Democracy and Development

It is ironic that Joseph Schumpeter, who was brought to Harvard's economics department largely on the basis of mathematical prowess that promised work more in the line of Léon Walras than Alfred Marshall, is today remembered for his broader and more sociological writings. It is equally ironic that, even as we have come to celebrate him, it is for the profound questions that he raised about the links among socialism, capitalism, and democracy rather than for his answers, which have lost their cogency.

Yet perhaps this is not so odd, for we economists often judge the significance of our colleagues and predecessors more by the questions they ask than by the answers they give. Why Schumpeter erred in his predictions, anticipating as he did the triumph of socialism, is itself a question of considerable interest. The answer may lie in his psyche, now illuminated by the new works on his life by Richard Swedberg.¹ Commenting on these, economist Paul Samuelson recently remarked:

My guess that the 52-year-old Schumpeter I first met in 1935, for all his gaiety and bravado, was a sad person is more than confirmed; indeed the diaries reveal him to have been a seriously depressed personality under the surface. And although he made no bones about his conservatism in politics, I don't think that any of us realized quite how conservative he really was at heart . . . . Schumpeter went along with the popular belief that the mass of people are led by wishful thinking into expecting to happen what they want to happen. But as I have noticed in life, among sophisticated people like Schumpeter, all goes into reverse: what they should hate to have happen, they paranoidly expect to happen.²

Interestingly, Schumpeter's pessimism was based, not on his economic analysis of the dynamics of capitalism—which he understood thoroughly and described brilliantly—but on a sociological analysis that focused on the presumed manner in which successful capitalism systematically undermines the precapitalist traditions that sustain it.

It was not Schumpeter but Friedrich Hayek who spotted the flaws in the reasoning of those, like Polish economist Oskar Lange, who claimed that socialism (with its central planning) would dominate capitalism because it would better calculate optimal prices. In advancing the then novel views that information is an essential input in the functioning of an economic system and that bureaucracies cannot compete with decentralized markets on this front, Hayek put his finger on the source of inefficiency under socialism.³

Bertrand Russell was thinking along similar lines when he predicted the problems that undemocratic socialism would create for individual initiative and scientific innovation. Focusing on what socialism would do to the former, he advised his readers:

Read Plato's Republic and More's Utopia—both socialist works—and imagine yourself living in the community portrayed by either. You will see that boredom would drive you to suicide or rebellion . . . . The impulse to danger and adventure is deeply ingrained in human nature, and no society which ignores it can long be stable . . . .⁴

On the topic of democracy and innovation, Russell had this to say:

Given two countries with equal natural resources, one a dictatorship and the other one allowing individual liberty, the one allowing liberty is almost certain to become superior to the other in war technique in no very long time. As we have seen in Germany and Russia, freedom in scientific research is incompatible with dictatorship. Germany might well have won the war if Hitler could have endured Jewish physicists. Russia will have less grain than if Stalin had not insisted upon the adoption of Lysenko's theories. It is highly probable that there will be, in Russia, a similar governmental incursion into the domain of nuclear physics. I do not doubt that, if there is no war during the next fifteen years, Russian scientific war technique will, at the end of that time, be very markedly inferior to that of the West, and that the inferiority will be directly traceable to dictatorship. I think, therefore, that, so long as powerful democracies exist, democracy in the long run will be victorious. And...