Capitalism, Socialism and Democracy PDF

 CAPITALISM, SOCIALISM AND DEMOCRACY When Joseph Schumpeter’s book first appeared, the New English Weekly predicted that ‘for the next five to ten years it will certainly remain a work with which no one who professes any degree of information on sociology or economics ca...

 CAPITALISM, SOCIALISM AND DEMOCRACY When Joseph Schumpeter’s book first appeared, the New English Weekly predicted that ‘for the next five to ten years it will certainly remain a work with which no one who professes any degree of information on sociology or economics can afford to be unacquainted’. The prophecy has been justified, but how much more fully than its maker anticipated. A generation later, it is more widely read than when it first appeared. The mixed economy has become established in North America as well as in the countries of the European Community, while in the socialist countries there has been a move towards various forms of decentralisation and of a market economy. In this new context the issues that Schumpeter raises are still matters of lively debate.  CAPITALISM, SOCIALISM AND DEMOCRACY Joseph A.Schumpeter INTRODUCTION BY RICHARD SWEDBERG Stockholm University London and New York  First published in the USA This edition published in the Taylor & Francis e-Library, 2003. First published in the UK in 1943 First impression 1944 Second edition 1947 Third edition 1950 First impression 1952 Fourth edition 1954 Eighth impression 1974 Fifth edition 1976 Third impression 1981 New in paperback 1994 © George Allen & Unwin (Publishers) Ltd 1976 All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN 0-203-20205-8 Master e-book ISBN ISBN 0-203-26611-0 (Adobe eReader Format) ISBN 0-415-10762-8 (Print Edition)  CONTENTS Introduction by Richard Swedberg ix PART I: THE MARXIAN DOCTRINE 1 Prologue 3 I. Marx the Prophet 5 II. Marx the Sociologist 9 III. Marx the Economist 21 IV. Marx the Teacher 45 PART II: CAN CAPITALISM SURVIVE? 59 Prologue 61 V. The Rate of Increase of Total Output 63 VI. Plausible Capitalism 72 VII. The Process of Creative Destruction 81 VIII. Monopolistic Practices 87 IX. Closed Season 107 X. The Vanishing of Investment Opportunity 111 XI. The Civilization of Capitalism 121 XII. Crumbling Walls 131 I. The Obsolescence of the Entrepreneurial Function 131 II. The Destruction of the Protecting Strata 134 III. The Destruction of the Institutional Framework of Capitalist Society 139 XIII. Growing Hostility 143 I. The Social Atmosphere of Capitalism 143 II. The Sociology of the Intellectual 145 XIV. Decomposition 156 PART III: CAN SOCIALISM WORK? 165 XV. Clearing Decks 167 XVI. The Socialist Blueprint 172 XVII. Comparison of Blueprints 187 I. A Preliminary Point 187 II. A Discussion of Comparative Efficiency 188 III. The Case for the Superiority of the Socialist Blueprint 193 v vi Contents XVIII. The Human Element 200 A Warning 200 I. The Historical Relativity of the Argument 200 II. About Demigods and Archangels 202 III. The Problem of Bureaucratic Management 205 IV. Saving and Discipline 210 V. Authoritarian Discipline in Socialism; a Lesson from Russia 212 XIX. Transition 219 I. Two Different Problems Distinguished 219 II. Socialization in a State of Maturity 221 III. Socialization in a State of Immaturity 223 IV. Socialist Policy Before the Act; the English Example 228 PART IV: SOCIALISM AND DEMOCRACY 232 XX. The Setting of the Problem 235 I. The Dictatorship of the Proletariat 235 II. The Record of Socialist Parties 237 III. A Mental Experiment 240 IV. In Search of a Definition 243 XXI. The Classical Doctrine of Democracy 250 I. The Common Good and the Will of the People 250 II. The Will of the People and Individual Volition 252 III. Human Nature in Politics 256 IV. Reasons for the Survival of the Classical Doctrine 264 XXII. Another Theory of Democracy 269 I. Competition for Political Leadership 269 II. The Principle Applied 273 XXIII. The Inference 284 I. Some Implications of the Preceding Analysis 284 II. Conditions for the Success of the Democratic Method 289 III. Democracy in the Socialist Order 296 PART V: A HISTORICAL SKETCH OF SOCIALIST PARTIES 303 Prologue 305 XXIV. The Nonage 306 XXV. The Situation that Marx Faced 312 XXVI. From 1875 to 1914 320 I. English Developments and the Spirit of Fabianism 320 II. Sweden on the One Hand and Russia on the Other 325 III. Socialist Groups in the United States 331  Contents vii IV. The French Case; Analysis of Syndicalism 336 V. The German Party and Revisionism; the Austrian Socialists 341 VI. The Second International 349 XXVII. From the First to the Second World War 352 I. The “Gran Rifiuto” 352 II. The Effects of the First World War on the Chances of the Socialist Parties of Europe 354 III. Communism and the Russian Element 358 IV. Administering Capitalism? 363 V. The Present War and the Future of Socialist Parties 373 XXVIII. The Consequences of the Second World War 376 I. England and Orthodox Socialism 377 II. Economic Possibilities in the United States 380 1. Redistribution of Income through Taxation 381 2. The Great Possibility 382 3. Conditions for Its Realization 385 4. Transitional Problems 391 5. The Stagnationist Thesis 392 6. Conclusion 398 III. Russian Imperialism and Communism 398 PREFACES AND COMMENTS ON LATER DEVELOPMENTS Preface to the First Edition, 1942 409 Preface to the Second Edition, 1946 411 Preface to the Third Edition, 1949 415 The March into Socialism 421 Index 433  INTRODUCTION This is a book to be read not for the agreement or disagreement it provokes but for the thought it invokes. John Kenneth Galbraith Capitalism, Socialism and Democracy is one of the great classics in twentieth century social science. What makes Schumpeter’s book so brilliant are three things in particular: its novel view of democracy; its heretic analysis of the workings of the capitalist economy; and its provocative argument that capitalism is bound to disappear—not because of its failure, but because of its success. Schumpeter’s style, it should be emphasized, also makes the book a pleasure to read: “Even if, in places, you may dislike what Schumpeter says”, as one reviewer put it, “you will like the way he says it”.1 In this introduction I shall say, first, a few words about the writing of Capitalism, Socialism and Democracy and its place in Schumpeter’s output as a whole (Part I). I shall provide then a reader’s guide to Schumpeter’s book, which may be of assistance to those who are approaching it for the first time. This will also enable the hurried reader to go straight to the most important parts of Capitalism, Socialism and Democracy (Part II). The third and final part of the introduction deals with the contemporary relevance of Schumpeter’s work. Schumpeter, for example, argued that socialism is about to replace capitalism—an opinion that seems totally wrong today, especially after the disintegration of state socialism in the Soviet Union and East-Central Europe (Part III). I. THE MAKING OF CAPITALISM, S OCIALISM AND DEMOCRACY AND ITS PLACE IN S CHUMPETER ’ S W ORK A S A W HOLE The story of how Schumpeter came to write Capitalism, Socialism and Democracy can be sketched in a few lines. Towards the end of the 1930s, Schumpeter decided to write a small book on socialism. To cite his wife, Elizabeth Boody Schumpeter: “J.A.S. had finished his monumental Business Cycles in 1938 and sought relaxation in Capitalism, Socialism and Democracy, which he regarded as a distinctly ‘popular’ offering that he expected to finish in a few months.”2 Schumpeter’s book, however, took longer to complete than he had expected, and it was not published until 1942. It was very well received, both in England and in the United States, and its reputation grew as further editions were published in 1947 and 1950. Today, according to John Kenneth ix x Introduction Galbraith, Capitalism, Socialism and Democracy is the main work by which Schumpeter is remembered.3 A summary account of this type fails, however, to do justice to the making of Capitalism, Socialism and Democracy in at least two important ways. First, Schumpeter’s work draws very much on his earlier research and personal experience. In the preface to the first edition, Schumpeter says that his book was the result of “almost forty years’ thought, observation and research on the subject of socialism”.4 Gottfried Haberler—one of the foremost authorities on Schumpeter—has added that the book “sums up, brings up-to-date and slightly modifies the result of Schumpeter’s life-long work and study [not only of socialism but of economic theory as well]”.5 There is also the fact that the period during which Capitalism, Socialism and Democracy was written was a particularly turbulent and dramatic one in Schumpeter’s life. He was, for example, investigated during these years by the FBI for possible espionage, and there were rumours, (as there still are), that he was pro-Nazi. He was also going through a personal crisis—reevaluating himself and his work. Through its exuberant style, Capitalism, Socialism and Democracy may give the impression that it was written by someone who was happy and carefree, but that was far from the case. If Schumpeter’s book has its origin in events “almost forty years ago”, we need to know more about Schumpeter around the year 1900. At this time the young Schumpeter, (who was born in 1883 in the small town of Triesch, the son of a textile manufacturer), was about to enter the University of Vienna. He had just finished his studies at Theresianum, an exclusive private school for the elite of the Austro-Hungarian Empire. It might be that he felt out of place at this school as he came from the provinces, and had been admitted only because of his stepfather’s connections. In any case, he received excellent grades at Theresianum and was eager to begin his university studies. From early on Schumpeter had been interested in economics and his ambition was to become an important economist. With Carl Menger at the University of Vienna, economics was a very exciting topic to study there around the turn of the century. Schumpeter had excellent teachers, among them Eugen von Boehm-Bawerk and Friedrich von Wieser. There was also a number of brilliant Marxist students at the university who forced the other students—including Schumpeter—to take Marxism and socialist economics seriously. Schumpeter was happy to debate them, but he made it clear that he was sceptical of Marxism. He received his doctorate in 1906, and by this time, had made the acquaintance of several Marxist students who soon were to hold prominent positions in the socialist movement, among them Otto Bauer and Rudolf Hilferding6. After some years abroad—mainly in England and Egypt—Schumpeter settled down to a conventional career as an economist. During the years 1908–1914 he published three brilliant books in economics and advanced to full professor at the  Introduction xi University of Graz, after some time at the University of Czernowutz. The most important of these books was the second, The Theory of Economic Development (1911). Schumpeter’s ambition with this work was to complement Walras’ economic theory with one where economic change was analyzed in a stringent, analytical manner. Schumpeter’s theory was centered around the entrepreneur: he argued that change in economic life always starts with the actions of a forceful individual and then spreads to the rest of the economy. As Schumpeter’s professional success grew, so did his personal ambitions. A number of prominent economists in the Austro-Hungarian Empire had held high political positions, and Schumpeter was clearly interested in getting one of these. During the First World War he approached a number of people he thought could further his political career, including former professors and ministers. He also wrote secret memoranda, which he hoped would influence the Emperor and the circles surrounding the Emperor. From these writings, which were discovered some years ago, a picture emerges of Schumpeter’s political ideas when he was in his early thirties. He was firmly conservative as a young man: he supported the Emperor, though he also felt that some form of tory-democracy would be suitable for Austria- Hungary. He did not believe in democracy for its own sake, but rather saw it as a means to modernize the Empire. After the First World War the Austro-Hungarian Empire disintegrated— and with it Schumpeter’s hope for a high position. To his surprise, however, he was asked by the Social Democrats in 1919 to become finance minister in a coalition government. He accepted—immediately—and it seemed he had reached one of his most cherished goals. But his joy was to be shortlived— he was forced to resign after little more than half a year in office. The main reason for his dismissal was his inability to get along with the Social Democrats, especially Otto Bauer. Why the Social Democrats had thought that Schumpeter, who was a convinced conservative, would be eager to carry out a reformist policy of the type that Otto Bauer and his colleagues favored, is something of a mystery. In any case, his resignation in October 1919 represents the end of his political career. Having served as a minister Schumpeter was reluctant to return to academic teaching in Graz, so he stayed in Vienna. Soon an opportunity arose: he was offered a high position in a small but respected banking firm, the Biedermann Bank. The reason for the offer was that Schumpeter had been allotted a banking permit for his political service to the Austrian state, which the Biedermann Bank needed in order to become a public corporation. He was given a high salary and a nice title but was not expected to interfere in the bank’s everyday transactions. Schumpeter, however, kept busy in other ways, mainly as a private investor and speculator. Initially he was quite successful and even made a small fortune. In 1924, however, his luck ran out: he went bankrupt and was fired xii Introduction later from the Biedermann Bank because of the dubious reputation he had acquired in the business world. During his years as a financial entrepreneur Schumpeter had little time to write. Nonetheless he produced a few articles that are of interest in this context. Of particular importance is the main theme of Capitalism, Socialism and Democracy that now appears for the first time in his writings, namely that capitalism will undo itself ultimately through its own success. The more capitalism advances, Schumpeter argued, the more entrepreneurs will be replaced by bureaucratically-minded managers. The sense of property, which is so central to capitalist society, will also grow weaker as solid property is replaced by mere shares.7 By the mid-1920s Schumpeter was in a terrible state; he had failed in politics as well as in business; he had lost his job; and he had huge debts. In 1925, however, his luck changed and he was offered a good academic position at the University of Bonn. Around this time also he fell in love and got married. His first marriage (to a mysterious English woman called Gladys Ricarde Seaver) had been a failure, but this time he felt that he had met the love of his life. Her name was Annie Reisinger; she was twenty years younger than Schumpeter; and she was the daughter of the concierge in the house of Vienna where he had grown up. For a brief time in Bonn Schumpeter was extremely happy. But in 1926 disaster struck, and in one stroke his whole family was eliminated: his mother, his wife and his newborn son all died. He was devastated by the loss. For a long time he was unable to work, and for comfort he often retreated into a kind of communion with his wife and mother. He called them die Hasen (roughly, my beloved) and he communicated with them in his mind and in his diary. From now on, Annie and Schumpeter’s mother would be the object of a kind of private cult from Schumpeter’s side. When he was tired or in need of help, he would pray to die Hasen. When, in 1924, Schumpeter decided to resume his career as an economist, he knew that he had to produce books as brilliant as his three books from 1908– 1914. This, however, turned out to be harder than he thought, and it was not until 1939 that his fourth book—Business Cycles—was published. By this time Schumpeter was working in the United States, at Harvard University, where he had moved permanently in 1932. During the years 1924–1939 Schumpeter would several times try to produce a book, but each time he failed. There was first and foremost a projected book on the theory of money, on which Schumpeter worked extremely hard but which never materialized. Then there were a number of minor projects which he tried his hand at, but quickly let die. Among the latter was a book on socialism, a topic that held his fascination. Schumpeter continued to follow political events very closely, even though he had promised himself never to get involved in politics again. He was, for example, greatly annoyed that he had been unable to predict Hitler’s succession to power in 1933. He was  Introduction xiii incidentally also unsure whether Hitler would be good or bad for Germany. “Recent events”, he wrote in a letter dated March 1933, “may mean a catastrophe but they also may mean salvation”.8 When news reached Schumpeter in 1934 about the recent successes of the Austrian Nazis, he worried that his native country would be governed from Berlin. According to available information, Schumpeter detested the Austrian Nazis and was very upset by the Anschluss of 1938. It was at this time, 1938, that Schumpeter decided to write Capitalism, Socialism and Democracy. As the giant manuscript for Business Cycles was coming to finish, Schumpeter began to contemplate a couple of other projects. For a while he thought of reviving the book on money, which he had worked very hard on earlier. Other candidates were a book on economic theory and a revised edition of his history of economic thought from 1914. He finally decided however to write a small book on socialism; and for a long time he referred to what was to become Capitalism, Socialism and Democracy as his “book on socialism”.9 By June 1939 he had prepared a rough outline for his new project that included the argument that capitalism is about to fail because of its very success.10 He was still unsure about the last part of the book, but finally decided to devote it to a history of socialist parties. The whole project turned out to be much more time consuming than Schumpeter had initially thought, and the book was not published until the fall of 1942. The years 1938–1942, during which Capitalism, Socialism and Democracy was conceived and executed, were very difficult for Schumpeter on a personal level. As always, he taught and lectured to excess, which made him irritable and gave him little time to write. He was also very annoyed with Harvard for a number of reasons. For one thing, he had very few students left after Keynes’ General Theory (1936) had been discovered at Harvard. He was also on a collision course with his own department. Its chairman—Harold Burbank—was antisemitic and a mediocre figure; and his decision in 1940 to deny an appointment to Paul Samuelson, the department’s star student, infuriated Schumpeter. The same year he began to negotiate with Yale University, which had extended a very favorable offer to him. In the last hand, however, Schumpeter decided to stay at Harvard— only to complain again soon about “[the] stifling atmosphere at Harvard”.11 There was also the issue of politics. Schumpeter detested everything that Roosevelt stood for and was convinced that he would ruin the United States in one way or another. Once the Second World War broke out in 1939, he feared the President would drag the United States into the war, and, using the war as a pretext, would then extend the grip of Washington over the economy with disasterous consequences. “A ten-year’s war and a ten-year’s Roosevelt dictatorship”, he wrote in 1941, “will completely upset the social structure”.12 Schumpeter’s hatred of Roosevelt reached such proportions that people around him, shocked by his verbal attacks on the President, began to avoid him. This tendency was strengthened by xiv Introduction what Schumpeter said about Nazi Germany and Japan. Schumpeter basically despised and disliked Hitler—but he feared Stalin and “the Slavs” much more. During the early stages of the war he suggested that Nazi Germany could keep its conquered territories since a change in Europe was long overdue anyway. Incidentally it was this opinion—publicly expressed in a talk in Cambridge in October 1939—that led the FBI to decide to investigate Schumpeter.13 Schumpeter was unable to understand why everyone around him was so hostile to Hitler but not to Stalin. As the war continued, and as Schumpeter began to realize that Hitler would lose the war, he became increasingly obsessed with the idea that Stalin must be stopped. After the Allies had defeated Hitler, he felt they should attack the Soviet Union. “A job half done”, as he put it, “is worse than nothing”.14 Maybe it was Schumpeter’s difficulties at Harvard and the ostracism he experienced in the social circles of Cambridge that led to Schumpeter’s difficult personal crisis during the years when he wrote Capitalism, Socialism and Democracy. He began to scrutinize himself and the way he had lived his life, and he did not like what he saw: he was “worthless”, “frivolous”, “vain” and a “snob”.15 His life had been “a failure”, and so had his work.16 He prayed increasingly to his mother and his beloved second wife for support. Sometimes he lashed out in anger, and wrote hateful statements in his diary about the blacks, the Jews and Roosevelt. While earlier he had vented his anger only in private (primarily, it seems, in his diary), he now had outbursts in public also. This dark side of Schumpeter was very difficult for those of his friends who were still loyal to him. While it is the scholarly consensus that Schumpeter was basically not pro-Nazi, some of his statements from these years were nonetheless perceived as pro-Hitler. According to one of Schumpeter’s favorite students at Harvard, for example, “in the Second World War [Schumpeter] was pro-Hitler, saying to anyone who cared to listen, that Roosevelt and Churchill had destroyed more than Genghis Khan”.17 II. A READER’S GUIDE TO SCHUMPETER’S BOOK Capitalism, Socialism and Democracy consists of around 400 pages of dense text and would take the average reader around twenty hours of concentrated reading. For those who can ill afford to invest this amount of time, the following selection is recommended: Chs. XI–XIV, which give the essence of the argument why capitalism cannot survive; Chs. XV– XVI, where Schumpeter explicates why socialism can indeed work; the important Chs. XX–XXIII in which different theories of democracy are discussed; and the famous chapters on the way that contemporary capitalism works (Ch. VII, “The Process of Contemporary Capitalism” and Ch. VIII, “Monopolistic Practices”). Capitalism, Socialism and Democracy is divided into five distinct parts, which are loosely connected. In the preface to the first edition the author talks about “the heterogeneous material” of his book and describes its five parts as “almost  Introduction xv self-contained pieces of material”, connected to one another through “links” and “bridges”.18 The book starts with a long and brilliant section on Marx, which is instructive and enjoyable but not essential for the main argument of the book (Part I, “The Marxian Doctrine”). The basic innovation in Schumpeter’s analysis of Marx is the consistent manner in which he separates Marx’s thought into “sociology” and “economics”. Schumpeter admired Marx’s sociology very much (Ch. II), but was more sceptical of his economics (Ch. III). However, he credited Marx very highly for having tried to introduce a dynamic element into economic analysis—something that Schumpeter himself had tried to do through his theory of the entrepreneur. The main argument of the book begins with Part II, entitled “Can Capitalism Survive?” The first chapters of this part are devoted to an analysis of the way that contemporary capitalism works, and the reader should pay especial attention to Chs. VII and VIII with their famous analysis of “creative destruction” and “monopolistic practices”. Woven through the first chapters of Part II also is an interesting critique of mainstream economics for being non-dynamic in general and for lacking a realistic concept of competition in particular. The last chapters of Part II are devoted to a discussion of why capitalism, in Schumpeter’s opinion, cannot survive (Chs. XI– XIII): capitalist civilization is falling apart, the bourgeoisie lacks faith in itself, and so on. These chapters are witty and entertaining, though ultimately not very convincing, as many critics have pointed out. (See also later in this introduction). Part III (“Can Socialism Survive?”) is likewise entertaining. Schumpeter argues that socialism may be superior to capitalism in some aspects (Ch. XXVII); he discusses whether human nature precludes a socialist society (Ch. XXVIII); and he tries to establish when a transition from capitalism to socialism can take place (Ch. XXIX). Of particular interest is Ch. XXVI in which he explains why a socialist economy is a feasible proposition, which is in contrast to the arguments of Ludwig von Mises and others. Part IV (“Socialism and Democracy”) represents one of the high points in Capitalism, Socialism and Democracy. All the chapters are succinctly argued and free from the excessive detours that mar some of the other parts of the book. Chs. XXI and XXII, in which Schumpeter presents and confronts two different theories of democracy, are especially brilliant (“The Classical Doctrine of Democracy” and “Another Theory of Democracy”). Part IV also contains an interesting sketch of what a socialist democracy might look like (Ch. XXIII, Section III). The last part of Capitalism, Socialism and Democracy (Part V, “A Historical Sketch of Socialist Parties”) is clearly the most expendable. Schumpeter himself said that his history of socialist parties was only “a sketch” and “woefully incomplete”, both of which are true.19 The reader will find some interesting details xvi Introduction on the Austrian Marxists (many of whom Schumpeter knew), the Bolshevik leaders, and so on—but not much more. Some editions of Capitalism, Socialism and Democracy (including this one) also contain an appended talk that Schumpeter gave in 1949, just before his death, entitled “The March into Socialism”. The talk shows that towards the end of his life Schumpeter was still convinced that the main thesis of Capitalism, Socialism and Democracy was correct: capitalism was about to be replaced by socialism. III. THE CURRENT RELEVANCE OF SCHUMPETER’S BOOK All three editions of Capitalism, Socialism and Democracy (1942, 1947, 1950) that Schumpeter himself oversaw were very well received by the economics profession as well as elsewhere. It has been translated into more than a dozen languages, including Chinese and Japanese, and has spawned a huge number of articles and a couple of books.20 Capitalism, Socialism and Democracy is clearly Schumpeter’s most popular book and there are no signs that interest in it is waning. Still, it was written more than fifty years ago and events have changed enormously since it was first published: socialism has collapsed—not capitalism, as Schumpeter predicted. Is Schumpeter’s analysis in Capitalism, Socialism and Democracy still relevant today? There are, as I see it, a number of reasons why Schumpeter’s book deserves to be read as widely today as yesterday. Some of these can be stated in a few lines while others require more elaboration. Let me start with a simple case: Schumpeter’s analysis of Marx. The swing to conservatism during the 1980s, in combination with the dramatic collapse of socialism, has practically wiped out interest in Marxism and also threatens existing knowledge of it. This represents a major loss as Marx is one of the most important Western thinkers. Schumpeter’s analysis of Marx in Capitalism, Socialism and Democracy is important in this situation as it represents a well-balanced attempt to sort out what remains valuable in Marx’s thought. Part I of Schumpeter’s book (“The Marxian Doctrine”) can be recommended as an excellent introduction to Marxism. This section is also of interest to those who are familiar already with Marx since it contains a sophisticated and innovative interpretation of Marx’s ideas. Schumpeter’s argument about capitalism is considerably more complex and contradictory than his reading of Marx. It consists principally of two parts which should be kept separate: an analysis of the way the capitalist economy works, and the argument that capitalism will fail due to its very success. Schumpeter’s analysis of the way the capitalist economy works consists of a sharp polemic with mainstream economics, which he considered lacking on a number of points. His main assertion was that mainstream economics had failed to understand that basically capitalism consists of change and cannot be analyzed in static terms. “Capitalist reality is first and last a process of change”, as he phrased it.21 It is in this context that Schumpeter introduces his concept of “creative destruction”.  Introduction xvii He was also very critical of the current (and present) tendency among economists to operate with a formalistic and non-realistic concept of competition. Schumpeter was convinced that perfect competition had never existed; that it never would exist; and that if it ever came into existence, it would be harmful to the economy. Big business and monopolies, he pointed out, are to a large extent responsible for the high standard of living. “Monopolistic practices” are healthy in that they facilitate expenses on research as well as huge investments. When Capitalism, Socialism and Democracy was published, Joan Robinson wrote that “Professor Schumpeter is at his most brilliant [when he discusses competition and monopoly], and his argument blows like a gale through the dreary pedentry of static analysis”.22 Quite a few economists, however, were deeply offended by Schumpeter’s defense of monopoly.23 The situation is somewhat different with respect to Schumpeter’s famous argument that capitalism is bound to go under, due to a number of institutional changes: the entrepreneur is vanishing with the emergence of the modern corporation; intellectuals are always hostile to capitalism; the old sense of property is being eroded; and so on. The problem with Schumpeter’s analysis on this score is that he is contradicted by reality on most points. In short, in areas where Schumpeter perceived a threat to capitalism, there is no apparent threat at all or, alternatively, a very minor one. To illustrate this, let us look at two of the alleged causes for the demise of capitalism: the role of intellectuals in capitalist society and the relationship of property owners to their property. According to Schumpeter, as capitalism develops it gives rise to an increasing number of intellectuals who are basically resentful and hostile to capitalism. The argument, however, does not accord well with our observations; rather, most intellectuals appear fairly well integrated into the various institutions in which they work, and the vocal intelligentsia changes its political opinions at regular intervals, usually oscillating between pro-capitalism and indifference to economic questions, and only rarely lapsing into anti-capitalism. In any case, it is simply not correct to state that Western intellectuals in general have been hostile to capitalism and that they are likely to be hostile also in the future. Likewise the sense of property is not being eroded, as Schumpeter claimed, by the shift from owning physical property (say a factory building) to having shares in a corporation. Evidence indicates rather that shareholders are as eager to defend their property as owners of physical property. During the 1980s, for example, shareholders in the United States reasserted their right to control directly, and sometimes even to manage, various huge corporations through take-overs and similar maneouvres. The growth of institutional investors, which because of the very size of their holdings are more prone to “voice” than to “exit” in the stock market, is another indicator that Schumpeter was wrong in this matter. It is of course true that managers in a shareholding corporation have interests that xviii Introduction are not identical to those of the owners. Owning shares, however, does not seem to change one’s attitude to property any more than having bills, as opposed to gold coins, changes one’s attitude to money. Schumpeter’s analysis of socialism similarly has its strong and its weak points. Personally an inveterate foe of socialism, Schumpeter should be applauded for his objectivity in recognizing that socialism can be democratic. The part of Capitalism, Socialism and Democracy in which he outlines the structure of a socialist democracy, is usually forgotten but deserves a better fate (see Ch. XXIII, Part III). It should also be pointed out that Schumpeter thought that a socialist democracy might be inherently unstable since socialist society—as opposed to capitalist society—lacks a strong separation of powers. In socialist society, Schumpeter pointed out, it would be much easier for the politicians to seize power of the economy than in capitalist society with its independent private sector. “As a matter of practical necessity”, Schumpeter said, “socialist democracy may eventually turn out to be more of a sham than capitalist democracy ever was”.24 Schumpeter’s analysis of socialism is also dubious in other ways. Take, for example, his analysis of the workings of a socialist economy, as presented most fully in Ch. XVI. Schumpeter argues here that von Mises is wrong in asserting that socialism cannot have a rational economy since it lacks markets. The price mechanism can work in an equally efficient manner in a socialist society as in a capitalist society, Schumpeter says. This would be the case—theoretically—if all the citizens in a socialist society received vouchers (representing claims on the overall production of goods and services) and used these to shop in state- run shops. These shops, Schumpeter says, would then regulate the price in accordance with the demand of the consumers. Similarly, a central board would post “prices” in response to the demand by industrial boards for the various factors of production. A system of this type, Schumpeter states, would work perfectly well—in theory as well as in practice. It is clear that Schumpeter’s model of the socialist economy differs from the way that the socialist economies of the Soviet Union and East-Central Europe operated. The latter failed to produce efficient prices and were plagued by constant political interference in the economy, by corruption among the managers and by general inefficiency in the labor force. One is tempted to pose the question as to whether Schumpeter’s model of the socialist economy would have worked more efficiently than the economies of the socialist states, could it ever have been implemented. A question of this type is, of course, impossible to answer. Since Schumpeter, however, does not even discuss a number of difficulties that are likely to beset his system—such as the failure of the central board to come up with correct prices and of the state-run shops to regulate their prices in response to consumer demand—one is justified in rejecting his proposal as utopian and naïve.  Introduction xix Finally, one part of Schumpeter’s book that is as much to the point today as when it was originally written, is the section on democracy (Part IV). This is where Schumpeter makes his famous distinction (borrowed from Weber) between, on the one hand, democracy as a supreme value in itself (“the Classical Doctrine of Democracy”), and, on the other hand, democracy as a method for the selection of leaders (“Democracy as Competition for Political Leadership”). While the former approach views democracy as a metaphysical value to be realized (“the Will of the People”), the latter sees it as a way for the citizenry to select its leaders. What is especially valuable with Schumpeter’s discussion of democracy as a value in itself, is the firmness with which he attacks various illusions, such as the notion that the only task of the politician is to carry out the alleged will of “the people”. For one thing, as Schumpeter makes clear, politicians have their own distinct interests, and these must be borne in mind in order to get a realistic picture of the way a democracy works. And, for another, the majority does not represent “the people”—only the majority. Through his splendid discussion of democracy, Schumpeter joins the small number of thinkers who have made seminal contributions to its theory. Granted this, the question must nonetheless be raised if Schumpeter does not overdo his attack on “the Classical Doctrine of Democracy”, and end up with far too negative, not to say cynical, a view of democracy. He may well have been right to emphasize democracy as a means for the selection of leaders—but can it not simultaneously be recognized as a value in itself? Indeed, the more strongly democracy is valued in a population, the more eager, (one would presume), people would be to challenge the hierarchical and authoritarian kind of democracy that Schumpeter (again following Weber) had in mind. One also wonders how much Schumpeter’s attacks on “the Classical Doctrine of Democracy” had to do with his ill-concealed contempt for the masses. Is it, for example, true that the typical citizen “becomes a primitive again” as soon as “he enters the political field”?25 Schumpeter’s analysis of democracy deserves a more thorough discussion than is possible here. Our final judgment of Schumpeter’s book, is that it always inspires discussion, whether one agrees or disagrees with the author’s point of view. Schumpeter’s main ambition in writing Capitalism, Socialism and Democracy, he says, was to shake up the reader and make him or her think. “We resent a call to thinking and hate unfamiliar argument that does not tally with what we already believe or would like to believe”, Schumpeter wrote in the preface to the second edition. “Now this is precisely where I wanted to serve the reader. I did want to make him think”.26 Richard Swedberg Stockholm University xx Introduction NOTES 1 Fritz Machlup, “Capitalism and Its Future Appraised by Two Liberal Economists”, American Economic Review, 33 (1943), p. 320. 2 Joseph A.Schumpeter, History of Economic Thought (London: Allen & Unwin, 1954), pp. v–vi. 3 John Kenneth Galbraith, “Near or far Right [Review of Capitalism, Socialism and Democracy]”, New Society No. 758 (14 April 1977), p. 74. 4 Joseph A.Schumpeter, Capitalism, Socialism and Democracy (New York: Harper & Brothers, 1950), p. xiii. (The reason for citing the 1950 edition is that the prefaces to the first and the second editions of Capitalism, Socialism and Democracy cannot be found in the currently available edition of Schumpeter’s work). 5 Gottfried Haberler, “Schumpeter’s Capitalism, Socialism and Democracy after Forty Years”, p. 72 in Arnold Heertje (ed.), Schumpeter’s Vision: Capitalism, Socialism and Democracy after Forty Years (New York: Praeger, 1981). 6 Schumpeter’s doctorate was formally in law since there was no department of economics at this time at the University of Vienna. 7 See especially “Sozialistische Moeglichkeiten von heute”, Archiv fuer Sozialwissenschaft and Sozialpolitik 48 (1920/1), pp. 305–60. Schumpeter had expressed his conviction that capitalism one day would be replaced by socialism already in “The Crisis of the Tax State” from 1918. 8 Schumpeter to Gottfried Haberler, 20 March 1933, as cited in Richard Swedberg, The Life and Work of Joseph A.Schumpeter (Cambridge: Polity Press, 1991), p. 215. 9 See e.g. Schumpeter to Herbert Zassenhaus, June 1941, as cited in Robert Loring Allen, Opening Doors: The Life and Work of Joseph Schumpeter (New Brunswick: Transaction Publishers, 1991), Vol. 2, pp. 107–8. 10 One part of Capitalism, Socialism and Democracy was written in 1938 and another as early as 1935 (cf. Schumpeter, Capitalism, Socialism and Democracy [New York: Harper & Row, 1976], pp. 163, 231). The 1935 part was probably written in connection with a talk that Schumpeter used to give around this time entitled “Can Capitalism Survive?”, which is very similar in structure to Part II of Capitalism, Socialism and Democracy (“Can Capitalism Survive?”). This talk has recently been reprinted, both in its oral form and in its written form (see pp. 298– 315 in Joseph Schumpeter, The Economics and Sociology of Capitalism [Princeton: Princeton University Press, 1991] and pp. 370–85 in Archives Européennes de Sociologie, 33 ). 11 Schumpeter’s private diary, 9 October 1942, as cited in Swedberg, Schumpeter, p. 140. 12 Schumpeter to Charles C.Burlingham, 21 May 1941, as cited in Swedberg, Schumpeter, p. 148. 13 FBI failed to find any incriminating evidence during its investigation. Schumpeter’s third wife—Elizabeth Boody Schumpeter—was under investigation as well (for pro- Japanese sentiments); and also here the FBI failed to find any incriminating material whatsoever. 14 Schumpeter, Capitalism, Socialism and Democracy (New York: Harper & Brothers, 1950), p. 401. 15 Schumpeter’s diary 1941–2, as cited in Swedberg, Schumpeter, p. 144. 16 Schumpeter’s diary 23 November 1942, as cited in Swedberg, Schumpeter, pp. 144–5. 17 Richard Goodwin, “Schumpeter: The Man I Knew”, Ricerche Economiche, 4 (1983), p. 610.  Introduction xxi 18 Schumpeter, Capitalism, Socialism and Democracy (1950), p. xiii. 19 Schumpeter, Capitalism, Socialism and Democracy (1950), p. xiv. 20 For the secondary literature on Capitalism, Socialism and Democracy (as well as on other works by Schumpeter), see Massimo Augello, Joseph Alois Schumpeter: A Reference Guide (Berlin: Springer-Verlag, 1990). Two recent books devoted to Capitalism, Socialism and Democracy are: Arnold Heertje (ed.), Schumpeter’s Vision: Capitalism, Socialism and Democracy after 40 Years (New York: Praeger, 1981); Richard D.Coe and Charles K.Wilber (eds.), Capitalism and Democracy: Schumpeter Revisited (Notre Dame: University of Notre Dame Press, 1985); and Herbert Matis and Dieter Stiefel (eds), 1st der Kapitalismus noch zu retten? 50 Jahre Joseph A.Schumpeter: ‘Kapitalismus, Sozialismus und Demokratie’ (Vienna: Ueberreuter, 1993). See in this context also Richard Swedberg, “Can Capitalism Survive?: Schumpeter’s Answer and Its Relevance for New Institutional Economics”, Archives Européennes de Sociologie 33 (1992), pp. 350–85. 21 Schumpeter, Capitalism, Socialism and Democracy (1976), p. 77. 22 Joan Robinson, “Review of Capitalism, Socialism and Democracy”, The Economic Journal 53 (1943), p. 382. 23 For a discussion of this problem as well as an attempt to synthesize the enormous amount of empirical research that has been inspired by Schumpeter’s discussion of the relationship between monopoly and technological innovation, see Morton Kamien and Nancy Schwartz, Market Structure and Innovation (Cambridge: Cambridge University Press, 1982). 24 Schumpeter, Capitalism, Socialism and Democracy (1976), p. 302. 25 Schumpeter, Capitalism, Socialism and Democracy (1976), p. 262.  PART I The Marxian Doctrine  PROLOGUE M OST of the creations of the intellect or fancy pass away for good after a time that varies between an after-dinner hour and a generation. Some, however, do not. They suffer eclipses but they come back again, and they come back not as unrecognizable elements of a cultural inheritance, but in their individual garb and with their personal scars which people may see and touch. These we may well call the great ones—it is no disadvantage of this definition that it links greatness to vitality. Taken in this sense, this is undoubtedly the word to apply to the message of Marx. But there is an additional advantage to defining greatness by revivals: it thereby becomes independent of our love or hate. We need not believe that a great achievement must necessarily be a source of light or faultless in either fundamental design or details. On the contrary, we may believe it to be a power of darkness; we may think it fundamentally wrong or disagree with it on any number of particular points. In the case of the Marxian system, such adverse judgment or even exact disproof, by its very failure to injure fatally, only serves to bring out the power of the structure. The last twenty years have witnessed a most interesting Marxian revival. That the great teacher of the socialist creed should have come into his own in Soviet Russia is not surprising. And it is only characteristic of such processes of canonization that there is, between the true meaning of Marx’s message and bolshevist practice and ideology, at least as great a gulf as there was between the religion of humble Galileans and the practice and ideology of the princes of the church or the warlords of the Middle Ages. But another revival is less easy to explain—the Marxian revival in the United States. This phenomenon is so interesting because until the twenties there was no Marxian strain of importance in either the American labor movement or in the thought of the American intellectual. What Marxism there was always had been superficial, insignificant and without standing. Moreover, the bolshevist type of revival produced no similar spurt in those countries which had previously been most steeped in Marxology. In Germany notably, which of all countries had the strongest Marxian tradition, a small orthodox sect indeed kept alive during the post-war socialist boom as it had during the previous depression. But the leaders of socialist thought (not only those allied to the Social Democratic party but also those who went much beyond its cautious conservatism in practical 3 4 The Marxian Doctrine questions) betrayed little taste for reverting to the old tenets and, while worshiping the deity, took good care to keep it at a distance and to reason in economic matters exactly like other economists. Outside of Russia, therefore, the American phenomenon stands alone. We are not concerned with its causes. But it is worth while to survey the contours and the meaning of the message so many Americans have made their own.1 1 References to Marx’s writings will be confined to a minimum, and no data about his life will be given. This seems unnecessary because any reader who wishes for a list of the former and a general outline of the latter finds all he needs for our purposes in any dictionary, but especially in the Encyclopedia Britannica or the Encyclopaedia of the Social Sciences. A study of Marx begins most conveniently with the first volume of Das Kapital (first English translation by S.Moore and E.Aveling, edited by F.Engels, 1886). In spite of a huge amount of more recent work, I still think that F.Mehring’s biography is the best, at least from the standpoint of the general reader.  CHAPTER I MARX THE PROPHET I T WAS not by a slip that an analogy from the world of religion was permitted to intrude into the title of this chapter. There is more than analogy. In one important sense, Marxism is a religion. To the believer it presents, first, a system of ultimate ends that embody the meaning of life and are absolute standards by which to judge events and actions; and, secondly, a guide to those ends which implies a plan of salvation and the indication of the evil from which mankind, or a chosen section of mankind, is to be saved. We may specify still further: Marxist socialism also belongs to that subgroup which promises paradise on this side of the grave. I believe that a formulation of these characteristics by an hierologist would give opportunities for classification and comment which might possibly lead much deeper into the sociological essence of Marxism than anything a mere economist can say. The least important point about this is that it explains the success of Marxism.1 Purely scientific achievement, had it even been much more perfect than it was in the case of Marx, would never have won the immortality in the historical sense which is his. Nor would his arsenal of party slogans have done it. Part of his success, although a very minor part, is indeed attributable to the barrelful of white-hot phrases, of impassioned accusations and wrathful gesticulations, ready for use on any platform, that he put at the disposal of his flock. All that needs to be said about this aspect of the matter is that this ammunition has served and is serving its purpose very well, but that the production of it carried a disadvantage: in order to forge such weapons for the arena of social strife Marx had occasionally to bend, or to deviate from, the opinions that would logically follow from his system. However, if Marx had not been more than a purveyor of phraseology, he would be dead by now. Mankind is not grateful for that sort of service and forgets quickly the names of the people who write the librettos for its political operas. But he was a prophet, and in order to understand the nature of this achievement we must visualize it in the setting of his own time. It was the zenith of bourgeois realization and the nadir of bourgeois civilization, the time of mechanistic materialism, of a cultural milieu which had as yet 1 The religious quality of Marxism also explains a characteristic attitude of the orthodox Marxist toward opponents. To him, as to any believer in a Faith, the opponent is not merely in error but in sin. Dissent is disapproved of not only intellectually but also morally. There cannot be any excuse for it once the Message has been revealed. 5 6 The Marxian Doctrine betrayed no sign that a new art and a new mode of life were in its womb, and which rioted in most repulsive banality. Faith in any real sense was rapidly falling away from all classes of society, and with it the only ray of light (apart from what may have been derived from Rochdale attitudes and saving banks) died from the workman’s world, while intellectuals professed themselves highly satisfied with Mill’s Logic and the Poor Law. Now, to millions of human hearts the Marxian message of the terrestrial paradise of socialism meant a new ray of light and a new meaning of life. Call Marxist religion a counterfeit if you like, or a caricature of faith—there is plenty to be said for this view—but do not overlook or fail to admire the greatness of the achievement. Never mind that nearly all of those millions were unable to understand and appreciate the message in its true significance. That is the fate of all messages. The important thing is that the message was framed and conveyed in such a way as to be acceptable to the positivistic mind of its time—which was essentially bourgeois no doubt, but there is no paradox in saying that Marxism is essentially a product of the bourgeois mind. This was done, on the one hand, by formulating with unsurpassed force that feeling of being thwarted and ill treated which is the auto- therapeutic attitude of the unsuccessful many, and, on the other hand, by proclaiming that socialistic deliverance from those ills was a certainty amenable to rational proof. Observe how supreme art here succeeds in weaving together those extra- rational cravings which receding religion had left running about like masterless dogs, and the rationalistic and materialistic tendencies of the time, ineluctable for the moment, which would not tolerate any creed that had no scientific or pseudo-scientific connotation. Preaching the goal would have been ineffectual; analyzing a social process would have interested only a few hundred specialists. But preaching in the garb of analysis and analyzing with a view to heartfelt needs, this is what conquered passionate allegiance and gave to the Marxist that supreme boon which consists in the conviction that what one is and stands for can never be defeated but must conquer victoriously in the end. This, of course, does not exhaust the achievement. Personal force and the flash of prophecy work independently of the contents of the creed. No new life and no new meaning of life can be effectively revealed without. But this does not concern us here. Something will have to be said about the cogency and correctness of Marx’s attempt to prove the inevitability of the socialist goal. One remark, however, suffices as to what has been called above his formulation of the feelings of the unsuccessful many. It was, of course, not a true formulation of actual feelings, conscious or subconscious. Rather we could call it an attempt at replacing actual feelings by a true or false revelation of the logic  Marx the Prophet 7 of social evolution. By doing this and by at tributing—quite unrealistically— to the masses his own shibboleth of “class consciousness,” he undoubtedly falsified the true psychology of the workman (which centers in the wish to become a small bourgeois and to be helped to that status by political force), but in so far as his teaching took effect he also expanded and ennobled it. He did not weep any sentimental tears about the beauty of the socialist idea. This is one of his claims to superiority over what he called the Utopian Socialists. Nor did he glorify the workmen into heroes of daily toil as bourgeois love to do when trembling for their dividends. He was perfectly free from any tendency, so conspicuous in some of his weaker followers, toward licking the workman’s boots. He had probably a clear perception of what the masses are and he looked far above their heads toward social goals altogether beyond what they thought or wanted. Also, he never taught any ideals as set by himself. Such vanity was quite foreign to him. As every true prophet styles himself the humble mouthpiece of his deity, so Marx pretended no more than to speak the logic of the dialectic process of history. There is dignity in all this which compensates for many pettinesses and vulgarities with which, in his work and in his life, this dignity formed so strange an alliance. Another point, finally, should not go unmentioned. Marx was personally much too civilized to fall in with those vulgar professors of socialism who do not recognize a temple when they see it. He was perfectly able to understand a civilization and the “relatively absolute” value of its values, however far removed from it he may have felt himself to be. In this respect no better testimony to his broad-mindedness can be offered than the Communist Manifesto which is an account nothing short of glowing2 of the achievements of capitalism; and even in pronouncing pro futuro death sentence on it, he never failed to recognize its historical necessity. This attitude, of course, implies quite a lot of things Marx himself would have been unwilling to accept. But he was undoubtedly strengthened in it, and it was made more easy for him to take, because of that perception of the organic logic of things to which his 2 This may seem to be an exaggeration. But let us quote from the authorized English translation: “The bourgeoisie…has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals…. The bourgeoisie… draws all nations…into civilization…. It has created enormous cities… and thus rescued a considerable part of the population from the idiocy [sic!] of rural life…. The bourgeoisie, during its rule of scarce one hundred years, has created more massive and more colossal productive forces than have all preceding generations together.” Observe that all the achievements referred to are attributed to the bourgeoisie alone which is more than many thoroughly bourgeois economists would claim. This is all I meant by the above passage—and strikingly different from the views of the vulgarized Marxism of today or from the Veblenite stuff of the modern non-Marxist radical. Let me say at once: not more than that is implied in anything I shall say in the second part about the performance of capitalism. 8 The Marxian Doctrine theory of history gives one particular expression. Things social fell into order for him, and however much of a coffeehouse conspirator he may have been at some junctures of his life, his true self despised that sort of thing. Socialism for him was no obsession which blots out all other colors of life and creates an unhealthy and stupid hatred or contempt for other civilizations. And there is, in more senses than one, justification for the title claimed for his type of socialist thought and of socialist volition which are welded together by virtue of his fundamental position: Scientific Socialism.  CHAPTER II MARX THE SOCIOLOGIST W E HAVE now to do a thing which is very objectionable to the faithful. They naturally resent any application of cold analysis to what for them is the very fountain of truth. But one of the things they resent most is cutting Marx’s work into pieces and discussing them one by one. They would say that the very act displays the incapacity of the bourgeois to grasp the resplendent whole, all parts of which complement and explain one another, so that the true meaning is missed as soon as any one part or aspect is considered by itself. We have no choice, however. By committing the offense and next taking up Marx the sociologist after Marx the prophet, I do not mean to deny either the presence of a unity of social vision which succeeds in giving some measure of analytic unity, and still more a semblance of unity, to the Marxian work, or the fact that every part of it, however independent intrinsically, has been correlated by the author with every other. Enough independence remains nevertheless in every province of the vast realm to make it possible for the student to accept the fruits of his labors in one of them while rejecting those in another. Much of the glamour of the faith is lost in the process but something is gained by salvaging important and stimulating truth which is much more valuable by itself than it would be if tied to hopeless wreckage. This applies first of all to Marx’s philosophy which we may as well get out of our way once and for all. German-trained and speculative-minded as he was, he had a thorough grounding and a passionate interest in philosophy. Pure philosophy of the German kind was his starting point and the love of his youth. For a time he thought of it as his true vocation. He was a Neo-Hegelian, which roughly means that while accepting the master’s fundamental attitudes and methods he and his group eliminated, and replaced by pretty much their opposites, the conservative interpretations put upon Hegel’s philosophy by many of its other adherents. This background shows in all his writings wherever the opportunity offers itself. It is no wonder that his German and Russian readers, by bent of mind and training similarly disposed, should seize primarily upon this element and make it the master key to the system. I believe this to be a mistake and an injustice to Marx’s scientific powers. He retained his early love during the whole of his lifetime. He enjoyed certain formal analogies which may be found between his and Hegel’s 9 10 The Marxian Doctrine argument. He liked to testify to his Hegelianism and to use Hegelian phraseology. But this is all. Nowhere did he betray positive science to metaphysics. He says himself as much in the preface to the second edition of the first volume of Das Kapital, and that what he says there is true and no self-delusion can be proved by analyzing his argument, which everywhere rests upon social fact, and the true sources of his propositions none of which lies in the domain of philosophy. Of course, those commentators or critics who themselves started from the philosophic side were unable to do this because they did not know enough about the social sciences involved. The propensity of the philosophic system-builder, moreover, made them averse to any other interpretation but the one which proceeds from some philosophic principle. So they saw philosophy in the most matter-of-fact statements about economic experience, thereby shunting discussion on to the wrong track, misleading friends and foes alike. Marx the sociologist brought to bear on his task an equipment which consisted primarily of an extensive command over historical and contemporaneous fact. His knowledge of the latter was always somewhat antiquated, for he was the most bookish of men and therefore fundamental materials, as distinguished from the material of the newspapers, always reached him with a lag. But hardly any historical work of his time that was of any general importance or scope escaped him, although much of the monographic literature did. While we cannot extol the completeness of his information in this field as much as we shall his erudition in the field of economic theory, he was yet able to illustrate his social visions not only by large historical frescoes but also by many details most of which were as regards reliability rather above than below the standards of other sociologists of his time. These facts he embraced with a glance that pierced through the random irregularities of the surface down to the grandiose logic of things historical. In this there was not merely passion. There was not merely analytic impulse. There were both. And the outcome of his attempt to formulate that logic, the so-called Economic Interpretation of History, 1 is doubtless one of the greatest individual achievements of sociology to this day. Before it, the question sinks into insignificance whether or not this achievement was entirely original and how far credit has in part to be given to predecessors, German and French. 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 1 First published in that scathing attack on Proudhon’s Philosophie de la Misère, entitled Das Elend der Philosophie, 1847. Another version was included in the Communist Manifesto, 1848.  Marx the Sociologist 11 itself in the individual psyches is an essential element of the theory and one of its most significant contributions. Marx did not hold that religions, metaphysics, schools of art, ethical ideas and political volitions were either reducible to economic motives or of no importance. He only tried to unveil the economic conditions which shape them and which account for their rise and fall. The whole of Max Weber’s2 facts and arguments fits perfectly into Marx’s system. Social groups and classes and the ways in which these groups or classes explain to themselves their own existence, location and behavior were of course what interested him most. He poured the vials of his most bilious wrath on the historians who took those attitudes and their verbalizations (the ideologies or, as Pareto would have said, derivations) at their face value and who tried to interpret social reality by means of them. But if ideas or values were not for him the prime movers of the social process, neither were they mere smoke. If I may use the analogy, they had in the social engine the role of transmission belts. We cannot touch upon that most interesting post-war development of these principles which would afford the best instance by which to explain this, the Sociology of Knowledge.3 But it was necessary to say this much because Marx has been persistently misunderstood in this respect. Even his friend Engels, at the open grave of Marx, defined the theory in question as meaning precisely that individuals and groups are swayed primarily by economic motives, which in some important respects is wrong and for the rest piteously trivial. While we are about it, we may as well defend Marx against another misunderstanding: the economic interpretation of history has often been called the materialistic interpretation. It has been called so by Marx himself. This phrase greatly increased its popularity with some, and its unpopularity with other people. But it is entirely meaningless. Marx’s philosophy is no more materialistic than is Hegel’s, and his theory of history is not more materialistic than is any other attempt to account for the historic process by the means at the command of empirical science. It should be clear that this is logically compatible with any metaphysical or religious belief—exactly as any physical picture of the world is. Medieval theology itself supplies methods by which it is possible to establish this compatibility.4 What the theory really says may be put into two propositions: (1) 2 The above refers to Weber’s investigations into the sociology of religions and particularly to his famous study. Die protestantische Ethik und der Geist des Kapitalismus, republished in his collected works. 3 The German word is Wissenssoziologie, and the best names to mention are those of Max Scheler and Karl Mannheim. The latter’s article on the subject in the German Dictionary of Sociology (Handwörterbuch der Soziologie) can serve as an introduction. 12 The Marxian Doctrine 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. Both propositions undoubtedly contain a large amount of truth and are, as we shall find at several turns of our way, invaluable working hypotheses. Most of the current objections completely fail, all those for instance which in refutation point to the influence of ethical or religious factors, or the one already raised by Eduard Bernstein, which with delightful simplicity asserts that “men have heads” and can hence act as they choose. After what has been said above, it is hardly necessary to dwell on the weakness of such arguments: of course men “choose” their course of action which is not directly enforced by the objective data of the environment; but they choose from standpoints, views and propensities that do not form another set of independent data but are themselves molded by the objective set. Nevertheless, the question arises whether the economic interpretation of history is more than a convenient approximation which must be expected to work less satisfactorily in some cases than it does in others. An obvious qualification occurs at the outset. Social structures, types and attitudes are coins that do not readily melt. Once they are formed they persist, possibly for centuries, and since different structures and types display different degrees of this ability to survive, we almost always find that actual group and national behavior more or less departs from what we should expect it  Marx the Sociologist 13 to be if we tried to infer it from the dominant forms of the productive process. Though this applies quite generally, it is most clearly seen when a highly durable structure transfers itself bodily from one country to another. The social situation created in Sicily by the Norman conquest will illustrate my meaning. Such facts Marx did not overlook but he hardly realized all their implications. A related case is of more ominous significance. Consider the emergence of the feudal type of landlordism in the kingdom of the Franks during the sixth and seventh centuries. This was certainly a most important event that shaped the structure of society for many ages and also influenced conditions of production, wants and technology included. But its simplest explanation is to be found in the function of military leadership previously filled by the families and individuals who (retaining that function however) became feudal landlords after the definitive conquest of the new territory. This does not fit the Marxian schema at all well and could easily be so construed as to point in a different direction. Facts of this nature can no doubt also be brought into the fold by means of auxiliary hypotheses but the necessity of inserting such hypotheses is usually the beginning of the end of a theory. Many other difficulties that arise in the course of attempts at historical interpretation by means of the Marxian schema could be met by admitting some measure of interaction between the sphere of production and other spheres of social life.5 But the glamour of fundamental truth that surrounds it depends precisely on the strictness and simplicity of the one-way relation which it asserts. If this be called in question, the economic interpretation of history will have to take its place among other propositions of a similar kind—as one of many partial truths—or else to give way to another that does tell more fundamental truth. However, neither its rank as an achievement nor its handiness as a working hypothesis is impaired thereby. To the faithful, of course, it is simply the master key to all the secrets of human history. And if we sometimes feel inclined to smile at rather naïve applications of it, we should remember what sort of arguments it replaced. Even the crippled sister of the economic interpretation of history, the Marxian Theory of Social Classes, moves into a more favorable light as soon as we bear this in mind. Again, it is in the first place an important contribution that we have to record. Economists have been strangely slow in recognizing the phenomenon of social classes. Of course they always classified the agents whose interplay produced the processes they dealt with. But these classes were simply sets of individuals that displayed some common character: thus, some people 5 In his later life, Engels admitted that freely. Plekhanov went still further in this direction. 14 The Marxian Doctrine were classed as landlords or workmen because they owned land or sold the services of their labor. Social classes, however, are not the creatures of the classifying observer but live entities that exist as such. And their existence entails consequences that are entirely missed by a schema which looks upon society as if it were an amorphous assemblage of individuals or families. It is fairly open to question precisely how important the phenomenon of social classes is for research in the field of purely economic theory. That it is very important for many practical applications and for all the broader aspects of the social process in general is beyond doubt. Roughly speaking, we may say that the social classes made their entrance in the famous statement contained in the Communist Manifesto that the history of society is the history of class struggles. Of course, this is to put the claim at its highest. But even if we tone it down to the proposition that historical events may often be interpreted in terms of class interests and class attitudes and that existing class structures are always an important factor in historical interpretation, enough remains to entitle us to speak of a conception nearly as valuable as was the-economic interpretation of history itself. Clearly, success on the line of advance opened up by the principle of class struggle depends upon the validity of the particular theory of classes we make our own. Our picture of history and all our interpretations of cultural patterns and the mechanism of social change will differ according to whether we choose, for instance, the racial theory of classes and like Gobineau reduce human history to the history of the struggle of races or, say, the division of labor theory of classes in the fashion of Schmoller or of Durkheim and resolve class antagonisms into antagonisms between the interests of vocational groups. Nor is the range of possible differences in analysis confined to the problem of the nature of classes. Whatever view we may hold about it, different interpretations will result from different definitions of class interest6 and from different opinions about how class action manifests itself. The subject is a hot-bed of prejudice to this day, and as yet hardly in its scientific stage. Curiously enough, Marx has never, as far as we know, worked out systematically what it is plain was one of the pivots of his thought. It is possible that he deferred the task until it was too late, precisely because his thinking ran so much in terms of class concepts that he did not feel it necessary to bother about definitive statement at all. It is equally possible 6 The reader will perceive that one’s views about what classes are and about what calls them into existence do not uniquely determine what the interests of those classes are and how each class will act on what “it”—its leaders for instance or the rank and file—considers or feels, in the long run or in the short, erroneously or correctly, to be its interest or interests. The problem of group interest is full of thorns and pitfalls of its own, quite irrespective of the nature of the groups under study.  Marx the Sociologist 15 that some points about it remained unsettled in his own mind, and that his way toward a full-fledged theory of classes was barred by certain difficulties he had created for himself by insisting on a purely economic and over- simplified conception of the phenomenon. He himself and his disciples both offered applications of this under-developed theory to particular patterns of which his own History of the Class Struggles in France is the outstanding example.7 Beyond that no real progress has been achieved. The theory of his chief associate, Engels, was of the division of labor type and essentially un- Marxian in its implications. Barring this we have only the sidelights and aperçus—some of them of striking force and brilliance—that are strewn all over the writings of the master, particularly in Das Kapital and the Communist Manifesto. The task of piecing together such fragments is delicate and cannot be attempted here. The basic idea is clear enough, however. The stratifying principle consists in the ownership, or the exclusion from ownership, of means of production such as factory buildings, machinery, raw materials and the consumers’ goods that enter into the workman’s budget. We have thus, fundamentally, two and only two classes, those owners, the capitalists, and those have-nots who are compelled to sell their labor, the laboring class or proletariat. The existence of intermediate groups, such as are formed by farmers or artisans who employ labor but also do manual work, by clerks and by the professions is of course not denied; but they are treated as anomalies which tend to disappear in the course of the capitalist process. The two fundamental classes are, by virtue of the logic of their position and quite independently of any individual volition, essentially antagonistic to each other. Rifts within each class and collisions between subgroups occur and may even have historically decisive importance. But in the last analysis, such rifts or collisions are incidental. The one antagonism that is not incidental but inherent in the basic design of capitalist society is founded upon the private control over the means to produce: the very nature of the relation between the capitalist class and the proletariat is strife—class war. 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,” 7 Another example is the socialist theory of imperialism which will be noticed later on. O.Bauer’s interesting attempt to interpret the antagonisms between the various races that inhabited the Austro-Hungarian Empire in terms of the class struggle between capitalists and workers (Die Nationalitätenfrage, 1905) also deserves to be mentioned, although the skill of the analyst only serves to show up the inadequacy of the tool. 16 The Marxian Doctrine 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. On this question Marx is much less explicit.8 He contemptuously rejects the bourgeois nursery tale (Kinderfibel) that some people rather than others became, and are still becoming every day, capitalists by superior intelligence and energy in working and saving. Now he was well advised to sneer at that story about the good boys. For to call for a guffaw is no doubt an excellent method of disposing of an uncomfortable truth, as every politician knows to his profit. Nobody who looks at historical and contemporaneous fact with anything like an unbiased mind can fail to observe that this children’s tale, while far from telling the whole truth, yet tells a good deal of it. 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. As a matter of economic theory, therefore, Marx had a real case—though he overstated it— when he denied to saving the role that the classical authors attributed to it. Only his inference does not follow. And the guffaw is hardly more justified than it would be if the classical theory were correct.9 The guffaw did its work, however, and helped to clear the road for Marx’s alternative theory of primitive accumulation. But this alternative theory is not 8 See Das Kapital, vol. i, ch. xxvi: “The Secret of Primitive Accumulation.” 9 I will not stay to stress, though I must mention, that even the classical theory is not as wrong as Marx pretended it was. “Saving up” in the most literal sense has been, especially in earlier stages of capitalism, a not unimportant method of “original accumulation.” Moreover, there was another method that was akin to it though not identical with Many a factory in the seventeenth and eighteenth centuries was just a shed that a man was able to put up by the work of his hands, and required only the simplest equipment to work it. In such cases the manual work of the prospective capitalist plus a quite small fund of savings was all that was needed— and brains, of course.  Marx the Sociologist 17 as definite as we might wish. Force—robbery—subjugation of the masses facilitating their spoliation and the results of the pillage in turn facilitating subjugation—this was all right of course and admirably tallied with ideas common among intellectuals of all types, in our day still more than in the day of Marx. But evidently it does not solve the problem, which is to explain how some people acquired the power to subjugate and to rob. Popular literature does not worry about it. I should not think of addressing the question to the writings of John Reed. But we are dealing with Marx. Now at least the semblance of a solution is afforded by the historical quality of all the major theories of Marx. For him, it is essential for the logic of capitalism, and not only a matter of fact, that it grew out of a feudal state of society. Of course the same question about the causes and the mechanism of social stratification arises also in this case, but Marx substantially accepted the bourgeois view that feudalism was a reign of force10 in which subjugation and exploitation of the masses were already accomplished facts. The class theory devised primarily for the conditions of capitalist society was extended to its feudal predecessor—as was much of the conceptual apparatus of the economic theory of capitalism11—and some of the most thorny problems were stowed away in the feudal compound to reappear in a settled state, in the form of data, in the analysis of the capitalist pattern. The feudal exploiter was simply replaced by the capitalist exploiter. In those cases in which feudal lords actually turned into industrialists, this alone would solve what is thus left of the problem. Historical evidence lends a certain amount of support to this view: many feudal lords, particularly in Germany, in fact did erect and run factories, often providing the financial means from their feudal rents and the labor from the agricultural population (not necessarily but sometimes their serfs).12 In all other cases the material available to stop the gap is distinctly inferior. The only frank way of expressing the situation is that from a Marxian standpoint there is no satisfactory explanation, that is to say, no explanation without resorting to non-Marxian elements suggestive of non- Marxian conclusions.13 10 Many socialist writers besides Marx have displayed that uncritical confidence in the explanatory value of the element of force and of the control over the physical means with which to exert force. Ferdinand Lassalle, for instance, has little beyond cannons and bayonets to offer by way of explanation of governmental authority. It is a source of wonder to me that so many people should be blind to the weakness of such a sociology and to the fact that it would obviously be much truer to say that power leads to control over cannons (and men willing to use them) than that control over cannons generates power. 11 This constitutes one of the affinities of the teaching of Marx to that of K. Rodbertus. 12 W.Sombart, in the first edition of his Theorie des modernen Kapitalismus, tried to make the most of those cases. But the attempt to base primitive accumu lation entirely on the accumulation of ground rent showed its hopelessness as Sombart himself eventually recognized. 18 The Marxian Doctrine This, however, vitiates the theory at both its historical and its logical source. Since most of the methods of primitive accumulation also account for later accumulation—primitive accumulation, as it were, continues throughout the capitalist era—it is not possible to say that Marx’s theory of social classes is all right except for the difficulties about processes in a distant past. But it is perhaps superfluous to insist on the shortcomings of a theory which not even in the most favorable instances goes anywhere near the heart of the phenomenon it undertakes to explain, and which never should have been taken seriously. These instances are to be found mainly in that epoch of capitalist evolution which derived its character from the prevalence of the medium-sized owner-managed firm. Beyond the range of that type, class positions, though in most cases reflected in more or less corresponding economic positions, are more often the cause than the consequence of the latter: business achievement is obviously not everywhere the only avenue to social eminence and only where it is can ownership of means of production causally determine a group’s position in the social structure. Even then, however, it is as reasonable to make that ownership the defining element as it would be to define a soldier as a man who happens to have a gun. The water-tight division between people who (together with their descendants) are supposed to be capitalists once for all and others who (together with their descendants) are supposed to be proletarians once for all is not only, as has often been pointed out, utterly unrealistic but it misses the salient point about social classes—the incessant rise and fall of individual families into and out of the upper strata. The facts I am alluding to are all obvious and indisputable. If they do not show on the Marxian canvas, the reason can only be in their un-Marxian implications. It is not superfluous, however, to consider the role which that theory plays within Marx’s structure and to ask ourselves what analytic intention—as distinguished from its use as a piece of equipment for the agitator—he meant it to serve. On the one hand, we must bear in mind that for Marx the theory of Social Classes and the Economic Interpretation of History were not what they are for us, viz., two independent doctrines. With Marx, the former implements the latter in a particular way and thus restricts—makes more definite—the modus operandi of the conditions or forms of production. These determine the social structure and, through the social structure, all manifestations of 13 This holds true even if we admit robbery to the utmost extent to which it is possible to do so without trespassing upon the sphere of the intellectual’s folklore. Robbery actually entered into the building up of commercial capital at many times and places. Phoenician as well as English wealth offers familiar examples. But even then the Marxian explanation is inadequate because in the last resort successful robbery must rest on the personal superiority of the robbers. And as soon as this is admitted, a very different theory of social stratification suggests itself.  Marx the Sociologist 19 civilization and the whole march of cultural and political history. But the social structure is, for all non-socialist epochs, defined in terms of classes— those two classes—which are the true dramatis personae and at the same time the only immediate creatures of the logic of the capitalist system of production which affects everything else through them. This explains why Marx was forced to make his classes purely economic phenomena, and even phenomena that were economic in a very narrow sense: he thereby cut himself off from a deeper view of them, but in the precise spot of his analytic schema in which he placed them he had no choice but to do so. On the other hand, Marx wished to define capitalism by the same trait that also defines his class division. A little reflection will convince the reader that this is not a necessary or natural thing to do. In fact it was a bold stroke of analytic strategy which linked the fate of the class phenomenon with the fate of capitalism in such a way that socialism, which in reality has nothing to do with the presence or absence of social classes, became, by definition, the only possible kind of classless society, excepting primitive groups. This ingenious tautology could not equally well have been secured by any definitions of classes and of capitalism other than those chosen by Marx—the definition by private ownership of means of production. Hence there had to be just two classes, owners and non-owners, and hence all other principles of division, much more plausible ones among them, had to be severely neglected or discounted or else reduced to that one. The exaggeration of the definiteness and importance of the dividing line between the capitalist class in that sense and the proletariat was surpassed only by the exaggeration of the antagonism between them. To any mind not warped by the habit of fingering the Marxian rosary it should be obvious that their relation is, in normal times, primarily one of cooperation and that any theory to the contrary must draw largely on pathological cases for verification. In social life, antagonism and synagogism are of course both ubiquitous and in fact inseparable except in the rarest of cases. But I am almost tempted to say that there was, if anything, less of absolute nonsense in the old harmonistic view—full of nonsense though that was too—than in the Marxian construction of the impassable gulf between tool owners and tool users. Again, however, he had no choice, not because he wanted to arrive at revolutionary results—these he could have derived just as well from dozens of other possible schemata—but because of the requirements of his own analysis. If class struggle was the subject matter of history and also the means of bringing about the socialist dawn, and if there had to be just those two classes, then their relation had to be antagonistic on principle or else the force in his system of social dynamics would have been lost. 20 The Marxian Doctrine Now, though Marx defines capitalism sociologically, i.e., by the institution of private control over means of production, the mechanics of capitalist society are provided by his economic theory. This economic theory is to show how the sociological data embodied in such conceptions as class, class interest, class behavior, exchange between classes, work out through the medium of economic values, profits, wages, investment, etc., and how they generate precisely the economic process that will eventually break its own institutional framework and at the same time create the conditions for the emergence of another social world. This particular theory of social classes is the analytic tool which, by linking the economic interpretation of history with the concepts of the profit economy, marshals all social facts, makes all phenomena confocal. It is therefore not simply a theory of an individual phenomenon which is to explain that phenomenon and nothing else. It has an organic function which is really much more important to the Marxian system than the measure of success with which it solves its immediate problem. This function must be seen if we are to understand how an analy