Schumpeter and the end of Western Capitalism

Abstract

Schumpeter’s forecast in his Capitalism, Socialism and Democracy (1942) that ‘a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society’ did great damage to his reputation. This was especially so after the fall of the Berlin wall, when the spectre of Communism seemed to have been finally exorcised. The current financial crisis, however, has vindicated him. For Schumpeter, capitalism rightly meant, not just individual property rights, but the ability to ‘create money from nothing.’ This is such an enormous and dangerous power that it obviously has to be subject to the strictest constraint, which was traditionally provided, however imperfectly, by denial of incorporation with limited liability to those who dealt in money. The decline of capitalism began when financiers were released from this discipline, and it ended with the catastrophe caused by belief that bureaucratic control could replace it. The cause of the change was the progressive capture of democratically elected politicians by interests. On this, Schumpeter’s The Crisis of the Tax State (1918) was almost as insightful as his later book. When Governments could not allow banks to fail, they signalled the definitive arrival of centralized financing, which is a fundamental characteristic of a socialist economy.