Public Choice 42:161-174 (1984). © 1984 Martinus Nijhoff Publishers, The Hague. Printed in the Netherlands.

SCHUMPETER AND PUBLIC CHOICE, PART II Democracy and the demise of capitalism: The missing chapter in Schumpeter

WILLIAM C. MITCHELL*

In Capitalism, Socialism and Democracy, ~ Schumpeter asked whether capitalism could survive. His answer was a simple but emphatic No. Because the reasons he set forth in Part II of his book are now so familiar and persuasive, readers invariably overlook the fact that he left out one of the most important causes of the possible if not probable demise of capitalism, namely, the 'successful ' working of democratic political processes. 2 It is this missing link, this missing chapter that I wish to add or fit into the Schumpeterian analysis. Such a chapter seems utterly consis- tent with Schumpeter 's own views of democracy, at least those spelled out in Part IV, on 'Socialism and Democracy. ' Although Schumpeter did not write a parallel section, nor even a chapter on 'Capital ism and Democracy, ' he did offer countless obiter dicta and footnote asides that provide the necessary substance for anyone writing the missing chapter. I want to suggest, also, that Schumpeter was much too sanguine about the compatibili ty of socialism and democracy, but that will be a lesser theme in this paper.

We need not provide a detailed summary of Schumpeter 's classic theory of the demise of capitalism. Suffice it to say, the theory was a complex but logical examination of the social and intellectual consequences of a suc- cessful economic system that led inexorably to the internal crumbling of capitalist institutions and the social environment within which that economy functioned. A 'growing hostility' created, in part, and exploited by intellectuals led, finally, to the destruction of the institutional f ramework and the protecting strata of society. The analysis he set forth in Part II of his book is surely one of the most imaginative and surprising feats in social theory. One is simply dazzled by his virtuoso performance. He did stand Marx on his head.

Compelling as it is, the analysis remains incomplete. Schumpeter, no great friend of democracy (as suggested by the theory in Part IV and by reminiscences of personal friends), 3 surprisingly and inexplicably ignored

* Department of Political Science, University of Oregon, Eugene, OR 97403.

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the role democracy plays in hastening the death of or, at least, the substan- tial reform of capitalism. What I am about to write could and should have been penned by Schumpeter. While Schumpeter took a romantic view of capitalism and the entrepreneur, his views of the politician, democracy, and politics, more generally were anything but romantic. Certainly, many analysts (Xenos, 1980) think of him as hardly less than cynical about democracy. Nevertheless, he credited democracy with being the historical 'tool' of the bourgeoisie in its reconstruction of the monarchy and mercan- tilism. (297) Needless to say, modern democracy is rather different and whether it will continue a favorable environment for capitalism is de- batable.

Milton Friedman (1962) has argued that capitalism and democracy are highly compatible in the sense that economic freedom is a necessary condi- tion for political freedom but he, unlike Schumpeter, worries more about the consequences of politicizing society. Unlike Schumpeter, Friedman has focused attention on the dangers posed by democratic processes for the survival of economic freedom and competitive markets. The missing chapter, I submit, can be written on the basis of recent advances in public choice, various political writings of Friedman and others of the 'Chicago School' and, of course, Schumpeter's own partial but insightful analysis of democracy.

Schumpeter understood that democracy functioned on the basis of rules other than those found in free market economies. He understood that political systems, including that of democracy, contained an element of authoritative coercion not found in the voluntary unanimity of market ex- change. He understood, too, the preponderant and pervasive role of self- interest among politicians and bureaucrats and that 'the public interest' was not a useful analytical concept. He understood and wrote in con- siderable detail about the sources of inefficiency in the polity. (286) Indeed, he said, 'Nothing is easier than to compile an impressive list of failures of the democratic method . . . . ' (289) He also understood that democracy can work, but that it does so only under a highly restrictive set of condi- tions, one of the most important of which is that it not be applied to every task in society. (292; 297)

Schumpeter did not advance our technical knowledge much beyond pro- viding a paradigm for the analysis of democracy; in his own words, one may say that he provided a 'vision' rather than a set of positive theories about the actual operations of democracy. Such fundamental processes as voting, elections, campaigning, coalition-formation, log-rolling, agenda- setting, and the impact of constitutional rules, etc., the very substance of democracy were not examined as they are, today. Still, Schumpeter had a good 'feel' for the nature of democratic rule and the anti-capitalistic policies that democratic governments pursued during the Great Depression

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and immediate post-World War II period. (Cf. Chapter XXVIII appended to the 1946 edition and his address to the AEA just before his death entitled 'The March into Socialism,' now a part of the Third Edition.) During the 1920s and in the late forties Schumpeter warned of the dangers of infla- tionary policies. (421 - 424) He also warned of the adverse effects of price controls, restrictive market regulations, and the 'impulse' for income redistribution. His opposition to Keynes was based not solely on technical grounds, but the fear that Keynesian short-run policy prescriptions would not aid the survival of capitalism. What he seems not to have grasped, at least in any detail, were the institutional mechanisms of democratic politics that encourage public policies which inhibit the market economy and, thereby, hasten its demise. Nor, did he emphasize the important role that democratic politicians play in the creation and dissemination of unrealistic expectations - expectations that governments, themselves, can, in fact, create greater wealth and distribute income in ways superior to those of free markets. Ironically, such misbegotten hopes may lead not only to a reduced faith in free markets, but to disillusionment with democracy, itself.

Ideology: From rising capitalistic expectations to democratic entitlements

Like Marx, Schumpeter emphasized not only the extraordinary power of capitalism to generate an ever-increasing flow of goods and services but the facilitating role of ideology in society. An increasing supply of capitalist goods also generated an ever-increasing set of expectations, indeed, expec- tations that tend to outrun economic performance, thus, producing a gap with portentous possibilities. An increasing GNP is, of course, a long-run phenomenon and one which is not likely to be personally experienced in ways that satisfy individuals whose own rate of improvement is less than the average or the median overall growth rates. Because of distributional disparities many are apt to be disappointed by their perceived shares. Not keeping up with the Joneses becomes an unacceptable fate.

Those whose gains are less than others and those who may lose are in need of explanations, especially self-justificatory reasons for their lesser achievements and statuses. Such explanations, more commonly known as ideologies, are in plentiful supply, provided as they are by high status and well-paid intellectuals and, Schumpeter might well have added, politicians. The latter become retailers or entrepreneurs of simple beliefs and aspira- tions as will satisfy the disappointed and discontented citizens. As H.L. Mencken (1977) put it: 'For every complex and difficult issue there is always an answer that is simple, easy and wrong.'

The most frustrated individuals are those who experience welfare gains

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but at a decreasing rate as contrasted with their expectations. But, as de Tocqueville noted, when social differences have, in fact, narrowed, those which remain appear especially annoying and objectionable. To this obser- vation we might add that individuals - especially those'surfeited with capitalist goods - tend to then find fault with capitalist institutions because they have 'failed' to generate still other goods, especially en- vironmental amenities that enhance the quality of life.

Whether the demand is for greater equality or amenities, a demand for an ideology is created. And, just as market entrepreneurs emerge to create new demands and satisfy existing ones, so, too, do ideological entre- preneurs emerge to provide attractive intellectual packages. The most at- tractive ideologies are those which provide meaningful explanations, i.e., simple, direct, con~pelling sets of beliefs that account for what is and ideals as to what might be. The egalitarian ideology has such a powerful appeal, not only to those who do less well but to intellectuals and politicians who, themselves well-off, require good consciences that enable them to live with their own superiority. Since people are assumed to be born equal some ex- planation must be devised that will account for obvious discrepancies in rewards. Such an explanation is provided by blaming capitalist institutions. Since institutions are the source of the unethical maldistribution then in- stitutions also provide the means for salvation.

And, those institutions are the political. By changing the rules of the economic game to those of politics one can alter market distributions. Not only that but such a change will also alter who plays the game and the skills that will dominate outcomes. The anti-capitalistic ideology rests, of course, on more than a diagnosis; it rests also on the ideals that might prevail in society. Again, the appeal of equality manifests itself, because the democratic polity is, in one sense, the embodiment of equality - equal votes and equality before the law, etc. Thus, capitalism confronts a more powerful and authoritative institution - the polity and, ironically, one which emphasizes equal treatment and increasingly equal social outcomes, Whereas the market economy stresses free but risky choices the polity seems to stress guaranteed as well as equal outcomes. The achievement of the latter does not seem to promote free choices.

It is in the self-interest of the politician to appeal to both themes of equality and guaranteed shares. An expanding electorate cannot be ignored by the elective official. And, so, the origins of the rent-seeking society.

In an escalating ideological war the basic institutions of capitalism, private property, profit, contract, and markets will all suffer since none can be readily defended in simplified terms in the arena known as politics. None seem consistent with the ideals of equality and all appear to em- phasize the impersonal, the inhumane, or the very opposite of what generous, warm, considerate people value. The intellectual complexities of

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even a beginning economics textbook are guaranteed to provide an ineffec- tual ideology. Besides, those who would defend the capitalist order are put into the uncomfortable position of having to defend an imperfect system whether the imperfections are properly understood or not. For example, many environmentalists are strongly disposed to believe that the source Of, say, pollution is in the market and /or profit-making rather than in poorly- specified property rights which is a political failure.

Democratic politics and 'fettered capitalism'

Against the ideological background just sketched occurs the real-world politics of democracy, a politics which Schumpeter understood but did not elaborate in the detail provided in his discussion of capitalism. Never- theless, his sketchy portrait of democracy combined with obit~,r dicta on policy outcomes seems to suggest a certain foreboding about tae political environment of capitalism. Unlike the Marxist-inspired theorists of his time, Schumpeter did not view politics as superstructure.

Politics could disable if not destroy the basic economic ins*, ~utions of market, property, contract, profit, and entrepreneurship. Schumpeter clearly discerned that capitalism was increasingly 'fettered' as he put it by an ever larger public sector which enacted an increasingly onerous tax burden (198; 383-385) , provided an ever-tightening web of regulations (386- 388), and pursued the interests of the men of government and those who demanded a redistribution of income and wealth. In short, the bourgeois who had advanced democracy in order to advance their own in- terests were now in the twentieth century being consumed by the monster to whom they had given birth. Schumpeter also discerned the beginnings of a rent-seeking society when he observed that a considerable part of the labor of lawyers and of the state apparatus, itself, is engaged in the un- productive task of 'protective activities'. (198) Taxes must be wrestled from the private sector and are always to be considered 'in the nature of an injury to the productive process'. (198) Unfortunately, but understan- dably, taxes have become the 'dominant item of business and family budgets and a major factor in the explanation of unsatisfactory economic performance' . (198) It is interesting to note that Schumpeter's views of tax- ation provided him with an unexpected and, perhaps, 'gleeful' opportunity to ridicule the social scientists:

The theory which construes taxes on the analogy of club dues or of the purchase of services,

say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind. (198)

In the 1946 edition of his book Schumpeter's already cautious and

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suspicious view of politics seemed to increase. After some brief discussion of the possibilities of achieving a GNP of two hundred billion he declared that this possibility could only be achieved if the state does not prevent it.

Politics and bureaucracy must not prevent our reaching it. Nothing should be more obvious than that the business organism cannot function according to design when its most important parameters of action - wages, prices, interest - are transferred to the political game, or, which sometimes is more serious still, according to the ideas of some planners. (386)

He worried, too, about the fact that under rent-seeking conditions, business heads are chosen not for their economic acumen but their political skills in dealing with the public, unions, and government officials. (388)

Political competition and entrepreneurship

Thus far we have managed the impossible - discussing Schumpeter with- out reference to his theory of competition and entrepreneurship. That can no longer be delayed. After all, Schumpeter 's theory of democracy, like his view of capitalism, is founded on the fundamental idea of entrepreneurial competition. And, it is this conception of entrepreneurial com'petition that distinguishes the Schumpeterian as well as Austrian economics from the standard neoclassical f ramework and divides the Austrians, themselves? So far as I know, no one - including contemporary disciples - has ap- plied Austrian analysis to the political sector. Such applications would seem to offer much in redirecting certain inquiries in the analyses of not only competition among politicians but among bureaucrats.

Politicians are the major entrepreneurs in the polity. In this role they of-

fer the electorate promises of policies, performances, and in the case of the middle class who are the backbone of capitalism, leadership they cannot provide themselves. 'Without protection by some non-bourgeois group, ' Schumpeter wrote ' the bourgeois is politically helpless and unable not only to lead its nation but even to care of its particular class interest. Which amounts to saying that it needs a master ' .(138) Aside from the latter, somewhat vague Marxist notion, Schumpeterian politicians, like their counterparts in the economy, are not policy innovators but rather the sellers of policies, including the innovative. Standard public choice models appear to postulate politicians as retailers of existing or but marginally dif- ferent policies among voters with fixed policy preferences. The Schumpeterian theory would, instead, consider the possibility that at least opposition politicians and especially minor parties consider offering new options. Even conservative parties have been known to innovate especially during times of stress. In any event, we really know very little about this

' innovative' activity.

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Doubtless, Schumpeter would remind us that innovation would have far more latitude in a capitalist economy than in a democratic polity. Market innovators need not gain majorities to offer their products, services, etc. And, that is a crucial distinction and limitation. Political innovation must, of course, become public policy or law and the political process is long, complex, and full of barriers to entry. In addition there is the widespread belief that laws and policies ought not to be changed at the drop of a hat whereas in the market innovation is the spice of life. Still, laws are chang- ed; policies are altered - sometimes dramatically, as in the case of the New Deal and nearly fifty years later, the Reagan supply-side policies. Public choice is not good at accounting for these innovations.

Friedman (1971) has contended that in contrast with the marketplace, the adoption of new measures in the policy is difficult because it is costly or hard to start but once adopted impossible to fail. Getting a new program into place is indeed costly but once a bureaucracy has been established for its implementation 'bankruptcy' is unheard of in politics. In still other words economic innovation is relatively simple, but failed products and services are innumerable, whereas in politics few new programs are enacted but those that are are offered a guaranteed survival. All this is best explain- ed by Lee and Orr (1980): 'Diffused losses and focused gains explain the initial success in securing the adoption of such policies, whereas diffused gains and concentrated losses serve to explain the failure of efforts to repeal.' Lee and Orr (1980) further state a 'law' about rent-diffusion that Schumpeter surely would have found most appealing; namely, that rent- seeking success creates its o w n internal competition for the rents and thereby reduces them in somewhat the same way that the promise of monopoly rents in the economy attracts new competitors.

But what sort of innovations succeed? Every session of Congress witnesses at least 18,000 bills brought up for some sort of consideration. Of them, only 1,200 or so become law and of that number only a mere handful are regarded of basic significance to the vast citizenry. Most deal with the lives of small subsets of the population. A number of things can be said about these legislative changes. In the first place, as a generation of political scientists have shown, most changes are incremental in substance and quantity. Unfortunately, the former may be more important, but neither public choice nor political science has paid heed. Secondly, it is clear that legislative changes have been primarily in the direction of expand- ing public supplies of good, services and income transfers to an expanding set of beneficiaries. As in social security and medical insurance the favorite strategy of the policy innovator is to propose collectivizing a private activity in which the costs of private provision are thought to be beyond the capabilities of private persons and families. Such proposals have enormous political appeal. And once enacted into law these proposals necessarily

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reduce the capitalist realm and are most difficult to alter. Another area of innovative political activity is based on the externality

argument. In a complex, highly interdependent society social costs are apt to be not only a daily experience but significant ones for most citizens. When negative externalities are felt it is only understandable that many citizens will quickly conclude that government must penalize and/or con- trol the guilty perpetrators. Politicians in search of votes and office are not apt to be insensitive to such passionate pleas and demands. Since many legislators are lawyers one should not be surprised when they propose regulation. And, since the capitalist is in search of profits the uninformed citizen blames the immoral capitalist and the almighty pursuit of profit. That the explanation of externalities is somewhat more complex rarely oc- curs to the ordinary voter and it is the ordinary voter to whom the politi- cian offers his proposals. And, so, the realm of capitalist choice and in- novation, especially, is again restricted.

While political scientists and sociologists have been prone to note the many obstacles to liberal reform in democracy they have seldom noted their successes in the achievement of the welfare state and the difficulties of ever dismantling it. Schumpeter would, I suspect, fully understand the difficulties that confront the nineteenth century liberal in a twentieth cen- tury democracy. Anyone who advocated substantial reform of the welfare state is not apt to win many elections. Laws to free the factors of produc- tion so that mobility is enhanced are not popular. Laws that would abolish minimum wages are not popular. Laws that would outlaw price ceilings are not popular. Laws eliminating barriers to free trade are not popular. Since this is the case, democratic policies invariably work to limit the functioning of markets and, worse, the realm of market entrepreneurship - innova- tion. The fact that all these policies can be shown to entail inefficiencies and even dead-weight losses to society makes little difference because ra- tional citizens, politicians, and bureaucrats are pursuing the only intelligent course of action, namely, rent-seeking and redistribution. Their gains are immediate and the societal losses long-run. 'High capitalism' produces en- trepreneurs and startling innovations; high democracy destroys them. While the entrepreneur unleashes 'creative destruction' the democratic politician is merely destructive.

Like his counterpart in the economy, the political entrepreneur becomes an advertiser for that is the way in which he must compete for the atten- tions of busy citizens. Unlike the neoclassicists Schumpeter was not am- bivalent about the role of advertising in either the market or the polity; such activities, wherever they occur, are the heart and soul of competition, not an imperfection. However, Schumpeter while viewing political cam- paigns as a necessary activity also viewed them with the same aristocratic disdain that his one-time colleague Galbraith views Madison Avenue and

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its power to manipulate choices. Schumpeter clearly recognized the power

o f politicians, interest groups, and government to manipulate the people:

• . . Human Nature in Politics being what it is, they [politicians and interest groups] . . . are able to fashion and, within very wide limits, even to create the will of the people. What we are confronted with in the analysis of political processes is largely not a genuine but a manufacture will . . . So far as this is so, the will of the people is the product and not the motive of the political process. (203)

Schumpeter cont inued his analysis by saying ' the ways in which issues and

the popular will on any issue are being manufac tu red is exactly analogous

to the ways o f commercial advertising. We find the same at tempts to con-

tact the subconscious . . . We find the same evasions ' . (203) Quite correct-

ly, Schumpeter noted that the picture o f the prettiest girl will not compen- sate for a bad cigarette. And , equally important , he observed that there is

no inexpensive reality test in the political system. (203) With its founda-

tions in neoclassical economics public choice has not seen fit to treat

political a rgument and advertising in the Schumpeter ian mode; one learns

only o f politicians posit ioning themselves in three-dimensional spaces in

search o f votes among fixed preferences. W h o defines the space is at the

heart o f the Schumpeter ian view of political competi t ion. As G o r d o n

Tullock (1967) has written, much o f politics is directed towards changing

existing preferences and, I might add, clarifying inchoate feelings and 'con-

sciousness raising. ' In discovering existing tastes and at tempting to alter them both the

businessman and the politician encounter vast uncertainty, but uncertain- ties that are somewhat different in origin and consequences. The

businessman tries to discover wants that are relatively benign, i.e., the

means o f satisfying them do not impinge in any negative sense on others

while the politician works on wants that are essentially conflictual in

nature. A businessman does not mobilize consumers to at tack or deny

other consumers; a politician does! Politicians are mobilizers o f anger,

dispair, resentment, envy, and disappointments in general. And these possessors o f emot ional dynamite need not always be concerned with the

redistribution o f income and wealth; rather they may and often are more

agitated over ethical and moral issues that are by their very nature zero-

sum conflicts. One is a patriot or not; one is either for or against slavery, abor t ion, school prayers, smoking pot and drinking liquor, etc. Politicians

may wish to defuse these issues and some make at tempts to compromise them, but compromises cannot be made until large numbers o f citizens view matters with indifference. In the meanwhile those politicians who sup-

port and lead the e i the r /o r ' s will win and, thereby, inflame the issue still more. Outr ight conflict may be the only means o f settling such issues; witness wars, civil wars, rebellions, riots.

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All this suggests that Schumpeter and Austrians, more generally, view entrepreneurship as a vital and productive force within an economy but not in the polity. Market entrepreneurs search for the buyers who value something more and make an exchange with those persons. Politicians search for the median voter/s a position which will be the best possible under the circumstances but one which leaves all non-median voters unhap- py and often frustrated, angry, and embittered. Solutions based on less- than-unanimity cannot be otherwise. A businessman creates havoc but the 'destruction' is creative. Not so in politics.

In short, Schumpeter might have said that both businessmen and politi- cians upset whatever momentary equilibriums exist in their respective spheres but businessmen also serve to mitigate the oscillations and, in the long-run, serve to increase overall welfare. Politicians, on the other hand, upset equilibiums and exaggerate their movements and worse frequently drive a society into a counter-Paretian direction. Figure l(a) and (b) offers a simplified version of the contrast. In panel l(a) we see the familiar depic- tion of Pareto optimality while in panel(b) we observe the more complete and complicated process and perverse or counter-Paretian possibilities of politics. Malevolence is a concept only rarely encountered in economics, public choice and, surprisingly, political science. Its absence in economics is suggested rather pointedly by Figure l(a) since only positive outcomes are possible in a freely contracting market. Figure l(b) offers a more com- plete set of possibilities since it depicts negative moves and outcomes. Since inflicting harm on others or at the very least denying gains occurs with distressing frequency Figure l(b) should be a basic device in social science and certainly in public choice. However disturbing it may be to sensitive souls, malevolence does enable some persons to enjoy the knowledge that they may have harmed another. Schumpeter would not only understand this phenomenon as distinctly political but he might well have sketched in such possibilities in a chapter on democracy and capitalism.

Words that succeed and policies that fail

And, so we are led back to where we began - ideologies in political com- petition. And, here, in a major twist of intellectual history, public choice may be forced, ironically, to adopt the so-called 'irrational' theories of Freud (1951, 1961), Pareto (1935), and in our time, Lasswell (1930, 1948). Of course, Schumpeter argued that the leaders engage in rational strategies to manipulate the less or non-rational electorate or, at least, the rationally uninformed voters. Nevertheless, Schumpeter was alert to a source of irra- tionality that has not been much noticed in public choice, namely, the ex- istence of pathological personalities. While we must study inefficiency in

A's Welfare

B~s

Welfare

(b) Politics

(a) Markets

C-)

B's Welfare

\

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A's Welfare

C-)

Figure 1.

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resource allocation at both the individual and collective levels the irra- tionality based on personality disorders that political psychologists explore must also be examined. Perhaps, a word or two on each is in order.

Public choice deals with both resource allocation and the rules thereof, and finds that political processes are not apt to provide efficient results or, better, provide less efficient results than are found in most markets. The argument is based on the idea that rational individuals are dominated by distributive rather than allocative motives and given the nature of political processes the former will win in that context. The outcomes rather than the motivations are considered inefficient or irrational. Everyone is a calculator of advantage. There is sufficient evidence in Schumpeter's book that he would agree with such an analysis (256-264) , but he went on repeatedly and in a variety of contexts to suggest' that he feared the plenitude of opportunities democracy affords people and especially the would-be politician to exercise wholly 'irrational' behavior. He seems in agreement with Lasswell that political leadership roles are especially coveted by the 'weird, ' the demonic, the troubled, the frustrated personali- ty. But even when conventionally sane individuals seek and obtain public office or citizens engage in crowd activities, Schumpeter maintained that moral restraints are lowered; primitive impulses hold sway, and even criminal propensities are accorded greater room in politics. (257) The 'psychic economy' of the ordinary citizen finds itself in a 'fictitious world'. (261) And, he noted that the exercise of power is very tiring. (286)

Schumpeter would not be surprised at the findings of psycho-analysts who have studies the lives and political actions of Hitler, Stalin, Wilson, Lincoln, and other charismatic leaders. Nor would he reject much of, say, Eric Hoffer 's classic book The True Believer (1951), a study of mass movements. While public choice analysts might have some difficulty incor- porating these studies into existing models Schumpeter would not; he did, in fact, make favorable references to Freud, Le Bon, Pareto, and Wallas. (256 - 264) He could fully grasp the fact that much of democratic behavior involves mundane but rational efforts to equivocate, compromise, con- tradict, and the like; but he could also conceive of the pathological forms of behavior so often manifested in the language and paroxysms of righteousness, moral indignation, uncompromised principles, 'all or nothing' demands. The melodramatics of President Kennedy's Inaugural Address

• . . let every n a t i o n k n o w w h e t h e r it wishes us well o r ill, t ha t we shal l p a y a n y pr ice , bea r

a n y b u r d e n , mee t a n y h a r d s h i p , s u p p o r t a n y f r i end , o p p o s e a n y foe , in o r d e r to a s su re the

surv iva l a n d the success o f l i b e r t y . . .

suggest that political rhetoric is not economic reason. It also suggests why we might have gotten into the Vietnam War.

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Just how a reconciliation of irrationality and public choice rationality might be achieved is another matter. Suffice it to say that Schumpeter regarded politics as slightly insane and, therefore, in conflict with market behavior. Politicians he noted rarely make good businessmen and good businessmen rarely succeed in politics. Regardless of the rationality issue, the rules of the two games are in conflict and cannot be easily reconciled. And since the rules of the political game must necessarily dominate capitalism is apt to be on the defensive.

Final words

Although incomplete, Schumpeter's analysis of the demise of capitalism may have been too brilliant for the world of capitalism, even if fettered, is still with us. As a social and economic system it has proven to be a hardy perennial, perhaps, because its institutions are founded on a fairly realistic estimate of human nature. In any event it not only survives but has blossomed in unexpected places.

Still, capitalism faces challenges everywhere including those in the more stable democracies of the West. The social challenges were depicted with a sure hand but strangely enough, Schumpeter failed to focus on the most powerful of those threats - the political system. Not only did Schumpeter fail to discern the political threat from outside but even more astonishingly he failed to fully understand the democratic threat. The democratic bias against an efficient capitalism is now better understood. Because Schumpeter cared little for politics one is strongly tempted to say that he preferred bureaucratic to democratic rule. Certainly, a case can be made out for that view. For some inexplicable reason Schumpeter felt that bureaucrats could surmount self-interest and become informed, efficient planners. (Chapters X V I I - X V I I I ) Bureaucrats could be rational whereas politicians and voters were far more inclined to leave their emotional pro- clivities undisciplined.

Bureaucracy itself imposes rationality and, like Weber, Schumpeter probably believed that bureaucracy recruited the ideal type bureaucratic personality whereas elective office attracted those personalities we often identify as 'political' types. Despite Schumpeter's aberration from Austrian doctrine on bureaucracy he could easily have included a chapter on the anti-capitalistic tendencies of modern democracy. This paper offers a sketch of such a chapter.

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NOTES

1. All references are to the third edition of Capitalism, Socialism and Democracy. New York: Harper & Row, 1975.

2. This incredible oversight is nowhere better displayed than in the recent and otherwise ex- cellent collection of essays on Capitalism, Socialism and Democracy, edited by Arnold Heertje (1981).

3. See, Harris (1951). 4. Kirzner (1973, 1979).

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Freud, S. (1951). Group psychology and the analysis of the ego. New York. Freud, S. (1961). CiviTization and its discontents. New York. Friedman, M. (1962). Capitalism and freedom. Chicago. Friedman, M. (1971). Introduction. Mary B. Peterson. In The regulated consumer. Ottawa,

Ill. Harris, S.E. (Ed.) (1951). Schumpeter: Social scientist. Cambridge, Mass. Heertje, A. (Ed.) (1981). Schumpeter's vision: Capitalism, socialism and democracy after

forty years. New York. Kirzner, I.M. (1973). Competition and entrepreneurship. Chicago. Kirzner, I.M. (1979). Perception, opportunity, and profit. Chicago. Lasswell, H.D. (1930). Psychopathology and politics. Chicago. Lasswell, H.D. (1948). Power and personality. New York. Lee, D.R., and Orr, D. (1980). Two laws of survival for ascriptive government policies. In

J.M. Buchanan, R.D. ToUison, and G. Tullock (Eds.), Toward a theory of the rent- seeking society. College Station, Texas.

Mencken, H.L. (1977). Lawrence J. Peter (Ed.), Peter's quotations. New York. Pareto, V. (1935). Mind and society. New York. Tullock, G. (1967). Toward a mathematics of politics. Ann Arbor. Xenos, N. (1982). Democracy as method: Joseph A. Schumpeter. Democracy, December.