Wednesday, June 12, 2013

Capitalism, Socialism and Democracy - Joseph Schumpeter

It is too tempting to say that Joseph Schumpeter's Capitalism, Socialism and Democracy is a must read these days. In fact, the Wall Street Journal just did that a couple of months ago, and I am sure that the Financial Times and The Economist praised this book recently, more than 70 years after its first edition. One of The Economist's featured columns is after called "Schumpeter".

As tempting as it is to recommend Capitalism, Socialism and Democracy to everybody, some parts of the text will result either too arcane or too outdated for the regular reader.  Particularly, Part I ("The Marxian Doctrine"), most of Part IV ("Socialism and Democracy"), and Part V ("A Historical Sketch of Socialist Parties") will be of interest only to academics. 

The three things you need to read from this book are:

  • The discussion on how capitalism is a victim of its own success. Schumpeter argues that enterprises grow so large that eventually capitalism turns into corporatism: a state of the World in which markets are, at best, divided among rival oligopolies, or, at worst, a collection of monopolies. Monopolies result in larger profits for shareholders but particularly for managers. This creates the environment for intellectuals hostile to capitalism to put political pressure on government, who increase the levels of taxation on enterprises, which in turn reduces growth and profits (unless, of course, enterprises captures the State). Higher levels of taxation eventually result in a socialist society ("welfare state", in modern jargon). The problem with this is that a socialist state is too expensive to maintain and, with lower rates of growth and increasingly large levels of taxation, crisis are likely to be recurrent. If you think this looks a lot like the World of today with its too-big-to-jail  bankers, its over-extended Western governments, and its principal-agent problems across the industrial World, you're right. And that's why you need to read this book.
  • The discussion on creative destruction, a term popularized by Schumpeter and widely used today to describe how innovation is the source of growth in capitalism. Libertarians and neoliberals totally misunderstand the way in which Schumpeter presents this term. "Creative destruction" is used today as a catch-all term to sell the idea that deregulation, small government, and persistent lay-offs will regenerate markets over and over in a virtuous cycle. Schumpeter thinks that creative destruction will actually destroy the capitalist system. If you want to understand what the Apple - Samsung mess is all about, you need to understand what creative destruction actually is.
  • The discussion on how and why politics became a profession. If you want to know why Occupy (U.SA.), 15M/Indignados (Spain) #Yosoy132 (México), the guys of Tahrir Square (Egypt) and Qasbah (Tunisia) failed miserably (and why the Turkish of Taksim will fail as well), you need to understand that politics became a profession a long time ago, just like teaching, or law practicing, or typing. Politics has been the affaire of a small well-practiced elite for a long time and those who don't have the skills required for the job need not apply. This is not necessarily a bad thing: the only thing worse than being in the hand of professionals is being in the hands of improvised...
You can download Capitalism, Socialism and Democracy here.

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