Schumpeter and the Capitalist Paradox

A friend recommended a recent article in the International Business Times by Matt McCaffrey, who is with the Ludwig von Mises Institute. The essay discusses the uncertain future of capitalism, and the fact that thousands of beneficiaries of the free market seem bent on destroying the very system that gives them the means of pursuing their comfortable ideological (and idle) existence. Referring to the important “big picture” political and economic theorist, Joseph Schumpeter, McCaffrey notes

Schumpeter argued the economic systems that encourage entrepreneurship and development will eventually produce enough wealth to support large classes of individuals who have no involvement in the wealth-creation process. This generates apathy or even disgust for market institutions, which leads to the gradual takeover of business by bureaucracy, and eventually to full-blown socialism.

Unlike Karl Marx, who prophesied that capitalism would collapse because of its failures, the early twentieth century Austrian thinker predicted that capitalism would collapse because of its successes.  Many economic decisions are totally irrational and have nothing to do with economics. It seems inevitable that over time a libertarian system will become un-libertarian, just as our limited government has become highly unlimited. One can delay or ameliorate the decline, or prepare to rebuild amidst the ruins, but I am not sure that the cycle can ever really be prevented. (For related comments, see my post on Donald Kagan.)

I believe that a true market outlook accepts that paradox. Capitalism will be as good or as bad, or ignorant, etc.,  as the people who comprise it. The very acknowledgment of free will and unpredictability rules out a utopian solution (either individualist or collectivist).  By contrast, under statist regimes, people’s choices are limited or predetermined. This may, in theory, obviate certain evils. But as McCaffrey points out, “the regime uncertainty” of onerous and ever changing regulations imposed on entrepreneurs is, ironically, much worse than the uncertainties of the normal market, to which individuals can respond more rapidly and flexibly when unhampered by unnecessary governmental intervention.

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