Joseph A. Schumpeter – Friend or Foe of Capitalism?

The first part of this essay was written a few years ago; the second part is added today (January 2016). Footnotes have been added.

Stray Observations on Joseph A. Schumpeter

Marx was wrong in his diagnosis of the manner in which capitalist society would break down; he was not wrong in his prediction that it would break down eventually.
(Capitalism, Socialism and Democracy, p. 424f.)

Some years ago I bought Joseph Schumpeter’s Capitalism, Socialism and Democracy in a second hand bookstore and then forgot to read it until recently. (I also bought his Ten Great Economists in a Swedish translation.[1]) Then a well-known Objectivist – Raymond C. Niles – wrote about Schumpeter on Facebook: he thought that Schumpeter’s business cycle theories and his views on the role on the entrepreneur might be superior to the “Austrian” view on those subjects (although, in all fairness, he had not quite made up his own mind.) I engaged in some debate with him, but after a while I lost patience and backed out of the debate (basically, I wanted to make up my own mind without his interference).

Anyway, I read the book, and I also borrowed from the library a collection of essays by Schumpeter in a Swedish translation. (I also read part of Ten Great Economists.) I also posted some notes on Schumpeter on Facebook; most of the material here is a compilation of those notes.

As the titles says, you should take the following as “stray observations”. Maybe, some day, I will be able to write a better integrated analysis and criticism.

I had originally planned a more provocative title: “Joseph Schumpeter – Friend or Foe of Capitalism?”. As far as I can make out, Schumpeter did prefer capitalism to socialism, and it was “with a heavy heart” that he predicted that socialism would ultimately prevail. (In fact – as I have learned from reading a biographical sketch – Schumpeter hated socialism and communism.[2]) Also, it should be noted that Schumpeter was extremely circumspect: He did not mean to say that socialism is inevitable, just that there are strong tendencies pointing in this direction. And looking at the world, it is hard to disagree with him on this point. We do live in a mixed economy, and what will be the ultimate outcome of the struggle between the two parts of the mixture we cannot know for sure; all we can do is to work in the right direction – spread the right ideas and hope for the best.

“Creative destruction” or “destructive creation”?

To most people, Schumpeter is best known for having coined the phrase “creative destruction” and the idea that capitalism is a process of “creative destruction”. He refers to the fact that older technologies are continually being replaced by newer and better technologies – a standard example being that the horse-and-buggy has been replaced by the automobile. There are of course numerous examples of this. To give you one simple example (that Schumpeter himself couldn’t have thought of):

Not too many decades ago, many of us possessed a typewriter or used a typewriter on the job. The typewriter industry was a successful industry; there was always a demand for more and/or better typewriters. And improvements were made: we went from manual typewriters to electrical typewriters. Today, virtually nobody uses a typewriter; its role has been taken over by word processors. And, as a result, there are no longer companies specializing in manufacturing typewriters. This particular branch of industry has been wiped out.

There are of course many more examples that you can think of yourselves. A similar phenomenon is that people do not write letters the way they did before; they use e-mail instead. And so on.

Now, this phenomenon was certainly not an original discovery made by Joseph Schumpeter. He merely coined a phrase for it – a phrase which is obviously an oxymoron: how could “destruction” be “creative”? If we take this phrase seriously, we might as well coin the opposite phrase, “destructive creation”. Nevertheless, this idea that creation is destructive or that destruction is creative, seems to lie at the center of Schumpeter’s analysis of capitalism.

Schumpeter vs. Mises

As you probably know, Schumpeter is not regarded as a member of the “Austrian” school, although he was born in Austria and although, in his youth, he studied under Eugen von Böhm-Bawerk. I may write more extensively on Schumpeter in the future (time permitting); here I just want to focus on a couple of points where he obviously (and flagrantly) deviates from Mises. The quotes are obviously taken out of their full context, but I think they are illuminating all the same.

Schumpeter, in his book, asks two fundamental questions: “Can capitalism survive?” and “Can socialism work?” He answers both those questions in the affirmative. He does believe that capitalism will ultimately be replaced by some form of socialism – he just isn’t 100% sure about it. He also believes that socialism, once the transition from capitalism has taken place, could actually work (although he is not 100% sure about that, either.) If this sounds confusing – well, it is confusing. (Or, at the very least, it makes me confused.)

The two points I would like to take up is his view (versus Mises) on fiduciary media and his view (versus Mises) on the so-called calculation problem in a socialist economy. (I presuppose some familiarity on my readers’ part with The Theory of Money and Credit and Socialism: An Economic and Sociological Analysis.)

On the first of these subject, Schumpeter makes a distinction between what he calls “commercial society” and capitalism – he takes the latter as a sub-division of the former. In his own words:

Commercial society is defined by an institutional pattern of which we need only mention two elements: private property in means of production and regulation of the productive process by private competition (or management or initiative). Such a type of society is not as a rule purely bourgeois […] Nor is commercial society identical with capitalist society. The latter, a special case of the former, is defined by the additional phenomenon of credit creation – by the practice, responsible for so many outstanding features of modern economic life, of financing enterprise by bank credit, i.e. by money (notes or deposits) manufactured for that purpose. (P. 157; emphasis added.)

The “credit creation” he talks about here is not what Mises would call “Sachkredit”, i.e. credit consisting of actual “commodity money” (gold and/or silver). It is clearly “circulation credit”, i.e., credit created through the issuance of fiduciary media: it is money manufactured for that very purpose.

This means that, on Schumpeter’s view, fiduciary media is not something that disturbs the working of a capitalist economy – on the contrary, it is the very basis of capitalist society (it is what basically distinguishes capitalist society from a merely “commercial” society).

The “Austrian” (or “Misesian”) understanding of fiduciary media is that it is a bad thing even under free banking and a total disaster when it is added to the fiat or paper money that we have today: it sets the business cycle in motion and will ultimately lead, either to a deep depression (the deeper, the longer it is postponed) – or to hyperinflation, which is even worse, since it effectively destroys the value of money. (Schumpeter, by the way, has his own theory of business cycles; it is refuted by Murray Rothbard in America’s Great Depression, p. 69ff.)

If Schumpeter is right, then capitalism is not destroyed by fiduciary media or credit expansion (over and above credit given in the form of “commodity money”) – it is destroyed by the absence of fiduciary media and artificial credit expansion.

Enough about this for now. The second point is the “calculation problem” in socialism. On this he writes:

There is nothing wrong with the pure logic of socialism. […] The only authority standing for denial [of this point] that we need to mention is Professor L. von Mises. Starting from the proposition that rational economic behavior presupposes rational cost calculation, hence prices of cost factors, hence markets which price them, he concluded that in a socialist society, since there would be no such markets, the beacon lights of rational production would be absent so that the system would have to function in a haphazard manner if at all. (P. 172.)

Although this presentation is very condensed, I think it is a fair summary of Mises’ view. But does Schumpeter accept it? No. He spends page after page trying to show that the calculation problem indeed can be solved by socialism. Unfortunately, his reasoning is so contorted that I cannot make heads or tails of it. I have to dismiss it with a sarcasm: he is presenting something he calls a “blueprint” of socialist society – but this blueprint is nothing but a blueprint of a castle in the air.

Schumpeter’s business cycle theory

As for Schumpeter’s business cycle theory (which some people seem to regard as a serious competitor to the “Austrian” theory), I would say that it is not about business cycles at all. Using Rothbard’s terminology (from America’s Great depression), it may explain business fluctuations, but not business cycles. It seems that Schumpeter was not even aware of the “Austrian” (or “Misesian”) theory. He was certainly not aware of the crucial role played by what Mises calls “circulation credit” in inaugurating the business cycle. Nor of the closely related role played by fiduciary media.

So what is his business cycle theory? In short, and of course rather simplified: There comes a new innovation, creating a new branch of industry; capital is gravitating to this new branch; investments are made in this branch; credit is granted to it. But the innovation does not stay new for long; it may in its turn be replaced by some other innovation; or the development simply stagnates. The investment and credit dries out (Schumpeter calls this “vanishing investment opportunities”).

Concrete examples of this are: the invention of the steam engine in the beginning of the industrial revolution; the building of railways in the 19th century; the advent of the automobile in the early 20th century; and, of course, today the computer revolution. (This is of course just a short list of examples that could easily be multiplied.)

It is undeniable that those innovations have vast effects on the economy. But do they explain the business cycle? No. They explain why capital gravitates to, and then away from, specific branches of industry. This is what Rothbard calls business fluctuations. (And this is also something George Reisman writes extensively about in Capitalism, although he does not use this term.) But a business cycle is economy-wide; it affects every branch of business. And it can only be explained the way Mises and other “Austrians” explain it; as a result of inflationary policies and artificial credit expansion. (By “artificial” I mean credit financed by new paper money and/or fiduciary media. I have to add that, because when I discussed this on Facebook, someone asked me what I meant by “artificial”.)

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Here is a quote that I think illustrates the difference between Schumpeter and the “Austrians”:

He [Karl Marx] aptly says that “the superficiality of Political Economy shows itself in the fact that it looks upon expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycles, as their cause.” (Capitalism, Socialism and Democracy, p. 40; emphasis added.)

According to the “Austrians”, expansion and contraction of credit is a phenomenon that lies at the very core of the business cycle. Marx says it is the other way ‘round: they are a “mere symptom”; And Schumpeter agrees.

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Has Schumpeter anything in common with Mises? Yes – but on an issue where Mises is clearly wrong! He shares the idea that ultimate ends are outside the realm of reason.

Schumpeter on inflation

Schumpeter has a couple of interesting paragraphs on socialism and inflation; before I quote them, I will try to set the context:

Schumpeter believes, with Marx, that capitalism will lead to socialism “in the fullness of time”. He considers two cases: the first is that capitalism has “matured”; i.e. has led to monopolies. In that case, the transition to socialism would be fairly painless. But if you try to instigate socialism before capitalism has “matured”, there will be some transitional problem to be solved. (This is of course a very short summary.) Now to the quote:

The first thing which must be done is to bring about inflation. The banks must be seized and combined or coordinated with the treasury, and the board or ministry must create deposits and banknotes using traditional methods as much as possible. I believe inflation to be unavoidable because I have still to meet the socialist who denies that in the case under discussion the socialist revolution would at least temporarily paralyze the economic process or that in consequence the treasury and the financial centers would for the moment be short of ready means. The socialist system of bookkeeping and income units not being as yet in working order, nothing except a policy analogous to that of Germany during and after the First World War or that of France during and after the revolution of 1789, notwithstanding the fact that in those cases it was precisely the unwillingness to break with the system of private property and with the methods of commercial society that enforced inflation for so considerable a time; for “the day after the socialist revolution” when nothing would be in shape, this difference does not matter.

It should be added however that besides necessity there is another motive to embark upon this course. Inflation is in itself an excellent means of smoothing certain transitional difficulties and of effecting partial expropriation. As regards the first, it is for instance evident that a drastic increase in money wage rates will for a time avail to ward off possible outbreaks of rage at the fall in real wage rates that, temporarily at least, would have to be imposed. As regards the second, inflation expropriates the holder of claims in terms of money in a delightfully simple way. [Yes: delightfully.] The board might even make matters easier for itself by paying owners of real capital – factories and so on – any amount of indemnities if it resolves at the same time that these shall become valueless before long. Finally, it must not be forgotten that inflation would powerfully ram such blocks of private business as may have to be left standing for the moment. For, as Lenin has pointed out, nothing disorganizes like inflation: “in order to destroy bourgeois society you must debauch its money.” (Capitalism, Socialism and Democracy, p. 226f.)

Now, this is really a strong indictment, both of inflation and of socialism. But it does not seem that Schumpeter himself saw it that way. (If he did, why wouldn’t he fight socialism the way Mises did?) – Someone has told me that Schumpeter writes in an “ironic” style. But I don’t think this is irony; it is sheer cynicism.

Schumpeter on the gold standard

I found this on Wikipedia (it is from a book called History of Economic Analysis):

An “automatic” gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation’s money rates and price levels with the money-rates and price levels of all the other nations that are “on gold.” It is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, to foreign policy, to certain policies of taxation, and, in general, to precisely all those policies that violate the principles of [classical] liberalism. This is the reason why gold is so unpopular now and also why it was so popular in a bourgeois era. It imposes restrictions upon governments or bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and the guarantee of bourgeois freedom—of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense. From this standpoint a man may quite rationally fight for it, even if fully convinced of the validity of all that has ever been urged against it on economic grounds. From the standpoint of etatism and planning, a man may not less rationally condemn it, even if fully convinced of the validity of all that has ever been urged for it on economic grounds.

He is right, of course. Gold is part and parcel of a laissez-faire society. Socialists must be against it.

Schumpeter on the role of the entrepreneur

Apart from “creative destruction”, Schumpeter is most famous for his analysis of the role of the entrepreneur in a capitalist society. To quote my adversary Raymond Niles:

For a student of economics, as I am, the most notable thing about him is his nearly heroic assessment of the importance of the entrepreneur. His biggest contribution to economics is that he places the creative entrepreneur at the center of capitalism, and as the spark plug of material progress. Then he explains the economic consequences, the mechanism, of how that entrepreneur’s actions create a rising standard of living. No other economist, to my knowledge, does this. (Ayn Rand does this, but as a philosopher.)

From what I have read so far, I think this is true. He has observations of the role (and psychology) of the entrepreneur that I have not encountered elsewhere. (See his essay “Change and the entrepreneur” from 1949, which I have read in a Swedish translation.)

It is of course not true that my own favorite economists (such as Mises and Reisman) have had nothing to say about the entrepreneur. But Schumpeter does add to our knowledge here.

But I should also say that this, however true it might be, has no bearing on the issue of what causes business cycles.

Schumpeter on democracy

Schumpeter also has an interesting theory of democracy, but it is deceptively simple: he rejects the idea that democracy is an expression of “the will of the people” (in all its variants) and says it is “competition for political leadership”. (I generally agree with his analysis – but he does not go into the really important question: what are the proper limits of government?)

Is Schumpeter of value to an Objectivist?

Since the person who triggered my interest in Schumpeter is an Objectivist, I ask myself if there is anything in Schumpeter to be “gained and/or kept” by Objectivists.

Well, Objectivism holds that the mixed economy in which we live today is a mixture of freedom and controls – or, to put it another way, that there is a capitalist component and a socialist component in the mixture. It also holds that this mixture is precariously unstable – that, sooner or later, it has to end with either full-fledged capitalism or full-fledged socialism (or maybe some other form of statism). It also holds that – since men have free will – the ultimate outcome of this struggle cannot be exactly predicted; such prediction would imply determinism. And this in its turn means that the outcome of the struggle depends on what we do now: if we manage to convince enough people, then we can turn the tide; if we don’t, the tide won’t be turned. (All of this should be familiar territory to my readers.)

Schumpeter (who of course knew nothing of Objectivism) nevertheless was aware of those facts: he knew that socialism was inevitable if the trend toward socialism were not broken. He often went wrong in his analysis, and – to be optimistic – he was far too pessimistic in his predictions. So, from this viewpoint, there is some value in studying his ideas.

But to replace Mises and Reisman as guides to economics with Schumpeter would be a disaster.

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See also my blog posts Horror Quote from Joseph Schumpeter and Creative Destruction?.


Schumpeter’s Blueprint for Socialism[3]

I wrote earlier that Schumpeter’s reasoning with regard to the possibility of economic calculation in a socialist economy was too contorted to make heads or tails of. But the first step in his reasoning is at least comprehensible. He begins with explaining that socialism severs the link between production and distribution of goods and services:

Viewed from the economist’s standpoint, production – including transportation and all operations incident to marketing – is nothing but the rational combination of the existing “factors” within the constraints imposed by technological conditions: In a commercial society, the task of combining factors include buying or hiring them, and those individual incomes which are typical of such a society emerge in the very process of buying and hiring. That is to say, the production and the “distribution” of the social product are but different aspects of one and the same process that affects both simultaneously.

This is eminently true.

Now the most important logical – or purely theoretical – difference between commercial and socialist economy is that in the latter this is no longer so. Since prima facie there are no market values of means of production and, which is still more important, since the principles of socialist society would not admit of making them the criterion of distribution even if they did exist, the distributive automatism of commercial society is lacking in a socialist one.

Again, eminently true. The principle of socialism is: “From each according to his ability, to each according to his need”. From the producers according to their productive ability, the product then to be distributed according to the receivers’ need.

The void has to be filled by a political act, let us say by the constitution of the government. Distribution thus becomes a distinct operation and, in logic, at least, is completely severed from production. This political act or decision would have to result from, and in turn go a long way toward determining, the economic and cultural character of the society, its behavior, aims and achievements; but it would be completely arbitrary when viewed from the economic standpoint. (P. 173f; my italics.)

Let us see what this means in reality (a reality that logic and theory ought to explain and make understandable).

Take a relatively simple division-of-labor economy. Apart from farmers who produce meat, eggs, milk and cheese, there are also bakers, shoemakers, tailors and blacksmiths. They all produce goods, which are then distributed simply by selling and buying (or, in a barter economy, by exchange). The link between production and distribution here is seamless. How could this link be severed?

Since this society, at this primitive stage, would probably be a tribal society[4], one could imagine that the chief and/or the council of elders he surrounds himself with, has read Karl Marx, or even Schumpeter, and has been enamored by the idea “from each according to his (productive) ability, to each according to his (less productive) need”. The chief and his council would the simply confiscate the farmer’s meat, eggs, milk and cheese, the shoemakers shoes, the tailor’s clothes and the blacksmiths various products, and then hand them out to other members of the tribe according to their respective needs.

Would the producers in the tribe accept this? Or would they follow the advice of some John Galt in their midst and go on strike and shrug? Then the tribe would fall apart, much the same way Starnesville fell apart in Atlas Shrugged.

The various producers in this economy might need helpers or employees; for example, the farmer might need a few farm hands; in a barter economy, they would be given board and lodging for their work; in a money economy they may also get some money. The farmer would choose farm hands that were strong enough to perform the work; the tailor and shoemaker helpers that were handy enough. But this link would also be severed by the socialistically minded chief of the tribe or mayor of the town; and he would force the producers to hire, not the persons best endowed to do the work, but the ones most in need of a job.

It is slightly more complicated in an advanced economy like ours, but the principle is the same. We can still buy a tailor-made suit directly from a tailor, or a pair of hand-made shoes directly from a shoemaker, if we want to and can afford it; or we can buy meat directly from a farmer if we want really good meat. But the norm is that our clothes, our shoes, etcetera, are produced in big factories and reach us through a retailer. The only real difference is that the distribution chain has more than one link. And there are more factors of production involved; there is much more of what Carl Menger called “goods of higher order”.

But this means only that there is much more for a modern socialistic government to confiscate in order to break this link between production and distribution which is so essential to even get socialism off the ground. Or, to put it brutally: our economy is an affluent economy; there is much more for a socialist government to plunder (and to call “redistribution”).

But it has to be this distinction between production and plunder that Schumpeter regards as “arbitrary when viewed from the economic standpoint”, as if it would have no economic effects whatsoever.[5]

What About Money?

Ludwig von Mises has explained to us that in the absence of a price mechanism a socialist economy will be unable to establish money process, neither for capital goods (“goods of higher orders”) nor for consumer goods (“goods of the first order”). In practice, socialist economies have solved this problem by imitating and copying the prices that have been established in surrounding capitalist economies. What solution does Schumpeter suggest?

His solution is to replace money with vouchers:

Suppose then that the ethical persuasion of our socialist commonwealth is thoroughly equalitarian but at the same time prescribes that comrades should be free to choose as they please among all the consumers’ goods which the ministry is able and willing to produce […] Furthermore let us assume that the particular equalitarian ideal adopted is satisfied by handing out to every person […] a voucher representing his or her claim to a quantity of consumers’ goods equal to the social product available in the current period of account divided by the number of claimants, all vouchers to become valueless at the end of that period.

This proposal, as you probably know, was made by Silvio Gessel.

These vouchers can be visualized as claims to the Xth part of all clothing, household goods, houses, motorcars, movie plays and so on that have been or are being produced for consumption during the period under consideration. It is only to avoid a complex and unnecessary mass of exchanges that would otherwise have to take place among the comrades, that we express the claims not in goods but by equal amounts of conveniently chosen but meaningless units – we can call them simply units, or moons or suns or even dollars – and rule that units of each goods will be handed over against the surrender of a stated number of them. (P. 174.)

Schumpeter should be reminded that money originally came into existence precisely to overcome this “complex and unnecessary mass of exchanges that would otherwise have to take place among the comrades”.[6] But this problem was not solved by printing vouchers, or by any other form of fiat money.

Schumpeter goes on and on trying to explain how this would work out in practice, but I think this quote is sufficient to explain what his view is. Just one more short quote:

… they [the industrial managements] must produce as economically as possible. (P. 175.)

And pray tell me how they can do this without a price mechanism, expressed in real money rather than fiat vouchers. Bur Schumpeter has already given Mises short shrift, so he is free to ignore every single Misesian insight.

Perfect Competition?

Schumpeter has some words on the idea of “perfect competition”:

Some socialist as well as non-socialists economists have been not only willing but anxious to recognize a particularly strong family likeness between a socialist economy of the type envisaged and a commercial economy of the perfectly competitive kind. We might almost speak of a school of socialist thought that tends to glorify perfect competition and to advocate socialism on the ground that it offers the only method by which the results of perfect competition can be attained in the modern world. […]

As we have already seen, the bloodless concept of perfect competition that economic theory has framed for its purposes turns on whether or not individual firms can, by their single-handed action, influence the prices of their products and of their cost factors. If they cannot – that is, if each firm is a mere drop in an ocean and therefore has to accept the prices that rule in the market – the theorist speaks of perfect competition. And it can be shown that in this case the mass effect of the passive reaction of all individual firms will result in market prices and volumes of output displaying certain formal properties that are similar to those of the indices in our blueprint of a socialist economy. However […] in everything that constitutes the physiognomy of competitive capitalism, the blueprint is the very opposite of perfect competition and much further removed from it than from the big-business type of capitalism. (P. 183.)

As readers of this blog probably know, the theory of “pure and perfect competition” has been thoroughly thrashed by George Reisman in his essay Platonic Competition[7]. This kind of “competition” would require omniscience of the part of each and every participant in the economic system; and it has nothing whatsoever to do with competition in the real world (in what Schumpeter calls “the big-business type of capitalism”[8]. Yet, proponents of this kind of “competition” use it as a standard by which, and against which, real-life competition should be judged.

The idea – which Schumpeter seems to accept – is that “pure and perfect capitalism” would be characterized by this kind of competition, and that the other type of capitalism (“big-business capitalism”) is a deviation from the ideal.

Schumpeter on Inflation

In order to facilitate the transition to socialism, Schumpeter proposes inflation – even hyperinflation. I repeat the quote I gave earlier:

The first thing which must be done is to bring about inflation. The banks must be seized and combined or coordinated with the treasury, and the board or ministry must create deposits and banknotes using traditional methods as much as possible. I believe inflation to be unavoidable because I have still to meet the socialist who denies that in the case under discussion the socialist revolution would at least temporarily paralyze the economic process or that in consequence the treasury and the financial centers would for the moment be short of ready means. The socialist system of bookkeeping and income units not being as yet in working order, nothing except a policy analogous to that of Germany during and after the First World War or that of France during and after the revolution of 1789, notwithstanding the fact that in those cases it was precisely the unwillingness to break with the system of private property and with the methods of commercial society that enforced inflation for so considerable a time; for “the day after the socialist revolution” when nothing would be in shape, this difference does not matter.

It should be added however that besides necessity there is another motive to embark upon this course. Inflation is in itself an excellent means of smoothing certain transitional difficulties and of effecting partial expropriation. As regards the first, it is for instance evident that a drastic increase in money wage rates will for a time avail to ward off possible outbreaks of rage at the fall in real wage rates that, temporarily at least, would have to be imposed. As regards the second, inflation expropriates the holder of claims in terms of money in a delightfully simple way. [Yes: delightfully.] The board might even make matters easier for itself by paying owners of real capital – factories and so on – any amount of indemnities if it resolves at the same time that these shall become valueless before long. Finally, it must not be forgotten that inflation would powerfully ram such blocks of private business as may have to be left standing for the moment. For, as Lenin has pointed out, nothing disorganizes like inflation: “in order to destroy bourgeois society you must debauch its money.” (P. 226f.)

Please note: it is not the relatively modest inflation of a few percent per year that we are used to that Schumpeter proposes; it is not even the two-digit inflation that we experienced around 1980; as the examples he gives – the assignats of the French Revolution, and the German post-World War I inflation – show, it is the kind of hyperinflation that wipes out the currency. (Current examples of this are Zimbabwe and Venezuela.) Time to quote Francisco d’Anconia:

Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, “Account overdrawn.”

Schumpeter might call this “creative destruction”, but I say it is destruction, pure and simple.

Schumpeter on “Social Discipline”

There is an odd section in his book about “discipline”, by which is meant such things as obeying orders and refraining from strikes.

… there are two facts that may be expected to make for stricter self-discipline and group discipline in the socialist order. […}

First, the socialist order will command the moral allegiance which is being increasingly refused to capitalism. This, it need hardly be emphasized, will give the workman a healthier attitude toward his duties than he can possibly have under capitalism. […]

Second, one of the chief merits of the socialist order consists in the fact that it shows up the nature of economic phenomena with unmistakable clearness whereas in the capitalist order their faces are covered by the mask of the profit interest. We may think as we please about the crimes and follies which socialists hold are perpetrated behind that mask, but we cannot deny the importance of the mask itself. For instance, in a socialist society nobody could possibly doubt that what a nation gets out of international trade is the imports and that the exports are the sacrifice which must be undergone in order to procure the imports, whereas in commercial society this common-sense is as a rule completely hidden from the man in the street […] Far beyond the matter in hand, economic policy will therefore be rationalized and some of the worst sources of waste will be avoided simply because the economic significance of measures and processes will be patent to every comrade. (P. 211f.)

Later on:

socialism might be the only means of restoring social discipline. [Schumpeter’s own italics.]

And why?

First, the socialist management will have at its disposal many more tools of authoritarian discipline than any capitalist management can ever have again. The threat of dismissal is practically the only one that is left […] But threat of dismissal by the socialist management may mean the threat of withholding sustenance that cannot be secured by an alternative employment. […]

Second, the socialist management will find it much easier to use whatever tools of authoritarian discipline it may have. There will be no government to interfere. Intellectuals as a group will no longer be hostile and those individuals who are will be restrained by a society that once more believes in its own standards. […] A strike would be mutiny.

Third, there will be infinitely more motive for the managing group to uphold authority that there is for government in capitalist democracy. […] Attempts at paralyzing operations and at setting people against their work will amount to attacking the government. And it can reasonably be expected to react to this. (P. 215.)

If this were written by, for example, George Reisman (or, for that matter, by myself), it would be part of the strongest possible indictment of socialism; it would be one of many examples of how a socialist society treats is subjects like slaves. But not for Schumpeter. He regards this authoritarian discipline as one of the great virtues of socialism!

But this is still just theory and logic, part of the “blueprint” of socialism. But Schumpeter also has some words on the practice:

The fact that the Russian state, unlike the capitalist state, is in a position to enforce, in the teaching and guiding of the young, conformity with its ends and structural ideas immeasurably increases its ability to create an atmosphere favorable to factory discipline. Intellectuals are evidently not at liberty to tamper with it. And there is no public opinion to encourage infractions.

Finally, dismissal spelling privation, shifts amounting to deportation, “visits” by shock brigades and occasionally also by comrades of the Red Army are, practically independent means in the hands of the government by which to safeguard performance. There is motive to use them and, as a matter of universally admitted fact, they have been unflinchingly used. Sanctions which no capitalist employer would think of applying even if he had the power frown sternly behind all gentler psycho-technics.

Is this a problem for Schumpeter?

The sinister connotations of all this are not essential to our argument. There is nothing sinister in what I am trying to convey. The cruelties to individuals and whole groups are largely attributable to the unripeness of the situation, to the circumstances of the country and to the quality of its ruling personnel. In other circumstances, in other stages of development and with other ruling personnel they will not be necessary. If it should be unnecessary to apply any sanctions at all, so much the better. The point is that at least one socialist regime has actually been able to foster group discipline and to impose authoritarian discipline. It is the principle that matters and not the particular form in which it was turned into practice. (P. 217f.)

Those words alone ought to be sufficient to exclude Schumpeter from the human race and place him in the category of moral monsters. To the common objection to socialism – “I see the broken eggs, but where’s the omelet? – he answers: “If the socialist omelet could be made without breaking any eggs, so much the better. I admit that some eggs have been broken, but we still have the omelet.”

$ $ $

This ought to be enough to answer the question in the heading. Schumpeter is a foe of capitalism. And – capitalism being the only system conducive to progress and to human life and well-being, he has to be regarded as a foe of humanity.[9]


[1] The striking feature of Ten Great Economists is that Schumpeter praises every one equally. The economists are:

Karl Marx
Leon Walras
Carl Menger
Alfred Marshall
Vilfredo Pareto
Eugen von Böhm-Bawerk
Frank Taussig
Irving Fisher
Wesley Claire Mitchell
John Maynard Keynes

Which name is glaringly missing here I leave to you to figure out.

[2] In view of what he writes on the subject, this may be doubtful. One must say that he shows a Janus face to the world, one pro-capitalist and one pro-socialist face.

[3] Schumpeter gives main credit to an Italian economist, Enrico Barone, a student and follower of Vilfredo Pareto. He also mentions Oskar Lange, who, as you might know, gave credit to Mises for having identified the calculation problem of socialism and suggested putting up statues of Mises in all socialist capitals. (He also thought he had solved the calculation problem.) Mises’ own comment on all those attempts was that they were like pre-school children playing school: they might have fun, but they would not learn anything.

[4] It may be unrealistic to imagine a tribal society having even this rudimentary division of labor. But it would not change my reasoning if I instead imagined a small town, where the chief and his council would be replaced by a mayor and his council.

[5] Had he read Atlas Shrugged and paid some attention to all the copper wires that break in the end of the novel – and all the other events that led up to the lights of New York going out – he might have thought differently.

[6] This is known as the problem of “double coincidence of wants”. To take a simple example, a farmer who mainly produces eggs is in dire need of a new shirt (or pair of trousers, or whatever) and has to fins a tailor who is in equally dire need of more eggs. If he does not find one, he may try to find a shoemaker in need of eggs, who in his turn has to find a tailor in need of new shoes. And if this, too, is impossible … we, you take it from there.

[7] There is an expanded version of this essay in Capitalism: A Treatise on Economics, chapter 10, section 10.

[8] He is right in calling the concept “bloodless”.

[9] I cannot resist the following, even if it is not a serious criticism:

His [Schumpeter’s] ambitions as a young man were virtually boundless. He sought to become the greatest economist in the world, the greatest horse rider in Austria, and the greatest lover in Vienna. (Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism, p. 164.)

Since I am not acquainted with any Viennese women from that time (or with any Viennese women at all), I cannot say anything about his third ambition. As for the second, at least Hugo Simon and Thomas Frühmann are superior Austrian horse riders. As for the first, he ranks with John Maynard Keynes as being the worst economist of them all.

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