Capitalism, Socialism and Democracy

Schumpeter believes that socialism will follow from capitalism’s demise. Capitalism tends toward increasing bureaucratic and technical control of industry. Therefore, the economic organization of capitalism leads toward socialism. Socialism is defined here as a socioeconomic system whereby “the control over means of production and over production itself is vested with a central authority” and with the public (167). This is in contrast to capitalism, where the means of production is in the hands of private individuals and groups.

Schumpeter argues that socialism is an economic doctrine. Socialists believe that the realization of social goods is predicated on a transformation of economic structures. In other words, they believe that a new culture and new values will emerge from economic change. However, socialists are divided on what these new values will amount to.

Schumpeter asks whether socialism would work on a practical and economic level. Namely, would it allocate resources efficiently like capitalism?

One argument suggests that it would not: Optimal production and consumption requires a price mechanism. And without consumer demand, as found in capitalist markets, there could be no such mechanism. How would the socialist central planner know what is optimal to produce without price signals? Schumpeter argues that this problem could be overcome in a socialist economy by creating a system of “credits” or “premiums” for buying and selling.