Capitalism and Western Civilization: Schumpeter

William H. Young

In a previous article, Corporations, I noted that Austrian-born Harvard economist Joseph Schumpeter (Capitalism, Socialism, and Democracy, Third Edition, 1950, reprinted 2008) described the role of the entrepreneur in capitalism as the main source of economic growth, stimulating investment and innovation and making old technologies obsolete, thereby causing what he called “creative destruction.” Schumpeter was a strong supporter of capitalism but, after long study, reluctantly concluded that society could eventually replace it with a kind of socialism—or corporatism. His warning is apt for today’s America.

Ironically, Schumpeter (1883-1950) prophesied that the economic success, not failure, of capitalism would be its undoing, creating “secular improvement that is taken for granted.” The process of obsolescence of technologies and workers would cause “individual insecurity that is acutely resented,” leading to “an atmosphere of almost universal hostility to its own social order.” He added:

The social atmosphere for the theory of which we have been gathering stones and mortar, explains why public policy grows more and more hostile to capitalist interests, eventually so much so as to refuse on principle to take account of the requirements of the capitalist engine and to become a serious impediment to its functioning.

Schumpeter believed that this process was greatly assisted by the creation of “a large stratum of intellectuals.” Capitalism inevitably generates, educates and subsidizes an intellectual class which develops a scorn for market values, envy of market rewards, and “a vested interest in social unrest.”

Intellectuals are in fact people who wield the power of the spoken and the written word, and one of the touches that distinguish them from other people who do the same is the absence of direct responsibility for practical affairs….

Of course, the hostility of the intellectual group—amounting to moral disapproval of the capitalist order—is one thing, and the general hostile atmosphere which surrounds the capitalist engine is another thing.

During the late 1960s, with One-Dimensional Man (1964), Herbert Marcuse came to be known as “the father of the New Left” and began to turn it towards cultural Marxism. Marcuse railed against the false consciousness and existential alienation that he believed characterized a soul-destroying consumer society in which Americans found their selves only in their possessions. His solution was to destroy the existing oppressive and repressive capitalist social order. Both economic and cultural Marxism still dominate the academic left. 

The late Harvard sociologist Daniel Bell (1919-2011) argued in “The Cultural Wars” (The Wilson Quarterly, Summer 1992) that Antonio Gramsci’s concept of “hegemony” is 

an essential tool in the Left’s effort to undermine the dominion of ‘capitalist culture,’ but as it is difficult to define the capitalist ‘culture,’ what this means in practice is the legitimacy of capitalism as a just system. The attack was developed most sharply by the Critical Legal Studies movement, which originated in the early 1980s at Harvard Law School and has now spread to the major law schools of the country….

Late Harvard philosophy professor Robert Nozick (1938-2002) saw the importance of what he called “wordsmith intellectuals”

concentrated in…academia, the media, government bureaucracy….The opposition of wordsmith intellectuals to capitalism is a fact of social significance. They shape our ideas and images of society; they state the policy alternatives bureaucracies consider….Their opposition matters, especially in a society that depends increasingly upon the explicit formulation and dissemination of information.

(Robert Nozick, “Why Do Intellectuals Oppose Capitalism?” Cato Policy Report, January/February 1998)

Schumpeter anticipated another of the social and educational subversions of capitalism:

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.

Much of our contemporary society lacks a basic understanding of how our economy works and poorly comprehends even the most elementary and accepted principles of economics. Instead, by the time most students leave high school, they have been exposed almost exclusively to Marxist theory, social justice, anti-capitalism, and class envy against the rich by public education. (See my article, Marxist Justice)

George Leef of the Pope Center reported in “Capitalism on Campus?” that “many students enter college with a jaundiced view of capitalism and the free market.” American college professors are predominantly hostile to laissez-faire capitalism, ranging from liberals who want ever-increasing economic regulation to Marxists, who would abolish private property. (See my previous article, Exchange) The academy seeks “social justice” to eliminate inequality through “democratic engagement”—applying its version of a collective will to drive societal decisions.

Schumpeter argued that capitalism’s collapse would come about as democratic majorities voted for restrictions upon entrepreneurship that would burden and destroy the capitalist structure. The dislocation that is part of capitalism produces discontent, which the intellectual class is then able to protest and exploit. As he argued further: 

Faced by the increasing hostility of the environment and by the legislative, administrative and judicial practice born of that hostility, entrepreneurs and capitalists—in fact the whole stratum that accepts the bourgeois scheme of life—will eventually cease to function. Their standard aims are rapidly becoming unattainable….The modern corporation, although the product of the capitalist process, socializes the bourgeois mind; it relentlessly narrows the scope of capitalist motivation; not only that, it will eventually kill its roots…through bureaucratization.” 

During the 1970s, corporatism led American capitalism down the path of low labor productivity and corporate profitability. The resurgence of shareholder capitalism in the 1980s and 1990s recovered much of the lost ground. (See my Productivity and Finance) Since 2000, that recovery has slowed. 

While the “destruction” part of creative destruction continues apace in a globally competitive economy, the “creative” part that once distinguished America has been declining. The number of new businesses started by entrepreneurs “has drifted down since the mid-1990s,” reports the Kauffman Foundation, after being “steady for years.” (John Bussey, “Shrinking in a Bad Economy, America’s Entrepreneurial Class,” The Wall Street Journal, August 12, 2011) One reason is that onerous labor, environmental, and other regulation and tort litigation have become so extreme as to retard innovation, especially by small business. (See my article, Law) Also, American educational attainment no longer produces enough workers with the basic skills needed to keep up with technological advance, according to Harvard economists Claudia Goldin and Lawrence F. Katz in The Race Between Education and Technology (2008). 

President Obama’s rhetoric more closely resembles the academy’s ideological anti-capitalism than it does economics. Capitalism produces immoral profits for wealthy investors and unfair inequality for workers. Government must control the economy to correct this. But regulation and litigation strangle private sector job creation and spending and debt impede private sector investment. Such hostility, as Schumpeter anticipated, has become a serious impediment to the functioning of the capitalist engine. 

Schumpeter closed the Third Edition of Capitalism, Socialism, and Democracy with the following words: 

The Stagnationists are wrong in their diagnosis of the reasons why the capitalist process should stagnate; they may still turn out to be right in their prognosis that it will stagnate with sufficient help from the public sector. 

Continued expansion without reform of federal spending and regulation will provide that “sufficient help from the public sector,” thus ensuring economic stagnation and a corporatist path to a zero-growth command economy—the ultimate destination of the sustainability policies now ascendant in the academy. (See Reverse Metamorphosis of Sustainability - Economy

In 2012, America has an essential opportunity to choose to return to capitalist free enterprise, investment, innovation, jobs, productivity, and economic growth in the private sector. And business education as supported by NAS should cover the key theoretical components of that capitalism. 

Next week’s article will discuss the failure of higher education to provide much-needed human capital.


This is one of a series of occasional articles applying the lessons of Western civilization to contemporary issues relevant to the academy.

The Honorable William H. Young was appointed by President George H. W. Bush to be Assistant Secretary for Nuclear Energy and served in that position from November 1989 to January 1993. He is the author of Ordering America: Fulfilling the Ideals of Western Civilization (2010) and Centering America: Resurrecting the Local Progressive Ideal (2002).

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