"Understanding the Economic Basics & Modern Capitalism: Market Mechanisms and Administered Alternatives"
by Dan Blatt - Publisher of FUTURECASTS online magazine.

Smith: Wealth of Nations.   Ricardo: Principles.
Marx: Capital (Das Capital).   Keynes: General Theory.
Schumpeter: Capitalism, Socialism and Democracy.

Economics is the miracle science. Even imperfect capitalist markets routinely raise billions out of poverty.

Table of Contents & Chapter Introductions

The broad relevance of Schumpeter on socialism:

  Joseph A. Schumpeter, in 1942, in “Capitalism, Socialism, and Democracy,” accurately identified and explained the social and political tendencies that supported the trends leading to the widespread advance of socialism after WW-II. Even though socialism has since been widely tried and found wanting, those social and political forces remain as a continuing threat to capitalist market systems.
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The Federal Reserve’s commitment to artificially low interest rates, is leading yet once again to a recovery that is full of dangerous froth.

The private sector business cycle is a modern fiction. Government policies have played important and often predominant roles in every economic contraction since WW-I.

  Rather than socialism, they today support industrial policy, socialist and entitlement welfare state programs, and the spreading of moral hazard credit guarantees broadly over the commanding heights of the private economy.
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  That government policies and agencies played a primary role in the boom and bust of the Credit Crunch recession of 2007-2009, and that government profligacy played the predominant role in Europe's sovereign debt crises, have quietly disappeared from media coverage and commentary. Blame and regulatory attention concentrate instead on the very real excesses of the private financial sector.
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  Meanwhile, Fannie Mae and Freddie Mac, the affordable housing laws and tax and credit policies that distort the housing and mortgage markets remain in existence. The Federal Reserve’s commitment to artificially low interest rates, is leading yet once again to a recovery that is full of dangerous froth. In Europe, it is the pain and anguish of austerity efforts that is emphasized rather than the government profligacy that ultimately made austerity absolutely essential.
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  Indeed, the private sector business cycle is a modern fiction. In the U.S., government policies have played important and often predominant roles in every economic contraction since WW-I. This includes the Great Depression, the Keynesian inflationary morass of the 1970s, and the two bubble crises of the first decade of the 21^st century. All too frequently, what government policy destroyed in response to recent crises was the right to fail - a process as vital for economic markets as the right to succeed.
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  Thus, even after the widespread collapse of the socialist alternative to capitalist market mechanisms, capitalism continues to be undermined by the social and political tendencies identified and described by Schumpeter in "Capitalism, Socialism, and Democracy."
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Socialist expectations:

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  Joseph A. Schumpeter was a committed socialist with decades of scholarship in socialist history, practice and theory. "Capitalism, Socialism and Democracy," the source of his theory of creative destruction in capitalist systems, is thus about socialism, not capitalism.
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Marx recognized the working class as "an existing or potential source of social power." Marx also recognized the social, economic and political tendencies that supported socialism as a serious political factor.

The labor movement, for one prominent example, is not necessarily socialist and clearly benefits over time from capitalist economic development.

  Schumpeter admired Karl Marx as the first theorist to provide a systematic analysis of socialism. Marx was "the one great socialist thinker," according to Schumpeter. Marx established socialist theory as a principled doctrine attached to a class movement.  Marx recognized the working class as "an existing or potential source of social power." Marx also recognized the social, economic and political tendencies that supported socialism as a serious political factor. Schumpeter thus accepts Marx' theory as "scientific."
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  Despite his admiration for Marx, Schumpeter expressly rejects Marx' analysis. Admiration did not blind Schumpeter to the glaring weaknesses in many of Marx' most important doctrinal elements. Schumpeter found many inadequacies in Marx' analytical methodology, including "a long list of conclusions that do not follow or are downright wrong; mistakes which if corrected change essential inferences, sometimes into their opposites." Schumpeter points out that the labor movement, for one prominent example, is not necessarily socialist and clearly benefits over time from capitalist economic development. 
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  Marx, too, is thus revealed to be as utopian as the utopian socialists both Marx and Schumpeter despised. Marx’ theory is mere "ideology," Schumpeter asserts. It is "unrealistic dreaming." Since the early trade union movement was viewed during Marx' time as a diversion, and thus a competitor of socialism, communism was then just a movement of squabbling intellectuals.
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Competition would continuously drive out the outmoded, the poorly managed and the poorly placed so that profitable capitalist production would always be possible for the survivors.

Capitalism would ultimately be undermined not by some inevitable economic collapse but by its continued massive success. It would eventually achieve a "mature capitalism" state of full capitalization and an economic "stationary state" that would lay the groundwork for socialist takeover.

  Marx readily acknowledged the productivity of capitalism and thus based his prophecy of capitalist demise precisely on its great productivity. Marx' expected that the capitalist drive for capital accumulation and profits would run into a cul-de-sac of overproduction and squeezed profits and ultimately chronic crisis. The result would be an increasingly militant workforce exploited under increasingly harsh working conditions. There would also be an enlarged and militant reserve army of unemployed and underemployed workers that would be ready, willing and able to participate in the triumph of communism. (See, six articles on Das Kapital beginning with Marx, Capital (Das Kapital) (vol. 1)(I).) This expectation, however, ignored the processes of what Schumpeter called "creative destruction."

  Creative destruction also undermines the mature capitalism expectations of other economists like John Maynard Keynes, (see, Keynes, The General Theory (I), Keynesian theory, and Keynes, The General Theory (II), Keynesian policy) John Kenneth Galbraith, (See, Modern Advocacy Scholars, Galbraith and Thurow), and indeed like Schumpeter himself.

  Competition would continuously drive out the outmoded, the poorly managed and the poorly placed so that profitable capitalist production would always be possible for the survivors and for new capitalist enterprises, Schumpeter explained. Schumpeter viewed the demise of capitalism as a tentative probability while Marx' viewed it as a "scientific" certainty. It is a central thesis of Schumpeter's book that capitalism will ultimately destroy its own foundations not in its economic evolution but in its sociological evolution. Capitalism would ultimately be undermined not by some inevitable economic collapse but by its continued massive success. It would eventually achieve a "mature capitalism" state of full capitalization and an economic "stationary state" that would lay the groundwork for socialist takeover. “Capitalism is being killed by its achievements." Marx' explanation of the ultimate collapse of capitalism is obviously untenable, according to Schumpeter, but capitalism was probably doomed nevertheless.
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Socialist experiments  were not benign. The suffered catastrophic failures that blighted the lives of billions of people for several generations during the 20th century.

  A segment on creative destruction occupying about one quarter of this book was included by Schumpeter for the purpose of explaining why Marx' expectation of a capitalist collapse due to chronic overproduction and profit squeeze would not come to pass. However, it was communist and socialist systems worldwide that collapsed. These experiments were not benign. They suffered catastrophic failures that blighted the lives of billions of people for several generations during the 20th century.
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  Thus, about three quarters of Schumpeter's "Capitalism, Socialism, and Democracy," are today of apparently little more than historic interest. All that today is left of major significance would seem to be just the segment on the capitalist creative destruction process that keeps competitive capitalism eternally vibrant. For this, Schumpeter is correctly included with Smith and Ricardo in the pantheon of immortal contributors to capitalist theory. While Smith recognized the creative destruction process, it is Schumpeter who explained it in some detail and provided its name.

  The importance of Schumpeter's creative destruction segment was quickly realized, and it was republished as a small separate book entitled "Can Capitalism Survive: Creative Destruction and the Future of the Global Economy," (1950). See, Schumpeter, on Creative Destruction, "Can Capitalism Survive?" for a review of the parts of "Capitalism, Socialism, and Democracy" covering creative destruction.

  Schumpeter explained that sociological and political factors based on envy - "immiserization" - and redistributionist fervor would probably result in a political turn to socialism at some point in the future. He recognized tendencies favoring socialism already existing in the New Deal government, in its bureaucracy and political classes. Efficiencies of scale of an increasingly concentrated capitalist system would undermine all of the smaller competitors. A mature capitalist system would reach a point of development that left little scope for entrepreneurial activity, thus facilitating the socialist takeover. He expected innovation to be dominated by the "increasing mechanization of industrial progress (teamwork) in research departments," leaving little scope for the individual entrepreneur or small innovative enterprise.
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Schumpeter, too, exhibited a total lack of understanding of the infinite possibilities of capitalism and entrepreneurship. In this he was just like Marx and Keynes and so many other left wing intellectuals, and was similarly mugged by reality.

  Both communism and socialism achieved widespread often fervent acceptance in the years between the world wars with intellectuals who were all too often intentionally blind to glaring doctrinal weaknesses. Marxian doctrine had achieved little influence in the U.S. before WW-I.
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  Ultimately, of course, it was the markets that had the last word. Believers whose analytical capabilities were thus revealed to be grossly deficient doggedly kept the faith until brutally mugged by reality. Marx was revealed as a false god. Schumpeter, too, exhibited a total lack of understanding of the infinite possibilities of capitalism and entrepreneurship. In this he was just like Marx and Keynes and so many other left wing intellectuals, and was similarly mugged by reality.

  It is more than a little ironic that the creative destruction segment on capitalist theory became the basis for Schumpeter's fame as a theorist of capitalism, while his major work and decades of scholarship on socialist theory is today dead and buried for all but a few economic scholars. It should be remembered that Schumpeter wrote this book under the influence of the Great Depression. Somehow, he failed to realize that his creative destruction process must ultimately doom all socialist schemes. The expected "mature capitalism" period of full capitalization and an economic "stationary state" that would lay the groundwork for socialism seemed reasonable during the Great Depression, but was and remains an impossibility.
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  However, Schumpeter very accurately described the sociological and political processes that he expected would lead to a socialist transformation. They continue to be vital factors in the persistent advances of the entitlement welfare state and commanding heights government enterprise capitalism. The socialist gods - the sociological and political trends explained by Schumpeter - survived the widespread demise of socialism to become the gods of the entitlement welfare state. They thus continue to threaten private enterprise capitalism in the 21st century. For this reason, the bulk of Schumpeter's "Capitalism, Socialism, and Democracy" on socialism actually retains considerable relevancy.

Evaluation of Marx:

Marxism provides "absolute standards."

  Marxism is in one sense a "religion," Schumpeter asserts. For believers, Marxism provides "absolute standards" for understanding economic events and for guiding actions to achieve economic salvation from evil. It "promises paradise on this side of the grave."
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Marx' theory most powerfully affirmed "the feelings of the unsuccessful many." Schumpeter notes that opponents who reject this revealed wisdom are "not merely in error but in sin" and are not to be tolerated.

  Marx thus achieved for his secular propaganda myth what the most compelling theology achieves for religion. By proclaiming "socialist deliverance" for the "unsuccessful many" from the horribles of the early phases of capitalist economic development, Marx offered "a new ray of light and a new meaning of life." In the United States during the Great Depression, Marx' theory most powerfully affirmed "the feelings of the unsuccessful many." Schumpeter notes that opponents who reject this revealed wisdom are "not merely in error but in sin" and are not to be tolerated.

  "But preaching in the garb of analysis and analyzing with a view to heartfelt needs, this is what conquered passionate allegiance and gave 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."

  Ultimately, however, the markets always triumph - viciously if necessary – even in the face of religious beliefs.

Marx' labor theory of value is "without practical importance" and, in any case, "dead and buried."

Since labor power is not produced by rational cost calculations, labor power value will not necessarily be "proportional to the man hours" involved in its "production."

The Surplus Value doctrine does not conform to "the plain facts of economic reality."

Marx' theory of immiserization based on an ever present "industrial reserve army" crumbles in the absence of this army in anything more than cyclical terms.

Marx' frequent references and comments on the business cycle amount to a sufficient body of work "to assure him high rank among the fathers of modern cycle research."

  Schumpeter parses the strengths and weaknesses of several Marxian concepts and provides "a desperately abbreviated outline of the Marxian argument." This evaluation includes Marx' economic interpretation of history, his theory of social classes and his principle of class struggle between capitalist and proletariat, his explanation of the initial "primitive accumulation" of capital, and Marx' denigration of the importance of savings and enterprise.

•  Schumpeter asks how the Labor Theory of Value, Marx' central concept,  "works as a tool of analysis," and concludes: The “real trouble with it is that it does so very badly." Schumpeter points out the vast difficulties of practical application even in instances of "perfect competition" and worker mobility. Marx' labor theory of value is "without practical importance" and, in any case, "dead and buried."

• The ideologically vital "Theory of Exploitation" is undermined, according to Schumpeter, by the difficulty in evaluating labor as a commodity. Since it is not produced by rational cost calculations, labor power value will not necessarily be "proportional to the man hours" involved in its "production."
• Weaknesses in Marx' "Surplus Value" doctrine arise because the doctrine does not conform to "the plain facts of economic reality." When capitalism is viewed as a system in constant turmoil due to the processes that Schumpeter calls "creative destruction," it is survival rather than hunger for increased surplus value that drives constant capitalist investment and accumulation.

  "It is sufficient that, as we have seen, the profit of every individual plant is incessantly being threatened by actual or potential competition from new commodities or methods of production which sooner or later will turn into a loss. - - - [No] individual assemblage of capital goods remains a source of surplus gains forever."

• Marx did provide a "Theory of Concentration" foretelling the consolidation of the great industrial giants that would blossom towards the end of the 19th century, and "the social situation they were bound to create."
• However, Marx' theory of "immiserization" based on the inevitable creation of an ever recreated, ever present "industrial reserve army" crumbles in the absence of this army in anything more than cyclical terms.
• While Schumpeter does not find anything resembling a business cycle theory in Marx' writings, Marx' frequent references and comments on the business cycle amount to a sufficient body of work "to assure him high rank among the fathers of modern cycle research."

Marx "certainly worked in order to verify a definite vision"

  Although there is no objectivity in Marx, Schumpeter nevertheless has high praise for his “scientific” analytical efforts. Schumpeter acknowledges the frequency with which tactical considerations colored Marx' public speeches and writings. Marx "certainly worked in order to verify a definite vision." Schumpeter thus deals carefully with anything not clearly a carefully crafted presentation of Marx' mature analytical efforts.
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  Schumpeter notes the extent to which Engels contributed to Book III of Das Kapital, particularly in regards to business cycle theory. He doesn't view Engels as Marx' equal and asserts that the scattered notes Engels put together for Book III in at least some instances "cannot be trusted to render what might have been [Marx'] final view."
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Marx' propaganda myth:

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  The fantastic success of Marxian theory despite its numerous and often obvious weaknesses proves that "in this case the whole is more than the sum of its parts." Indeed, the whole can be viewed as either more true or more false than any of its parts.
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This "particularly narrow and warped theory" yields results that are "very simple and definite." However, applied systematically to individual cases it offers only "the unending jingle about the class war between owner and non-owners" that ranges from the inadequate to the trivial. Marxists immediately become experts at everything.

Marx provides a synthesis of economics and sociology - but at the expense, according to Schumpeter, of "emasculating" them both. Political and sociological institutions are analyzed as variables instead of just as given factors, but at the expense of theoretical simplification "in terms of class warfare, or attempts at and revolt against exploitation, of accumulation and of qualitative change in the capital structure, of changes in the rate of surplus value, and in the rate of profit." Politics and social developments are determined by economic factors and transmit those factor impacts back to the economy in accordance with Marx' economic theory.
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  This "particularly narrow and warped theory" yields results that are "very simple and definite." However, applied systematically to individual cases it offers only "the unending jingle about the class war between owner and non-owners" that ranges from the inadequate to the trivial.
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  Marxists immediately become experts at everything. Imperialism, wars, protectionism, the 1930s depression, "the whole maze of international politics," and much else in history lose their complexity and all analytical difficulty as they succumb to simplistic Marxian explanations.
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Without denying that economic factors are vital elements in all such historic events, Schumpeter readily demonstrates the absurdity of restricting the understanding of history to economic determinants.

• Protectionism - an economic factor - cannot be understood without acknowledging that it has broad support within many classes - labor as well as capitalist, intellectual and nationalist.
• Foreign policy - including economic components of colonization and capital export - has in fact been little influenced by big business and finance. "The attributes of capitalist groups toward the policy of their nations are predominantly adaptive rather than causative." "At this point Marxism degenerates into the formulation of popular superstition." Schumpeter compares it to the myths before WW-II of Jewish control of international and perhaps national politics.
• Socialism may indeed displace capitalism "in the fullness of time," but it is not the scientifically inevitable result of any breakdown of capitalism.

The naïve in the media and the young are particularly susceptible to this type of myth, Schumpeter observes.

  "Panting with impatience to have their innings, longing to save the world from something or other, disgusted with textbooks of un-describable tedium, dissatisfied emotionally and intellectually, unable to achieve synthesis by their own effort, they find what they crave for in Marx. There it is, the key to all the most intimate secrets, the magic wand that marshals both great events and small. - - - They need no longer feel out of it in the great affairs of life -- all at once they see through the pompous marionettes of politics and business who never know what it is all about. And who can blame them, considering the available alternatives."

Schumpeter on socialism:

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    Schumpeter, like Marx, presents economic analysis as "science" subject to precise calculation rather than as professional opinion. Schumpeter sets forth a rational scheme for "socialist planning in a stationary process of economic life in which everything is correctly foreseen and repeats itself and in which nothing happens to upset the plan."

  Schumpeter is discussing socialism based on administered alternatives to market mechanisms, not government enterprise operating within market mechanisms such as today survive the widespread collapse of socialist systems.

Capitalism will have nearly fulfilled all capital needs, leaving its socialist successor "richly endowed - - - with experience and techniques as well as with resources," and thus "approaching a stationary state."

  Schumpeter ridiculously expects the development of a point of full capitalization, a point where capitalism will have nearly fulfilled all capital needs, leaving its socialist successor "richly endowed - - - with experience and techniques as well as with resources," and thus "approaching a stationary state." Change, he admits, brings forth great administrative complications. Schumpeter admits that he is attempting to mimic market functions without markets.

  The attempt is completely otherworldly - something that could only be taken seriously in high academic and other intellectual circles completely apart from reality. Human ingenuity being infinite, there can never be anything approaching a "stationary state" that is not soon left in the dust of economic advance.

Some administrative agency must subject the "freedom of choice of occupation" to "the requirements of its general plan" in a manner analogous to military service.

  The need for regimentation quickly rears its ugly head. Some administrative agency must subject the "freedom of choice of occupation" to "the requirements of its general plan" in a manner analogous to military service. If this is not to indeed lead to serfdom, a system of "inducements" or "premiums" must be devised to rationally fill all needed occupations. Something similar to the "labor market" would have to be established. Similarly, an administered scheme similar to a market for consumer goods that orients production rationally "according to indications derived from it" is envisioned by Schumpeter. "[There] exists no more democratic institution than a market."
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  Schumpeter asserts that the similarity with market mechanisms is merely a reflection of the extent to which both market and socialist administered alternatives need to allocate scarce resources in a "rational" manner. In the "sphere of economic behavior the molding influence of mere rationality goes pretty far" in requiring similar mechanisms for different systems.
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Schumpeter notes that the New Deal effort to cartelize the economy facilitates transition to socialism. "To fight this tendency unconditionally is tantamount to fighting socialism."

 Schumpeter repeatedly refers to the absence of perfect competition, thus in this instance ignoring the cornucopia of benefits bestowed by competitive markets operating at levels that are far from perfect. He assumes that since socialism in advanced nations “will inherit a ‘monopolistic’ and not a competitive capitalism, we need not trouble about the competitive case except incidentally.”

  Socialism requires bureaucracy. Lacking automatic market mechanisms, that bureaucracy would have to be huge. However, in a big business capitalism increasingly fettered by government intervention, government bureaucracy will keep growing in any event. By cartelizing the economy, socialist managers would be relieved from the pressures and uncertainties of competition, thus actually reducing managerial problems. Schumpeter notes that the New Deal effort to cartelize the economy facilitates transition to socialism. "To fight this tendency unconditionally is tantamount to fighting socialism."
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  Typically, Schumpeter compares actual capitalist systems - including all their warts - with a socialist alternative managed by selfless, ideal managers. He compares "capitalist reality with socialist chances of success." However, while the socialist alternative is granted ideal conditions, capitalist reality in the 1930s is "big business capitalism in fetters," which he terms "fettered capitalism."
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  Schumpeter applies efficiency of scale theory when comparing socialism not to competitive market capitalism but to market capitalism dominated by monopoly or oligopoly or "big" enterprise. He assumes that since socialism in advanced nations “will inherit a ‘monopolistic’ and not a competitive capitalism, we need not trouble about the competitive case except incidentally.” "How modern capitalism would work under perfect competition is hence a meaningless question."

  Indeed, it is just a straw man - widely used for anti-capitalist propaganda. That the undoubted efficiency advantages of scale would be swamped by the inefficiency inherent when scale is protected from the pressures of competition escapes Schumpeter’s analysis here.
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  Schumpeter repeatedly refers to the absence of perfect competition. That competitive markets bestow a cornucopia of benefits even when operating at levels where competition is far from perfect is here ignored.

Schumpeter's central ministry would control all sources of revenue and allocate them to producers for productive purposes.

  At least as a matter of theory, the socialist blueprint that he provides is superior, Schumpeter concludes. A socialist society would eliminate the wasted effort involved in the struggle between private capital and public governance. Schumpeter's central ministry would control all sources of revenue and allocate them to producers for productive purposes. (Of course! What could possibly go wrong?)

  Whenever private markets are affected by substantial government allocations, incentives for efficiency range from minimal to non-existent. Whether for defense, health care, housing, or college tuition, government expenditures exert upwards pressure on prices - just as the simple supply and demand schedules demonstrate. In the government bureaucracy, it is common practice to make sure all allocations are spent lest savings be a reason for budget cuts. In the absence of government intervention, private markets always impose downwards pressures on prices, as Marx frequently acknowledges.

  Schumpeter deals with bureaucracy and management at the level of philosophy - without any indication of familiarity with the realities of economic management. All problems can be dealt with by the adoption of suitable techniques. Laborers would simply still be laborers. Socialist agriculture can be organized like New Deal agriculture, with farmers simply obeying production directives and receiving various production benefits from the agricultural authority.

  Disciplinary problems and promotion practices would of course change radically. Agriculture policy throughout the world still suffers from problems that are apparently beyond the possibility of political solution.
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  Schumpeter’s approach is inadequate even for a stable system. In the real world where economic change keeps accelerating, it is absurd. The majority of dominant corporations existing when Schumpeter was writing no longer exist as dominant corporations, if they still exist at all. Socialism has demonstrated no capacity for creative destruction, and Schumpeter admits that there would be none under Schumpeterian socialism.

The road to serfdom:

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  Socialism must be a dictatorship over the people, instead of a government of the people, Schumpeter bluntly reveals. He lauds the "authoritarian discipline" that supports the group and moral disciplinary forces of socialism.
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Socialist assertion of acting for the people gives the socialist authority moral grounds for other forms of discipline not available to the capitalist. Labor strikes would be viewed as "anti-social attacks upon the nation's welfare."

  Socialism can be far more authoritarian than capitalism, Schumpeter points out, since labor would be totally dependent on the socialist authority. Socialist assertion of acting for the people gives the socialist authority moral grounds for other forms of discipline not available to the capitalist. Labor strikes would be viewed as "anti-social attacks upon the nation's welfare." (See, Hayek, The Road to Serfdom.)

  Authoritarian discipline would be essential to achieve and maintain suitable levels of productivity. Work, after all, remains work. Sub-par performers will always be a problem. There will remain all the economic, social or political reasons for dissatisfaction and controversy not related to capitalism.
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  By 1940, capitalism no longer had the unfettered disciplinary powers that it possessed in the 19th century. Indeed, with the political rise of labor and its unions, "socialism might be the only means of restoring social discipline," Schumpeter emphasized. 

  Ultimately, it would be market forces that would impose a sense of reality and discipline on private sector labor as competition was brought to bear even on monopoly and oligopoly enterprises and their unions.

There would be "elimination of subnormal units of production, of further concentration on the best opportunities, of locational rationalization and incidental redistribution of the population, of standardization of consumers' and producers' goods and so on."

"Foundation of new firms would of course be prohibited."

• The ministries in charge of production will be assumed to be striving for the benefit of all, so no checks on their authority will be imposed. "There will be no government to interfere." There would be no need for lawyers as litigators or negotiators. The economic winners and losers would be determined by the ministries.

• Socialism at first would be applied with a light hand. However, over time, there would be "elimination of subnormal units of production, of further concentration on the best opportunities, of locational rationalization and incidental redistribution of the population, of standardization of consumers' and producers' goods and so on."

• To fund development, the central authority can always impose abstinence as a substitute for private saving, as Soviet Russia was then brutally demonstrating. The socialist state can also simply choose a slower rate of economic development. A "quasi-stationary" economic state would in any event reduce the need for saving "if economic progress - - - is held to have gone far enough to be of no account for the future."

• "Foundation of new firms would of course be prohibited." ( Extracting resources from the economy and investing them wisely are two entirely different tasks.)

Schumpeter admires the power that the Soviet Russian state has to indoctrinate youth - "teaching and guiding the young" - in conformity with state ends "and structural ideas." "A strike would be a mutiny." Trade unions become "organs of authoritarian discipline." With intellectual opinion properly restrained, "there is no public opinion to encourage infractions."

In economically unready nations, socialism has to be imposed by guile supported by ruthlessness.

Soviet Russia has established the principle that socialist group and authoritarian discipline is practical,

• The young will be firmly guided towards suitable attitudes. Schumpeter admires the power that the Soviet Russian state has to indoctrinate youth - "teaching and guiding the young" - in conformity with state ends "and structural ideas." 

• Trade unions become "organs of authoritarian discipline." "A strike would be a mutiny."

• With intellectual opinion properly restrained, "there is no public opinion to encourage infractions. Public opinion will no longer tolerate "semi-criminal" practice. 

  "[Thus, socialism could] realize all the possibilities of superior performance inherent in its blueprint."

  The psychological and physical sanctions in use in Russia are justified by the "unripeness" of the economic situation in that country. In such economically unready nations, socialism has to be imposed by guile supported by ruthlessness. Schumpeter recommends a type of commanding heights socialism in these instances due to the initial difficulties involved in organizing the mass of small and medium sized businesses. Organization of the farm sector should be left until later.
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  All of this should not be necessary for socialist authorities in more highly developed nations, but at least Soviet Russia has established the principle that socialist group and authoritarian discipline is practical, Schumpeter concludes with approval. Schumpeter acknowledges that the only people who immediately benefit are the socialist revolutionary cadre who take on the risks and burdens.
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  Schumpeter thus presents himself as a tough-minded realist. He is willing to break eggs to make the socialist omelet. No wooly headed left wing idealist he! He presents a blueprint of a practical socialist system. Comparison with "fettered capitalism does not turn out too badly for the socialist alternative" Schumpeter asserts. Other socialist systems fettered with idealistic assumptions would not fare well.

  "In fact, we need only assume that the ideas prevail which constitute what I have termed idyllic socialism in order to convince ourselves of the likelihood of complete and even ludicrous failure. This would even not be the worst possible outcome. Failure so patent as to be ludicrous could be remedied. Much more insidious as well as likely is failure not so complete which political psycho-technics could make people believe to be a success."

  Post WW-II European socialism was indeed developed as Schumpeter forecast and without Soviet Russian levels of authoritarian discipline. Within one generation, it proved a total failure. Industrial policy, government enterprise capitalism and the welfare state are its more permanent residue, but are also not without serious problems and prospects that are doubtful.

The democracy problem:

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  Democracy is recognized as merely a means to an end by Schumpeter. It is not an end in itself and is no guarantor of particular ends. Like socialism, democratic ideals are frequently held with religious fervor. It is beyond attack by reason. He provides a fine explanation of the political considerations that impact the effectiveness of democratic governance.
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Schumpeter recognizes the pressures driving ultimately towards rational results. Competition inherently creates similar pressures in both economic and political markets. Democratic political contests require many of the skills needed for effective governance and at least weed out most of the total incompetents. However, conflicting interests and shear - sometimes deliberate - ignorance can undermine rational decision making for generations.

  The weaknesses of idyllic notions of democracy are easily exposed by Schumpeter. The desirability of democratic forms of governance are evaluated by Schumpeter “independent of the desirability of results." He parses the obvious weaknesses of popular opinion and crowd psychology, emphasizing the powers of advertising and propaganda.
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  However, he also recognizes the pressures driving ultimately towards rational results. Competition inherently creates similar pressures in both economic and political markets. Democratic political contests require many of the skills needed for effective governance and at least weed out most of the total incompetents. However, conflicting interests and shear - sometimes deliberate - ignorance can undermine rational decision making for generations.

  "[No] system of selection whatever the social sphere - with the possible exception of competitive capitalism - tests exclusively the ability to perform and selects in the way a stable selects [its race horse entries].

  Democracy is indeed an awful way to govern a nation - unless compared objectively against all the realistic alternatives. This is one of Winston Churchill's famous dictums. As with the capitalist  utopian ideal in the economic sphere, the democratic utopian ideal is the greatest domestic danger for the democratic practical best in the political sphere.

Successful implementation of democratic governance thus must include checks and balances of powers and constraints on democratic governance - without which democracies routinely fail.

  The prospects for democratic governance at local levels is far different than at state and national levels due to increased individual participation and familiarity with issues and leaders. Prospects are also different with respect to issues of widespread rather than narrow concern, and in cases where short term interests conflict with long-term interests.
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  Successful implementation of democratic governance thus must include checks and balances of powers and constraints on democratic governance - without which democracies routinely fail. Democracy is also critically dependent on participation by an economically, legally and politically empowered civil society that is committed to the democratic system.

  Democratic governments must have limits and constraints to protect them and the public from their self-destructive tendencies. The checks and balances and constraints on democratic political powers included in the U.S. Constitution to deal with many of the weaknesses in democratic governance are under remorseless attack by ideologues who chafe over the frustration of their wonderful plans.

The competition for political leadership is inevitably far from "perfect" but nevertheless offers a cornucopia of benefits even in imperfect forms. It is also an invaluable method of evicting from government those currently in power.

Schumpeter acknowledges that autocratic forces may permanently hijack the socialist apparatus

Democratic socialism:

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  Only if socialism becomes broadly accepted is it compatible with political democracy. The loss of broad acceptance of the capitalist structure renders capitalist democracy increasingly nonfunctional, Schumpeter points out. (Today, the political rift is over the extent of industrial policy and the entitlement welfare state.)
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Socialist democracy "will not increase personal freedom,"

  However, democracy must not mean any relaxation of industrial discipline. Socialist democracy "will not increase personal freedom," Schumpeter candidly acknowledges.

  "After all, effective management of the socialist economy means dictatorship not of but over the proletariat in the factory. - - - As a matter of practical necessity, socialist democracy may eventually turn out to be more of a sham than capitalist democracy ever was." (emphasis Schumpeter)

  Socialism is indeed the road to serfdom, as Schumpeter proposes it. Achievement of the economic success of socialist alternatives to market mechanisms justifies the loss of freedoms. Managing personnel must have suitable authority and independence. He believes bureaucracies can be sufficiently isolated from political pressures as to provide effective professional management for economic entities. In evaluating the prospects for democratic socialism, he assumes the correctness of his analysis of the prospects for the success of socialist economic management. However, he is well aware of how socialist political parties have used patronage as a political tool.

  As repeatedly demonstrated by the supposedly independent Federal Reserve and as proven by recent experience with such supposedly independent agencies as the IRS and the SEC, political considerations affect all Washington administrative agencies. Schumpeter's assertion that production ministries can somehow be protected from political and bureaucratic imperatives is extraordinarily naïve. He admits that politics and patronage appointments, as with the policies and executive positions of Fannie Mae and Freddie Mac,  are an unavoidable problem.

  Schumpeter correctly foresaw the growing socialist influence in the United States. He maintained hopes for socialist success “within the fullness of time,” or within approximately 50 years, but did not venture a confident forecast as to the immediate outcome. He acknowledged the bureaucratic and political economic mismanagement in the U.S., but attributed it to the lack of "maturity" as compared with the more established European bureaucracies that he erroneously thought capable of suitable economic management. He correctly foresaw the triumph of labor-socialism in England and its takeover of much of the economy.

  However, Schumpeter totally failed to foresee how completely the nationalized industries would fail. Ultimately, the markets had the last word and punished England for its socialist initiatives.

  He recognized labor as the most difficult economic segment to socialize and control by political dictate.

  In the event, the inability of democratic socialist systems to dominate their labor unions was one of the reasons, among many others, for the failures of democratic socialist systems.