

Communist parties began to form by attracting the more extreme Socialists

• Gradually, they came to be funded and controlled by Stalin

• Communists were as implacably opposed to the Socialist gov’t as they were to Nazis

• At the same time, WWI underscored the masses’ allegiance to vestigial values i.e. nationalism.

• Socialists governed admirably but were doomed

• Soc had to govern in a Cap world

• Western institutions were not ready for Socialism 

The Great Depression seriously undermined confidence in Capitalism and Democracy

• Writing in 1942, S. predicts that WWII will further entrench trends established in Depression

• e.g. high taxation, regulation, growing bureaucracy, bloated gov’t budgets

• Regardless of war’s outcome, Schumpeter foresees great strides toward Socialism

Schumpeter’s outlook was too pessimistic in the short run, especially regarding the US.

• Transition to post – WWII peace was managed exceptionally well

But his predictions regarding Europe were more on point.

• Most European countries have dialed back the more radical post war Socialist and Communist agendas.

• But the European Union has imposed a wholly new redundant layer of bureaucracy and regulation on top of existing bureaucracies

This concludes the first edition of CSD (1942.)

THE CONSEQUENCES OF THE SECOND WORLD WAR

376  This section is an addendum to the 2^nd edition of CSD, published in 1946

As expected, Socialism in Europe made a strong postwar advance

• Labor party came to power in the U.K.

• But surprisingly, the more radical leftist parties lost influence

• Ruling coalitions in France and West Germany were centrist

• People sought security, stability

• The threat from the Soviet bloc was stark

In UK, Socialist measures were predictable

• Bank of England was nationalized – a superficial change

• S predicted that some wartime measures would not be fully rescinded

  • e.g. equalization of incomes.

• If labor remains in power, it will pursue more Socialist policies

• 379      BIG PROBLEM: To do this, Europe will need to socialize trade unions.

In the UNITED STATES, the war economy continued New Deal policies

• Government sector grew much larger.

• Tax rates were hiked

• These policies dramatically reduced bourgeois incomes relative to workers

But to Schumpeter, the truly shocking thing was the “colossal industrial success” of the US unleashed by the war.

• Americans were shielded from war’s worst depredations.

• “Short of atrocious mismanagement”, Schumpeter believed that the US economy could drive increased incomes for all social classes both in the US and maybe in Europe too.

• 384  But mismanagement is a real risk among those with “that spirit of waste that delights in spending a billion when a hundred million will do.”

S does not mention the sharp conservative turn of postwar US politics.  Perhaps, as he was writing, this trend was not yet evident.  Truman, who fell into the presidency, was much more conservative than FDR, and Eisenhower was the definition of conservative. Whatever radicalism had appeared in the Great Depression had disappeared, supplanted by a paranoid (but not wholly unjustified) fear of Communism.

The US Gov’t must end wartime wage and price controls and central planning

• Bureaucracy must resist its desire to control private firms 

  • Must step back from onerous anti-trust regulation

  • Business wastes energy on gov’t and union relations rather than business issues.

  • Which means more fees to attorneys, lobbyists, etc.

• Inflation is a serious transitional problem that must be confronted.

• It will take strong leaders to abjure price and wage controls, etc.

• 392.  S was concerned that bad government policy might throttle economic growth

• But he had no doubt that the intrinsic power of US industry was immense

In the event, the US suffered a serious bout of postwar inflation from 1945-1948 as price controls were removed, and then a shallow recession.  But modest monetary tightening and our incredible productive capacity, combined with overseas rebuilding, quickly set the US on a steady growth path.

Most economists in 1946 were worried about insufficient postwar demand.

• Schumpeter calls these economists “stagnationists.”

• For the most part, these were followers of Keynes

  • Mostly associated with Alvin Hansen

• They conceded that near term economic growth looked extremely strong, but predicted that consumers would save far more than the private sector could invest.

  • Thus, gov’t involvement was necessary to sustain demand

They argued that “in modern societies, the ultimate cause of unemployment is the inequality of  incomes”  Sounds eerily familiar.

• Their proposed solution was to apply extremely high tax rates to wealthy people, who presumably had a high marginal propensity to save.

  • The gov’t could then invest these revenues.

• Stagnationists believed that “the high level of national income . . . . . is the most serious problem of all.”

Today’s consensus “Neo-Keynesian” economists still buy into this fallacy. The myopic focus on “aggregate demand” explains why not one “Neo-Keynesian” economist in 2021 saw inflation coming (except Larry Summers.)  With the onset of COVID, they proved unable to distinguish real economic demand from phantom income arising from fiscal stimulus and money printing.   Hence: their delusion that inflation would be “transitory”.

But then Schumpeter’s addendum takes a much darker turn:

Stalin was the real winner in WWII

• S deplores “Russia’s victory over her allies”

• Allies handed Stalin all of Eastern Europe

• Stalin dominated other Western leaders

• Churchill hated Communism and Stalin in particular, but FDR knuckled under to most of Stalin’s demands at Yalta.  He was extremely sick at the time and died soon afterward.

• Schumpeter has saved his strongest language for this section. 

• No one except Churchill had the will to confront the USSR 

• Europe was starving, plus most countries had powerful Stalin-controlled 5^th columns

• The US was eager to disengage

• Stalin is patient: he will build his military and become a real danger

Much of what he says is frighteningly relevant to the situation today:

404      “The trouble with Russia is not that she is Socialist, but that she is Russia.”