Capitalism & Democracy: The Missing Link

The past half-century has seen a remarkable inversion of the expectations that Joseph Schumpeter expressed in his Capitalism, Socialism and Democracy. Rather than capitalism leading inevitably to socialism, as he predicted, socialism has inexorably given way to capitalism. Meanwhile, capitalism and democracy—which he believed to be strongly at odds—have found a way of coexisting, indeed, of reinforcing one another. The reasons for these dramatic reversals of Schumpeter's expectations can be found in two developments: first, the changing character of the industrialization process driven by modern natural science; and second, a growing consensus concerning the legitimacy of liberal democracy in an autonomous realm of politics.

Despite socialism's current poor reputation, it is clear in retrospect that it formed a perfectly viable economic alternative to capitalism in the early phases of industrialization. The Soviet Union's GNP grew at a rate of 4.4 to 6.6 percent per year between 1928 and 1955—a remarkable figure given the havoc and destruction wreaked first by Stalin's forced collectivization and then by World War II—and at a rate half again as fast as the United States in the two decades from 1955 to 1975.¹ These figures may have to be revised once the many hidden costs of Soviet-style industrialization are taken into account, such as environmental damage and intangible but seriously deleterious effects on the work ethic. Still it remains true that the USSR succeeded in transforming itself into an industrial giant in less than a generation without allowing much in the way of either political or economic freedom. At one time, it seemed that this type of state-directed industrialization from above was the only way of producing such rapid results, though the experience of much of East Asia would suggest the existence of a kinder and gentler approach based on markets. But the Soviet achievement cannot be denied, or dismissed as a route to a certain stage of industrial modernity.

It is clear too that this early phase of industrialization had many similar social consequences, whether it occurred under socialism or capitalism. That is, peasants were drawn or pushed out of the countryside and into large industrial cities; traditional social groups and forms of authority were replaced by "modem" rational and bureaucratic ones; and overall levels of education, both mass and elite, increased substantially.² Thus socialist development, in a sense, created the social basis for the eventual breakdown of communist totalitarianism by creating an educated and relatively cosmopolitan urban class, the class that produced Gorbachev and those who supported him in the late 1980s.

But while socialism was able to produce the level of industrialization represented by the American midwestern "rust belt"—steel, chemicals, tractors, and the like—its failure as an economic system lay in its inability to achieve subsequent levels of industrial modernity. In predicting that socialism would ultimately replace capitalism, Schumpeter failed to anticipate the emergence of what has been variously labeled "postindustrial society," the "information age," the "technetronic era," and so forth. Economic life in the second half of the twentieth century came to be far more complex and information-intensive, oriented toward services rather than manufacturing, and dependent on dizzying rates of technological innovation to maintain productivity gains and growth. Under these circumstances, central planning and centralized economic decision making became increasingly inefficient. Since Schumpeter wrote Capitalism, Socialism and Democracy less than a decade after the world had passed through the trough of the Great Depression, at the point of transition between the old and new economic eras, his mistake is quite understandable, but a mistake it nonetheless was.

Schumpeter clearly underestimated capitalism's vitality and ability to adjust to these new circumstances. Based on historical performance, Schumpeter predicted overall growth in the capitalist world of 2 percent for the period 1928-78; actual performance for the OECD world for this period was double that, and individual countries like Japan and Taiwan managed to achieve rates of GNP growth of 10 percent and higher for extended periods of time. Many of the negative consequences of capitalist development, moreover, either failed to materialize, or else tuned...