Schumpeter on comparative efficiency of socialism and capitalism

by Stephen Simmons


During the Second World War, the economist Joseph Schumpeter wrote a book on capitalism, socialism, and democracy. In this book, two sections discuss comparative efficiency of capitalism, and a "blueprint" of socialism. This "blueprint" is a model of how Schumpeter believed socialism would function. He states, "All we can do is to list such differences between the mechanisms of the economic engines of socialist and of commercialist society as we may nevertheless perceive, and to appraise their importance as best we can." (189-190) Even though he is only analyzing a proven system against a "blueprint", he believes his conclusions are relevant.

Schumpeter first lays down a number of assumptions for both systems. First, the socialist system has advanced beyond the transition phase from capitalism to socialism, and overcome any difficulties resulting from that process. To simplify his comparison, production efficiency is studied only. In addition, "the number, quality, tastes and age distribution of the the same in both cases." (190) His definition of the more efficient system is the one which produces more consumer goods in the long run.

Schumpeter believes that the moves and countermoves made when production and prices are determined by the market, would not occur under a socialist system. In addition, there would be much less uncertainty, and as a result the optimal prices and production quantities would be determined more quickly and cheaply, by the central planners. As a result, there would be less waste produced. There would still be some excess capacity in a socialist system, but socialist management would identify this immediately and be able to eliminate it. The planners would also be in a position to redirect some wastes into useful commodities or inputs in other industries. In addition, a centralized system would eliminate economic warfare between firms, insuring stability and less waste.

Even more important are the constant fluctuations of the business cycle which plague capitalist system. While tools such as the interest rate and the supply of credit can be used to curb the excessive nature of these swings, socialism would exhibit a smooth, steady growth path, devoid of inflation and recessions. Economic forecasts and planning, which is often evident even in big business, would be reached by socialist managers, "with less disturbances and loss without necessarily incurring the disadvantages that would attend attempts at planning progress within the framework of capitalist institutions." (195) In regards to unemployment, the elimination by socialism of depressions and recessions would have a noticeable effect. He believes that most unemployment, if any, would be structural unemployment. Structural unemployment occurs as a result of technological improvements which causes the replacement of less skilled workers. Still, the socialist planners would have the means to reeducate or place these workers in other industries which could utilize their skills.

Another advantage of socialism also pertains to technological improvements. Whereas in a capitalist economy technological improvements are met with great opposition, especially be the workers, a socialist society could make the changes by law. Also, lower order managers and management would be able to operate more efficiently in a socialist system. In a capitalist system, managers are often given many responsibilities, some of which are bound to fall outside their expertise. In a socialist system, the planners could place managers in any industry and only give them responsibilities according to their abilities.

The last area Schumpeter studies is not related to his blueprints, but as he considers it "an advantage of prime importance." (197) I will also cover it. It relates to the friction in society which is created as a result of the division of commercial society between the public and private sectors. He believes that the capitalist society is increasingly being crippled by the public sector. First, the taxation of the private sector severely limits and sometimes halts the production and production efficiency of it. In addition, as more taxes are attempted to be collected, the more it costs to do so, because they must prosecute the increasing amount of evaders. The firms would also incur costs by defending itself legally. Schumpeter also identifies an interesting social cost which is incurred as a result of the resulting expansion of the legal profession. He believes that many good brains used up as lawyers, could be instead used to discover new technologies or in managing industries. He believes that much of the economic slowdown of his time could be attributed to this tug of war between a ever expanding public sector, and the private sector which unwillingly supported it.

Under socialism, with all revenue being directly owned by the government, all these wastes would be eliminated. The planners would take what was needed, and then redistribute it.

Schumpeter makes a good case for the superiority of production efficiency of socialism in his paradigm. I would like to study some of his conclusions set against the experience of Eastern Europe. While many of his assumptions are violated, and those countries did not follow a purely socialist system, I believe it is still interesting to match them up with one another. Some of Schumpeter's conclusions could be observed in Eastern Europe. There was a great degree of stability and certainty in their economies. Prices changed little, and everyone was employed. Unfortunately for the Eastern Bloc, these were some of the only advantages. First, due to the overemphasis on heavy industry, there was often excess capacity, when too many goods were produced for which there was no market. Also, technology transfer did not occur as Schumpeter predicted. At the fall of communism, some factories could be observed that had not been significantly changed since the end of the Second World War. In the management area, even worse results could be seen. Many managers earned their job not as a result of skill or merit, but rather their membership in the party. Many factories were run by people more interested in personal merit than in efficiency. The workers themselves were also very inefficient. The stability of their life, whether they worked hard or not, created huge disincentives to work, driving the marginal productivity of labor far below that of the West. While there were no "taxes", a phenomenon similar to tax evasion could be observed. This 'work evasion' resulted when managers would request the largest amount of inputs as possible, while trying to negotiate the least amount of output for their firm. Thus, even though huge amounts of investment were evident in those countries, the marginal productivity of capital was also very low. Lastly the public sector grew to huge proportions. This was a result of the centrality of the party, and the underestimated task of running a planned economy.

Schumpeter's conclusions do have merit, and these theories were written before the the communist explosion that at one point had significant control of Europe and Asia. But we cannot disprove Schumpeter's theories either, because as of yet, no economy has had the means to set up a socialist system like his "blueprint".

Schumpeter, Joseph. Capitalism, Socialism, and Democracy. New York: Harper and Brothers Publishers. pp. 188 - 199.












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