Capitalism, Socialism and Democracy

Review of “Capitalism, Socialism and Democracy“, Joseph A. Schumpeter;
Harper Torchbooks, 1976; ISBN: 0061330086

The man of system… seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chessboard. He does not consider that the pieces upon the chessboard have no other principle of motion besides that which the hand impresses upon them; but that, in the great chessboard of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably and the society must be at all times in the highest degree of disorder.

Adam Smith: The Theory of Moral Sentiments, Part 6, Chapter 2.

Schumpeter is of course aware of this argument and acknowledges its validity, yet the kind of society he conceives in “Capitalism, Socialism and Democracy” will not, he predicts, have to content with any such difficulties. This is of course easily demonstrated in Schumpeter’s taxis. The socialist engine is clearly much more conducive to promoting authoritarian discipline, and this is, for Schumpeter, one of its great merits. Yet the valuation of a command economy is one of the many claims Schumpeter makes that are questionable.

Schumpeter goes to great pains to demonstrate to us the great efficiency of the capitalist system. He is entirely convinced that Capitalism is the sole explanation for us being where we are. With his characteristic candidness he dismisses all arguments that fail to bestow laurels on Capitalism. Yet beginning from this conviction, Schumpeter goes on to indulge in a socio/psychological analysis and finally tells us that

“… the ever-rising standards of life and particularly the leisure that modern capitalism provides for the fully employed workman… well, there is no need for me to finish the sentence or to elaborate one of the tritest, oldest and most stodgy of all arguments which unfortunately is but too true. 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.”[pg. 145]

So, beginning with an acute analysis of Marx and a piercing critique of Marxist economics, Schumpeter finally declares the Marxist prophecy to be true.

It would be quite futile to argue against any such theory, and to an extent the rest of this tract is formulated by this pivotal statement. Schumpeter has reconciled himself with the inevitability of an increasing demand for Socialism, and as he himself notes this is because “Political criticism cannot be met effectively by rational argument.”[pg. 144] As the book progresses however, Schumpeter modifies his stance somewhat and we find various defences of Socialism that come rather unexpectedly after the first two sections of the book. This may be simply an attempt by an eternal optimist to see a half-full glass where there is nothing at all, but this is the portion of this tract that needs to be looked at most closely.

If there is one thing Schumpeter cannot be accused of, it is lack of thoroughness. He has challenged almost all, and answered many, criticisms of the socialist schema in this rather wide ranging book. Yet there are a few that he has shrugged off rather flippantly and it is here that we must focus our attention. Along with all the other dismissals that Schumpeter hands out to economists and social scientists of all persuasions, he has answered the Hayekian critique in a few sentences [185], and Mises’s reservations concerning the socialist order with equal brevity [172-3]. Schumpeter’s responses do not do justice to the Austrian critique.

Unanswered questions

Schumpeter details an elaborate plan involving vouchers and price-fixing which a socialist state could adopt in order to make distribution a “distinct operation” that “in logic at least, is completely severed from production.” [173] Schumpeter then goes on to claim that though this separation may become a determining factor as far as the society’s attitudes are concerned, it is completely arbitrary from the economic standpoint. By separating distribution and production, however, Schumpeter’s hypothetical socialist state is forced to find a replacement for the price system that will convey information regarding the market to those making production decisions. The tool that is readily available is of course an efficient bureaucracy infused with an adequate amount of espirit de corps. Schumpeter fails to realize however that a bureaucracy cannot but be less responsive than the price system. Renouncing the market price system entails giving up the most effective information dispersal mechanism we have chanced upon. Despite his claims to the contrary [185], this bureaucracy will not function as efficiently or rationally as the market does. Again contrary to Schumpeter’s expectations, such a bureaucracy will not require less intelligent managers than a modern capitalist enterprise; at worst it would require omnipotent beings, and at best those with very different thinking capacities. Schumpeter fails to tackle the problem of gathering particular information for such a bureaucracy to process, and with rather irritating confidence declares that certain macro-economic variables, and other production data would suffice. With surprising naiivete, Schumpeter assures us that it would be possible to set up a system of incentives to ensure that the bureaucracy makes the right decisions. Of course this only makes us ask the question of a higher authority, and in the socialist schema there is always a higher authority. So we finally have to put this question to those on the top. What are your criteria for making decisions? The answer can only be that there are no criteria, that there are no laws, no rules, that all decisions are made arbitrarily as the “needs of the moment” dictate. So much is implied in the Mises-Hayek doctrine.

Of course it is rather easy to see where Schumpeter has derived his vision of the “socialist engine” as a big enterprise from. After all it with St. Simon that the imagery of the “one workshop” originated [F. A. Hayek, The Counter-Revolution of Science, pg. 121]. (Curiously, this is the one figure Schumpeter fails to denegrate, treats with positive veneration [307] and goes to the lengths of adopting an apologetic tone.) Yet Schumpeter can hardly, at this juncture, defend this concept solely on the basis of its origins and he does not. Not
surprisingly, Schumpeter has another surprise in store for us. In perfect harmony with the refined Marxist prophecy Schumpeter declares that the capitalist system has itself created an environment where individuals are being trained to accept the all-encompassing bureaucracy. Big business becomes for Schumpeter, the progenitor of the state economy. Ignoring all the problems such a claim presents, (the promiscuity of small businesses in new and emerging technologies, the phenomenon of consultants to provide small enterprises with the expertise they lack, the re-emergence of the self-employed entrepreneur in all fields…) it is rather amusing that Schumpeter informs us, countering Marx, of the white collar workers resistance to socialization. The driving force behind this almost unanimous clamour for the “socialization of the economy” is Schumpeter’s (and in his view society’s) thirst for stability. Writing in the post-depression moment, Schumpeter has perhaps been greatly shaken by, what appears to him to be, the naturally catastrophic undulations of the capitalist structure. So Schumpeter opts for a system that places direct control in the hands of a few authorities, and by his thinking, consequently involves less arbitrariness, more “rationality”, less “creative destruction” and more stability. The irony of it all is that Schumpeter is forced to acknowledge the need for regular changes, or repairs, to be undertaken on the socialist engine and (considering the bureaucratic aversion towards change in the absence of a direct threat to its own survival) this can only increase the uncertainty and friction he wants so much to avoid.

Even if we do accept that socialism might provide us with more stability, it becomes necessary to ask: At what cost? Interestingly, Schumpeter has reversed Mises’ argument somewhat and in a rather fiery response to Keynesian economics and other “half-way” socialist measures, condemns them as mere platitudes that will only serve to delay the inevitable socialization of society and must be opposed by all true socialists.

But the question remains; at what cost? Quite candidly, Schumpeter acknowledges that democracy becomes dispensable in a socialist environment. This argument is preceded by a rather incisive analysis of what democracy is commonly understood to be and its own inherent limitations. Yet, after concluding with this analysis Schumpeter does acknowledge that any form of democracy is quite incompatible with full-fledged socialism. Once we are done with destroying this cherished myth, Schumpeter goes on to applaud the virtues of the socialist engine embodied in its ability to “impose hardships” [210], “eradicate the bourgeois separation of powers”, “empower social admonishment” [215], “insert the stock of the bourgeois extraction into its proper place within that machine” [207]. Sadly, Schumpeter seems to have rationalized the loss of individual freedom this would entail. Paradoxically, he appears to be very concerned about rights abuses in Russia, yet even this concern is qualified by an elaboration on the uniqueness of the Russian situation, in that Russia was not a fully-evolved capitalist economy on the eve of the Bolshevik revolution. None of this detracts however, from the fact that Schumpeter does not protest the subjection of the individual in the interests of “society”. Rather, he would go as far as to suggest that such subjection of the individual is rational and desireable in that it enables society to harness the abilities of each individual more effectively. The validity of that claim is highly questionable.

Despite all the reservations one may have about the thesis presented in the book, it is almost impossible to refuse to acknowledge Schumpeter’s thoroughness. This book is a quite comprehensive discourse on Socialism, and one can hardly accuse Schumpeter of setting his sights too low. It must also be said that the book is a delight to read, if only to taste Schumpeter’s irreverence.

The piece was written in Fall 1995 as an assignment in Prof. Kirzner’s
course on the “Foundations of Capitalism”.

Hayek’s The Road to Serfdom

The page numbers refer to the Fiftieth Anniversary Edition, University of Chicago Press; 1994; ISBN: 0226320618.

The Road to Serfdom

In the original introduction to “The Road to Serfdom“, Hayek describes this book as a “pamphlet”, which he wrote in his spare time. Yet as Hayek himself was aware much later, this book contained the gist of the argument to which he was to devote the rest of his life. “The Road to Serfdom” deals with so much material that it would be futile to attempt a review of the book in five pages, I can at most enumerate its most striking features and try to string them together in a semblance of order.

Order seems like a good place to begin. Many years after “The Road to Serfdom” was published, Hayek wrote the first volume of “Law, Legislation and Liberty” and gave it the title “Rules and Order”. The concept of the rule of law remains central to Hayek’s later work, and his emphasis on this institution is apparent in “The Road to Serfdom”. Hayek is convinced that the rules of the game cannot be arbitrary if individuals are to be able to function within a working market order. Though circumstances are constantly changing, the entities within any structure must be aware of limitations on other players if they are to be capable of forming plans. For Hayek these limitations are essentially restrictions on the powers of government to coerce specific individuals in order to achieve a particular outcome. Hayek contends that if we permit the state to invade the individual’s private sphere “in the interest of society”, the incentives to engage in market activity will largely disappear.

This argument that the rule of law serves as a means to facilitate the formation of plans which individuals can attempt to realize in the market, is supplemented by Hayek’s understanding of the nature of arbitrary power. Hayek does not fail to remind us of the dangers inherent in a structure that relies on the use of arbitrary power to achieve broadly defined objectives. Under a system where “society’s interests” are represented by the state, and where these interests take precedence over individual rights, we can be sure that these objectives will soon be perverted and the powers conferred on the state used to serve ends that they were not intended to serve. In Hayek’s own words, in a situation where the state is expected to plan out and solve the problems of the economic sphere, “As the coercive power of the state will alone decide who is to have what, the only power worth having will be a share in the exercise of the directing power” [pg. 92, F. A. Hayek, The Road to Serfdom, 1994]. Since it will often be necessary to exercise this power ruthlessly, Hayek believes that only those who are capable of using brute force shall be appointed to or attain positions of power, the gentler amongst the population would tend to drift away from posts where the use of force would be necessary. We can see how in replacing the dynamic of unaligned forces that constitute the market with a strict hierarchy it becomes necessary that the hierarchy have a ruler. Thus Hayek’s conclusion (and that of many socialists) that such a structure would of necessity turn into a totalitarian order.

Unlike the situation in a free market, a consistently planned order would force us to adhere to a common set of values. Whereas the market is capable of serving the needs and desires of numerous individuals by a process that achieves a relative ordering of these values with the aid of the price system, an enforced order would force us to choose “whether it shall be we who decide what is more, and what is less important for us, or whether this is to be decided by the planner” [pg. 100]. Thus the individual effectively abrogates all right to self-determination. If all actions are intended to serve one set of purposes, it is easy to see how the process of determining these ends constitutes the complete loss of individual liberty. Hayek is well aware that the degree of concurrence towards desirable ends that such a system requires simply does not exist. This is why we are warned of relying on the democratic procedure to guard against a deterioration to a totalitarian order. Once it has been demonstrated that such a system cannot function if it requires the approval of a large proportion of the population, the need for such approval will itself be questioned.

Since Hayek ascribes to the Mengerian notion that “civilization advances by extending the number of important operations we an perform without thinking about them” [pg 87, The Counter-revolution of Science, quote from A. N. Whitehead], a planned economy seems to him a step back as far as solving the “economic problem” is concerned. Since we would by opting for a planned economy, be refusing the services of the price system as a tool to convey pertinent information in a concise form, a planned economy would involve a degree of complexity that cannot perhaps be comprehended or abstracted by the human mind. In a mercurial environment –which the economic sphere is, if only because of our constantly shifting tastes and desires– it is essential that responses be quick and effective. Yet by making economic decisions on a large scale subject to conscious thought, indeed by giving such movements the character of a decision, destroying the only institutions capable of producing such responses. As Prof. Boettke notes in another essay on this book “rather than spontaneous adaptation” such an order ” requires conscious adaptation, and there are epistemological limits to this procedure”. As always Hayek remains aware of the sort of effect an imposed economic order will have on our understanding of our needs, how these are to be satisfied, and the very concept of justice itself. The market process Hayek believes is highly “impersonal”, yet an imposed order cannot but recognize the differences between individuals and treat them in different ways. In such circumstances it is highly likely that an individual’s dissatisfaction with her/his position will be channeled into attempts to improve that position by petitioning the state. If such attempts are unsuccessful however, it is easy to see how a violent conflict might arise between the individual and the authorities, or even among groups that have alienated themselves from one another. As Hayek himself stresses “Although competition and justice may have little else in common, it is as much a commendation of competition as it is of justice that it is no respecter of persons”.

“The Road to Serfdom” may appear to some as a prophetic text. Indeed Hayek’s convictions are portrayed with such strength that it is easy to believe Hayek is outlining a sequence of developments that is inevitable. Yet this book is not a prophecy, nor is it a theory of history and the nation-state. It is however an analysis of the sort of institutions that might develop in an environment where the individual is not free to choose. As such it demonstrates tendencies, not immutable consequences. After all, as Hayek himself said “if we can regain the belief in the power of ideas which was the mark of liberalism at its best, the battle is not lost” [The Intellectuals and Socialism].

This paper was written in Fall 1995 for Prof. Israel Kirzner’s class
“Foundations of Capitalism”. One grammatical error has been
corrected.

Ludwig von Mises, “SOCIALISM: An Economic and Sociological analysis”

Ludwig von Mises, “SOCIALISM: An Economic and Sociological analysis“; Yale University Press, New Haven; 1962; translated by J. Kahane; LCCN: 51009080; ISBN: 0913966620 (1981 edition)

Prices are the cornerstone of the market, they are the rule by which all agents measure value. This is admittedly a presumption Mises has made before embarking on his analysis of “Socialism”. Yet it is not an altogether preposterous assumption. Mises claims that without the assistance of prices one is at sea in the market; it becomes impossible to effect any rational thought process because such processes presuppose the tools necessary for calculation. Any rational economic process must have some method with which to rank the various means and ends at our disposal, without such an ordering a rational (i.e. one which permits agents to make informed, rational decisions) economic system is inconceivable. In the price system Mises finds a highly evolved process which distills the various signals received from all agents in the market and determines the value society ascribes to a particular commodity.

With the assistance of the price system, all actors in the market can make decisions that promote the general good and assist in the satisfaction of the desires of individuals. Guided by their own self-interest, producers and consumers can make decisions that reconcile their subjective values with those of all other individuals. Prices provide us with an invaluable table of costs that accurately reflects the desires of all other individuals. Without prices no agent has accurate and succinct data on which to base her decisions, consequently such a system cannot sustain rational behaviour. Mises’ fundamental critique of Socialism is that with the abolition of private property it will, with the disappearance of the price system, become impossible to calculate.

Unless we are free to bid for products, based on the value we believe they have, the market is unable to arrive at a price for the product. An alternative system, short of one that has direct access to the minds and hearts of all individuals, will not provide us with information that accurately reflects the desires of society. This is not of course a claim that goods will have different prices under Socialism, non-monetary costs will substitute to make up for under-priced commodities. Yet a system that relies on long lines and overflowing warehouses as the only signals on which to revise production decisions is wholly inefficient. Mises argues that Socialism is exactly such a system.

Since no one under a Socialist state will have access to prices it is entirely reasonable to suppose that inaccurate decisions will be made due to lack of appropriate measures of value. This not only destroys the much vaunted “rationality” of Socialism, it also suggests that a Socialist economy may be unable to perform as well as a Capitalist market system. If we are aware that redistribution of the present wealth of society will not in itself be sufficient to ensure for each individual the standard of living the Socialists promise, it is difficult to see how an economy that is more prone to “persist in error” [Reuven Brenner, “Labyrinths of Prosperity”] can create enough wealth to enhance our individual positions so dramatically. Mises assures us that the Socialist system is hardly an “improvement” on the Capitalist structure and as such will produce an inferior result.

Once “the fundamental question whether the socialist order of society promises a higher productivity than Capitalism” has been answered in this manner, little remains of the material rationale for socialism. The Socialist is then forced to evoke other forms of reasoning to support his agenda. One of these is an appeal to an acquisitive urge that is present among most of us, and which is sparked when we are presented with the opportunity to “take from the rich what is rightly ours”. Proponents of such actions, quite apart from the fact that they lack any respect or understanding of rights, assume that they can redistribute in such a manner without affecting the total value of the economy’s product. Such a position fails to comprehend the subtle relationship between production, distribution and consumption. Yet this is not surprising when we realize that these claims are forwarded by authoritarians who presume to free us from all cares by replacing the capitalist’s “monopoly” over these three functions with their own. It is clear that any tampering with either of these processes will radically change the end result of an economic process.

Yet any process that fails to acknowledge the nature of the human agent in the economic sphere and fails to create an incentive structure that forces us to weigh the benefits of consumption and saving can hardly be called economic [pg. 458]. After demonstrating the impotency of the socialist scheme in the economic sphere, Mises has to retaliate to the alleged “materialism” of the bourgeoisie. At this point however, it is rather futile to argue about the merits of poverty and Mises rests his case after drawing various parallels between socialism and a particular interpretation of Christianity.

There are more problems in the discourse on Socialism than would otherwise be imagined. One of the points Mises highlights, is the apparent ease with which Socialists (and particularly Marx) use words in different ways, imposing on them a variety of contexts and connotations, till the very logic of the argument has been lost in what Mises calls “word-play”. This happens, Mises argues, in Marx’s writing where the terms rebellion and society are used at different times to mean different things. It is not clear whether this is done intentionally, to obscure the argument or whether it is accidental. In either case, it is clear that such verbal acrobatics simply make it even more difficult to conduct this discourse since one is never completely certain of the arguments advanced by others. These issues become crucial in Hayek, where the very word “Law” is imbibed with a halo that the legislature attempts to acquire by cloaking legislative decisions in an exterior of legality. A similar conception of language is at work in Hayek’s “The mirage of Social Justice”, where he claims that the term “justice” is abused when employed in referring to an outcome that is not generated by an authority, but which is the outcome of an impersonal process. Oddly, Mises does not seem to have stressed this mode of thought, and claims that “on this [the relative justice of the outcome produced by these two orders] point science can give no judgement” [pg. 273, also pg 436]. Yet, this has to be reconciled with Mises’ insight that “one is not permitted to ask whether a particular price is justified or not” [pg. 435]. The issue becomes a little clearer when we notice the value Mises has ascribed to the term “science”, and why he would wish to keep away from issues that could “only be evaluated subjectively” [pg. 436], or those that appear to require the application of a particular value structure.

Perhaps what comes out most clearly in this book, is that the structures described in Socialist literature cannot be accepted as they are. As such these visions of Socialist societies are Utopias (ou + topos, no place), in the sense that they prophecy circumstances that Economic analysis tells us cannot be sustained with the institutions under consideration. These visions are imaginary places because their structure fails to take into account the nature of the human animal and the way in which we make decisions. We cannot reconcile Socialist Utopia with our Economic and Sociological knowledge of the nature of human action.

This paper was written for Prof. Kirzner’s class “The Foundations of Capitalism”, during Fall 1995.