Schumpeter's theory of capitalism's transformation to socialism

Schumpeter: The Transition From Capitalism to Corporatism

The objective of this work is to research the theory of Joseph Schumpeter, which held that the demise of capitalism would lead to corporatism. Schumpeter's theory will be contrasted with Marx's theory of capitalism that would evolve into socialism. Finally, this work will examine how capitalism can be constrained by the creation of a welfare state and a constriction on entrepreneurship.

SCHUMPETER

The work of Henrekson and Jakobsson (2001) entitled: "Where Schumpeter was nearly Right - the Swedish Model and Capitalism, Socialism and Democracy" states: "In Capitalism, Socialism and Democracy (CSD), Joseph Schumpeter raised the question as to whether capitalism as an economic system would be able to survive. He concluded that socialism would eventually displace capitalism in the Western democracies. While he thereby reached the same conclusion as Marx, his arguments were quite different. It was not the shortcomings or the instability of capitalism that produced the victory of socialism. Instead, it was the superior performance of capitalism that paved the way for socialism." The work of Schumpeter indicated that "different countries are unlikely to follow the same route to socialism." (Henrekson and Jakobsson, 2001)

According to Henrekson and Jakobsson only a very few economists "have done more than Joseph Schumpeter...to increase our understanding of the role of the entrepreneur in the capitalist economy. In particular, he asserted the crucial role of the entrepreneur in the process of innovation and creative destruction -- today it is virtually impossible to conceive of a dynamic capitalist economy in the absence of the Schumpeterian entrepreneur." (2001) Schumpeter's (1942) later work viewed the declining economic importance of the entrepreneur as one of the major forces in the transformation from capitalism to socialism. Schumpeter claimed that by means of modern techniques and modern modes of organization, the innovation process would become more and more automated, and so innovations would no longer be connected with the efforts and the brilliance of a single person. They were increasingly to become the fruits of the organized effort of large teams. This would be done most effectively within the framework of large corporations." Henrekson and Jakobsson, 2001)

Schumpeter held that the large corporation would be enabled "from its monopoly power to finance new innovations" to perfect its monopolizing position and effectively "crowd out entrepreneurs and smaller firms.' (Henrekson and Jakobsson, 2001) it was posited by Schumpeter that capitalism would "kills itself by undermining its political base by its own efficiency; the forces of creative destruction would eventually kill capitalism itself." (Henrekson and Jakobsson, 2003) the entrepreneurs in the view of Schumpeter are "the backbone of the bourgeoisie, thus providing capitalism with its institutional and political basis." (Henrekson and Jakobsson, 2001)

The work of Raines and Leathers entitled: "Behavioral Influences of Bureaucratic Organizations and the Shumpeterian Hypothesis Controversy" states that Schumpeter "stressed the importance of understanding the nature of capitalist evolution and integrating the knowledge in economic theory." (2007) Schumpeter's "The Theory of Economic Development" was published in 1911 in German and translated in 1934 to English attributed innovational successes to "the special vision and organizational effects of the individual entrepreneurs." (Raines and Leather, 2007) the work of Raines and Jung (1992) explained by stating "...those entrepreneurs possessed 'super-normal qualities of intellect and will' and 'super-rational characteristics' that enabled them to break down social resistance to change and extend the economic and technologies frontiers." (Raines and Leather, 2007) in 1928 Schumpeter wrote and article which described in brief, "innovation in the big firms as becoming an impersonal 'automized' process, carried out as a matter of course on the advice of specialists." (Raines and Leather, 2007) the focus in this article was that "trustified capitalism reduced the instability of the capitalist system." (Raines and Leather, 2007) Schumpeter's views on entrepreneurship and innovational processes in large corporations was presented in the work entitled: "Capitalism, Socialism and Democracy" in which he state the hypothesis that "large corporations are more powerful engines of technological and economic progress than competitive firms rested on claims that large-scale monopolist firms have both demand-side and supply-side advantages." (Raines and Leather, 2007) Demands for innovations are greater in the larger firms since "their market power increases their ability to profit from successful innovations. At the same time, they will generate a larger supply of innovations because of the superior methods available only to monopolists, namely the ability to attract 'better brains' and secure financial standing." (Schumpeter 1950; as cited in Raines and Leather, 2007)

Raines and Leathers state that Schumpeter "discussed the rationalizing influence on capitalism on the bourgeois mind and the erosive effects of certain modern trends on the socio-psychological 'superstructure' of the capitalist economy. One of those trends was the influence of large bureaucratic corporations on the behavioral tendencies of stockholders and managers." (2007) Schumpeter is noted as having stated: "First, a given set of propensities to feel and to act may be altered by changes in the social environment while the fundamental pattern underlying it ("human nature") remains what it is. We will call this Change by Reconditioning. Second, still within that fundamental pattern, reconditioning may impinge on propensities to feel and to act, which, though ultimately amenable to change by environmental alterations -- particularly if these alterations are carried out rationally -- yet resist for a time and create trouble as long as they do. This fact we may associate with the term Habits." (1950; as cited in Raines and Leathers, 2007)

In regards to capitalist evolution, it was posited by Schumpeter that "reconditioning" in an unplanned nature of "propensities to feel and act" was "in progress of as the economic motivations of property owners and businessmen were being altered by the influence of modern large-scale industrial corporations. Because bourgeois society was 'cast in a purely economic hold.' (1950; as cited in Raines and Leathers, 2007) that society so readily responded to a system of "pecuniary rewards and penalties that success became identified with business success. Resting on a 'schema of motives that is unsurpassed in simplicity and force' (1950; as cited in Raines and Leathers) that system's major achievement was in attracting 'the majority of super-normal brains'." (1950; as cited in Raines and Leathers, 2007) Schumpeter held that assuring the "maximum performance of an optimally selected group" could be assured with the capitalist conditioning and selection processes. The bourgeois mind is held by Schumpeter to be socalized by the large bureaucratic corporation, which also worked toward a "relentlessly" narrowing of the "scope of capitalist motivation." (1950_) Schumpeter held as well that "evaporation of the material substance of property" occurred due to ownership and management separation in the large enterprise as the proprietor's interest is replaced by that of stockholders, salaried executives, and managers. Parceling out of the shares of the corporations "walls and machines in a factory" results in the removal of the "life" form the "idea of property." (Schumpeter, 1950) This results in the stockholders failing to think as would a property owner and often results in hostility being developed not only toward their own corporations but toward larger business as well. (1950) Schumpeter states specifically "Dematerialized, defunctionalized and absentee ownership does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it -- nobody within and nobody without the precincts of the big concerns." (1950: as cited in Raines and Leather, 2007) Raines and Leathers state: "Of direct relevance to the Schumpterian hypothesis is the "reconditioning" process occurring internally in large corporate enterprises. Business executives, managers, and sub-managers acquire the psychology of the salaried employee working in a bureaucratic organization, and rarely identify with the interests of the stockholders (1950, p. 141; as cited in Raines and Leather, 2007). Their system of values and conception of duty undergo a profound change for two reasons. One is the effect of large corporations on the innovational process, which is to routinize the entrepreneurial function. The other is the process of conditioning people for performance within the corporate bureaucracy and selecting individuals for success within the corporate hierarchy." (Raines and Leather, 2007) Schumpeter writes that the "perfectly bureaucratized giant industrial unit" is that which results in the ousting of the entrepreneur. (1950: as cited in Raines and Leather, 2007) Elimination of the individual function of leadership and creative has been eliminated within the large corporation due to the fact that "...innovation itself is being reduced to a routine. Technological progress is increasingly becoming the business of teams of trained specialists who turn out what is required and make it work in predictable ways." (1950: as cited in Raines and Leather, 2007) Schumpeter states "Bureau and committee works tends to replace individual action...Rationalized and specialized office work will eventually blot out personality, the calculable result, the 'vision'. The leading man no longer has the opportunity to fling himself into the fray. He is becoming just another office workers - and one who is not always difficult to replace. (1950)

The process was discussed in the work of Schumpeter in which individuals are "conditioned for performance within the corporate bureaucracy and individuals are selected for success within the corporate hierarchy in 'Capitalism Socialism, and Democracy' and notes that "the fundamental motive that drove entrepreneurs was the dynastic aim of placing their families solidly within the bourgeois class." (Raines and Leather, 2007) This goal was achievable through wealth acquisition derived from "monopoly profits from successful innovations."(Raines and Leather, 2007) Schumpeter held that the ability of these businessmen is that which determines how far they will rise "because in that schema rising to a position and doing well in it is one and the same thing." (1950: as cited in Raines and Leather, 2007) Schumpeter also discussed the 'human element' in the political democratic decision-making in his work "Capitalism, Socialism and Democracy" and in one section which he entitled 'Human Nature in Politics' he stressed that the mindset of capitalism was one of rationalism and held a view of individual rationality as "consumers and in political activities as being quite limited." (Raines and Leathers, 2007) Schumpeter rejected the "idea of the human personality that is a homogeneous unit and the idea of the definite will that is the prim mover of action." (1950: as cited in Raines and Leather, 2007) Consumers were described by Schumpeter as being "so amenable to the influence of advertising and other methods of persuasion that producers often seem to dictate to them instead of being direct by them." (1950: as cited in Raines and Leather, 2007) Schumpeter writes: "There is for everyone, within a much wider horizon, a narrower field -- widely differing in extent as between different groups and individuals and bound by a broad zone rather than a sharp line -- which is distinguished by a sense of reality or familiarity or responsibility. And this field harbors relatively definite individual volitions." (1950: as cited in Raines and Leather, 2007) the "little field" of the individual is held by Schumpeter to be those things, which are the most directly concerned with that individual and include the individual's family, business, community and other social organizations in which the individual is involved. Schumpeter states specifically: "...the typical citizen drops down to a lower level of mental performance as soon as he enters the political field. He argues and analyzes in a way, which he would readily recognize as infantile within the sphere of his real interests. He becomes a primitive again. His thinking becomes associative and affective." (1950: as cited in Raines and Leather, 2007) Therefore, it is easy in matters that are political for the individual to give in to "extra-rational or irrational prejudice and impulse" and to the political and special interest group manipulation. Raines and Leathers state: "Schumpeter's views on behavior with respect to political issues would seem to apply to some degree to behavior within large bureaucratic corporations, expanding his depiction of entering into and rising within the corporate hierarchy as similar to political behavior. In such organizational environments, individuals are highly likely to experience the same reduced sense of reality, responsibility, and volition as they do in the political arena. As the bureaucratic management structure becomes larger and more complex, each individual working in that environment may increasingly feel that he is a member of an "unworkable committee" over which he has no influence." (Raines and Leather, 2007) Schumpeter noted the individual negative impact of the bureaucratic organization stating: "The bureaucratic method of transacting business and the moral atmosphere it spreads doubtless often exert a depressing influence on the most active minds. Mainly, this is due to the difficulty, inherent in the bureaucratic machine, of reconciling individual initiative with the mechanics of its working. Often the machine gives little scope for initiative and much scope for vicious attempts at smothering it. From this a sense of frustration and futility may result which in turn induces a habit of mind that revels in blighting criticism of the efforts of others. This need not be so; many bureaucracies gain on closer acquaintance with their work. But it is difficult to avoid and there is no simple recipe for doing so." (1950: as cited in Raines and Leather, 2007)

III. COMPARE/CONTRAST

The work of Wood (2001) states that the theory of competition which was developed first by Marx and then later in the work of Schumpeter "is quite distinct from the notion of perfect competition in neoclassical general equilibrium theory." Marx holds that competition is a "dynamic process of rivalry among large capitalist firms" whereas Schumpeter considers competition to be a "dynamic and evolutionary process" (Wood, 2001) the theory of Marx can be summarized in three points:

1) Competition is a derived concept and is not a self-contained starting point for his economic theory;

2) Competition is not only a force of equilibrium, but also a force that produces disequilibria, distortions, and a misallocation of resources;

3) Marx's concept is one of moving centers of gravitation and is an elaboration on the relation of competition, capital accumulation and technical change and the long-run changes of the centers of gravitation as either direct and indirect labor requirements or market values or as process of production. (Wood, 2001)

Wood holds that the concept of competition by Schumpeter is one that "deviates from the neoclassical conception" in much the same manner and in three specific ways:

competition is not limited to price or quantity adjustments;

Schumpeter stresses that competition is not necessarily and equilibrating force; and Competition is an evolutionary process characterized by rivalry of firms that derive motivation in the 'search for surplus profit'. This is also referred to as monopoly profit. (Wood, 2001)

III. The WELFARE STATE

In the examination of how capitalism can be constrained by the creation of a welfare state and a constriction on entrepreneurship, the work of Held (1999) is examined who posits that in economics terms as international trade grows, resulting, is greater interrelation among economies. Because of this, "...social protection and the welfare state play an important role in ameliorating the impact of structural change arising from trade." (Shackman, Liu, and Wang, 2002) Democracy has been defined by Giddens (2000) as "a system involving effective competition between political parties for positions of power." (Shackman, Liu, and Wang, 2002) Democracy makes a requirements of fair elections on a regular basis in which all individuals take part. The primary feature in society is the demographic makeup of that society including population, size, age, and race/ethic breakdown and urbanization." (Shackman, Liu, and Wang, 2002) Creation of the welfare state has categorized these demographics into groups within society through a perpetual type of osmosis of certain ethnic groups into the welfare recipient group thereby discouraging entrepreneurship among these groups and further perpetuating the state of welfare in the lives of these individuals and ethnic groups within society.

CONCLUSION

The work of Schumpeter fails toward the theoretical development of changes that occur in the long-run on gravitational centers effectuated by technological process. Marx does however, very specifically develops theoretically the change development in technology render upon the gravitational centers and holds that competition of: "...capitals, capital accumulation and technical progress produce changes in the direct and indirect labor requirements of commodities and their prices of production. Labor requirements, both those of the direct and indirect nature undergoes change as labor becomes more productive therefore, "the development of productivity of labor is in the first approximation the determinant of the development of the center of gravitation." (Wood, 1991) in other words, supply and demand, such as other forces including "random events, speculation, restricted mobility of capital...."may result in "deviations from the center of gravitation" however these do not "determine the center itself" because the center's determining factor is the "cost of reproduction" both in terms of resource cost and labor costs. " (Wood, 1991) One of the primary assumptions in the work of Marx was that "demand or the level of output does not play a role in the determination of the centers of gravitation." Within this framework demand changes result only in changes in actual prices relating to center of gravity in regards to the long-term.