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"Capitalism, socialism, and Democracy" by Joseph A. Schumpeter Schumpeter believes that governmental or political decisions are made on a majority basis; they do not allow for differing levels of choice for individuals because they produce a single outcome; the market allows for each individual to come to an agreement at the level he feels comfortable. Thus, the more that is left within the scope of the market, the more likely it is that agreement can be achieved while still maintaining freedom. He believes that the modern trend has been to curb the scope of the market in favor of government intervention, a trend, which has had poor, results overall.
While he concedes that the market does not function perfectly, he states that the effects of extensive government intervention over the past few decades have proven to have even worse results around the world. According to Schumpeter, the US government has subscribed to the traditional Keynesian philosophy of fiscal policy, which involves deficit spending and tax cuts during periods of recession in order to lower unemployment, and reduced government spending during periods of expansion to combat inflation. (Schumpeter 33) Schumpeter's basic criticism of this policy is that historically, it has done little to combat recession due to time lags in fiscal policy implementation. Instead, it has put inflationary pressure on the expansions that follow a recession and has fostered a continuous and permanent increase in government expenditures that were originally supposed to be temporary. While Schumpeter only provides a preliminary criticism of US fiscal policy in his work, he does make certain points that are valid. Since the Depression era, perhaps the government has overreacted to fears of unemployment gains and has focused on expenditure too much; the ridiculous size and rate of growth of the government budget deficit is evidence of this.
The idea of a time lag is also valid; by the nature of our political mechanism, fiscal policy is slow to be implemented, and it is likely that much of the government spending that has been undertaken has been after the problem of low private expenditure has already taken care of itself. Another area, which Schumpeter focuses on extensively, is the broad topic of social welfare policy, which he divides into a few categories. One area that he addresses are minimum wage laws, which have exactly the opposite of their intended effect in his opinion. The idea behind a minimum wage is to decrease poverty by outlawing wage rates below some specific level. (Schumpeter 51) However, while such a law does guarantee that wage level, it does not guarantee that employers will hire workers at this new inflated wage, and only serves to increase unemployment. The people who had hoped to receive these minimum wage positions would have been better off with their previous lowered wages than with no income at all. The problem, according to Schumpeter, is that the visible parties are those who are helped by the minimum wage, the workers who are able to receive jobs at that wage; the vast majority of people, those who lose their jobs or are never able to acquire a job, remain anonymous.
The government would be best to let the market determine wages; a minimum wage causes an unnecessary market failure while only creating the illusion of poverty improvement. Another government policy criticized by Schumpeter was agricultural price supports, which he claimed worked inverse to need. (Schumpeter 120) Since the successful farmers were those who sold a large portion of their goods, the farmers who actually need help, those who are unable to sell, see an unbalanced portion of the benefits. Rather than raise income per farmer, as intended, the price support program has only raised agricultural output, not the intended outcome. The program has imposed numerous costs on the American public, however; consumers not only pay in taxes to support the program, but pay once again in higher food prices. Also, in order to maintain a price higher than the equilibrium world price, quotas on farm products have been established, further restricting the free functioning of the market. Thus, according to Schumpeter, farm price supports are a policy, which do not benefit society, but rather restrict the freedom of the public and interfere with the functionality of the market.
Poverty among farmers cannot be addressed through artificial mechanisms such as price supports, just as poverty among other workers cannot be solved through a minimum wage, he states. Again, this point seems to have some validity; while agricultural products have a relatively inelastic demand, allowing for price increases while still being purchased, the benefits seen by the small farmer do not seem commensurate to the price paid by society. By encouraging increased output, the government has only served to lower prices, hurting the poor farmer and the public at the same time. Another topic Schumpeter addresses is social security, which he finds numerous problems with.
Social security involves compulsory savings for old age and a redistribution of income, from current income-earners to retirees. The paternalistic standpoint of the government in terms of forcing the public to save is the major problem Schumpeter has with social security; it completely removes personal freedom and is a display of the ultimate government expansion at the expense of freedom and market functionality. (Schumpeter 149) The idea that the government should make savings decisions for the public in order to save the few people that become charges on the public, as he puts it, is one that does not make sense, and only increases bureaucracy and the inefficiency of the system. Schumpeter cites many reasons why government expansion is harmful to society as a whole; his view that the market is always the best decision-making model for society is one that is controversial but also holds some validity. Government intervention in social issues is one of the most highly debated topics in economics and politics today, as it has been forever. Schumpeter delivers many examples of how government intervention has not had the intended effects and has actually harmed society, and how the trend towards further government expansion is one that should be stopped immediately. Bibliography 1.
Schumpeter, J. A. Capitalism, socialism, and Democracy. New York: Harper Collins, 2003.
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Research essay sample on Capitalism Socialism And Democracy By Joseph A Schumpeter
