Book Key Points: Capitalism, Socialism, and Democracy

The purpose of the compilation of quotes below is not for readers to skip reading the book, but rather to remind readers of the key points outlined in the classic text by Joseph Schumpeter. The book highlights reasoning behind the tendency for mature capitalism to slowly drift toward socialism, and whether democracy could work well within a socialist framework.

We always plan too much and always think too little. We resent a call to thinking and hate unfamiliar argument that does not tally with what we already believe or would like to believe.
  The economic interpretation of history does not mean that men are, consciously or unconsciously, wholly or primarily, actuated by economic motives. On the contrary, the explanation of the role and mechanism of non-economic motives and the analysis of the way in which social reality mirrors itself in the individual psyches is an essential element of the theory and one of its most significant contributions.
  What the theory really says may be put into two propositions: (1)The forms or conditions of production are the fundamental determinant of social structures which in turn breed attitudes, actions and civilizations. Marx illustrates his meaning by the famous statement that the “hand-mill” creates feudal, and the “steam-mill,” capitalist societies. This stresses the technological element to a dangerous extent, but may be accepted on the understanding that mere technology is not all of it. Popularizing a little and recognizing that by doing so we lose much of the meaning, we may say that it is our daily work which forms our minds, and that it is our location within the productive process which determines our outlook on things—or the sides of things we see—and the social elbowroom at the command of each of us. (2) The forms of production themselves have a logic of their own; that is to say, they change according to necessities inherent in them so as to produce their successors merely by their own working. To illustrate by the same Marxian example: the system characterized by the “hand-mill” creates an economic and social situation in which the adoption of the mechanical method of milling becomes a practical necessity that individuals or groups are powerless to alter. The rise and working of the “steam-mill” in turn creates new social functions and locations, new groups and views, which develop and interact in such a way as to outgrow their own frame. Here, then, we have the propeller which is responsible first of all for economic and, in consequence of this, for any other social change, a propeller the action of which does not itself require any impetus external to it.
  As we shall see presently, Marx tries to show how in that class war capitalists destroy each other and eventually will destroy the capitalist system too. He also tries to show how the ownership of capital leads to further accumulation. But this way of arguing as well as the very definition that makes the ownership of something the constituent characteristic of a social class only serves to increase the importance of the question of “primitive accumulation,” that is to say, of the question how capitalists came to be capitalists in the first instance or how they acquired that stock of goods which according to the Marxian doctrine was necessary in order to enable them to start exploiting.
  Supernormal intelligence and energy account for industrial success and in particular for the founding of industrial positions in nine cases out of ten. And precisely in the initial stages of capitalism and of every individual industrial career, saving was and is an important element in the process though not quite as explained in classic economics. It is true that one does not ordinarily attain the status of capitalist (industrial employer) by saving from a wage or salary in order to equip one’s factory by means of the fund thus assembled. The bulk of accumulation comes from profits and hence presupposes profits—this is in fact the sound reason for distinguishing saving from accumulating. The means required in order to start enterprise are typically provided by borrowing other people’s savings, the presence of which in many small puddles is easy to explain or the deposits which banks create for the use of the would-be entrepreneur. Nevertheless, the latter does save as a rule: the function of his saving is to raise him above the necessity of submitting to daily drudgery for the sake of his daily bread and to give him breathing space in order to look around, to develop his plans and to secure cooperation.
  Both Ricardo and Marx say that the value of every commodity is (in perfect equilibrium and perfect competition) proportional to the quantity of labor contained in the commodity, provided this labor is in accordance with the existing standard of efficiency of production (the “socially necessary quantity of labor”). Both measure this quantity in hours of work and use the same method in order to reduce different qualities of work to a single standard.
  where capital goods such as plant, machinery and raw materials are used in the production of a commodity, this commodity will sell at a price which will yield a net return to the owner of those capital goods. He realized that this fact has something to do with the period of time that elapses between the investment and the emergence of salable products and that it will enforce deviations of the actual values of these from proportionality to the man-hours “contained” in them—including the man-hours that went into the production of the capital goods themselves—whenever these periods are not the same in all industries.
  exploitation did not arise from individual situations occasionally and accidentally; but that it resulted from the very logic of the capitalist system, unavoidably and quite independently of any individual intention.
  The brain, muscles and nerves of a laborer constitute, as it were, a fund or stock of potential labor (Arbeitskraft, usually translated not very satisfactorily by labor power). This fund or stock Marx looks upon as a sort of substance that exists in a definite quantity and in capitalist society is a commodity like any other. We may clarify the thought for ourselves by thinking of the case of slavery: Marx’s idea is that there is no essential difference, though there are many secondary ones, between the wage contract and the purchase of a slave—what the employer of “free” labor buys is not indeed, as in the case of slavery, the laborers themselves but a definite quota of the sum total of their potential labor.
  This constitutes the value of that stock, and if he sells parts of it—expressed in days or weeks or years—he will receive wages that correspond to the labor value of these parts, just as a slave trader selling a slave would in equilibrium receive a price proportional to the total number of those labor hours.
  Moreover, it can be shown that perfectly competitive equilibrium cannot exist in a situation in which all capitalist-employers make exploitation gains. For in this case they would individually try to expand production, and the mass effect of this would unavoidably tend to increase wage rates and to reduce gains of that kind to zero. It would no doubt be possible to mend the case somewhat by appealing to the theory of imperfect competition, by introducing friction and institutional inhibitions of the working of competition, by stressing all the possibilities of hitches in the sphere of money and credit and so on.
  saving by the capitalist class ipso facto implies a corresponding increase in real capital.11 This movement will in the first instance always occur in the variable part of total capital, the wage capital, even if the intention is to increase the constant part and in particular that part which Ricardo called fixed capital—mainly machinery.
  When discussing Marx’s theory of exploitation, I have pointed out that in a perfectly competitive economy exploitation gains would induce capitalists to expand production, or to attempt to expand it, because from the standpoint of every one of them that would mean more profit. In order to do so they would have to accumulate. Moreover the mass effect of this would tend to reduce surplus values through the ensuing rise in wage rates, if not also through an ensuing fall in the prices of products—a very nice instance of the contradictions inherent in capitalism that were so dear to Marx’s heart. And that tendency itself would, also for the individual capitalist, constitute another reason why he should feel compelled to accumulate,12 though again that would in the end make matters worse for the capitalist class as a whole. There would hence be a sort of compulsion to accumulate even in an otherwise stationary process which, as I mentioned before, could not reach stable equilibrium until accumulation had reduced surplus value to zero and thus destroyed capitalism itself.
  Possibilities of gains to be reaped by producing new things or by producing old things more cheaply are constantly materializing and calling for new investments. These new products and new methods compete with the old products and old methods not on equal terms but at a decisive advantage that may mean death to the latter. This is how “progress” comes about in capitalist society. In order to escape being undersold, every firm is in the end compelled to follow suit, to invest in its turn and, in order to be able to do so, to plow back part of its profits, i.e., to accumulate.14 Thus, everyone else accumulates.
  It is sufficient that, as we have seen, the profit of every individual plant is incessantly being threatened by actual or potential competition from new commodities or methods of production which sooner or later will turn it into a loss. So we get the driving force required and even an analogon to Marx’s proposition that constant capital does not produce surplus value—for no individual assemblage of capital goods remains a source of surplus gains forever—without having to rely on those parts of his argument which are of doubtful validity.
  Marx undoubtedly held that in the course of capitalist evolution real wage rates and the standard of life of the masses would fall in the better-paid, and fail to improve in the worst-paid, strata and that this would come about not through any accidental or environmental circumstances but by virtue of the very logic of the capitalist process.
  Ricardo’s example presents another interesting feature. He considers a firm owning a given amount of capital and employing a given number of workmen that decides to take a step in mechanization. Accordingly, it assigns a group of those workmen to the task of constructing a machine which when installed will enable the firm to dispense with part of that group. Profits may eventually remain the same (after the competitive adjustments which will do away with any temporary gain) but gross revenue will be destroyed to the exact amount of the wages previously paid to the workmen that have now been “set free.” Marx’s idea of the replacement of variable (wage) capital by constant capital is almost the exact replica of this way of putting it. Ricardo’s emphasis upon the ensuing redundancy of population is likewise exactly paralleled by Marx’s emphasis upon surplus population which term he uses as an alternative to the term “industrial reserve army.”
  “Hand in hand with this centralization, or this expropriation of many capitalists by few, develops . . . the entanglement of all nations in the net of the world market, and with this, the international character of the capitalist regime. Along with the constantly diminishing number of the magnates of capital, who usurp and monopolize all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working class, a class always increasing in numbers, and disciplined, united, organized by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with it, and under it. Centralization of the means of production and socialization of labor at last reach a point where they become incompatible with their capitalist integument. This integument bursts. The knell of capitalist private property sounds. The expropriators are expropriated.”
  Is it not the most natural thing in the world to conclude that crises or depressions are due to the fact that the exploited masses cannot buy what that ever-expanding apparatus of production turns out or stands ready to turn out, and that for this and also other reasons which we need not repeat the rate of profits drops to bankruptcy level? Thus we seem indeed to land, according to which element we want to stress, at the shores of either an under-consumption or an over-production theory of the most contemptible type.
  Since, on the one hand, capitalist society cannot exist and its economic system cannot function without profits and since, on the other hand, profits are constantly being eliminated by the very working of that system, incessant effort to keep them alive becomes the central aim of the capitalist class. Accumulation accompanied by qualitative change in the composition of capital is, as we have seen, a remedy which though alleviating for the moment the situation of the individual capitalist makes matters worse in the end. So capital, yielding to the pressure of a falling rate of profits—it falls, we recall, both because constant capital increases relative to variable capital and because, if wages tend to rise and hours are being shortened, the rate of surplus value falls—seeks for outlets in countries in which there is still labor that can be exploited at will and in which the process of mechanization has not as yet gone far. Thus we get an export of capital into undeveloped countries which is essentially an export of capital equipment or of consumers’ goods to be used in order to buy labor or to acquire things with which to buy labor.3 But it is also export of capital in the ordinary sense of the term because the exported commodities will not be paid for—at least not immediately—by goods, services or money from the importing country. And it turns into colonization if, in order to safeguard the investment both against hostile reaction of the native environment—or if you please, against its resistance to exploitation—and against competition from other capitalist countries, the undeveloped country is brought into political subjection. This is in general accomplished by military force supplied either by the colonizing capitalists themselves or by their home government which thus lives up to the definition given in the Communist Manifesto: “the executive of the modern State [is] … a committee for managing the common affairs of the whole bourgeoisie.” Of course, that force will not be used for defensive purposes only. There will be conquest, friction between the capitalist countries and internecine war between rival bourgeoisies.
  So far as colonial expansion is prompted by a falling rate of profit in the capitalist countries, it should occur in the later stages of capitalist evolution—Marxists in fact speak of imperialism as a stage, preferably the last stage, of capitalism. Hence it would coincide with a high degree of concentration of capitalist control over industry and with a decline of the type of competition that characterized the times of the small or medium-sized firm.
  The proposition that many protective duties owe their existence to the pressure of large concerns that desire to use them for the purpose of keeping their prices at home above what they otherwise would be, possibly in order to be able to sell more cheaply abroad, is a platitude but correct, although no tariff was ever wholly or even mainly due to this particular cause. It is the Marxian synthesis that makes it inadequate or wrong. If our ambition is simply to understand all the causes and implications of modern protectionism, political, social and economic, then it is inadequate. For instance, the consistent support given by the American people to protectionist policy, whenever they had the opportunity to speak their minds, is accounted for not by any love for or domination by big business, but by a fervent wish to build and keep a world of their own and to be rid of all the vicissitudes of the rest of the world.
  The attitudes of capitalist groups toward the policy of their nations are predominantly adaptive rather than causative, today more than ever. Also, they hinge to an astonishing degree on short-run considerations equally remote from any deeply laid plans and from any definite “objective” class interests.
  As has been stated before, all this means is that by virtue of its very logic capitalist evolution tends to destroy the capitalist and to produce the socialist order of things.
  Marx himself, while very wisely refraining from describing socialist society in detail, emphasized conditions of its emergence: on the one hand, the presence of giant units of industrial control—which, of course, would greatly facilitate socialization—and, on the other hand, the presence of an oppressed, enslaved, exploited, but also very numerous, disciplined, united and organized proletariat. This suggests much about the final battle that is to be the acute stage of the secular warfare between the two classes which will then be arrayed against each other for the last time. It also suggests something about what is to follow; it suggests the idea that the proletariat as such will “take over” and, through its dictatorship, put a stop to the “exploitation of man by man” and bring about classless society.
  Thus there are prolonged periods of rising and of falling prices, interest rates, employment and so on, which phenomena constitute parts of the mechanism of this process of recurrent rejuvenation of the productive apparatus.
  The difficulties do not seem to consist so much in the lack of surplus sufficient to blot out the darkest hues in the picture: they consist, on the one hand, in the fact that the unemployment figure has been increased by anti-capitalist policies beyond what it need have been in the thirties and, on the other hand, in the fact that public opinion as soon as it becomes at all alive to the duty in question, immediately insists on economically irrational methods of financing relief and one lax and wasteful methods of administering it. Much the same argument applies to the future—and to a great extent the present—possibilities held out by capitalist evolution for the care of the aged and sick, for education and hygiene and so on. Also, an increasing number of commodities might reasonably be expected, from the standpoint of the individual household, to pass out of the class of economic goods and to be available practically up to the satiety point. This could be brought about either by arrangement between public agencies and producing concerns or by nationalization of municipalization, gradual progress with which would of course be a feature of the future development even of an otherwise unfettered capitalism.
  From the standpoint of the economic analyst, the chief merit of the classics consists in their dispelling, along with many other gross errors, the naïve idea that economic activity in capitalist society, because it turns on the profit motive, must by virtue of that fact alone necessarily run counter to the interests of consumers; or, to put it differently, that moneymaking necessarily deflects producing from its social goal; or, finally, that private profits, both in themselves and through the distortion of the economic process they induce, are always a net loss to all excepting those who receive them and would therefore constitute a net gain to be reaped by socialization.
  Still it can be shown, within the general assumptions of the Marshall-Wicksell analysis, that firms which cannot by their own individual action exert any influence upon the price of their products or of the factors of production they employ—so that there would be no point in their weeping over the fact that any increase in production tends to decrease the former and to increase the latter—will expand their output until they reach the point at which the additional cost that must be incurred in order to produce another small increment of product (marginal cost) just equals the price they can get for that increment, i.e., that they will produce as much as they can without running into loss. And this can be shown to be as much as it is in general “socially desirable” to produce.
  Neither Marshall and Wicksell nor the classics saw that perfect competition is the exception and that even if it were the rule there would be much less reason for congratulation than one might think.
  And as regards practically all the finished products and services of industry and trade, it is clear that every grocer, every filling station, every manufacturer of gloves or shaving cream or handsaws has a small and precarious market of his own which he tries—must try—to build up and to keep by price strategy, quality strategy—“product differentiation”—and advertising. Thus we get a completely different pattern which there seems to be no reason to expect to yield the results of perfect competition and which fits much better into the monopolistic schema. In these cases we speak of Monopolistic Competition.
  In the general case of oligopoly there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoves, an indefinite state of warfare between firms. It is true that there are many special cases in which a state of equilibrium theoretically exists. In the second place, even in these cases not only is it much harder to attain than the equilibrium in perfect competition, and still harder to preserve, but the “beneficial” competition of the classic type seems likely to be replaced by “predatory” or “cutthroat” competition or simply by struggles for control in the financial sphere. These things are so many sources of social waste, and there are many others such as the costs of advertising campaigns, the suppression of new methods of production (buying up of patents in order not to use them) and so on. And most important of all: under the conditions envisaged, equilibrium, even if eventually attained by an extremely costly method, no longer guarantees either full employment or maximum output in the sense of the theory of perfect competition. It may exist without full employment; it is bound to exist, so it seems, at a level of output below that maximum mark, because profit-conserving strategy, impossible in conditions of perfect competition, now not only becomes possible but imposes itself.
  If we list the items that enter the modern workman’s budget and from 1899 on observe the course of their prices not in terms of money but in terms of the hours of labor that will buy them—i.e., each year’s money prices divided by each year’s hourly wage rates—we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement in qualities, seems to have been greater and not smaller than it ever was before.
  Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. And this evolutionary character of the capitalist process is not merely due to the fact that economic life goes on in a social and natural environment which changes and by its change alters the data of economic action; this fact is important and these changes (wars, revolutions and so on) often condition industrial change, but they are not its prime movers. Nor is this evolutionary character due to a quasi-automatic increase in population and capital or to the vagaries of monetary systems of which exactly the same thing holds true. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
  This process of Creative Destruction is the essential fact about capitalism.
  In order to put the first into the strongest possible light, let us assume that an industry which refuses to reduce prices in recession goes on selling exactly the same quantity of product which it would sell if it had reduced them. Buyers are therefore out of pocket by the amount to which the industry profits from the rigidity. If these buyers are the kind of people who spend all they can and if the industry or those to whom its net returns go does not spend the increment it gets but either keeps it idle or repays bank loans, then total expenditure in the economy may be reduced thereby. If this happens, other industries or firms may suffer and if thereupon they restrict in turn, we may get a cumulation of depressive effects. In other words, rigidity may so influence the amount and distribution of national income as to decrease balances or to increase idle balances or, if we adopt a popular misnomer, savings. Such a case is conceivable. But the reader should have little difficulty in satisfying himself111 that its practical importance, if any, is very small.
  Progress entails, as we have seen, destruction of capital values in the strata with which the new commodity or method of production competes. In perfect competition the old investments must be adapted at a sacrifice or abandoned; but when there is no perfect competition and when each industrial field is controlled by a few big concerns, these can in various ways fight the threatening attack on their capital structure and try to avoid losses on their capital accounts; that is to say, they can and will fight progress itself.
  So far as the use of the old machines saves future costs as compared with the immediate introduction of the new methods, the remainder of their service value is of course an element of the decision for both the capitalist and the socialist manager; otherwise bygones are bygones for both of them and any attempt to conserve the value of past investment would conflict as much with the rules following from the profit motive as it would conflict with the rules set for the behavior of the socialist manager.
  It is however not true that private firms owning equipment the value of which is endangered by a new method which they also control—if they do not control it, there is no problem and no indictment —will adopt the new method only if total unit cost with it is smaller than prime unit cost with the old one, or if the old investment has been completely written off according to the schedule decided on before the new method presented itself. For if the new machines when installed are expected to outlive the rest of the period previously set for the use of the old machines, their discounted remainder value as of that date is another asset to be taken account of. Nor is it true, for analogous reasons, that a socialist management, if acting rationally, would always and immediately adopt any new method which promises to produce at smaller total unit costs or that this would be to the social advantage.
  Even railroads and power and light concerns had first to create the demand for their services and, when they had done so, to defend their market against competition. Outside the field of public utilities, the position of a single seller can in general be conquered—and retained for decades—only on the condition that he does not behave like a monopolist. Short-run monopoly will be touched upon presently.
  Even if the opportunity to set monopolist prices were the sole object, the pressure of the improved methods or of a huge apparatus would in general tend to shift the point of the monopolist’s optimum toward or beyond the competitive cost price in the above sense, thus doing the work—partly, wholly, or more than wholly—of the competitive mechanism,20 even if restriction is practiced and excess capacity is in evidence all along. Of course if the methods of production, organization and so on are not improved by or in connection with monopolization as is the case with an ordinary cartel, the classical theorem about monopoly price and output comes into its own again.21 So does another popular idea, viz., that monopolization has a soporific effect. For this, too, it is not difficult to find examples. But no general theory should be built upon it. For, especially in manufacturing industry, a monopoly position is in general no cushion to sleep on. As it can be gained, so it can be retained only by alertness and energy. What soporific influence there is in modern business is due to another cause that will be mentioned later.
  As a matter of fact, perfect competition is and always has been temporarily suspended whenever anything new is being introduced—automatically or by measures devised for the purpose—even in otherwise perfectly competitive conditions.
  traditional theory is correct in holding that profits above what is necessary in each individual case to call forth the equilibrium amount of means of production, entrepreneurial ability included, both indicate and in themselves imply net social loss and that business strategy that aims at keeping them alive is inimical to the growth of total output.
  Since the capitalist process always has been geared to a large amount of current investment, even partial elimination of it would suffice to make plausible the forecast that the process is going to flop. This particular line in the Marxist argument no doubt seems to agree well not only with some outstanding facts of the past decade—unemployment, excess reserves, gluts in money markets, unsatisfactory margins of profits, stagnation of private investment—but also with several non-Marxist interpretations. There is surely no such gulf between Marx and Keynes as there was between Marx and Marshall or Wicksell. Both the Marxist doctrine and its non-Marxist counterpart are well expressed by the self-explanatory phrase that we shall use: the theory of vanishing investment opportunity.2
  The main reasons for holding that opportunities for private enterprise and investment are vanishing are these: saturation, population, new lands, technological possibilities, and the circumstance that many existing investment opportunities belong to the sphere of public rather than of private investment.
  Technological possibilities are an uncharted sea. We may survey a geographical region and appraise, though only with reference to a given technique of agricultural production, the relative fertility of individual plots. Given that technique and disregarding its possible future developments, we may then imagine (though this would be wrong historically) that the best plots are first taken into cultivation, after them the next best ones and so on. At any given time during this process it is only relatively inferior plots that remain to be exploited in the future. But we cannot reason in this fashion about the future possibilities of technological advance. From the fact that some of them have been exploited before others, it cannot be inferred that the former were more productive than the latter. And those that are still in the lap of the gods may be more or less productive than any that have thus far come within our range of observation.
  capitalism—and not merely economic activity in general—has after all been the propelling force of the rationalization of human behavior.
  The capitalist process rationalizes behavior and ideas and by so doing chases from our minds, along with metaphysical belief, mystic and romantic ideas of all sorts. Thus it reshapes not only our methods of attaining our ends but also these ultimate ends themselves.
  The capitalist process, by substituting a mere parcel of shares for the walls of and the machines in a factory, takes the life out of the idea of property. It loosens the grip that once was so strong—the grip in the sense of the legal right and the actual ability to do as one pleases with one’s own; the grip also in the sense that the holder of the title loses the will to fight, economically, physically, politically, for “his” factory and his control over it, to die if necessary on its steps. And this evaporation of what we may term the material substance of property—its visible and touchable reality—affects not only the attitude of holders but also that of the workmen and of the public in general. Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without the precincts of the big concerns.
  Secular improvement that is taken for granted and coupled with individual insecurity that is acutely resented is of course the best recipe for breeding social unrest.
  politics is a profession which evolves interests of its own— interests that may clash with as well as conform to the interests of the groups that a man or party “represents.”
  As soon as men and women learn the utilitarian lesson and refuse to take for granted the traditional arrangements that their social environment makes for them, as soon as they acquire the habit of weighing the individual advantages and disadvantages of any prospective course of action—or, as we might also put it, as soon as they introduce into their private life a sort of inarticulate system of cost accounting —they cannot fail to become aware of the heavy personal sacrifices that family ties and especially parenthood entail under modern conditions and of the fact that at the same time, excepting the cases of farmers and peasants, children cease to be economic assets. These sacrifices do not consist only of the items that come within the reach of the measuring rod of money but comprise in addition an indefinite amount of loss of comfort, of freedom from care, and opportunity to enjoy alternatives of increasing attractiveness and variety—alternatives to be compared with joys of parenthood that are being subjected to a critical analysis of increasing severity.
  Thus the same economic process that undermines the position of the bourgeoisie by decreasing the importance of the functions of entrepreneurs and capitalists, by breaking up protective strata and institutions, by creating an atmosphere of hostility, also decomposes the motor forces of capitalism from within.
  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 of economic significance and volumes of output in our blueprint of a socialist economy. However, in all that really matters—in the principles governing the formation of incomes, the selection of industrial leaders, the allocation of initiative and responsibility, the definition of success and failure—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.
  we can readily convince ourselves by observing that one of the most important difficulties of running a business—the difficulty which absorbs most of the energy of a successful business leader —consists in the uncertainties surrounding every decision. A very important class of these consists in turn in the uncertainties about the reaction of one’s actual and potential competitors and about how general business situations are going to shape. Although other classes of uncertainties would no doubt persist in a socialist commonwealth, these two can reasonably be expected to vanish almost completely. The managements of socialized industries and plants would be in a position to know exactly what the other fellows propose to do and nothing would prevent them from getting together for concerted action.13 The central board could, and to a certain extent would unavoidably, act as a clearing house of information and as a coordinator of decisions—at least as much as an all-embracing cartel bureau would.
  It is often claimed that the socialist plan, by removing economic care from the shoulders of the individual, will release incalculable cultural energies that now go to waste in the struggle for daily bread. To some extent this is true—any “planned” society may do that as, for other reasons and in other respects, it also may smother cultural possibilities. It might be objected that public authorities as we know them are hardly up to the responsibility of discovering and nursing talent to the stage of fruition, and that there is no sound reason to believe that they would have appreciated Van Gogh any sooner than capitalist society did. But this objection misses the point. For public authority need not go as far as this. All that is necessary is that Van Gogh gets his “income” as everyone else does and that he is not worked too hard; this would suffice in any normal case—though, when I come to think of it, I am no longer sure whether it would have sufficed in the case of Van Gogh—to give the necessary opportunity for the assertion of creative ability.
  Even if any conceivable socialist economy were sure to be in our sense less efficient than any conceivable commercial economy, the majority of people—all in fact for whom the typical socialist cares—might still be “better off” or “happier” or “more content” in the former than in the latter. My first and main reply is that relative efficiency retains independent meaning even in such cases and that in all cases it will be an important consideration. But secondly I do not think that we lose much by adopting a criterion that neglects those aspects. This however is a very debatable matter on which it is just as well to be a little more explicit.
  One element of these costs should be mentioned specifically. It consists in the absorption of ability in merely protective activities. A considerable part of the total work done by lawyers goes into the struggle of business with the state and its organs. It is immaterial whether we call this vicious obstruction of the common good or defense of the common good against vicious obstruction. In any case the fact remains that in socialist society there would be neither need nor room for this part of legal activity. The resulting saving is not satisfactorily measured by the fees of the lawyers who are thus engaged. That is inconsiderable. But not inconsiderable is the social loss from such unproductive employment of many of the best brains. Considering how terribly rare good brains are, their shifting to other employments might be of more than infinitesimal importance.
  The friction or antagonism between the private and the public sphere was intensified from the first by the fact that, ever since the princes’ feudal incomes ceased to be of major importance, the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force.
  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 view is as a rule completely hidden from the man in the street who therefore cheerfully supports policies that are to his disadvantage.
  Marxian proposition that the economic process tends to socialize itself—and also the human soul. By this we mean that the technological, organizational, commercial, administrative and psychological prerequisites of socialism tend to be fulfilled more and more. Let us again visualize the state of things which looms in the future if that trend be projected. Business, excepting the agrarian sector, is controlled by a small number of bureaucratized corporations. Progress has slackened and become mechanized and planned. The rate of interest converges toward zero, not temporarily only or under the pressure of governmental policy, but permanently owing to the dwindling of investment opportunities. Industrial property and management have become depersonalized—ownership having degenerated to stock and bond holding, the executives having acquired habits of mind similar to those of civil servants. Capitalist motivation and standards have all but wilted away. The inference as to the transition to a socialist régime in such fullness of time is obvious. But two points deserve to be mentioned. First, different people—different socialists even—will differ from one another both in the degree of approximation to that state which will be satisfactory to them and in their diagnosis of the degree of approximation which has been actually reached at any given time.
  Second, even supposing that an unmistakable state of maturity be reached, transition will still require distinct action and still present a number of problems. The capitalist process shapes things and souls for socialism. In the limiting case it might do this so completely that the final step would not be more than a formality. But even then the capitalist order would not of itself turn into the socialist order; such a final step, the official adoption of socialism as the community’s law of life, would still have to be taken, say, in the form of a constitutional amendment. In practice however people will not wait for the limiting case to emerge. Nor would it be rational for them to do so, for maturity may to all intents and purposes be reached at a time when capitalist interests and attitudes have not yet completely vanished from every nook and cranny of the social structure. And then the passing of the constitutional amendment would be more than a formality.
  First the banking apparatus of England is no doubt quite ripe for socialization. The Bank of England is little more than a treasury department, in fact less independent than a well-ordered socialist community may well wish its financial organ to be. In commercial banking, concentration and bureaucratization seem to have done full work. The big concerns could be made to absorb as much of independent banking as there is left to absorb and then be merged with the Bank of England into the National Banking Administration, which could also absorb savings banks, building societies and so on without any customer becoming aware of the change except from his newspaper. The gain from rationalizing coordination of services might be substantial. From the socialist standpoint, there would also be a gain in the shape of an increase in the government’s influence on non-nationalized sectors. Second, the insurance business is an old candidate for nationalization and has to a large extent become mechanized by now. Integration with at least some of the branches of social insurance may prove feasible; selling costs of policies could be considerably reduced and socialists might again rejoice in the access of power that control over the funds of insurance companies would give to the state. Third, few people would be disposed to make great difficulties over railroads or even over trucking. Inland transportation is in fact the most obvious field for successful state management. Fourth, nationalization of mining, in particular coal mining, and of the coal and tar products down to and including benzol, and also of the trade in coal and in those products might even result in an immediate gain in efficiency and prove a great success if labor problems can be dealt with satisfactorily. From the technological and commercial standpoint, the case seems clear. But it seems equally clear that, private enterprise having been active in the chemical industry, no such success can with equal confidence be expected from an attempt to go beyond the limit indicated. Fifth, the nationalization of the production, transmission and distribution of electric current being substantially completed already, all that remains to be said under this head is that the electro-technical industry is a typical instance of what may still be expected from private enterprise—which shows how little sense, economically speaking, there is in standing either for general socialization or against any. But the case of power production also shows the difficulty of working a socialized industry for profit which nevertheless would be an essential condition of success if the state is to absorb so great a part of the nation’s economic life and still fulfill all the tasks of the modern state. Sixth, socialization of the iron and steel industry will be felt to be a much more controversial proposition than any made so far. But this industry has certainly sown its wild oats and can be “administered” henceforth—the administration including, of course, a huge research department. Some gains would result from coordination. And there is hardly much danger of losing the fruits of any entrepreneurial impulses. Seventh, with the possible exception of the architects’ share in the matter, the building and building material industries could, I believe, be successfully run by a public body of the right kind. So much of it already is regulated, subsidized and controlled in one way or another that there even might be a gain in efficiency—more than enough, perhaps, to compensate for the sources of loss that might be opened up.
  No doubt one might conceivably hold that, however criminal or stupid the thing that democratic procedure may strive to accomplish in a given historical pattern, the will of the people must prevail, or at all events that it must not be opposed except in the way sanctioned by democratic principles. But it seems much more natural in such cases to speak of the rabble instead of the people and to fight its criminality or stupidity by all the means at one’s command.
  The reduced sense of responsibility and the absence of effective volition in turn explain the ordinary citizen’s ignorance and lack of judgment in matters of domestic and foreign policy which are if anything more shocking in the case of educated people and of people who are successfully active in non-political walks of life than it is with uneducated people in humble stations.
  What we are confronted with in the analysis of political processes is largely not a genuine but a manufactured will. And often this artefact is all that in reality corresponds to the Volonté generate of the classical doctrine. So far as this is so, the will of the people is the product and not the motive power of the political process.
  Fifth, our theory seems to clarify the relation that subsists between democracy and individual freedom. If by the latter we mean the existence of a sphere of individual self-government the boundaries of which are historically variable—no society tolerates absolute freedom even of conscience and of speech, no society reduces that sphere to zero—the question clearly becomes a matter of degree. We have seen that the democratic method does not necessarily guarantee a greater amount of individual freedom than another political method would permit in similar circumstances. It may well be the other way round. But there is still a relation between the two. If, on principle at least, everyone is free to compete for political leadership6 by presenting himself to the electorate, this will in most cases though not in all mean a considerable amount of freedom of discussion for all. In particular it will normally mean a considerable amount of freedom of the press. This relation between democracy and freedom is not absolutely stringent and can be tampered with. But, from the standpoint of the intellectual, it is nevertheless very important. At the same time, it is all there is to that relation.
  Between socialism as we defined it and democracy as we defined it there is no necessary relation: the one can exist without the other. At the same time there is no incompatibility: in appropriate states of the social environment the socialist engine can be run on democratic principles.
  Democracy means only that the people have the opportunity of accepting or refusing the men who are to rule them.
  Every system can stand deviating practice to a certain extent. But even the necessary minimum of democratic self-control evidently requires a national character and national habits of a certain type which have not everywhere had the opportunity to evolve and which the democratic method itself cannot be relied on to produce.
  it should be clear that the labor movement is not essentially socialist, just as socialism is not necessarily laborite or proletarian.
  socialist parties could not be advised to watch bourgeois politics in silence. Their obvious task was to criticize capitalist society, to expose the masquerade of class interests, to point out how much better everything would be in the socialist paradise and to beat up for recruits: to criticize and to organize. However, a wholly negative attitude, though quite satisfactory as a principle, would have been impossible for any party of more than negligible political importance to keep up. It would inevitably have collided with most of the real desiderata of organized labor and, if persisted in for any length of time, would have reduced the followers to a small group of political ascetics. Considering the influence that Marx’s teaching exerted, right up to 1914, on the great German party and on many smaller groups it is interesting to see how he dealt with this difficulty.
  Thus that great sociologist, the man in the street, has been right once more. He said that socialism and socialists were un-American. If I catch his meaning, it amounts pretty much to what, less succinctly, I have been trying to convey. American development practically skipped the phase of socialism which saw the career of unadulterated Marxism and of the Second International. Their essential problems were hardly understood. The attitudes appropriate to them existed only as sporadic imports. American problems and attitudes occasionally borrowed these imported articles. But that was all.
  Marx had visualized the conquest of political power as the prerequisite of socialization which was to be taken in hand immediately. This implied, however, as in fact Marx’s argument implied throughout, that the opportunity for that conquest would occur when capitalism had run its course or, to use our own phrase again, when things and souls were ripe. The breakdown he thought of was to be a breakdown of the economic engine of capitalism from internal causes.18 Political breakdown of the bourgeois world was to be a mere incident to this.
  Washington economists have veered round to recommend balanced budgets, but budgets balanced at a very high level of taxation, the taxes to be highly progressive so as to eliminate the high incomes from which the menace of saving primarily proceeds. This accords with the slogan that (owing to the saving done by the receivers of high incomes) “in modern societies, the ultimate cause of unemployment is the inequality of incomes.” Thus the high level of national income to which we have looked for the solution of a good many economic and social problems is itself made out to be the most serious problem of all. Since high income means high savings and since these savings will not be entirely offset by investment expenditure, it will not be possible for the economy to keep on that high level of income and employment— unless fiscal policy keeps it there—if indeed this high level can be reached at all.
  Normally people save with a view to some return, in money or in services of some “investment good.” It is not only that the bulk of individual savings—and, of course, practically all business savings which, in turn, constitute the greater part of total saving—is done with a specific investment purpose in view. The decision to invest precedes as a rule, and the act of investing precedes very often, the decision to save. Even in those cases in which a man saves without specific investment purpose, any delay in coming to an investment decision is punished by the loss of return for the interval. It seems to follow, first, that unless people see investment opportunities, they will not normally save and that a situation of vanishing investment opportunity is likely to be also one of vanishing saving; and, second, that whenever we observe that people display “liquidity preference,” that is to say, a desire to save unaccompanied by a desire to invest—a desire to hoard—this must be explained by special reasons and not by appeal to any psychological law postulated ad hoc.

About Kevin

Kevin is a global macro analyst with over four years experience in the financial market. He began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.
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