THE MARCH INTO SOCIALISM

By JOSEPH A. SCHUMPETER

 

 

Joseph Schumpeter delivered  this address before the American Economic Association in New York on December 30, 1949, from notes and not from a prepared manuscript. He was writing up these notes for the proceedings and had all but finished his paper the evening before his death. The brief concluding paragraphs have been supplied by his wife from notes and memory.  

a)         For the purposes of this paper, I define (centralist) socialism as that organization of society in which the means of production are controlled, and the decisions on how and what to produce and on who is to get what, are made by public authority instead of by privately-owned and privately-managed firms. All that we mean by the "march into socialism" is therefore the migration of people's economic affairs from the private into the public sphere. …., it is hardly possible to visualize a socialist society in this sense without a huge bureaucratic apparatus that manages the productive and distribu­tive process and in turn may or may not be controlled by organs of political democracy ... Therefore we may equate the march into socialism to a conquest of private industry and trade by the state. ….socialism in our sense does not necessarily-… exclude the use of competitive mechanisms as we see, e.g., from the Lange-Lerner model. Freedom of consumers' choice and of choice of occupation may, but need not necessarily, be restricted in socialist societies.  

b)        I do not advocate socialism. Nor have I any intention of discussing its desirability or undesirability, whatever this may mean. More important is it, however, to make it quite clear that I do not "prophesy" or predict it. Still more important is something else, however. As economic cares migrate from the private to the public sphere, many urges that favor this migration become satisfied, wholly or partly, so that the tendency may lose momentum. Some economists will add that any gradual movement towards a centrally planned economy offers opportunity for unfavorable developments to be experienced which may act as brakes. … I do not rate either possibility very highly … results that are felt to be unfavorable by sufficiently important groups are more likely to exert a propelling than they are to exert a restraining influence… most of the arguments that are framed in order to arrive at a result favorable to the survival of the private enterprise economy do not really deny the existence of a tendency towards socialism in our sense, but only deny that it will work itself out completely.

c)         The reasons for believing that the capitalist order tends to destroy itself and that centralist socialism --with the qualifications mentioned above- is likely heir ….may be summed up under four heads.  First the very success of the business class in developing the productive powers of this country and … that this success has created a new standard of life for all classes … undermined the social and political position of the same business class ….  Second, capitalist activity, being essentially "rational," tends to spread rational habits of mind and to destroy those loyalties and those habits of super- and subordination that are never­theless essential for the efficient working of the institutionalized leadership of the producing plant. No social system can work which is based exclusively upon a network of free contracts between (legally) equal contracting parties and in which everyone is supposed to be guided by nothing except his own (short-run) utilitarian ends. Third, … developed an attitude of independence from, and eventually of hostility to, the interests of large-scale business. Fourth, in consequence of all this, the scheme of values of capitalist society… is losing its hold not only upon the public mind but also upon the "capitalist" stratum itself.

… how far this process of disintegration of capitalist society has gone … ?

(1) the various stabilization policies that are to prevent recessions or at least depressions…(2) the "desirability of greater equality of incomes… the principle of redistributive taxation; …(3)a rich assortment of regulative measures, … as regards prices; …(4) public control though within a wide range of variation over the labor and the money market; (5) ..wants that are, …, to be satisfied by public enterprise, either gratis or on some post-office principle; and (6) of course all types of security legislation.  

It would spell complete misunderstanding of my argument if you thought that I "disapprove" or wish to criticize any of these policies. Nor am I one of those who label all or some of them "socialist." …. All I wish to emphasize is the fact that we have traveled far indeed from the principles of laissez faire capitalism … the extent to which capitalist interests can in fact be expropriated without bringing the economic engine to a standstill and the extent to which this engine may be made to run in the labor interest. … Capitalism does not merely mean that the housewife may influence production by her choice between peas and beans; nor that the youngster may choose whether he wants to work in a factory or on a farm; nor that plant managers have some voice in deciding what and how to produce. It means a scheme of values, an attitude toward life, a civilization-the civilization of inequality and of the family fortune. This civilization is rapidly passing away, however.  

II The transformation of social orders into one another is an incessant process but in itself a very slow one… In France the bourgeois republic ceased to function as it had functioned before 1914. In England, a labor party that was not yet socialist but was influenced by a socialist wing rose not indeed to power but at least to office. And in both countries, the attitude of the political sector to the private enterprise system quietly underwent a fundamental change.  

The world crisis and the second World War were additional "accelerators" and, this time, they asserted themselves also in the United States. They created situations that were felt, rightly or wrongly, to be beyond the remedies that would have recommended themselves to the men of the free-enterprise age. The business class itself.. all the time-gadgets of regulation that might prevent the recurrence of the experiences of 1929-33. 

 Let me repeat: I do not hold for a moment that any mere "events”… political situations attitudes or feelings …dominate the long-run contours of social history. These are a matter of much deeper forces. But I do hold that such events and the situations created thereby may remove obstacles from the path of the more fundamental tendencies -obstacles that would otherwise slow up the pace of social evolution.  

Now one of the most powerful factors that make for acceleration of social change is inflation. …from all imaginable standpoints …it is of prime importance .. to adjust a country's economic process as to stop it from producing further inflation. … this is an extremely difficult thing to do in a world where everybody is afraid of the short-run consequences of such a policy . Considerations of this type fail, however, to take into account an ominous fact. At a high level of employment … wage demands … become both inevitable and inflationary.  

III  A state of perennial inflationary pressure will have, qualitatively, all the effects of weakening the social framework of society and of strengthening subversive tendencies (however carefully wrapped up in  "liberal" phrases) that every competent economist is in the habit of attributing to more spectacular inflations. But this is not all. In addition, some of the standard remedies for such situations will not mitigate, and may even aggravate, the present one. It seems to me that this is not being fully understood. Let us, therefore, in desperate brevity, discuss three types of such remedies.  

a) The most orthodox of all measures for the control of inflation is action upon the volume of borrowing through interest rates or credit rationing and the like. I fully understand, of course, that money rates must be freed from the grip of cheap-money policies if normalcy in the sense of a free-enterprise economy is to be attained, …. But this does not alter the fact that a restrictive credit policy would at present produce consequences quite different from those that the old theory of credit policy would lead us to expect. ... In such a world, an increase in interest rates was supposed to reduce the volume of operations, money wages, and employment. Surely these effects would not materialize at present and, if they did, they would immediately provoke government action to neutralize them. In other words, credit restrictions would at present achieve little beyond increasing the difficulties of business. Even restrictions of consumers' credit would have this effect to some extent, though something could no doubt be done in this field.  

b) Similar difficulties stand in the way of controlling inflation by means of increasing taxation-a no less orthodox remedy but which enjoys a popularity with modern economists …It is quite true that something might be accomplished by increasing taxes on consumption. ... But if it is the corporation tax and the higher-bracket income tax which is to be increased, the effect upon inflationary pressure would be small at best and might even be negative. …  

c) The third household remedy consists in direct controls: price fixing, priorities and the like, including subsidies…. For the bureaucracy in particular their reintroduction would spell reconquest of ground that has been lost; .., price control may result in a surrender of private enterprise to public authority; that is, in a big stride toward the perfectly planned economy.  

Perennial inflationary pressure can play an important part in the eventual conquest of the private-enterprise system by the bureaucracy -the resultant frictions and deadlocks being attributed to private enterprise and used as arguments for further restrictions and regulations. I do not say that any group follows this line with conscious purpose…A situation may well emerge in which most people will consider complete planning as the smallest of possible evils.  

Marx was wrong in his diagnosis of the manner in which capitalist society would break down; he was not wrong in the prediction that it would break down eventually. The stagnationists are wrong in their diagnosis of the reasons why the capitalist process should stagnate; they may still turn out to be right in their prognosis that it will stagnate -with sufficient help from the public sector.

 

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