Part I, Chapter 1

Can Capitalism Survive?

Can capitalism survive? No, I do not think it can. The thesis I shall endeavor to establish is that the actual and prospective performance of the capitalist system is such as to negative the idea of its breaking down under the weight of economic failure, but that its very success undermines the social institutions which protect it, and inevitably creates conditions in which it will not be able to live and which strongly point to socialism as the heir apparent.

These words were written in 1942 by Joseph Schumpeter, Austrian-born Harvard social scientist, in his prophetic work,
Capitalism, Socialism and Democracy. Inasmuch as I intend to build my comments around this work, it might be appropriate for me to reinforce my own judgment of Schumpeter’s competence with a statement by the Nobel Prize-winning economist, Paul Samuelson. In one of his
Newsweek columns in 1970, Samuelson wrote:

It is just twenty years since Joseph Schumpeter died. Although it is not my practice to tout profitable speculations, today I’d like to suggest that Schumpeter’s diagnosis of the probable decay of capitalism deserves a new reading in our own time. The general reader cannot do better than begin with his 1942,
Capitalism, Socialism and Democracy.

Nothing that has happened in recent years at Berkeley or Harvard would come as a surprise to those who have absorbed this work. And if there are good clubs in the great beyond, one can picture Schumpeter—an 87-year-old by this time, martini glass in hand—reading
The New York Review of Books and chuckling with clinical amusement. Only his Viennese veneer keeps him from saying, “I told you so.”

(In common with his sometime colleague at Harvard, John Kenneth Galbraith, Schumpeter was possessed of a very healthy ego. He is reported to have remarked in his later years that, as a young man, he had had three ambitions: to become one of the world’s greatest economists, one of the world’s greatest horsemen, and one of the world’s greatest lovers. He continued by saying that he was happy to report that he had succeeded in two of those ambitions. He did not identify which two.)


On what does Schumpeter base his forecast, and how does all this relate to the life and times of the American businessman today? Bear with me; all will be revealed in due course. We begin with the analysis.(1) The first question that Schumpeter seeks to answer is this: Has capitalism proved to be a successful economic system in the sense of producing over time continuing improvement in the economic well-being of the masses? His answer to this is an unequivocal and resounding, Yes! In his words, “The capitalist process, not by coincidence, but by virtue of its mechanism, progressively raises the standards of life of the masses.”
*3 “Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”
I direct your attention to his phrase, “not by coincidence….” Critics of capitalism usually argue that the economic performance under capitalism in England and the United States was not the
result of capitalism but of a combination of fortuitous circumstances and wise governmental action to counteract capitalist excesses.
Schumpeter takes each of the “fortuitous circumstances” in turn and discards them as possible explanations of the capitalist track record. For example, the virgin land and other natural resources of the American continent were but “objective opportunities” waiting to be exploited by an efficient economic system—and capitalism was that system. I might add that some million or so Indians lived lives of severe economic privation on top of those self-same resources in an area where over 200 million now live lives of Galbraithian affluence.In the same way the technological revolution of the last two hundred years has been not an historic accident but a predictable concomitant of the capitalist system. More on this later.To the claim that capitalism’s success was significantly produced by governmental corrections of capitalist excesses, he makes two replies. The first is that the track record (in terms of improvement in real wages) was just as good in the period of minimal state intervention and minimal trade union activity (1870-1914) as in later periods. The second is that most such interventions actually reduced the rate of improvement in economic well-being. For example, he argues that the unemployment figure was increased by the anti-capitalist policies of the 1930s. He concludes: “We have now established a reasonable case to the effect that the observed behavior of output per head of population during the period of fullfledged capitalism was not an accident but may be held to measure roughly capitalist performance.”
(2) Schumpeter turns next to the question of whether there are any purely economic factors that would prejudice the chances of capitalism continuing to bring improvement in the economic well-being of the masses. In this section, he is answering the doom-sayers of the thirties (including and particularly John Maynard Keynes) who saw in the depression evidence of a deeper malaise in the capitalist economy, in the form of a vanishing of the investment opportunity that had sparked the capitalist engine for so many decades.His attacks here are centered upon an enemy that has largely disappeared by now, as the “stagnation thesis” which so captured our imagination in the thirties has been undone by the simple course of events. I’ll spare you the details of the argument and report only one of the assumptions of the stagnationists: that, by the late 1930s, all of the great technological breakthroughs had been made, and the capitalist world from then on would be missing this great stimulus to private investment spending. This is an example of what the
New Yorker refers to as the “clouded crystal ball.” Schumpeter correctly labels this assumption of the stagnationists as nonsense and describes their other assumptions as either equally nonsensical or irrelevant. His conclusion is that there were no purely economic factors to obstruct continuing success for the capitalist system.
(3) In his answer to his next question, Schumpeter presents what I believe to be the most accurate and useful description of the nature of competition under capitalism ever developed. His question is this: How can capitalism be so successful a system when capitalist reality has always been at such odds with the perfect competition requirement of the textbook models? There are only two possible explanations. One is that “fortuitous circumstances” produced economic growth in spite of the gross imperfections of the capitalist system—but Schumpeter has already denied the validity of this thesis. The second, and the one for which he opts, is that the traditional textbook model of competition and monopoly, with its emphasis on perfect competition as the ideal and the target, is simply not relevant. As he puts it, “If we economists were given less to wishful thinking and more to the observation of facts, doubts would immediately arise as to the realistic virtues of a theory that would have led us to expect a very different result.”
Perhaps the best way to explain the difference between the textbook and the Schumpeter models of competitive behavior is with an example. In Table A you are given the shares of the diuretic market held by various firms over a ten-year period. By the criteria of the textbook model, each year—taken separately—would reveal a grossly imperfect market structure. Why? Because a few firms dominate the market. In addition (although the data given here do not reveal this), the profit margins on these products for the leading firms each year would most probably be very handsome indeed—perhaps far above what would be thought to be a “normal” profit. The technical description of the market structure, in the language of the textbook model, would be that of “oligopoly”—the rule of the few.

Table A

Drug Companies’ Shares of the Diuretic Market, 1951-1960
Letter = company

Digit = trade name product

A1 B2 C3 D4 F6 G8 G9 H10 H12 J13 Others
1951 32% 22% 19% 17% 10%
1952 9 25 37 18 11
1953 23 33 12 15% 17
1954 10 16 5 59 10
1955 6 13 61 13% 7
1956 11 67 9 13
1957 9 67 12% 12
1958 14 78% 8
1959 10 58 18% 7% 7
1960 8 45 23 7 17
Source: Marketing Division, Eli Lilly Company, Indianapolis, Indiana

All of this Schumpeter would label as nonsense. Why? Because the investigator would be examining “each year—taken separately” rather than the never-ending game of leapfrog that the data reveal and that represents the true nature of the competitive process.To the textbook economist, both the size of the firms relative to the market and the high profits on individual products would be evidence of market imperfection, implying “corrective” action (e.g. breaking up the larger firms). To Schumpeter, not only are size and profits not anticompetitive per se; both are natural and desirable features of the competitive process, when viewed as a dynamic process operating through the course of time. The size is often needed to assure innovative efficiency, and the profits are needed to keep the challengers trying. (In fact, says Schumpeter, when the losses of the failures are combined with the profits of the successes, the net cost to the consumer of all this may be zero—or less.)Neither the Yankees nor IBM nor General Motors need be dismembered; time and tide and “creative destruction” will operate on each and bring a demotion in rank—unless they behave as if they face immediate and equal rivals, i.e. unless they behave “competitively.” And, of course, unless they receive governmental assistance in maintaining their market positions.Schumpeter concludes his work in this area by saying that “long-run cases of pure monopoly must be of the rarest occurrence…. The power to exploit at pleasure a given pattern of demand … can under the conditions of intact capitalism hardly persist for a period long enough to matter … unless buttressed by public authority.”
My own conviction, deriving largely from Schumpeter, is that competition does not have to be created or protected; it inheres in the very nature of man. It can be reduced or eliminated
only by coercive acts of governments. All that a government need do to encourage competition is not to get in its way.
I agree with Schumpeter’s words in his preface to the second edition of
Capitalism, Socialism and Democracy, when he writes, “I believe that
most of the current talk about monopoly is nothing but radical ideology….”
In my opinion the antitrust laws of this country are anticapitalist in intent and in effect and, in addition, constitute one of the major sources of confusion and unwarranted guilt feelings on the part of the businessman. These laws brand as antisocial precisely those achievements by which the businessman evaluates his performance—growth in size, superiority over rivals, increasing market share, profits above average, etc.They also produce such absurdities as the case brought a few years ago against Topps Chewing Gum for monopolizing the baseball picture card industry. In the words of the FTC examiner, Topps had been “hustling around getting the players’ signatures, pretty well cornering the major league players.” He added, in a dramatic after-climax, that “players were paid $5.00 for a five-year contract.” Who could possibly compete with a company that was willing to throw money around like that? (That was ten years ago; today, under the influence of potential rivals, the figure has gone up to no less than $250 a year!)(4) Schumpeter’s case for capitalism is now complete and it is impressive indeed. Why does this not assure the public and political acceptance of the system? Because, says Schumpeter, “it is an error to believe that political attack arises primarily from grievance and that it can be turned by justification…. In no case is [rational argument] a match for the extra-rational determinants of conduct.”
In effect if capitalism is to survive, it must defend itself in the arena of values and emotions—and here its very success as an economic system reduces its chances of victory. We can best see Schumpeter’s analysis of this by examining the impact of capitalism on each of the groups in society that might serve as a bulwark against the system.(5) We begin with the principal beneficiaries of capitalism—the masses. Why do they not defend the system that has made them the most affluent people in the history of man? Because they do not connect their affluence with the capitalist system, because they are incapable of understanding
any economic system as such, because they are more aware of their daily frustrations and insecurities under the system than they are of their long-run gains from the system, and because they are taught by the intellectuals in society to resent the capitalist system and its central figure—the businessman.
This same point is eloquently made by another distinguished social observer, Ortega y Gasset. In
Revolt of the Masses, he writes:

The common man, finding himself in a world so excellent, technically and socially, believes it has been produced by nature, and never thinks of the personal efforts of highly endowed individuals which the creation of this new world presupposed.
Still less will he admit the notion that all these facilities still require the support of certain difficult human virtues, the least failure of which would cause the rapid disappearance of the whole magnificent edifice.*9

(6) The traditional aristocratic element in society that in the nineteenth century tended to protect the liberal capitalist system from its radical critics is itself a victim of the capitalist success. Capitalism is rationalistic in nature and creates an unfriendly climate for the tradition-based class system of the precapitalist society.(7) But why does any of this matter? Can’t the businessman be his own defender? Why must he rely on others? Why indeed. The response is that even if he were fully aware of the problem and determined to do something about it, the businessman lacks the capacity to capture the imagination of the society. In the words of Schumpeter,

A genius in the business office may be, and often is, utterly unable outside of it to say boo to a goose—both in the drawing room and on the platform. Knowing this he wants to be left alone and to leave politics alone…. There is surely no trace of any mystic glamor about him which is what counts in the ruling of men. The stock exchange is a poor substitute for the Holy Grail.

But this is not all. As capitalism matures, the form of the business firm and the role of the businessman change in such ways as to weaken the businessman’s
will to resist the critics of capitalism. Most importantly (to Schumpeter), with the growth of the large organization so essential to economic efficiency, the role of the individual entrepreneur is replaced by the work of the team, and innovation itself is reduced to routine. Personality is blotted out and with it the gut sense of ownership of the means of production that characterized the self-made man of early capitalism. Capitalism creates the organization man—and the organization man is indifferent to the fate of capitalism. He eventually comes to care little whether he reports to the anonymous stockholders or the anonymous citizen-owners of socialism.
A case in point from my own experience: As a college student, I was employed one summer by the privately owned gas distribution system in Hastings, Nebraska, to try to persuade the citizens of the city that it would be a most unwise action for them to vote
yes on a referendum proposal for the city to take over that system. Each Monday morning we “customer relations” men were given an impassioned lecture by the manager of the system on the evils of socialism. In spite of our eloquence (or because of it), the good burghers voted four to one to take over the system. One week later the manager of the now socialized enterprise was appointed, and who was it? Old God-how-I-hate-socialism himself! (This illustrates a point I have long argued: the kind of aggressive, ambitious, effective person who succeeds under capitalism is also likely to rise to power under most other economic arrangements. It is only under capitalism that his drive is harnessed in service to the interests of the consumers.)
(8) The result of all this is to make of capitalism a virtually undefended fortress, but this alone would not mean its destruction. What is needed is an enemy force—and this too capitalism provides, in the form of the intellectuals.How is the intellectual defined?

Intellectuals are people who wield the power of the spoken and written word, and one of the touches that distinguishes them from other people who do the same is the absence of direct responsibility for practical affairs…. The critical attitude [arises] no less from the intellectual’s situation as an onlooker—in most cases, also an outsider—than from the fact that his main chance of asserting himself lies in his actual or potential nuisance value.

The intellectual tends always to be a critic of the system, of the establishment, whether he is in Russia or the U.S. In Russia he is not tolerated—or is attuned solely to serving the current rulers and their ideology. But the businessman is by nature tolerant. He wants to sell people something—not send them to Siberia.The growing affluence of a mature capitalist society permits a continuing expansion in systems of higher education and hence in the ranks of the intellectuals. In fact, in 1942 Schumpeter accurately foresaw the current surplus of intellectuals, surplus in the sense of there being far more intellectuals than employment opportunities with income and prestige equal to the self-evaluations of such people. For this, said Schumpeter, the intellectuals will hold the capitalist system responsible, which will add fuel to their already burning critical fires. Moreover, the widening gap between their own incomes and those of the businessmen will induce them to find ego-restoring explanations of the businessman’s success—luck, exploitation, fraud, monopoly, etc. These rationalizations are described by Schumpeter as “the autotherapy of the unsuccessful.”One group that the intellectuals will seek to identify with and to stimulate to greater anticapitalist activity will be the workers. Schumpeter describes the advances of the intellectuals to them in words that would seem truly prophetic to anyone who has recently seen pictures of the adulatory groups around a Cesar Chavez. “Having no genuine authority and feeling always in danger of being unceremoniously told to mind his own business, he must flatter, promise and incite, nurse left wings and scowling minorities, sponsor doubtful or submarginal cases, appeal to fringe ends, profess himself ready to obey.”
A second group with which the intellectuals will feel a natural alliance will be the governmental bureaucrats, with whom they share a common educational background. In addition, of course, the bureaucrats will be increasingly involved in administering anticapitalist legislative policies. I might note that, to the intellectuals, these anticapitalist legislative creations will have a second happy feature—employment opportunities for themselves and their friends, carrying with them both decent pay and indecent amounts of power over others.(9) The enemy and his allies are now at the gates of the capitalist fortress. Is there any hope that the businessman will finally sense the danger to himself and the system of which he is a part and rise to meet the challenge? As Schumpeter sees it, quite the contrary. Here are his words:

Perhaps the most striking feature of the picture is the extent to which the bourgeoisie, besides educating its own enemies, allows itself in turn to be educated by them. It absorbs the slogans of current radicalism and seems quite willing to undergo a process of conversion to a creed hostile to its very existence. Haltingly and grudgingly it concedes in part the implications of that creed. This would be most astonishing and indeed very hard to explain were it not for the fact that the typical bourgeois is rapidly losing faith in his own creed.

This is verified by the very characteristic manner in which particular capitalist interests and bourgeoisie as a whole behave when facing direct attack. They talk and plead—or hire people to do it for them; they snatch at every chance of compromise; they are ever ready to give in; they never put up a fight under the flag of their own ideals and interests—in this country there was no real resistance anywhere against the imposition of crushing financial burdens during the last decade or against labor legislation incompatible with the effective management of industry…. Means of defense were not entirely lacking and history is full of examples of the success of small groups who, believing in their cause, were resolved to stand by their guns. The only explanation for the meekness we observe is that the bourgeois order no longer makes any sense to the bourgeoisie itself and that, when all is said and nothing is done, it does not really care.


We now have in front of us Schumpeter’s 1942 prediction of things to come—and a most unpleasing prospect it is indeed (at least to those who think even tolerably well of capitalism). What can we say of this prophecy in 1974? Is Schumpeter’s analysis even now being validated by the course of events or is it not? I take no pleasure in reporting to you my own conviction that the course of events is lending ever greater credibility to the Schumpeter thesis. I do not propose to repeat here each piece of evidence that leads me to that conclusion. But here are some samples.Do we or do we not have a surplus of intellectuals (as defined by Schumpeter)? Are they or are they not, by and large, critical of the American businessman and of the system of which he is a part? Do they or do they not “nurse left wings and scowling minorities, sponsor doubtful or submarginal cases” (such as the lettuce boycott)? Do not these critics of capitalism largely control the world of the academy? of the media? of the pulpit? When did you last see a businessman treated sympathetically in a novel or a play? Whose name is better known to the American people: Ralph Nader or the president of General Motors or General Electric?Can we find in the masses of the people any real understanding of the system that has heaped riches upon them or any instinct to defend from attack the central figure in that system, the businessman? Are they not, as Ortega has put it, the spoiled beneficiaries of a process they neither understand nor appreciate?But neither of these would be of first importance if the businessman himself were even occasionally interested in the survival of the system, aware of what that really means, and willing to work for it. That he is not, in the typical case, any of these, most of the time, is more or less clear.I offer in evidence the following examples: first, the tendency of the corporate leadership of this country to parrot the talk about the social responsibility of the businessman. With Adam Smith, I have never known much good done by a man who affected to trade for the public good. And, as Professor Milton Friedman has put it so many times, the way in which the businessman can
best serve society is to try to maximize his profits within the law. Nothing is more clearly anticapitalist than the notion that the profit-directed activities of the businessman are antisocial, and the related notion that he can serve society only by eschewing that goal and directing his activities according to his (or some intellectual’s) idea of the public good.
A second example is the response of the business community to the imposition of wage and price controls in the summer of 1971. For several years prior to that time, I had been collecting a folder of statements by leading businessmen demanding that such controls be established, and I have now added to that folder all of the statements from the same men (and their principal organizations) congratulating the President on his wisdom in imposing controls.(It is of some interest to note that the first economist of note to congratulate President Nixon on his wisdom in imposing controls was John Kenneth Galbraith. Of course this compliment was a little backhanded; he noted that Nixon had opposed such controls throughout his political life but, as he put it, “fortunately the President is a man without principle or scruple, willing to do what is expedient and necessary.” The fact is that Nixon took over a ship under heavy inflationary stress, induced by the unwise fiscal and monetary policies of his predecessors. It was as if the captain of the Titanic, immediately after his ship hit the iceberg, had turned to his second in command and said, “Now you’ve always wanted a ship of your own. Take over.”)Direct controls do not and cannot stop inflation (only an end to new-money-financed deficits can do that); they destroy the sensitive signal system that is at the center of a market economy; they are an economic absurdity and a moral monstrosity—yet we find them supported by some substantial part of the American business community. In fact, the response of the businessman to the general encroachment of government in his affairs has been similar to that predicted by Schumpeter and similar to the response of the native girl to Lord Jim’s advances, described by Conrad as follows: “He would have ravished her, but for her timely compliance.”John Kenneth Galbraith and his friends have indeed taught the businessman well, and what they have taught him is to repeat the phrases that must eventually sound his own death knell. The capitalist fortress is indeed almost naked of defenders and is encompassed round with a host of enemies.


Are there no signs pointing in the other direction? Are there no bright spots anywhere? Must the Schumpeterian process work its way to its appointed end? Is there nothing that can be done? Is mine not a defeatist message?I begin my reply with a statement by Schumpeter in the preface to the second edition:

This leads to the charge of “defeatism.” I deny entirely that this term is applicable to a piece of analysis. Defeatism denotes a certain psychic state that has meaning only in reference to action. Facts in themselves and inferences from them can never be defeatist or the opposite whatever that might be. The report that a given ship is sinking is not defeatist. Only the spirit in which this report is received can be defeatist: The crew can sit down and drink. But it can also rush to the pumps.

As you would guess, I am suggesting that such as are inclined rush to the pumps. But is the situation really all that desperate? Are there any hopeful signs? The flow of human experience is always disturbed by eddies and cross currents and the cutting of new channels, and is always complex. There are
some businessmen who are aware of and attempting to do something about the problem. Not
all the intellectuals are critics of capitalism. But the flood tide is still close to what Schumpeter predicted it would be, and the outlook is anything but reassuring.
My self-assigned task here has been one of diagnosis, not prescription. I offer you in closing the only possible assurance of my presentation. It comes from that master student of human affairs, Adam Smith, and it was penned at a time when the outlook for capitalism was less bright than it is today. Here is what he had to say:

This frugality and good conduct, however, is upon most occasions, it appears from experience, sufficient to compensate, not only the private prodigality and misconduct of individuals, but the public extravagance of government. The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.

Joseph A. Schumpeter,
Capitalism, Socialism, and Democracy, 3rd ed. (New York: Harper & Row, 1962), p. 61.

Paul A. Samuelson, “Joseph Schumpeter,”
Newsweek, April 13, 1970, p. 75.

Capitalism, p. 68.

Ibid., p. 67.

Ibid., p. 110.

Ibid., p. 75.

Ibid., p. 99.

Ibid., p. 144.

Jose Ortega y Gasset,
Revolt of the Masses (New York: Norton, 1932).

Capitalism, pp. 138-9.

Ibid., p. 147.

Ibid., p. 154.

Ibid., p. 161.

Ibid., p. xi.

Adam Smith,
The Wealth of Nations (New York: Modern Library, 1937), p. 326.

Part II