2.1.9 to 2.1.12

Schumpeter and Keynesianism So in Schumpeter's theory Walrasian equilibrium is not adequate to capture the key mechanisms of economic development. Schumpeter also thought that the institution enabling the entrepreneur to purchase the resources needed to realize his or her vision was a well-developed capitalist financial system, including a whole range of institutions for granting credit. One could divide economists among (1) those who emphasized "real" analysis and regarded money as merely a "veil" and (2) those who thought monetary institutions are important and money could be a separate driving force. Both Schumpeter and Keynes were among the latter. Nevertheless, Schumpeter, who was a liberal, at least in the classical European sense, rejected Keynesianism. Schumpeter and capitalism's demise Schumpeter's most popular book in English is probably Capitalism, Socialism, and Democracy . This book opens with a treatment of Karl Marx. On the surface level, this piece seems to support socialism. Schumpeter's reasoning was that an overt defense of capitalism would prompt the book to only be read by those who already supported capitalism. Therefore, he believed that he must masquerade as a seeming supporter of socialism to entice the young socialist to read his work. In the end, he hoped to awaken self-recognition in the reader to the flaws of socialism. Schumpeter is sympathetic to Marx's conclusion that capitalism will collapse, although Schumpeter concludes capitalism will be replaced by socialism for non-Marxist reasons. It is in this book that Schumpeter characterizes capitalism with the famous phrase "creative destruction" in which old ways of doing things are endogenously destroyed and replaced by the new. Schumpeter thinks that the success of capitalism will lead to a form of corporation and a fostering of values, especially among intellectuals, of hostility to capitalism. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism and it will be succeeded by socialism of some form or another. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism will collapse from within as democratic majorities will vote themselves the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure. Schumpeter emphasizes that he is analyzing trends, not engaging in political advocacy. Some have thought John Kenneth Galbraith was influenced in his The New Industrial State by Schumpeter's views on corporations. This view however did not negate the fact that Schumpeter still believed that free market capitalism was the best economic system.