On the sustainability of the capitalist order: Schumpeter's capitalism, socialism and democracyrevisited

On the Sustainability of the Capitalist Order: Schumpeter’s Cap;ta/ism, Socialism and Democracy Revisited

FILIP CAELDRIES* New York University

ABSTRACT: The present study provides a contemporary reading of Schumpeter’s instability-of-capitalism thesis as formulated in Cupitalism, Socialism and Democracy (1942). The study of the sustainability of the Western position in capitalism focuses on: (1) the dissociation between private and social objectives in welfare capitalism, (2) the deconstruction of the moral-ethical principles on which the capitalist order was founded, (3) the threat of egalitarianism, (4) the role of the intellectual class, and (5) the cultural contradictions of capitalism. Contrary to claims that the disolution of the state socialist order signals a victory for capitalism it is observed that capitalism remains exposed to powerful challenges.

“[Bletween now and the year 2000, the order of money will become universal. From Santiago to Beijing, from Johannesburg to Moscow, all economic systems will worship at the altar of the market.” “But capitalism’s very success creates the conditions Millenium, pp. 120, 118).

for failure” (Attali, 1991,

* Direct all correspondence to: Filip Caeldries, Leonard N. Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012-I 126. The Journal of Socio-Economics, Volume 22, Number 3, pages 163-185 Copyright @ 1993 by JAI Press Inc. All rights of reproduction in any form reserved. ISSN: 1053-5357

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INTRODUCTION Fifty years controversial

ago, Joseph Schumpeter (1942) published one of his most works: Capitalism, Socialism and Democracy (CSD). In Capitalism, Socialism and Democracy, Schumpeter argued that capitalism will ultimately be replaced by socialism. In contrast to the received Marxist doctrine however, capitalism would not disappear as a result of economic failure. Instead, capitalism would destroy itself from within because its economic successes would bring about social and cultural conditions inimical to its survival.’ The idea was not new. Already in 1928 Schumpeter had argued that: “Capitalism, whilst economically stable . creates, by rationalizing the human mind, a mentality and style of life incompatible with its own fundamental conditions, motives and social institutions, and will be changed into an order of things which it will be merely a matter of taste and terminology to call Socialism or not” (1928, pp. 385-386).

Fifty years have passed since CSD was first published. History has not been kind to Schumpeter. Schumpeter did not foresee the progress of the capitalist system in the postwar years. Most recently, Schumpeter’s thesis would seem to have been dealt a deadly blow by the disolution of state socialism. Indeed, the displacement of the state socialist order has been interpreted as signalling the ‘end of history’, i.e., “the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as thefinal form of human government” (Fukuyama, 1989, p. 50 emphasis added, also Fukuyama, 1992). In sharp contrast to Schumpeter, Fukuyama argues that the logic of modern natural science dictates a “universal evolution in the direction of capitalism” (1992, p. xv). Despite strong evidence documenting the economic success of capitalism, capitalism may remain exposed to a number of internal contradictions. For example, in a striking parallelism, at the same time the ‘East’ is divorcing itself from state socialism, the Western capitalist project is undermined by a “decharismatization of the centers, the weakening of the overall societywide utopian political vision and of the missionary-ideological component” (Eisenstadt, 1992, p. 34). According to Galtung there exists a profound crisis within the Western position inside capitalism (Isaak, 1991). With explicit reference to Schumpeter’s CSD thesis, Heilbroner (1989) observes that while capitalism may have scored an economic victory, it will nevertheless be destroyed Further echoeing Schumpeter, Attali by its internal cultural contradictions. (1991) recently argued that capitalism’s success creates the conditions for failure. These arguments are not just academic. Observes the Wall Street Journal in a series on American civilization: “[A]t the moment of victory, a wave of self-doubt sweeps America. Polls indicate fully three-fourths of all Americans believe the country is ‘on the wrong track.’ For the first time since the Depression, middle-

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class parents doubt that their children will have a better life than themselves” (July 27, 1992). In a similar vein, Steven Jobs (co-founder of Apple Computer) laments: “I don’t think we know what our values are anymore. I don’t think anybody’s asked us these questions in decades. How else could we have inner cities the way they are or an educational system in the condition it is? What do we care about? What do we stand for? What are our priorities? We simply don’t know, and we’re already paying the price” (Fortune, January 27, 1992, p. 76). Thus, in a survey of the evolution of the (American) public’s attitude toward capitalism (1980 versus 1989) Peterson, Kozmetsky, and Albaum (1991) observed that, despite an overall positive attitude, the general public was less favorably disposed toward capitalism in 1989 than it was in 1980. A remarkably large change in attitude was observed for the questionaire item “capitalism must be altered before any significant improvements in human welfare can be realized.” For this item agreement increased by 14 percentage points. Building on the above observations, hereafter a contemporary reformulation of Schumpeter’s instability-of-capitalism thesis is provided.2 While such a reformulation must remain general, it should contribute to a more realistic assessment of the sustainability of the capitalist order. Following Jameson’s (1984) argument that no satisfactory model of a given mode of production can exist without a theory of the historically and dialectically specific and unique role of culture within it, an important part of the analysis presented hereafter will focus on capitalism’s cultural component. In doing so, a conscious effort is made to present a contemporary reading of Schumpeter’s instability-ofcapitalism thesis which is consistent with Schumpeter’s desire to establish social economics (Sozialiikonomik) as a separate field of study. The remainder of this article is structured as follows. First, Schumpeter’s original formulation of the instability-of-capitalism thesis is presented. Second, while a victory for capitalism has been claimed, it needs to be recognized that “intact capitalism” has long been replaced by a “half-way” solution epitomized in the concept of the welfare state. Moreover, it is argued that welfare capitalism may be inherently unstable. Such instability is caused by: (1) the deconstruction of moral-ethical norms capable of resolving the structural contradiction between the principle of self-interest and the principle of collective interest, and (2) the imperfection of collectively imposed incentives, such as taxes and subsidies, to reconnect private and social objectives. Third, the desire to establish within the welfare state “equality of outcome” is identified as an important challenge to the capitalist order. In addition, the dissolution of state socialism is not likely to diminish the intrinsic attractiveness of the Marxist ideals underlying the socialist experiment. Fourth, the cultural contradictions of capitalism and the role of the intellectual class therein are explored. Parallelling the demise of the sacred in secular humanism, the trivialization of the secular in postmodernism is discussed as the next step in the cultural deconstruction process propelled by a strong intellectual class.

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OF CAPITALISM THESIS

In sharp contrast to received Marxist doctrine, Schumpeter believed that the capitalist system will cease to exist because it is economically successful. As the capitalist system develops according to its own logic-an evolution characterized by ever increasing economic wealth-the leadership position of the individual entrepreneur is undermined and eventually replaced by an “automatized, bureaucratic” system of specialized laborers in large corporations (“trustified capitalism”). Schumpeter’s description of the substitution of bureaucratic capitalism for entrepreneurial capitalism is very similar to (and undoubtedly influenced by) Rudolf Hilferding’s (1910) concept of “organized capitalism”. In his book Finance Capital (Das Finanzkapital), Hilferding describes organized capitalism as follows. “Finance capital puts control over social production increasingly into the hands of a small number of capitalist associations, separates the management of production from ownership, and socializes production to the extent that this is possible under capitalism” (19 lo/ 1981, p. 367). The similarity between Schumpeter’s concept of bureaucratized capitalism and Hilferding’s notion of organized capitalism is further underscored in a later text by Hilferding where he identifies the following four principal aspects of organized capitalism: (1) emphasis on technological progress, (2) the utilization of new opportunities in an organized way with an emphasis on trusts, cartels, and monopolies, (3) the attempt to unite trusts, cartels, and monopolies at the international level, and (4) the elimination of competition as far as the individual business is concerned, i.e. the gradual elimination of the entrepreneur (Hilferding, 1927/ 1983, pp. 247-249). According to Schumpeter, the rise of the large bureaucratic corporation as the principal means of capitalist progress is mirrored in changes in socio-political structures, values, and norms. Of particular importance is the rationalizing effect causes the of the capitalist order on society.3 Specifically, rationalization following problems (see Schumpeter’s: Can Capitalism Survive (1936, in Swedberg, 199 I, pp. 298-3 15), the Lowell Lectures: An Economic Interpretation of our Time (1941, in Swedberg, 1991, pp. 339-400) and Capitalism, Socialism, and Democracy (1942)): 1. the bourgeois class, by spreading its agenda of equality produces a class of intellectuals. By applying rationalism to every aspect of life, the intelligentsia destroys the power base of the capitalist class. “[Tlhe bourgeois finds to his amazement that the rationalist attitude does not stop at the credentials of kings and popes but goes on to attack private property and the whole scheme of bourgeois values” (CSD, p. 143). 2. capitalist progress leads to an increase in the standard of living. The “increased leisure of all classes were producing views and attitudes essentially

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engine and the people that man it” (Lowell Lectures,

3. as the prevailing socio-economic order is challenged, one observes that the capitalist class cannot defend itself. “They can just hide behind newspaper hearings, and hence capitalism . . . is an organization which can’t stand on its own feet” (Can Capitalism Survive, pp. 305-306). 4. because the business community is an anti-heroic and anti-glamorous class it is not well suited to inspire society with a sense of loyalty. To quote one of Schumpeter’s better known statements, “[t]he stock exchange is a poor substitute for the Holy Grail” (CSD, p. 137). 5. the institutional separation of business and political groups leads to the development of a liberal ethic which contrasts sharply with the autocratic organizational form of the capitalist factory. This situation eventually becomes untenable. Gradually, the above forces combine to erode the basic structure of the capitalist state. This process, Schumpeter argues, is accelerated by external shocks to the system such as wars and economic depressions. In a similar vein, Marx and Engels (The Communist Manifesto, 1848) described the economic crises of the capitalist system as important challenges which by their periodic return put the existence of the entire bourgeois society on trial, each time more threateningly. However, one would be mistaken to consider these external shocks as the true reasons for the demise of the capitalist system. Wars and depressions are merely facilitating conditions “eating away the structure that they would have to cut through otherwise, weakening the morals which would have resisted” (Lowell Lectures, p. 354). To illustrate, by 1933 the instability of the capitalist order was so strong that there was a “complete disbelief in standards, a disbelief both in the old social relationships and in the new ones; there was a moral drift” (Lowell Lectures, p. 361). A clear manifestation of such a disbelief in the capitalist ethic, argues Schumpeter, can be found in the taxation policies after 1933.4 After 1933, taxation was no longer seen as a necessary evil that needed to be minimized (i.e. the cheap state concept of Gladstonian finance). On the contrary, taxation was used to change the functioning of the capitalist system. There was a “moral disapproval of high incomes, of capitalist profit making [ . . .I whilst at the same time risky business was still based upon the profit motive” (Lowell Lectures, p. 366). Elsewhere ( Wage and Tax Policy in Transitional States of Society (1948, in Swedberg, 1991, pp. 429-437) Schumpeter refers to these taxation policies as one of the most fundamental public policy manifestations of the transformation of the intact capitalist state to a transitional state (i.e., a state where class structure and civilization have ceased to correspond to each other).

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According to Schumpeter, the origins of the demise of capitalism may be traced back as far as the 187 l-19 14 time period.5 During this time period the first signs of the ‘rationalizing’, ‘leveling’, ‘ mechanizing’, and ‘democratizing’, effects of capitalism began to manifest themelves. Civilization during this time period “required rationalist credentials for everything it was doing. It counted the costs of wars and did not back the glory as an asset [ . . . it] was also essentially unfavorable to religious beliefs” (Lowell Lectures, p. 340). Capitalism, argued Schumpeter, would inevitable be succeeded “into an order of things which it would be merely matter of taste and terminology to call Socialism or not” (Schumpeter, 1928, pp. 385-386). Summarizing, Schumpeter views the development of economic organization as passing through three stages: (1) entrepreneurial capitalism, (2) bureaucratic/ organized capitalism, and (3) socialism. Socialism he defined as that institutional arrangement that vests the management of the productive process with some public authority. In the following sections, an attempt is made to provide a new reading of Schumpeter’s instability-of-capitalism thesis reflecting contemporary conditions. CAPITALISM IN THE REAL WORLD:

HOW STABLE IS IT?

purposes, the adoption of Keynesian economic policies (The of welfare Keynes, 1926) marked the substitution capitalism for what Schumpeter called “intact capitalism”. An important corollary of the Keynesian economic agenda was the growth of state intervention. Despite ideological opposition to the growth of the state, state intervention does not necessarily contradict the optimal organization of economic activity as it creates and improves conditions for the realization of capital (Habermas, 1973/ 1975). To illustrate, in The Theory of the Optimum Regime Tinbergen (1959) argues that the use of private enterprise for economic activities characterized by high fixed costs and technical surplus capacity cannot maximize welfare. Socialization, i.e. state intervention, of these activities may be a superior organizational solution. More recently, Greenwald and Stiglitz (1986) showed that under conditions of market failure and imperfect information,-i.e. virtually always-the economy is almost never constrained Pareto efficient. In addition, it may be noted (Bernholz, 1982) that up to a certain point state activities (particularly those aimed at developing an economic infrastructure) are complementary to investments in the private sector and thus lead to increased investments in the private sector and increased productivity for private investments. Under these conditions then, there exist government actions capable of improving the position of some individuals without worsening the position of others. For all practical End

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The Instability of Welfare Capitalism

Within welfare capitalism, the role of the state is to improve the performance of the economy. In essence, state intervention restricts the pursuit of individual profit for three reasons: (1) to ease the burden of the market forces for the economically weak (the distributional corrective), (2) to increase the efficiency of market processes by incorporating social cost/ benefits in private choices, and (3) to increase the performance of the spontaneous market order by promoting social norms of behavior, e.g. “truth” as the conditio sine qua non for perfect market information. Taxes will pay for the functioning of the state. However, there exist definite limits to the growth of a tax-based welfare state (The Crisis of the Tax State, Schumpeter, 1918, in Swedberg, 1991, pp. 99-140) as the state exists by virtue of the revenues appropriated from the private domain (also Hawtrey, 1930; Bates & Lien, 1985).6 State intervention will therefore fail to increase welfare as soon as the private domain from which the state is “derived” is negatively affected.’ Observing that it is the objective of the state to promote the creation of public goods by constraining economic individualism, the relevant question is whether the imposition of coercive rules by the state (e.g. taxes, incentives) is more effective than the internalization of moral-ethical norms. Starting with Weber’s The Rise of Capitalism and the Protestant Ethic (1904-1905), there exists strong evidence suggesting the superiority of moral-ethical (religious) norms as a behavioral standard capable of reconnecting individual and collective objectives. The defense of state intervention rests on the assumption that-in contrast to the promotion of particularistic interests by the individual-the “controller” will promote the interest of the collectivity. In other words, it is assumed that the maximization principle of private interest is not applicable to the “controllers”. However, in light of the quis custodiet problem, Hirsch (1976) appropriately raises the following question: “[wlhy expect the controllers alone to abstain from maximizing their individual advantage?“( 1976, p. 12).8 Clearly, the controllers cannot be assumed to automatically contribute to the public interest. Consequently, “[clentral guidance of the invisible hand is subject to an internal snag. I . . .I In principle, individual maximization can be held to its social purpose . . . so long as it operates on the basis of properly designed and implemented rules; yet individual maximization means manipulating these rules too” (Hirsch, 1976, p. 13 1). Traditional solutions to reconnecting individual and social objectives rely on collectively imposed incentives (e.g. taxes, subsidies). Hirsch questions the usefulness of such incentives suggesting that the true challenge to the functioning of the welfare state is a moral one. That is, the welfare state can only function when individual behavior reflects a socio-moral dimension (also Harrington, 1990; Hechter, 198 I).’

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The classic formulation of Hirsch’s critique on economic individualism is to be found in Taicott Parsons’ (1937) The Structure of Social Action. Parsons’ (and later Hirsch’s (1976) and Cobb’s (1990)) sociological critique of utilitarianism suggests that the classical economic system can only function in a society which has internalized some form of public morality (Elster, 1985). Without this moral order the economic system would not be able to function. Argues Parsons: “1.. .I economic relations as conceived by classical economics can take place on a significant scale only within a framework of order by virtue of which force and fraud are at least held within bounds and where the rights of others are respected to a degree” (1937/ 1968, pp. 100-101). Recently, Cobb (1990) has taken the idea of morally constrained private behavior as the starting point for a theology-based critique of neoclassical economic theory. Cobb observes that the ever increasing interdependence among individuals and communities renders the traditional individualistic economic model obsolete. Individual action without regard to communal effects risks undercutting the “freedom of the future”. Cobb amends the traditional neoclassical model by emphasizing community welfare as the ultimate objective of the economic order and by evaluating individual action in light of its effect on community welfare. Importantly, communal and individual objectives are not mutually exclusive. To the contrary, argues Cobb, only by imposing the fate of the community can individual welfare be increased. Interestingly, Parsons’ critique on the neoclassical paradigm constitutes a return to Adam Smith’s concept of morally constrained private behavior. In The Theory of Moral Sentiments, Adam Smith (1759/ 1976) already observed that society cannot subsist among those who are at all times ready to hurt and injure another.” Fundamental for the functioning of society are the built-in restraints on economic individualism derived from morals, religion, customs, and education. Specifically, Smith presents “sympathy” as a natural faculty which makes possible the redistribution of moral action. Sympathy, because it lets individuals identify with the fate of others, moderates extreme individual behavior and reduces extremes in distribution. The necessary condition for private behavior to reflect a Smithian-Parsonian social norm, argues Hirsch, is the existence of justice, in the sense of fairness. Here Hirsch builds on A Theory of Social Justice by John Rawls (197 1). For Hirsch, the importance of Rawls’ work is its attempt to establish the basis for a politico-moral obligation within the context of a free market economy. Unfortunately, laments Hirsch, the Rawlsian state is an ideal state (also Maritain, 1958). According to Hirsch, “ltlhe absence of explicit moral justification and/ or of specified moral obligations within the system is now seen as weakening its operating efficiency in the previously neglected problem of securing the necessary collective goods and socially functional individual norms” (1976, p. 157; also Polanyi, 1944).”

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What to do? Observing the moral atrophy of radical individualism, Schumpeter-in a speech before a convention of L’Association Professionelle des Industriels: The Future of Private Enterprise in the Face of Modern Socialist Tendencies (1945, in Swedberg, 199 1, pp. 401-405)-proposed to organize society along corporatist lines. In his address, Schumpeter explicitly endorses a proposal of Pope Pius XI to establish a corporatist state (the encyclic Quadragesimo Anno). Schumpeter’s principal argument in defense of a corporatist organization is that it organizes but does not regiment (the latter effect being a major deficiency of the socialist state which according to Schumpeter was nothing more than authoritarian statism). Schumpeter thought highly of the coordination capability of the corporatist system. For example, in the event of an economic downturn unconstrained private action would cause negative effects for all enterprises and all workers. A negative chain reaction could be avoided by simply allowing intervention by professional organizations. The coordination implemented by these organizations would guarantee to every individual enterprise that it would not be the only one to advance as it would find in the production of others the demand for its own output (Schumpeter, 1945, in Swedberg, 1991). Schumpeter’s emphasis on the corporation as an institutional constraint on individualistic profit-maximizing behavior strongly mirrors Durkheim’s (1902, The Division of Labor in Society) proposal for the development of occupational corporations. According to Durkheim, the ability of the corporation to create a sense of solidarity and commitment, i.e., its ability to exert moral influence on its members translates into a better mode of economic organization. The capacity of the corporatist state to restrain individualistic decision-making, argues Schumpeter, would permit all members of society to advance. While not argueing for a corporatist alternative, Etzioni (1988) seemingly shares many of Schumpeter’s ideas when he suggests replacing the neoclassical (radical individualism) paradigm with, what he calls, the “deontological I and We” paradigm. Characteristic of the “I and We” paradigm is the assumption that social collectivities (and not individuals) are the prime decision-making units. Individual decisions occur, but always within a social context. The social context is perceived as a legitimate and integral part of one’s existence, a we, of which each individual is a constituent element (1988, see also Anderson’s (1990) Pragmatic Liberalism). The individual’s sense of shared identity reflects the internalization of moral values. Similar to Smith’s thesis in The Theory of Moral Sentiments, Etzioni sees a direct relationship between the optimal functioning of the economic order and the sharing of a “moral dimension”. Argues Etzioni: “[tlhe more individuals act under the influence of moral commitments, the more they are expected to persevere. Conversely, the more individuals heed their pleasure or self-interest, e.g. by calculating costs and

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benefits, the less likely they are to persevere” (1988, p. 68). This is so, suggests Etzioni, because moral commitments reduce moral hazards. For example, the stronger the moral commitments, the lower transaction costs are (p. 69 and p. 254), the lower expenditures for legal action are (p. 69) and the lower the level of incentives or sanctions needed to achieve compliance behavior (p. 46). Consistent with (the early) Adam Smith, Parsons, Schumpeter, and Hirsch, Etzioni’s promotion of the deontological I and We paradigm (and the increasing popularity of socio-economic theory based on it) suggests the need for abroadbased reform of the neoclassical paradigm and the limited sustainability of radical individualism as the prime ordering principle of the capitalist order (e.g. Eisenstadt, 1992; Manuel, 1992). Recently, more and more corporations are experimenting with alternative approaches to implement the “I and We” paradigm, i.e. to reconnect private and social objectives. Consider, for example, the case of Germany’s Software AG (one of the 10 biggest independent software houses in the world) which is organized as a private trust. Specifically, longtime employees own the company’s stock, but the shares function mainly to protect the company against hostile takeovers. Employees receive no dividends on their share holdings which must be returned to the company when they leave. As it is the CEO’s objective that the company should not produce richness for a few from the work of many, the trust requires that most of the profits be reinvested. In addition, top management cannot benefit from large salaries and lucrative stock options (Business Week, November 16, 1992, pp. 82-83). Consider, in a similar vein, the case of Just Desserts, Inc., a San Fransisco gourmet bakery. Its CEO, Elliot Hoffman, turned a nearby terrain into an elaborate garden tended to by parolees and the homeless. Argues Hoffman: “If business is to be the dominant social institution of the future, we have to mix social goals with business goals. The bottom line should include whether you hired more people and that you improved your products, your workplace, and your community-not just your profit” (Fortune, January 27, 1992, p. 77). Essentially, both the Software AG and the Just Desserts, Inc. examples are experiments with the concept of the firm as a “social union” (Rawls, 1971), as a “moral community” (Bowie, 1991). In a social union or moral community, the interest of any member of the community (stakeholder) is equal to the interest of every member. Furthermore, the moral firm will contribute to the development of the individual’s autonomy and self-respect. As the concepts of social union and moral community constitute a significant departure from the traditional neoclassical concept of the firm, the question arises whether a firm conceived as a moral community can have a competitive advantage. Given the contradictory empirical results reported in the corporate social responsibility literature, answering the above question may not be easy. Bowie (1991) among others, is optimistic. Observing that the more the neoclassical firm attempts to achieve profits the less likely it is to achieve them, Bowie contends that a

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moral firm should be capable of creating a sustainable advantage (assuming a genuine commitment to moral principles). Summarizing, the demise of state socialism does not necessarily imply a victory of “intact capitalism”. Intact capitalism has been succeeded by a “halfway” solution epitomized in the concept of the welfare state. Moreover, welfare capitalism may be inherently unstable due to: (1) the deconstruction of moralethical norms capable of resolving the difference between self-interest and collective interests, and (2) the imperfections of collectively imposed incentives to reconnect private and social interests. Recognizing the limitations of radical individualism and the implied private-social dichotomy, recent years have witnessed several attempts to reconnect private and social interests by implementing “alternative” (socio-economic) corporate configurations. CAPITALISM, SOCIALISM AND EGALITARIANISM For Schumpeter, the rise of socialism was inevitable. Seemingly then, the turnaround in Eastern Europe and the former Soviet Union would contradict Schumpeter’s prediction. Indeed, socialists themselves now admit the failure of rational redistribution-socialism’s central legitimizing principle (Konrad & Szelenyi, 1979).‘* While many factors contributing to the failure of the socialist experiment may be identified, in retrospect, it would seem that two are of particular importance. First, by focusing on the characteristics of early capitalist production and describing its weaknesses in terms of a conflict between owners and workers, the socialist critique failed to address the true conflict between the interests of producers and consumers as it arises within a single individual. Second, to implement the objectives of socialism it proved necessary to suppress individual liberties. This ultimately limited socialism’s capacity for selfcorrection (e.g. Hayek, 1944/ 1972). Despite its current demise, claims that the socialist experiment has been dealt a deadly blow are probably too absolute. First, recent events have seen the demise of a degenerate form of socialism, i.e. state socialism. Argues Burawoy (1990): “Although we have a great deal to learn from the experience of state socialism, it would be fallacious to conclude from the failure of but one of its forms that socialism in general is impossible” (1990, p. 791, emphasis added). Moreover, Burawoy suggests that the elimination of state socialism will liberate Marxism from the destructive effects of its most degenerate branch. This in turn will assure the long-term viability of Marxism. Also, the dissolution of state socialism is likely to leave intact the moral appeal of the Marxist ideal: from each according to his ability, to each according to his needs. Consequently, “ltlhe breakup of the communist empire . . . should not blind us to the possibility . . . of the resurgence in some new habit of Marx’s universalist utopia” (Manuel, 1992, p. 8). The validity of Manuel’s argument becomes obvious as soon as it is critically examined what the West

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can offer the East in terms of a legitimate societal ordering principle. In his review of the reforms in the nations of Central Europe, Kohak (1992) arrives at the conclusion that the dissolution of state socialism in the East serves to highlight the social disintegration of Western capitalism-precipitated by its loss of a legitimizing vision. For a long time concealed behind the veil of instant individual affluence, the West now comes face to face with “the weakness of a civilization that has lost its legitimating vision, its sense of reality and of personal responsibility. For some three hundred years, that civilization lived in the illusion that the pursuit of happiness could be supplanted by the pursuit of property” (Kohak, 1992, p. 214; also Eisenstadt, 1992). Second, despite claims to victory, there exists strong evidence for the continued socialization of Western capitalism. Of particular interest is the adoption of “egalitarianism” as a societal ordering principle. Egalitarianism is inherently hostile to the capitalist order because it attempts to establish uniformity in result (equality of outcome, Bork, 1978; Kaus, 1992). “Egalitarians mistrust authority, but also believe in economic and social equality, even if it takes government coercion to achieve it. Hence they favor redistributive tax, regulatory, and welfare programs, along with citizens’ legal rights to challenge governmental authority and deep-pocketed corporations in order to compel them to ameliorate economic injustice” (Kagan, 199 1, p. 301). The ascendancy of egalitarianism, suggests McCracken (1979), reflects the fundamental belief of the intellectual class that a meritocracy is indistinguishable from a system of hereditary privilege. Concurs Kolakowski (1990): “[wle live in a world in which all our inherited forms and distinctions have come under violent attack; they are attacked in the name of homogeneity, which is held up as an ideal with the aid of vague equations purporting to show that all difference means hierarchy, and all hierarchy oppression” (1990, p. 70). Interestingly, egalitarianism also gives rise to a powerful alliance between the intellectual class and the government as defining and controlling equality requires a substantial expansion of the state apparatus. The anticapitalist orientation of egalitarianism most clearly manifests itself in a hostile administrative and legislative attitude.13 A contemporary account of society’s use of the law to substitute egalitarianism for individualism at the expense of economic efficiency is provided by Polisar and Wildavsky (1989) in their historical analysis of tort law. Traditionally, tort law served as a mechanism for improving safety in an economic manner. The development of tort law evidences a reversal of the principle of protection of capital to the principle of compensation for the individual. According to the authors, this development reflects the demands for a greater equality of condition by certain strategically placed elites. The authors warn that when egalitarianism in tort law causes it to be used as a method of income redistribution “the economic principle is perverted as cost minimization to society is converted into cost maximization to business and, therefore, ultimately to the consumer.14

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Bork (1978) in his study of the antitrust laws concurs.” Prior to the 1977 Sylvania decision (Continental T V. Inc. v. GTE Sylvania Inc.) antitrust policy exhibited a particularly strong anticapitalist bias. In giving perhaps the broadest interpretation to the dictum monopolium est injustum et rei publicae injuriosum, economists and public policy makers were probably too quick to label as anticompetitive those innovations in organizational structure and business conduct which were incompatible with the perfectly competitive market that was their reference point (Dewey, 1990). The use of the antitrust laws as a means for wealth redistribution and minimization of individual differencesi.e., to establish equality of outcome-carries with it severe costs all of which combine to undermine the functioning of the capitalist system. “The first and most obvious cost is the destruction of wealth through the inhibition of efficiency. The second is the accumulation of power in government, because of the necessity for increased government incursions into the private sphere if greater equaliy of condition is to be achieved. The third is the replacement of free markets with government-regulated markets. The fourth is the shift of lawmaking from elected representatives to courts and bureaucracies” (Bork, 1978, p. 423). In sum, the desire to establish within the welfare state equality of outcome has succeeded socialism as the premier challenge to the capitalist order. In fact, given the virtually identical intellectual ancestry of socialism and egalitarianism (continental liberalism, McCracken, 1979) it may safely be argued that the capitalist order continues to be socialized. THE INTELLECTUAL

CLASS AS A DESTABILIZING

FORCE

According to Schumpeter, the capitalist system raises a class of intellectuals, a class which he described as the rope which will hang the capitalist/ bourgeois class (Schumpeter, 1941, in Swedberg, 1991). So, who are these intellectuals? Following Kolakowski (1990), the members of the intellectual class may be defined as those in whose hands the word becomes creative (or destructive). “Thus we do not consider those who simply convey the word as mediators, but those who use it to obtrude a particular world perception on others in order to create thereby a new world” (Kolakowski, 1990, p. 35). According to Kolakowski, the word does not just reproduce reality, it becomes reality’s coproducer. As a consequence, the intellectuals become the enemy of stability by relying on self-supported reason or by referring to other sources of wisdom independent of the ideological state. The persistence of an intellectual class hostile to the foundations of the capitalist order may again be illustrated using the case of the antitrust laws. Bork (1978), in true Schumpeterian fashion, observes that “much in modern political life is explicable by the recent enormous growth in size of an intellectual class-using the term broadly to include academics, journalists, lawyers,

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government officials, and others whose job centers on ideas and words-and the apparent affinity of that class for expansion of the public sector at the expense of the private sector” (1978, p. 424, emphasis added). The intellectuals as a class with distinctive tastes and interests attempt to shift the balance of power and prestige from the business class to itself, in this case via their influence on the drafting and interpretation of the law. The position of the intellectual class in the struggle for power with the business community is particularly well analyzed by Coase (1977) in his study of company advertising. According to Coase, there exists a striking contradiction between the government policies applicable in the intellectual’s market for ideas (governed by the First Amendment) and the government policies which apply to the capitalist’s market for goods and services. “In the market for ideas, consumers are assumed to be able to choose appropriately between what they are offered without serious difficulty . . . . But in the market for goods, we do not seem to believe that consumers are able to make such a firm discrimination and it is deemed necessary to regulate producers with regard to what they tell consumers, how goods are labelled and described, and so on, lest consumers make the wrong choices” (Coase, 1977, p. 2). Referring explicitly to the role of the intellectual class in setting up this differential treatment, Coase raises the question why the intellectuals are unaware of the inconsistency in their own views. “Aaron Director has given the answer to the question. It is self-interest. The market for ideas is the market in which the intellectuals operate. They understand the value of freedom where their own activities are concerned. ‘Freedom of expression’ is freedom for them” (Coase, 1977, p. 15). If indeed the intellectuals attempt to shift the balance of power in their favor, one would expect the law to become less restrictive when it impinges on the interest of the intellectual class. That is, one would expect to observe a strong legal support for freedom of speech (Bork, 1978; also Kolakowski, 1990). The expansion of the scope of the First Amendment during the last decades would certainly seem to support the Coase-Bork thesis. The above excursus would also suggest that the debate over the reform of the legal system is of more than just legal interest. Because it deals directly with public attitudes toward capitalism, the legislative debate (sure to intensify in the near future) may prove to be a major test case concerning the relative strength of the intellectual class. A contemporary formulation and (limited) empirical proof for Schumpeter’s theory of the intellectual class can be found in the interest group theory of government. The critical link here is the intellectual class as the pre-eminent progenitor of special-interest groups. The essence of the interest group theory of government and its implications for the evolution of the capitalist order may usefully be presented by means of Mancur Olson’s (1982) political theory of economic growth in relation to special-interest groups. Unlike most growth theories which explain differences in growth rates between nations in terms of differences in resource endowments, technology, and preferences, Olson’s

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attention turns to the political sphere, specifically to the role of the specialgroups accumulate interest group. According to Olson, special-interest gradually in societies characterized by continued freedom of organization (i.e., democratic capitalist countries). Members of small groups possess a disproportionate amount of lobbying power per capita. Small interest groups have a higher than proportionate amount of influence because individual members have a strong incentive to contribute to the group’s goals. This is so because the benefits are highly concentrated among group members (Olson, 1965). The implication of this is quite profound because by representing only a narrow segment of society, the special-interest group has little or no incentive to contribute to the interest of that society. It follows that “there is for practical purposes no constraint on the social cost such an organization will find it expedient to impose on the society in the course of obtaining a larger share of the social output for itself” (Olson, 1982, p. 44). Stated otherwise, because political participation is costly, concentrated groups are less exposed than are larger groups to Olsonian collective action problems (Shaviro, 1990). At this point the relationship between the presence of special-interest groups and the growth rate of a society becomes clear. Special-interest groups reduce the efficiency and aggregate income in the societies in which they operate. An important reason for this is the absence of market sanctioning mechanisms in the political sphere. Note that in the interest group theories, the state becomes a mechanism which is used by the special-interest groups to redistribute wealth. The general assumption is that the outcome of such a wealth transfer game will be inefficient. Olson was not the first to express reservations about the negative impact of rent-seeking activities of special-interest groups. Long before that, Jean-Jacques Rousseau (1762), in DU Contrat Social, had argued that the presence of specialinterest groups in society will prevent the private vote of individuals to express the public interest. According to Rousseau, the democratic voting process can only work in the absence of persuasion and pressures on the individual, i.e. when each individual voter is isolated from others (assuming full information). Since this situation cannot be attained, Rousseau suggests that special-interest groups-the embodiment of pressures and pursuasions-be banned. Should this be impossible, their number should be multiplied so that various groups would neutralize each other. Hereafter, the role of the intellectual class is examined as it involves its participation in the deconstruction of capitalism’s supporting cultural base. THE CULTURUAL

CONTRADICTIONS

OF CAPITALISM

Commenting on the recent economic victory of capitalism, Heilbroner (1989) observes that while capitalism’s internal economic contradictions are not what will destroy it, its internal cultural contradictions may (1989). Situating the

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cultural contradictions of capitalism within the deconstruction of religion, Kristol (1973) argues that the bourgeois capitalist order now lives of the accumulated capital of the traditional religious and moral values (the Protestant Ethic or, more generally, “work ethic”, Bloom, 1987). With this moral capital rapidly depleting, the bourgeois capitalist world gradually finds its legitimacy questioned as the socio-cultural system does not generate the requisite quantity of action-motivating meaning (Habermas, 1973/ 1975). Describing the disfunctionality of the socio-cultural system specific to the capitalist system, Habermas argues that: “[tlhe less the cultural system is capable of producing adequate motivations for politics, the educational system, and the occupational system, the more must scarce meaning be replaced by consumable values. To the same extent, the patterns of distribution that arise from socialized production for nongeneralizable interests are endangered. The definitive limits to procuring legitimation are inflexible normative structures that no longer provide the economic-political system with ideological resources, but instead confront it with exorbitant demands” (1973/ 1975, p. 93).

The position that capitalism cannot survive without a legitimizing culturalmoral ethic was perhaps best formulated by Daniel Bell (1976) in his classic work The Cultural Contradictions of Capitalism (for a recent formulation, see Rothman, 1992). According to Bell, American capitalism has lost its historical legitimacy because it has substituted hedonistic culture for the moral system of reward which was based in the Protestant sanctification of work and an appreciation of the merits of deferred gratification. Importantly, the Protestant (work) Ethic and the Puritan Temper (i.e., the traditional bourgeois value system) have been destroyed by the Success of the bourgeois market system (also Maritain, 1958; and Von Mises’, 1972, The Anti-Capitalist Mentality). Asks Bell (1976) following the deconstruction of these supporting moral-ethical legitimizing principles, what can hold society together? Situating the deconstruction of capitalism’s cultural base within the broader process of secularization, Kolakowski (1990) posits the existence of a close link between the dissolution of the sacred and spiritual phenomena and the demise of capitalism’s cultural foundations. “Whatever its origins, the sacred provided society with a system of signs, which served not only to identify . . . things but also to confer upon each of them a specific value, to fix each within a particular order, imperceptible by direct observation” (Kolakowski, 1990, p. 70). Secularization’s insistence on establishing homogeneity of form destroys this system of opposition and classification. While it is probably true that the sacred may have led to a defense of the conservative spirit, its direct oppositesecularization-is ultimately destructive of a society’s order as its ideal, total liberation, rejects man’s limitations, man’s imperfections.

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Under these conditions, culture loses all sense as with the adoption of secular rationalism arises the belief in man’s ability to solve all human problems including the need for moral guidance. That is, the deconstruction of the sacred creates the illusion that man can liberate himself totally because with the deconstruction of the sacred disappear the imposed limits to the perfection that could be attained by the profane. Implied is the notion that society is endlessly flexible and that to deny man’s flexibility and perfectability would be to deny man’s autonomy. According to Kolakowski, the concept of autonomous man and its ideal of total liberation “far from unfurling before us the prospect of divine self-creation, leaves us suspended in darkness”(l990, p. 72). That is, man could take it easy as long as God, nature, or history provided a system of values. But, as present values are destroyed, “[Nietzschian] men must be brought to the abyss, terrified by their danger and nauseated by what could become of them, in order to make them aware of their responsibility for their fate. They must turn within themselves and reconstitute the conditions of their creativity in order to generate values”(Bloom, 1987, p. 198). However, instead of creating values, secular rationalism has progressed to embrace the ultimate deconstructionist agenda leading to what may best be described as intellectual and moral relativism. Specifically, the last decades have seen the embracement of postmodernism leading to the deconstruction of the secular by replacing foundationalist theoretical philosophy with relativistic immanentist forms of reason.16 In essence, postmodernism argues that traditional conceptions of reason, knowledge and truth are groundless constructs to be subjected to a full-scale deconstruction. For example, according to Lyotard (1979/ 1984) “scientific knowledge cannot know and make known that it is the true knowledge without resorting to the other, narrative, kind of knowledge, which from its point of view is no knowledge at all” (1979/ 1984, p. 24). Importantly, postmodernism constitutes an attack on the cultural foundations of the capitalist order in that it destabilizes the notions of rationality, science, objectivity, and truth which constitute the corner stones of Western capitalist progress. According to Wolfe (1992) postmodernism attacks the Western scientific experiment and its associated philosophical constellation as both are considered to be nothing more than an elaborate attempt to find divine sanction for the capitalist order (Wolfe, 1992). Habermas (1990) thus suggests reading postmodernism’s critique of Western logocentrism as the critique of a bankrupt culture. Because the postmodern critique denies the existence of “the universal”, “the absolute”, the individual becomes free to assign meaning to the order of things. Stated otherwise, the ground of all knowledge lies within the individual. Such knowledge is not in need of verification. In this sense, it is self-validating and self-legitimizing. Denying the possibility of universal meaning the whole idea of a culture transmitted through language must be abandoned. Thus one’s

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command of reality, not to speak of the search for truth becomes fatally subverted (Moser, 1992; cf. Habermas’, 1973/ 1975 concept of taking-for-true (Fiirwahrhalten)). By awarding absolute power to the individual’s interpretive capacity and by insisting on the origination of knowledge and truth in the self, postmodernism insists that all sense can be decreed by arbitrary whim. Ideally, the resulting relativism will serve as the blueprint for a societal order characterized by great compassion as now multiple individual and societal perspectives are awarded legitimacy. However, at the societal level “cultures fight wars with one another. They must do so because values can only be asserted or posited by overcoming others, not by reasoning with them, cultures have different perceptions, which determine what the world is. They cannot come to terms. There is no communication about the highest things” (Bloom, 1987, p. 202). With respect to the Western capitalist project then, postmodernism’s agenda of cultural relativism: “succeeds in destroying the West’s universal or intellectually imperialistic claims, leaving it just another culture. So there is equality in the republic of cultures. Unfortunately, the West is defined by its need for justification of its ways and values, by its need for discovery of nature, by its need for philosophy and science. This is its cultural imperative. Deprived of that, it will collapse” (Bloom, 1987, p. 39).

To summarize, while capitalism has been economically successful, strong evidence exists that Schumpeter’s discussion of capitalism’s vulnerability to cultural contradictions is as relevant today as it was when Capitalism, Socialism and Democruy was written. First, secular rationalism and its implied belief in man’s autonomy has led to the deconstruction of society’s traditional moralethical ordering principles. Secular rationalism, because it recognizes no standpoint more inclusive than that of man, leads to the human standpoint to be treated as absolute which in turn tends to promote the dissociation of private and collective concerns. Second, just as the sacred was deconstructed by the secular, postmodernism, as it implies the deconstruction of the rational scientific project of Western culture and the defacto promotion of trivialized knowledge, has resulted in a further deconstruction of capitalism’s socio-cultural base. CONCLUSION In Capitalism, Socialism and Democracy, Schumpeter argued that capitalism’s economic success would create social and cultural conditions inimical to its survival. Over the years numerous scholars have either agreed or disagreed with Schumpeter. Samuelson (198 I), for example, commented on the student revolts of the late 1960s by expressing some belief in Schumpeter’s instability-of-

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capitalism thesis. While he faults Schumpeter for underestimating the economic successes of capitalism, the 1968/ 1969 university revolts prompted Samuelson to write the following: “Nothing that has happened in recent years at Berkeley or Harvard would have come as a surprise to those who have absorbed (CSD). And if there are clubs in the great beyond, one can picture Schumpeter-a spry 87-yearold by this time, martini glass in hand-reading the New York Review of Books and chuckling in clinical amusement. Only his Viennese veneer keeps him from saying, ‘1 told you so.’ The successes and rationalism of bourgeois capitalism will breed a swarm of discontented intellectuals-to fan the flames of hostility toward an efficient but unlovable system with no mistique to protect it” (Samuelson, 1981, p. 3).

Alternatively, Heilbroner (198 1) disagreed with Schumpeter’s predictions, characterizing his analysis as flawed, incomplete and inadequate. Building on Weber’s definition of capitalism as a “method of production” and observing that socialism is equally concerned with achieving efficiency, Heilbroner argues that with the continued pursuit of the values of efficiency and material pursuit, of hierarchy and restricted democracy, of rationalism and utilitarianism, socialism only implies the passage of the reins of authority from one social group to another. For Heilbroner then, socialism is capitalism at a new level of development. In the socialist state the same contradictions exist. This time however, they will be directed against the bureaucracy and not against the bourgeoisie. Recently, Heilbroner (1989) seems to be more in agreement with Schumpeter as he emphasizes the cultural vulnerabilities of capitalism. Other authors questioning the sustainability of the capitalist order on socio-cultural grounds include Kolakowski (1990), Attali (1991) Eisenstadt (1992) and Kohak (1992). While the economic successes of capitalism cannot be denied, Schumpeter’s analysis of the weaknesses of capitalism deserves to be revaluated. In the present study, a new reading of the instability-of-capitalism thesis reflecting the specific conditions of our time was provided. While much (most likely unproductive) time may be spent discussing the semantics of the capitalism-socialism controversy, the analysis presented above suggests that many of the forces identified by Schumpeter are still active, albeit different in shape. Specifically, (I) the intact capitalist position, because it disconnects private and social concerns is untenable, (2) the successes of capitalism have led to the deconstruction of the moral-ethical principles on which the capitalist order was founded, (3) egalitarianism has emerged as a powerful threat, and (4) the cultural contradictions of capitalism, propelled by a strong intellectual class, remain present. Combined, the available evidence strongly suggests that the Western position in capitalism, far from signalling the end of history, remains challenged.

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NOTES I.

2.

3.

4.

5. 6.

7.

8.

9. IO. I I.

12. 13.

In a similar vein, Hilferding (1910) suggests that the capitalist system will collapse for political and social reasons and not because it will become economically deficient. Studies reassessing the political aspects of CSD (especially the connection between capitalism and democracy) may be found elsewhere. Consider in this respect the Special Issue of the European Journal of Political Research (Vol. 23, No. 2, February 1993). Somewhat surprisingly perhaps, little or no research has been conducted regarding the rationalizing effects of capitalist methods of production and administration, A rare exception is a recent study by Carruthers and Espeland (1991) investigating the rationalizing effects of the double-entry bookkeeping system. In Capifalism, Socialism, and Democracy, Schumpeter had this to say about double-entry bookkeeping. “[Clapitalist practice turns the unit of money into a tool of rational cost-profit calculations, of which the towering monument is double-entry bookkeeping. Without going into this, we will notice that, primarily a product of the evolution of economic rationality, the cost-profit calculus in turn reacts upon that rationality: by crystallizing and defining numerically, it powerfully propels the logic of enterprise” (1942, p. 123). In their study, Carruthers and Espeland conclude that double-entry bookkeeping does have a rationalizing effect. The authors particularly emphasize the “rhetorical” side of accounting systems, i.e. their role in legitimizing new legal forms for commercial activity. They suggest that next to the technical (i.e., efficiency) aspects of rationality, future research should devote more attention to the rhetorical aspects. Earlier manifestations of the decay of the capitalist spirit may be found at the international level. Recognizing that free trade is the summarizing principle of the bourgeois society at the level of international relations, Schumpeter interprets the rise of neo-mercantilism at the turn of the century (and its political complements: imperialism, militarism, and nationalism) as additional evidence of the decay of the bourgeois world and its schemata. The year 1871 marks the collapse of Bonapartism and the start of the Paris Commune. Schumpeter makes it very clear that the state derives its meaning from the existence of an individual domain. “Only where individual life carries its own center of gravity within itself, where its meaning lies in the individual and his personal sphere, where the fulfillment of the personality is its own end, only there can the state exist as a real phenomenon” (Schumpeter, 1918, in Swedberg, 1991, p. 109). For example, Friedland and Sanders (1985) find that “increases of one percent in the tax burden relative to household income are directly associated with a 2.8 percent decline in income growth over three years, or just under one percent annually” (1985, p. 433). For empirical results documenting the presence of agency problems in regulatory agencies, see Spiller’s (1991) test of an expanded version of the self-interest theory of regulation. According to Spiller, agency problems arise between politicians and regulators because regulators’ actions are unobservable. Hence, congressional delegation of regulatory authority will give rise to agency problems. That is, regulators will pursue interests other than those of the politicians which appoint them. Spiller concludes that “[wlhile Congress seems to use its budgets to discipline regulators, congressional control does not seem to be perfect” (199I, p. 98). For an attempt to incorporate morality as a constraint, i.e. as a tax, in a neoclassical economic model, see Moffit (1983). For an extensive discussion of Adam Smith’s view of man, see Coase (I 976). Recall in this respect the study by Nordhaus and Tobin (1972). The principal purpose of the authors’ study was to investigate whether economic growth led to increased well-being. Using a newly constructed “measure of economic welfare”, Nordhaus and Tobin found that the historically strong correlation between economic growth and economic welfare has weakened since the end of World War II. An attempt to replicate the Nordhaus and Tobin study for later time periods reveals that “from 1980 to 1986, while per capita GNP rose at the rate of 1.84 percent per year, the per capita Index of Sustainable Economic Welfare fell at the rate of minus I .26 percent annually” (Cobb, 1990, p. 128). No detailed exposition of the problems of socialism is given as the basic topic of the study is not so much socialism as the instability of capitalism. According to Schumpeter, the separation of business and political systems is responsible for ‘codifying’ a latent anticapitalist attitude.

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15. 16.

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A very similar conclusion is reached by Kagan (1991) as he analyzes the rise in the number of legal deadlocks confronting business transactions in general and the legal problems in the Port of Oakland harbor-deepening case in particular. Consider, specifically the disproportionate amount of power manifested by the Half Moon Bay Fishermen’s Marketing Association. In addition, Bark’s analysis resembles Schumpeter’s in that it relies heavily on the role of the intellectual class. Consider in this respect Jacques Derrida’s Speech and Phenomena (1973) and Of Gramatology (1976) Michel Foucault’s The Order of Things: An Archeology of the Human Sciences (19661197 1) and Power/ Knowledge (1980) Jean-FranGois Lyotard’s The Postmodern Condition: A Report on Knowledge (1979/1984), Stanley Fish’s Doing What Comes Naturally: Change, Rhetoric, andthe Practice of Theory in Literature and Legal Studies (1989) and Fredric Jameson’s Postmodernism or, The Cultural Logic of Late Capitalism (1991). For a critical analysis of the emergence of the postmodern critique, see Habermas’ (1990) The Philosophical Discourse of Modernity: Twelve Lectures.

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