Is Capitalism Doomed?
In this article, I seek to briefly walk you through the theories on the fall of capitalism by Karl Marx, Joseph Schumpeter and Karl Polanyi. I will then provide critical evaluation of their arguments, to conclude with optimism in the survival of the capitalist system.
Definitions of capitalism are varied, if not contentious. They give rise to different interpretations of economic history that lead to incompatible conclusions. Indeed, while Marx, Schumpeter and Polanyi all saw the essence of capitalism in profit-seeking capitalists and the invisible hand guiding self-interests in a market economy, it can be said that the very difference of their definitions directed them to very different focuses and conclusions. Marx, for all his criticism of classical economic thought, adopted the orthodox Smithian interpretation of capitalism as the economic system of capital accumulation through the division of labour (Smith 1776). Schumpeter and Polanyi did not disagree with this, but they had critically dissimilar focuses on the system – Schumpeter with the role of innovative entrepreneurs in a dynamic and often monopolistic economy, and Polanyi with the focus on ‘socially-disembedded’ economic activity (It is important to recognize that these interpretations of capitalism are different but not in contradiction with each other. They are simply different perspectives on largely the same capitalist system.) The fact that these distinctive interpretations of capitalism all serve as cruxes to their respective narratives implies a more fundamental point, which is that the theorists all believed in the inherent institutional structure of capitalism as the seeds of its own destruction. This belief in the self-undermining nature of capitalism is a key similarity between the theories, and how capitalism, according to them, is doomed.
Marx’s grand theory of the demise of capitalism is presented in his book Capital, where he revealed the dark side of industrial capitalism in contrast to the contemporary whiggish views of progress and prosperity (Marx 1867). The essence of Marx’s critique of capitalism relies on his dissection of the labour theory of value which really is merely an extension from Ricardo’s analysis. This is the theory which suggests that the value of a commodity is entirely determined by the amount of labour required to produce it. Machinery importantly does not create value by itself, and Marx portrayed constant capital (machinery) as the product of dead labour (Marx 1867, c.10). The root of all problems comes from the creation of profit, which Marx claims to be the product of capitalists’ exploitation of workers to create surplus labour value. In the length of a normal working day, Marx separates it to ‘necessary’ labour time, where workers produce in return for their wages and for the capitalist’s costs of operating the company, and ‘surplus’ labour time, where labourers produce for pure profit for the capitalist (Marx 1867, c.10). The profit-seeking capitalists are thus incentivized to prolong working hours to produce maximum surplus labour. This causes increasing misery for the workers, who are unable to protest because there is an increasing army of the unemployed that would be willing to replace them for lower wages. The alienating nature of commodified industrial wage-labour, exacerbated by continued immiseration and increasing unemployment, incites the collective proletarian identity that will eventually overthrow the system. Marx therefore attributes exploitation of labour as the cause of the fall of capitalism.
The Schumpeterian theory of the demise of capitalism is most different from Marx in that he saw capitalism’s very own success as the cause of its decline. To Schumpeter, capitalism ‘is by nature a form or method of economic change’ driven by the process of creative destruction, where innovations of new products or superior methods of production continually destroy and replace old structures and processes (Schumpeter 1942, p.82). In this context, the entrepreneurial mind drives the economy forward dynamically, and is the cause of the success of capitalism. However, because of this very success, Schumpeter predicts the downfall of capitalism in the chapter ‘Crumbling Walls’ of his Capitalism, Socialism and Democracy (Schumpeter 1942, c.12). In it, Schumpeter illustrates a stage where the process of creative destruction grinds to a halt because material wants have been satisfied, and innovation routinized and automatized. Creative destruction stops because of the mechanization of entrepreneurial functions, which means that companies are no longer run by owners but impersonal unentrepreneurial professional managers. The rationalizing force of capitalism dehumanizes individuals who become rational calculating economic agents, and this would eventually turn on itself, for it undermines social institutions such as marriage, private property and entrepreneurship. In addition, Schumpeter also spoke of capitalism improving the quality of education, creating an increasing number of intellectuals who are either idle or underemployed. Failing to fully realize their potentials, these ‘losers of the system’ call for the abolishment of capitalism, and their opinions wield decisive power in influencing public opinion (Schumpeter 1942, p.145). As result, capitalism fails because of its own causes and products of success – relentless rationalization becomes antisocial, and educated individuals turn against it despite having been empowered intellectually by the system.
The dehumanization of capitalism is apparent in both Marx and Schumpeter, but it is most clearly shown in Polanyi and his book The Great Transformation (Polanyi 1944). Polanyi saw the economic development in history not as class struggles nor creative destructions, but instead a ‘double movement’ between capitalist forces and the countermovement for social protection (Polanyi 1944, c.11). As an economic anthropologist, Polanyi explains this in a chronological fashion. He contends that capitalist market economies are modern creations, as pre-modern societies had transactions based on redistribution and reciprocity instead of Smithian ‘natural propensity to barter, truck, and exchange’ (Polanyi 1944, p.45). Market economy only came to dominate with the Industrial Revolution, Polanyi furthers, and it inappropriately commodifies factors of production such as labour and land, which causes misery, dislocation and pollution. The laissez-faire movement to expand the scope of the market, and to ‘disembed’ the economy from social relations, causes social alienation which in turn naturally creates a countermovement against such excessive marketization. This back-and-forth tussle between economic liberalization and social protectionism ‘is inevitably doomed to collapse, or to revolution’, because they become irreconcilable oppositions through time, building uneasy tension that eventually implodes (Polanyi 1944, Intro).
At first sight, these theories may seem compelling in their arguments. But they suffer from being products of their time, only reflecting the respective historical circumstance. Marx’s work, for example, largely relied upon observations on the living and working conditions of the working class in nineteenth-century Europe. Similarly, Schumpeter wrote in the backdrop of great technological development, and Polanyi sought to explain the collapse of the long period of peace before the rise of fascism. Historical context is undeniably key to their understandings of capitalism, but to rely on personal experiences in order to make grand predictions of capitalism’s demise would mean a lack of proper recognition for capitalism’s dynamic adaptability. I will now argue against the validity of Marxian, Schumpeterian and Polanyian theories of the demise of capitalism by critically analyzing its historical accuracies and conceptual frameworks.
The most convincing counterpoint to anti-capitalist arguments remains to be that capitalism continues to be the most successful economic system in human history. The inaccuracy of the theorists’ predictions thus occupies the central, unavoidable challenge in their narratives. Capitalism is not doomed because the death as they predicted did not happen. A logical rebuttal to this argument may point to the idea that the demise has not happened yet. It is true that these predictions may have yet to appear, but none of these theories contain a stringent timetable. As result, exploiting this lack of clarity regarding timeframe would simply be invalidating the theories further, for one would be unable to conclude in ambiguity.
More importantly, reality also shows historical development diverging away from the thinkers’ narratives of societal change. Comparing Marx’s theory to reality, there are significant errors in his forecasts that disprove his account. Firstly, he predicted that the workers’ uprising would happen first in the most advanced economies of Britain and/or Germany. In hindsight, it took place instead in the less developed economies of Russia and China. This implies a significant error in Marx’s reasoning, for he miscalculated the actual mood of the working class. The communist revolutions in Russia and China also undermine Marx’s analysis because they were not due to capitalist exploitation of urban workers, but because of oppressed rural peasants. Secondly, Marx believed that wages will be kept at minimal subsistence level which would drive the workers to revolt. In reality, both wages and living standards rose drastically through dynamic technological development which was emphasized by Schumpeter. Together, the contradictions between reality and theory prove his theory of the destined failure of capitalism invalid.
The Schumpeterian paradox, that capitalism will be destroyed because of its success, also stops short of reality. Schumpeter was critically wrong in arguing against the transformation from individual ownership of companies to professional management (Schumpeter 1942, p.205). Nowadays, CEOs with the right strategies are often the reason of success for companies. In addition, making companies publicly owned also allowed more public scrutiny by activist investors which improves the process of creative destruction. Bureaucratization of enterprises was not the cause of the demise of capitalism, but in many ways an improvement, for it prevented individual owners from making irrational decisions and mistakes. Technological development has also massively accelerated, with firms like Apple and Google being born not from institutionalized labs, but innovative minds. Creative destruction continues to drive the economy more than seventy years after the publication of Schumpeter’s book. The historical evidence thus convincingly refutes the Schumpeterian prediction of the demise of capitalism.
In regard to Polanyi, his theory of the demise of capitalism is effectively rebutted from a historical point of view, considering he argued against the possibility of merging the double movements of social protection and market liberalization right before the golden age of regulated capitalism in the mid-20th century. Importantly, he also makes the critical error in claiming the market economy as a historical novelty (Polanyi 1944, c.5). The opinion that capitalist economic mentalities of self-interest are a relatively modern creation is countered by ample evidence. Pre-modern societies had capitalistic characteristics like private property and commodity trade that would create a price mechanism to guide self-interested economic behaviours. The existence of slave trade and well-developed rural labour markets before the Industrial Revolution also contradicts Polanyi’s key criticism on capitalism trading ‘fictitious commodities’ of labour (Polanyi 1944, c.6). These facts therefore invalidate Polanyi’s key assumption that the capitalist mentality came only after the Industrial Revolution, and contradicts the idea that modern capitalism disembeds economic activity from social organizations.
Beyond historical evidence, these theories of the fall of capitalism also come under attack in its conceptual frameworks. The qualitative nature of these theories in deriving their predictions, for example, means they lack an essential objectivity that develops from logical and mathematical deduction. The labour theory of value, which Marx adhered to, is also erroneous for value is dependent on demand (as argued by the Marginalists). A good is valueless if no one demands it, no matter how much labour was required to produce it. More importantly, Marx failed to recognize the reality that capitalists do not accumulate capital and profit by mere exploitation, but by Schumpeterian entrepreneurship and by bearing risks and uncertainties in investment. With correct understandings of the capitalist system, one would therefore see the flawed reasonings in Marx’s model.
Criticizing Marx, however, is not to say that Schumpeter got it entirely right in his conceptual framework on capitalism. Schumpeter was unsuccessful in his theory of creative destruction to the extent that he saw an unavoidable conflict between innovation incessantly destroying the status-quo and the political establishment resisting change to maintain power (Schumpeter 1942, p.83). Such Hegelian narratives of history should be avoided because it is consistently proven wrong by reality, where governments often subsidise and sponsor innovators and development. Similar criticism can be given to Polanyi as well, who saw social protection and market liberalization as incompatible opponents. Leaving aside Polanyi’s decisive inaccuracy in historical analysis, he also failed to see the benefits in commodifying labour. Where one used to be constrained socially and geographically, the creation of a robust wage-labour system enabled social mobility for workers looking to move up the social ladder. Polanyi ignores the fact that establishing a wage-labour system will allow labourers to choose where to work and whether to work. As Milton Friedman convincingly argues, economic freedom is a crucial precondition for political freedom (Friedman 1962). Polanyi’s narrative of the double movement instead suggests that economic freedom spontaneously creates social legislations and regulations. This guides us to a more subtle criticism on Polanyi’s conceptual framework, which is that his prediction was guided by the political purpose to establish a new historical narrative in favour of socialism. Whereas Schumpeter would not relish the destruction of capitalism, Polanyi argued for the destruction in hope that it would happen. As such, his prediction comes across more as an anti-capitalist argument than an objective prediction with robust reasoning.
In conclusion, the failure to accurately predict historical trends, in combination with serious faults in their chains of reasoning, means that these theories on the collapse of capitalism are wholly incorrect and fallacious. The targeted thinkers in this essay all predicted a sort of Hegelian model of history where we will arrive through the downfall of capitalism at a new utopia which marks the end of history. Reality has shown no signs of doing so. As such, due to the unresolvable weaknesses of the anti-capitalist theories, this paper concludes in favour of the continued survival of capitalism for the foreseeable future.
Friedman, Milton, Capitalism and Freedom, (Chicago, 1962).
Marx, Karl, Capital: Critique of Political Economy, originally published in 1867, (Penguin, 1990).
Polanyi, Karl, The Great Transformation, originally published in 1944, (Beacon, 2002).
Schumpeter, Joseph, Capitalism, Socialism and Democracy, originally published in 1942, (Routledge, 2010).
Smith, Adam, The Wealth of Nations, originally published in 1776, (Wordsworth, 2013).