Capitalism, Socialism and Democracy summary

In the social sciences, no figure looms larger than the German economist and philosopher Karl Marx. With his famous argument for an inevitable revolution, spearheaded by the working class, Marx became the great prophet of socialism. 

Indeed, for its proponents, Marxism is something like a religion. For better or for worse, they view absolutely everything through its lens. Why is that?

Well, it’s in part because Marx’s ideas were indeed prophetic, or at least very much ahead of their time. For example, Marx was one of the first thinkers to suggest that what shapes our societies, actions, and attitudes is the economy. He was also among the first to recognize the cyclical nature of economic processes. He recognized that economic crises were inevitable and occurred at regular intervals. 

The key message here is: Karl Marx’s economic theories were prophetic – but they’re too stationary to account for modern capitalism. 

The author, Joseph Schumpeter, recognized the prophetic qualities of Marx’s work – and he agreed that the great German thinker contributed greatly to the field of economics. But he maintained that there were quite a few problems with Marx’s conception of capitalism.

Marx argued that history is essentially all about a struggle between two – and only two – classes. On the one hand, there’s the working class, or proletariat. Its members sell their labor to the capitalists, or the bourgeoisie. These are the people who own the means of production.

According to Marx, the capitalist system encourages business owners to make laborers work longer and longer hours, without necessarily paying them for it. Business owners therefore extract “surplus value” from the work of the proletariat. This is the foundation of profit – and over time, the proletariat loses out; the poor become even poorer. Enterprises, meanwhile, tend to become less and less profitable. 

Schumpeter pointed to a few problems with Marx’s theory. First, it leaves no room for a third class of people essential to capitalism: entrepreneurs. Capitalism is driven by smart and energetic people who don’t necessarily belong to the bourgeoisie, but wish to ascend to it. With their ideas and innovations, entrepreneurs are constantly revolutionizing the system from within. 

For Schumpeter, another issue is that Marxism is too stationary. It cannot explain the constantly evolving phenomenon that is modern capitalism. 

Finally, Schumpeter sees no evidence that capitalism fuels oppression and poverty, as Marx held. In fact, capitalism has actually improved the lives of most people living under it – as we'll see in the next blink.