We live in a time of immense confusion. Words that used to mean one thing suddenly mean another. The values which made us prosperous and free are being questioned and trampled on. We are in a mess, and our instinctive reactions seem to make things worse.
In 1989, following the collapse of the Soviet Union, Francis Fukuyama declared "The End of History" and noted that 'The triumph of the West, of the Western idea, is evident first of all in the total exhaustion of viable systematic alternatives to Western liberalism'. Twenty years later, the ideological appeal of classic liberal values - free markets, property rights, civil liberty, and individual responsibility - is in decline, following an economic meltdown in developed countries and the perceived success of the authoritarian-socialist model, most notably in the People's Republic of China. Capitalism as we know it is dying. Some say it already died a long time ago.
In 1942, Joseph Schumpeter published Capitalism, Socialism, and Democracy. Shumpeter, an Austrian aristocrat and former Minister of Finance, left his professorial position at the University of Bonn, Germany, and fled to the US following Hitler's rise to power in the early 1930s. He taught at Harvard University from 1932 until the day he died. His life's work was the search for an ideal economic and political system.
Schumpeter opens his most famous book by asking 'Can Capitalism Survive?', and immediately responds 'No, I don't think it can'. Schumpeter was not a Marxist and did not wish for capitalism to perish, but he thought that capitalism's evolution into a new form of socialism was inevitable. At odds with the Marxist view that capitalism would be destroyed by the angry "proletariat", Schumpeter believed that 'capitalism would be destroyed by its successes'.
But why? And how? Since most of you are busy people, I prepared a brief summary of Schumpeter's main points, based on Capitalism, Socialism, and Democracy, as well as other publications, most notably The March into Socialism, a speech he delivered shortly before his death. While his work covers a broad array of issues - entrepreneurship, democracy, consumerism - my summary will focus on his ideas concerning the decline of capitalism.
Before we proceed, it is important to put things in historical context. Schumpeter was born in a world divided between imperial powers. He witnessed the triumph of America and England's relatively pure form of capitalism during the final decades of the 19th century and beginning of the 20th century. Back then, capitalism was synonymous with small government and individual responsibility. Schumpeter saw the erosion of this notion through the establishment of many institutions that seem to us, today, as god-given components of any capitalist system: When Schumpeter was 20, the US had no Central Bank, no progressive Income Tax, no military industry of any significance, no social security, and no government healthcare.
Schumpeter wrote his book at a time when only 14% of government expenditure was funded by individual income tax, as opposed to about 40% today; The expenditure on defense was about 1.7% of US GDP (in 1940), and is over 3% today. In 1960, ten years after he died, spending on Health and Human Services still took less than 3.5% of all government expenditure, compared to about 25% in the 2000s. The total Federal Government outlays in 1940 amounted to 9.8% of US GDP compared to about 20% during the 2000s - and that's before taking into account the recent government bailouts and stimulus packages, which take these numbers completely off the charts (additional historical data can be found in this PDF report published by the White House). Most importantly, Schumpeter lived at a time when the US Dollar was (mostly) tied to gold, and the government was severely limited in its ability to create new money and generate inflation.
Government control of economic affairs has grown by leaps and bounds during the last 60 years, and many of the things that we now take for granted were considered purely socialist back then. Ironically, the fact that so much has changed, and that we still call our current system "capitalism", makes it somewhat difficult to understand how astute Schumpeter was in his prediction of capitalism's demise. We might be proud to claim that capitalism is still alive and well, but - based on how much it has changed - many would argue that what we still call capitalism is simply a sophisticated form of socialism.
Stay tuned for Part II.
China isn't authoritarian socialist. It's authoritarian capitalist.
Thanks, Captcha, for serving as a living example of the process I am talking about. The fact that you can call China "capitalist" or not see the oxymoron in "authoritarian capitalism" shows how far we have come.
Even the most narrow definition of capitalism, one that does not take into account any political system, talks about a system in which trade and industry are controlled by private owners, for profit. Last time I checked, about 50% of China's economy was directly owned by the state, with the rest of it very tightly controlled as well.
Anyway - if you enjoy saying that China is capitalist, go ahead.
Captcha, for a very good analysis of why contemporary America can hardly capitalist (not to mention China), you can check out George Reisman's article on Mises.org.
"Even the most narrow definition of capitalism, one that does not take into account any political system, talks about a system in which trade and industry are controlled by private owners, for profit."
That exactly what it is. But it never exist. Pure capitalism (or "unfettered free market") and Communism are both ideal and utopia. If you want capitalism take into account of a political system, Robert Nozick maybe a candidate.
"The fact that you can call China "capitalist" or not see the oxymoron in "authoritarian capitalism" shows how far we have come."
I would say that your reference to 'authoritarian socialism' is the oxymoron. The aim of socialism is to create a classless society. State capitalism, soviet communism, call it what you like but in my view they are just as undesirable as what you assert is the real capitalism. The common denominator in all these systems is role that capital plays in the allocation of wealth and its part in maintaining class societies. This to me is capitalism, but that is hardly important.
Marcos: The meaning of the word "Socialism" is indeed very different today from when Proudhon or even Marx had in mind when they used it in the 19th century. Just like the word "Liberalism" means almost the opposite today from what Jefferson or Mills had in mind when they used it back in the day. I have written extensively about this change of meaning in other posts.
The above uses the term "Socialism" in it's common, 20th century meaning. Classes are always, and never, there, depending on the depth of your analysis. Each person is at any given moment a member of several classes and/or while some type of classes remain in a free country, the people within them change. The only way to avoid that from happening is by intervening in the market on behalf of big capital, which is what government have done consistently.