HIST363: Global Perspectives on Industrialization

Schumpeter's most popular book in English is probably Capitalism, Socialism, and Democracy. However, after publishing this book in 1942, Schumpeter was overshadowed by the work of John Maynard Keynes, who preached government spending as a way out of the depression.

His term, "creative destruction," denotes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one".

Unlike Karl Marx, who predicted capitalism would be overcome by forces outside those within the capitalist system, Schumpeter argued that capitalism would be destroyed through its own success. He described the capitalist society as producing a class of people who benefited from capitalism but were opposed to the ethos of wealth production, saving, and allocating resources to production; in short to that which sustains capitalism.

The Cambridge economist Joan Robinson found that Schumpeter "has little love for socialism, and none at all for socialists. His natural sympathy is all with the heroic age of expanding capitalism". Herself a leading theorist of imperfect competition, Robinson found Schumpeter's analysis of that subject the "most brilliant" part of the book, "his argument blows like a gale through the dreary pedantry of static analysis". Although Schumpeter had little to say about contrary evidence, especially in his argument about the fadeout of capitalism and its replacement by socialism, "The reader is swept along by the freshness, the dash, the impetuosity of Professor Schumpeter's stream of argument". Whether or not the reader was totally convinced, "this book is worth the whole parrot-house of contemporary orthodoxies, right, left, or centre".

Schumpeter emphasized that he was analyzing trends, not engaging in political advocacy. Although he went so far as to say that creative destruction was an essential aspect of capitalism, this view did not negate the Schumpeter's belief that free market capitalism was the best economic system.

Schumpeter's core argument in Capitalism, Socialism, and Democracy is reducible to three major tenets:

• The essence of capitalism is innovation ("creative destruction") in particular sectors. Certain standard tools of economics, such as static equilibrium and macroeconomic analysis, can therefore disguise reality and mislead scholars and students.
• The virtues of capitalism - in particular its steady but gradual pattern of growth - are long-run and hard to see; its defects, such as inequality and apparent monopoly, are short-run and conspicuously visible.
• It is dangerous for economists to prescribe "general" recipes, because political and social circumstances are always changing.

Schumpeter lauded "creative destruction" - the term he used to describe how innovative products and processes make older ones obsolete - as the likely result of human progress. Indeed, Schumpeter's theory is very much applicable to early twenty-first century economy. In celebrating technology, Schumpeter inherently recognized the creative expression of human beings.