Introduction By Richard Swedberg

Capitalism, Socialism and Democracy is one of the great classics in twentieth century social science.

It brilliant because of 3 things:

1. Its novel view of democracy
2. Its heretic analysis of the capitalist economy
3. Its argument that capitalism is bound to disappear because of its success

In this introduction I shall say:

1. The writing of Capitalism, Socialism and Democracy and its place in Schumpeter’s output as a whole
2. A reader’s guide to Schumpeter’s book
3. The contemporary relevance of Schumpeter’s work

He argued that socialism is about to replace capitalism. It is an opinion that seems totally wrong today, especially after the disintegration of state socialism in the Soviet Union and East-Central Europe (Part III).*

1. The Making Of Capitalism, Socialism And Democracy And Its Place In Schumpeter’S Work As A Whole

Towards the end of the 1930s, Schumpeter decided to write a small book on socialism.

His wife says: “He had finished his monumental Business Cycles in 1938 and sought relaxation in Capitalism, Socialism and Democracy, which he regarded as a distinctly ‘popular’ offering that he expected to finish in a few months.” 2

Schumpeter’s book, however, took longer to complete than he had expected, and it was not published until 1942. It was very well received, both in England and in the United States, and its reputation grew as further editions were published in 1947 and 1950. Today, according to John Kenneth Galbraith, Capitalism, Socialism and Democracy is the main work by which Schumpeter is remembered. 3

A summary account of this type fails, however, to do justice to the making of Capitalism, Socialism and Democracy in at least two important ways. First, Schumpeter’s work draws very much on his earlier research and personal experience. In the preface to the first edition, Schumpeter says that his book was the result of “almost forty years’ thought, observation and research on the subject of socialism”.4 Gottfried Haberler—one of the foremost authorities on Schumpeter—has added that the book “sums up, brings up-to-date and slightly modifies the result of Schumpeter’s life-long work and study [not only of socialism but of economic theory as well]”.5 There is also the fact that the period during which Capitalism, Socialism and Democracy was written was a particularly turbulent and dramatic one in Schumpeter’s life. He was, for example, investigated during these years by the FBI for possible espionage, and there were rumours, (as there still are), that he was pro-Nazi. He was also going through a personal crisis—reevaluating himself and his work. Through its exuberant style, Capitalism, Socialism and Democracy may give the impression that it was written by someone who was happy and carefree, but that was far from the case.

If Schumpeter’s book has its origin in events “almost forty years ago”, we need to know more about Schumpeter around the year 1900. At this time the young Schumpeter, (who was born in 1883 in the small town of Triesch, the son of a textile manufacturer), was about to enter the University of Vienna. He had just finished his studies at Theresianum, an exclusive private school for the elite of the Austro-Hungarian Empire. It might be that he felt out of place at this school as he came from the provinces, and had been admitted only because of his stepfather’s connections. In any case, he received excellent grades at Theresianum and was eager to begin his university studies. From early on Schumpeter had been interested in economics and his ambition was to become an important economist.

With Carl Menger at the University of Vienna, economics was a very exciting topic to study there around the turn of the century. Schumpeter had excellent teachers, among them Eugen von Boehm-Bawerk and Friedrich von Wieser. There was also a number of brilliant Marxist students at the university who forced the other students—including Schumpeter—to take Marxism and socialist economics seriously. Schumpeter was happy to debate them, but he made it clear that he was sceptical of Marxism. He received his doctorate in 1906, and by this time, had made the acquaintance of several Marxist students who soon were to hold prominent positions in the socialist movement, among them Otto Bauer and Rudolf Hilferding 6 . After some years abroad—mainly in England and Egypt—Schumpeter settled down to a conventional career as an economist. During the years 1908–1914 he published three brilliant books in economics and advanced to full professor at the University of Graz, after some time at the University of Czernowutz. The most important of these books was the second, The Theory of Economic Development (1911). Schumpeter’s ambition with this work was to complement Walras’ economic theory with one where economic change was analyzed in a stringent, analytical manner. Schumpeter’s theory was centered around the entrepreneur: he argued that change in economic life always starts with the actions of a forceful individual and then spreads to the rest of the economy.

As Schumpeter’s professional success grew, so did his personal ambitions. A number of prominent economists in the Austro-Hungarian Empire had held high political positions, and Schumpeter was clearly interested in getting one of these. During the First World War he approached a number of people he thought could further his political career, including former professors and ministers. He also wrote secret memoranda, which he hoped would influence the Emperor and the circles surrounding the Emperor. From these writings, which were discovered some years ago, a picture emerges of Schumpeter’s political ideas when he was in his early thirties. He was firmly conservative as a young man: he supported the Emperor, though he also felt that some form of tory-democracy would be suitable for Austria- Hungary. He did not believe in democracy for its own sake, but rather saw it as a means to modernize the Empire.

After the First World War the Austro-Hungarian Empire disintegrated— and with it Schumpeter’s hope for a high position. To his surprise, however, he was asked by the Social Democrats in 1919 to become finance minister in a coalition government. He accepted—immediately—and it seemed he had reached one of his most cherished goals. But his joy was to be shortlived— he was forced to resign after little more than half a year in office. The main reason for his dismissal was his inability to get along with the Social Democrats, especially Otto Bauer. Why the Social Democrats had thought that Schumpeter, who was a convinced conservative, would be eager to carry out a reformist policy of the type that Otto Bauer and his colleagues favored, is something of a mystery. In any case, his resignation in October 1919 represents the end of his political career.

Having served as a minister Schumpeter was reluctant to return to academic teaching in Graz, so he stayed in Vienna. Soon an opportunity arose: he was offered a high position in a small but respected banking firm, the Biedermann Bank. The reason for the offer was that Schumpeter had been allotted a banking permit for his political service to the Austrian state, which the Biedermann Bank needed in order to become a public corporation. He was given a high salary and a nice title but was not expected to interfere in the bank’s everyday transactions. Schumpeter, however, kept busy in other ways, mainly as a private investor and speculator. Initially he was quite successful and even made a small fortune. In 1924, however, his luck ran out: he went bankrupt and was fired later from the Biedermann Bank because of the dubious reputation he had acquired in the business world.

During his years as a financial entrepreneur Schumpeter had little time to write. Nonetheless he produced a few articles that are of interest in this context. Of particular importance is the main theme of Capitalism, Socialism and Democracy that now appears for the first time in his writings, namely that capitalism will undo itself ultimately through its own success. The more capitalism advances, Schumpeter argued, the more entrepreneurs will be replaced by bureaucratically-minded managers. The sense of property, which is so central to capitalist society, will also grow weaker as solid property is replaced by mere shares.

By the mid-1920s Schumpeter was in a terrible state; he had failed in politics as well as in business; he had lost his job; and he had huge debts. In 1925, however, his luck changed and he was offered a good academic position at the University of Bonn. Around this time also he fell in love and got married. His first marriage (to a mysterious English woman called Gladys Ricarde Seaver) had been a failure, but this time he felt that he had met the love of his life. Her name was Annie Reisinger; she was twenty years younger than Schumpeter; and she was the daughter of the concierge in the house of Vienna where he had grown up. For a brief time in Bonn Schumpeter was extremely happy. But in 1926 disaster struck, and in one stroke his whole family was eliminated: his mother, his wife and his newborn son all died. He was devastated by the loss. For a long time he was unable to work, and for comfort he often retreated into a kind of communion with his wife and mother. He called them die Hasen (roughly, my beloved) and he communicated with them in his mind and in his diary. From now on, Annie and Schumpeter’s mother would be the object of a kind of private cult from Schumpeter’s side. When he was tired or in need of help, he would pray to die Hasen.

When, in 1924, Schumpeter decided to resume his career as an economist, he knew that he had to produce books as brilliant as his three books from 1908– 1914. This, however, turned out to be harder than he thought, and it was not until 1939 that his fourth book—Business Cycles—was published. By this time Schumpeter was working in the United States, at Harvard University, where he had moved permanently in 1932. During the years 1924–1939 Schumpeter would several times try to produce a book, but each time he failed. There was first and foremost a projected book on the theory of money, on which Schumpeter worked extremely hard but which never materialized. Then there were a number of minor projects which he tried his hand at, but quickly let die. Among the latter was a book on socialism, a topic that held his fascination. Schumpeter continued to follow political events very closely, even though he had promised himself never to get involved in politics again. He was, for example, greatly annoyed that he had been unable to predict Hitler’s succession to power in 1933. He was incidentally also unsure whether Hitler would be good or bad for Germany.

“Recent events”, he wrote in a letter dated March 1933, “may mean a catastrophe but they also may mean salvation”.8 When news reached Schumpeter in 1934 about the recent successes of the Austrian Nazis, he worried that his native country would be governed from Berlin. According to available information, Schumpeter detested the Austrian Nazis and was very upset by the Anschluss of 1938. It was at this time, 1938, that Schumpeter decided to write Capitalism, Socialism and Democracy. As the giant manuscript for Business Cycles was coming to finish, Schumpeter began to contemplate a couple of other projects. For a while he thought of reviving the book on money, which he had worked very hard on earlier. Other candidates were a book on economic theory and a revised edition of his history of economic thought from 1914. He finally decided however to write a small book on socialism; and for a long time he referred to what was to become Capitalism, Socialism and Democracy as his “book on socialism”.9 By June 1939 he had prepared a rough outline for his new project that included the argument that capitalism is about to fail because of its very success. 10 He was still unsure about the last part of the book, but finally decided to devote it to a history of socialist parties. The whole project turned out to be much more time consuming than Schumpeter had initially thought, and the book was not published until the fall of 1942.

The years 1938–1942, during which Capitalism, Socialism and Democracy was conceived and executed, were very difficult for Schumpeter on a personal level. As always, he taught and lectured to excess, which made him irritable and gave him little time to write. He was also very annoyed with Harvard for a number of reasons. For one thing, he had very few students left after Keynes’ General Theory (1936) had been discovered at Harvard. He was also on a collision course with his own department. Its chairman—Harold Burbank—was antisemitic and a mediocre figure; and his decision in 1940 to deny an appointment to Paul Samuelson, the department’s star student, infuriated Schumpeter. The same year he began to negotiate with Yale University, which had extended a very favorable offer to him. In the last hand, however, Schumpeter decided to stay at Harvard— only to complain again soon about “[the] stifling atmosphere at Harvard”.11 There was also the issue of politics. Schumpeter detested everything that Roosevelt stood for and was convinced that he would ruin the United States in one way or another. Once the Second World War broke out in 1939, he feared the President would drag the United States into the war, and, using the war as a pretext, would then extend the grip of Washington over the economy with disasterous consequences. “A ten-year’s war and a ten-year’s Roosevelt dictatorship”, he wrote in 1941, “will completely upset the social structure”.12

Schumpeter’s hatred of Roosevelt reached such proportions that people around him, shocked by his verbal attacks on the President, began to avoid him. This tendency was strengthened by what Schumpeter said about Nazi Germany and Japan. Schumpeter basically despised and disliked Hitler—but he feared Stalin and “the Slavs” much more. During the early stages of the war he suggested that Nazi Germany could keep its conquered territories since a change in Europe was long overdue anyway. Incidentally it was this opinion—publicly expressed in a talk in Cambridge in October 1939—that led the FBI to decide to investigate Schumpeter.13 Schumpeter was unable to understand why everyone around him was so hostile to Hitler but not to Stalin. As the war continued, and as Schumpeter began to realize that Hitler would lose the war, he became increasingly obsessed with the idea that Stalin must be stopped. After the Allies had defeated Hitler, he felt they should attack the Soviet Union. “A job half done”, as he put it, “is worse than nothing”.14 Maybe it was Schumpeter’s difficulties at Harvard and the ostracism he experienced in the social circles of Cambridge that led to Schumpeter’s difficult personal crisis during the years when he wrote Capitalism, Socialism and Democracy. He began to scrutinize himself and the way he had lived his life, and he did not like what he saw: he was “worthless”, “frivolous”, “vain” and a “snob”.15 His life had been “a failure”, and so had his work.16 He prayed increasingly to his mother and his beloved second wife for support. Sometimes he lashed out in anger, and wrote hateful statements in his diary about the blacks, the Jews and Roosevelt. While earlier he had vented his anger only in private (primarily, it seems, in his diary), he now had outbursts in public also. This dark side of Schumpeter was very difficult for those of his friends who were still loyal to him. While it is the scholarly consensus that Schumpeter was basically not pro-Nazi, some of his statements from these years were nonetheless perceived as pro-Hitler. According to one of Schumpeter’s favorite students at Harvard, for example, “in the Second World War [Schumpeter] was pro-Hitler, saying to anyone who cared to listen, that Roosevelt and Churchill had destroyed more than Genghis Khan”. 17