Is Socialism Overtaking Capitalism In The Way Schumpeter Foresaw?

Investor’s Business Daily | John Tamny | March 19, 2009

In his 1942 book, “Capitalism, Socialism and Democracy,” Joseph Schumpeter asked the essential question: “Can capitalism survive?” His unsettling answer was, “No. I do not think it can.”

Schumpeter’s words were in no way meant to denigrate capitalism. Instead, he felt “its very success undermines the social institutions which protect it.” History in many ways proved his views prophetic.

The success of capitalism means that many are allowed to do things that have nothing to do with productivity. And from government and academic elites that frequently seek to undermine the very system that enabled their cushy jobs, to foundations created by capitalist profits that often dismiss same, the commercial success wrought by the pursuit of profit has created an unproductive elite that lives off the very business profits that it regularly casts a skeptical eye on.

Schumpeter was of course talking about a United States that he envisioned post-World War II, but his fears then don’t stray too far from the concerns of many today.

Indeed, he worried that as wars usually accrue to the power of the state, that heavy government spending “would likely evolve into total government control over investment.”

So far we’ve got the stratospheric spending to the tune of a $3.6 trillion budget, and from planned investment in everything from green energy to mortgage securities to autos, it seems that the alleged good that comes with government largesse will morph into the bad of government-directed investment.

On the business front, Schumpeter envisioned what would essentially be a two-tier system in which the government would largely stay out of the doings of retailers, laborers and clerks, all the while nationalizing what some call the “big business” parts of the economy.

So while the hapless Fed Chairman Bernanke not long ago suggested that bank nationalization would not materialize, a few days later the federal government took an 80% ownership stake in Citigroup, the largest bank in the United States.

Federal investment in Citi and other supposed beneficiaries of TARP money was supposed to be passive. But as the New York Times reported last week, the financial institutions that took TARP funds are now being told by their federal minders to, among other things, “put off evictions and modify mortgages for distressed homeowners,” slash dividends and cancel job offers made to individuals lacking a U.S. birth certificate.

Before Citigroup’s nationalization the U.S. economy had already been whacked by the nationalization of AIG, one of the largest insurers in the world. And as is well-known now, the federal government’s supposed compassion toward AIG had little to do with saving it, and a lot to do with aiding the banks whose risk was insured by AIG.

So while Goldman Sachs protested that it didn’t need TARP funds, it’s increasingly apparent that GS and others were the beneficiaries of an AIG bailout that ensures greater control from the Commanding Heights over bank and investment bank activities.

Schumpeter saw the investment banker as “the capitalist par excellence” for providing capital to entrepreneurs. But in our new economy the investment banker will have to please the political class first, and in ways that likely mean the disruptive entrepreneur will find it difficult to access capital.

If war is the health of the state, then economic crises are its oxygen, and Washington has used what should have been a minor financial hiccup and turned it into an opportunity to greatly expand its footprint.

The previous administration of course “blessed” us with our current Fed chairman, which means that the man who blinked with regard to Bear Stearns, and as such helped author our financial problems, will now oversee “tougher capital requirements for big banks, limits on investments by money-market funds, and the introduction of some mechanism that would allow the U.S. to wind down big financial institutions” and “possibly run them temporarily.”

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1 thought on “Is Socialism Overtaking Capitalism In The Way Schumpeter Foresaw?”

  1. I would say it is not capitalism per se but capitialism in the hands of materialists or deist positivism. From a materialist perspective if one is unhappy either because of envy or as an honest response to perceived excesses, it becomes quite easy to gravitate to another materialist ideology such as socialism or even communism.

    In an increasingly nilhistic world such ideologies may be the only alternative folks who have explicitly or in a de facto manner rejected God.

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