Capitalism, Socialism, and Democracy: An Introduction

Exactly 50 years ago, Joseph Schumpeter published Capitalism, Socialism and Democracy, his classic study of the relationship between political democracy and alternative economic systems. It is a book of magisterial scope and great insight that continues to be widely read and cited by social scientists today. Yet many of its central conclusions have been called sharply into question by the developments of recent years. It thus provides an ideal starting point for reflection about a question that is no less important or pressing today.

Though an admirer of capitalism's achievements and not an advocate of socialism, Schumpeter sought to show that "a socialist form of society will inevitably emerge from an equally inevitable decomposition of capitalist society." While his own analysis was complex and highly original, Schumpeter noted that this conclusion was "rapidly becoming the general opinion, even among conservatives." He also argued that, in principle if not necessarily in practice, there is no incompatibility between socialism and political democracy.

Half a century later, the general opinion on these matters appears to have undergone a wholesale transformation. Socialism as Schumpeter defined it—"an institutional pattern in which control over the means of production and over production itself is vested with a central authority" and "in which, as a matter of principle, the economic affairs of society belong to the public and not the private sphere"—is clearly in ideological retreat and political disarray.

The United States and other key countries in the West have been governed for the past decade by conservative, pro-private enterprise parties. The democratic socialist parties of Western Europe have rediscovered the virtues of markets and entrepreneurship. In the Third World, state-controlled economies have stagnated, and structural adjustment and privatization have become the order of the day. Finally, and most dramatically, communism has collapsed both in Eastern Europe and the former Soviet Union. Moreover, there seems to be widespread agreement—especially in the postcommunist countries—that democracy cannot succeed without the introduction of a market economy.

Even before the demise of the Soviet Union, its communist rulers had acknowledged the failure of centralized planning and adopted the goal of moving toward a market economy. This about-face on the part of the Soviet leadership made possible the approval of some striking documents on economic matters by the Conference on Security and Cooperation in Europe (CSCE), whose membership embraced the Soviet Union and its former East European satellites as well as the countries of Western Europe, the United States, and Canada. These documents may perhaps be regarded as an official statement of the opinion that now generally prevails on the issues of the economy and democracy.

On 11 April 1990, the Bonn Conference on Economic Cooperation in Europe affirmed that "democratic institutions and economic freedom foster economic and social progress"; that "the performance of market-based economies relies primarily on the freedom of individual enterprise"; and that "economic freedom for the individual includes the right freely to own, buy, sell, and otherwise utilize property." In addition, "recognizing the relationship between political pluralism and market economies," the CSCE member states endorsed not only multiparty democracy, the rule of law, and respect for human rights, but also "free and competitive market economies where prices are based on supply and demand."

Similarly, the "Charter of Paris for a New Europe," in which the leaders of the CSCE countries on 21 November 1990 officially proclaimed the end of the Cold War, affirmed not only the principles of democracy but the following propositions on the link between politics and economics: "The free will of the individual, exercised in democracy and protected by the rule of law, forms the necessary basis for successful economic and social development . . . . Freedom and political pluralism are necessary elements in our common objective of developing market economies toward sustainable economic growth, prosperity, social justice, expanding employment, and efficient use of economic resources."

The developments and proclamations recounted above might be taken as evidence that capitalism has triumphed over socialism and that there is an essential connection between capitalism and democracy. But there are also grounds on which these conclusions might...