Capitalism, Socialism and Democracy

Schumpeter published this in 1942 and it contains three largely separate arguments, held together by his method of taking opponents' positions seriously.

The economic argument is the most cited. Schumpeter holds that capitalism's essential feature is not price competition within a static structure but the process by which new products, methods, markets and organisational forms destroy existing ones. He calls this creative destruction and argues it is the fact about capitalism that everything else must accommodate. From this he draws conclusions that contradicted the economics of his time: temporary monopoly profits are the reward that induces innovation and are therefore functional rather than harmful; large firms with research capacity are the primary engines of innovation rather than small competitive ones; and static efficiency comparisons between market structures miss what actually matters.

The prediction is the most striking part. Schumpeter argued that capitalism would not fail economically but would be destroyed by its own success. Growth would create a large educated class with no property stake and a professional interest in criticism. The routinisation of innovation inside corporate research departments would eliminate the entrepreneurial function and with it the social basis for the bourgeoisie. The rationalising habit of mind capitalism produces would erode the traditional loyalties that sustain any social order including its own. Capitalism would therefore evolve into socialism through the decay of its own supporting institutions.

The democracy section rejects the classical theory that democracy expresses a popular will, arguing that no coherent popular will exists and that democracy should be defined procedurally as competition among elites for the people's vote. This became the dominant definition in political science.

The prediction of socialism has not occurred, though the mechanisms he identified, particularly the intellectual class and the bureaucratisation of innovation, are still argued about. The book's prose is dense and the three arguments are unequal in quality.