Critical Review

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Schumpeter, Socialism, and Irony

Peter J. Boettke, Solomon M. Stein & Virgil Henry Storr

To cite this article: Peter J. Boettke, Solomon M. Stein & Virgil Henry Storr (2018): Schumpeter,
Socialism, and Irony, Critical Review, DOI: 10.1080/08913811.2017.1453280

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 Peter J. Boettke, Solomon M. Stein, and Virgil Henry Storr

SCHUMPETER, SOCIALISM, AND IRONY

ABSTRACT: Schumpeter’s theory of socialism pivots on his response to Ludwig

von Mises’s claim that rational economic calculation is “impossible” in a socialist
economy. Mises held that because socialism eliminates market prices for the
means of production, it is impossible under socialism to know the relative scar-
cities of productive inputs, and thus to determine rationally which of any number
of technologically feasible production projects to pursue. Schumpeter appears to
assume away Mises’s epistemic concerns about socialism by contending that it
is theoretically possible to determine which goods should be produced in a socialist
economy if all the relevant data are known—which begs the question Mises had
asked. Did Schumpeter really commit such an elementary error of interpretation?
Or was the appearance of doing so part of his attempt to communicate to the
reader of Capitalism, Socialism and Democracy a host of reservations
about the likely consequences of socialism in practice, even as he ostentatiously
praised its feasibility in principle?
Keywords: economic calculation; market socialism; Oskar Lange; Ludwig von Mises; Joseph
Schumpeter; socialist calculation debate.

Peter Boettke, pboettke@gmu.edu,  University Drive, MSN G Fairfax, VA , is
University Professor of Economics and Philosophy at George Mason University. Virgil Storr,
vstorr@gmu.edu,  University Drive, PPE A Fairfax, VA , is a Senior Research
Fellow and the Senior Director of Academic and Student Programs at the Mercatus Center at
George Mason University and Research Associate Professor of Economics at George Mason
University. Solomon Stein, sstein@mercatus.gmu.edu,  University Drive, PPE A
Fairfax VA , is a Research Fellow with the F.A. Hayek Program in Philosophy, Politics,
and Economics at the Mercatus Center at George Mason University.
Critical Review () ISSN - print, - online
©  Critical Review Foundation https://doi.org/./..
 Critical Review Vol. , No. 

Capitalism, Socialism and Democracy presents an intricate argument so rich

with insights and controversial claims about such topics as democracy
and capitalism that Schumpeter’s main concern, socialism, is often over-
looked. Among political theorists and political scientists, Schumpeter’s
critique of the “classical doctrine of democracy,” and his development
of an alternative, minimalist doctrine of democracy—which both occur
in Part IV of the book—have drawn the lion’s share of scrutiny, with
little heed paid to the critique of Marxism in Part I, the analysis of capit-
alism in Part II, the discussion of socialism in Part III, or the analysis of
socialist parties in Part V. Among economists, Schumpeter’s articulation
in Part II of his theory that “creative destruction” is the motive force of
economic growth has been immensely influential, even to the point of
spawning the subfields of entrepreneurship studies (e.g., Shane and Ven-
kataraman ) and evolutionary economics (e.g., Nelson and Winter
). The aspects of the book that have attracted political scientists’
and economists’ attention, however, were knit together in an ambitious
argument about the inevitable rise of socialism.
One way of schematizing this argument, albeit one that is incomplete,
is as follows. () Capitalism has, by mass producing inexpensive but high-
quality goods, brought to the working class an immense enhancement of
its standard of living. () This was made possible by the creative destruc-
tion wrought by entrepreneurs, who eventually created the big businesses
that are responsible for most of the West’s phenomenal increase in wealth.
() Several factors are killing the entrepreneurial spirit and, at the same
time, rendering it unimportant; bureaucratic management is replacing
entrepreneurial empire building with routinized economic processes. ()
These developments point toward the coming of socialism. () Socialism
is economically feasible, in principle. () But socialism risks reversing the
economic gains created by capitalism, and it threatens liberal freedoms and
the already-thin form of democracy that has become hegemonic since the
advent of mass suffrage.
Consistent with this schema, Jerry Z. Muller has suggested in these
pages that Schumpeter’s argument on point (), apparently laudatory of
socialism, was actually meant ironically, as an attempt to get around
what Schumpeter thought was intellectuals’ “religious” commitment to
socialism (Muller , , quoting Schumpeter , ). Schump-
eter’s strategy, according to Muller, was to concede the in-principle feasi-
bility of socialism while subtly pointing out practical problems with it that
add up to reasons for rejecting it or delaying its advent indefinitely. We
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

will provide a close, albeit not exhaustive, reading of Part III that confirms
Muller’s thesis. However, ambiguity remains about the ostensible target of
Part III, Ludwig von Mises, the Austrian economist who had launched the
“socialist calculation debate” of the s and s, and whom Schump-
eter knew personally from his years in Vienna. According to Part III,
Mises failed completely in his attempt to show that socialism is “imposs-
ible.” We shall contend that Schumpeter’s exposition of Mises’s position
fundamentally misconstrued it—perhaps inadvertently, or perhaps with
ironic design.
Mises’s “impossibility of socialism” thesis was essentially epistemic. He
argued that because socialism eliminates market prices for the means of pro-
duction (capital goods, raw materials, and labor), it is impossible under
socialism to “calculate” the relative scarcities of the productive inputs
that might be used to make consumer goods, and that it is therefore imposs-
ible to decide rationally how to make them, given the infinite number of
technologically feasible combinations of factors of production that one
might use. In response to this argument, Schumpeter contended that it is
theoretically possible to determine which goods should be produced in a
socialist economy—if all the relevant data are known to the central plan-
ning bureau. Yet Mises’s claim was precisely that all the relevant data
cannot be known without there being a market in the means of production.
Therefore, it would seem that, at least on first glance, Schumpeter’s rebuttal
to the socialist calculation argument was an ignoratio elenchi.
Thus, one interpretation of Schumpeter’s argument regarding point ()
is that he simply misunderstood Mises’s position. On the other hand, it is
possible that he understood it but deliberately misconstrued it in the
service of his political objectives. We shall establish a strong case for the
latter possibility by going through Parts II and III in some detail. Our
argument will not be conclusive, however, because Schumpeter’s attitude
toward the epistemic requirements of a high-functioning modern
economy remains somewhat hazy, and there is reason to think that
while he used Mises’s argument as a device by means of which to
expose the impracticability of socialism, he did not think, as Mises did,
that this impracticability was epistemic, or primarily so.
In section I, we review Mises’s argument for the impossibility of
economic calculation under socialism. In section II, we argue that
Schumpeter’s analysis misrepresents the thrust of Mises’s argument. In
section III, we review some of the most important evidence sustaining
Muller’s suggestion that Schumpeter’s support for socialism was ironic
 Critical Review Vol. , No. 

and rhetorical. In section IV, we highlight the ambiguities of Schumpeter’s

posture toward the epistemic requirements of an advanced economy.

I. MISES’S “IMPOSSIBILITY” THESIS

In volume  of the celebrated social-science journal edited by Max

Weber, the Archiv für Sozialwissenschaft und Sozialpolitik, Mises ([]
) launched what would later become known as the “socialist calcu-
lation debate” by contending that rational economic calculation is imposs-
ible in a socialist economic system, because such a system would, by
programmatic design, eliminate private ownership in the means of pro-
duction. In a socialist economy—at the time, this was usually taken to
mean an economy run according to Marxist principles—almost all of the
factors that go into the production of consumer goods, such as raw
materials, land, factories and machines, transportation and distribution
channels, and other productive inputs, would be collectively owned.
And the one exception, labor, could not be bought and sold. Conse-
quently, a socialist economy would preclude a market in the factors of pro-
duction and thus their market pricing. If productive inputs cannot be
priced, however, then the expected values of the various ways of making
consumer goods cannot be compared to each other to ensure that society’s
resources are not squandered on wasteful methods of production.
Once it is decided what to produce, according to Mises, “the real task
of rational economic direction only commences, i.e. economically, to
place the means at the service of the end,” that is, to mobilize factors of
production rationally so as to produce consumer goods. But this rational
mobilization

can only be done with some kind of economic calculation. The human
mind cannot orientate itself properly among the bewildering mass of inter-
mediate products and potentialities of production without such aid. It
would simply stand perplexed before the problems of management and
location. (Mises [] , )

What did Mises mean by this? What is the “mass of intermediate products
and potentialities of production”?
A potential input to a productive process, such as aluminum, is valuable
because it can be combined with other inputs, such as specific types of
labor and specific machine tools, to make something that a consumer
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

might desire, such as a refrigerator. The factories in which a refrigerator

might be made, and the machine tools that might make it, are examples
of intermediate products. They, and the other factors of production, are
all means to the end of the consumer good, the refrigerator. But there
are a great many factors of production that can be deployed in an infinite
number of potential combinations, some of which would be obviously
wasteful, such as making refrigerators out of industrial silver, others
more subtly wasteful, such as using too much aluminum when cheaper
options are available for some parts, or hand-crafting the refrigerator
when an assembly line would use less labor. Even more ambiguously,
should cheaper but less durable materials, such as plastic, be used?
Answers to such questions cannot be rational without a means of deter-
mining which potential factors are cheaper, i.e., more efficient given
the available—or imaginable—factor combinations. A society that is not
to exhaust its raw materials and other factors of production without
meeting human needs requires some way to determine which combi-
nations are relatively too expensive and which are relatively
“economical.”
Under capitalism, this task is, in effect, farmed out to entrepreneurs,
who must choose among the potentially infinite combinations of
factors of production. Without prices to enable them to assess the costs
of the various options against a common measure (money), entrepreneurs
would be utterly at sea. The same applies to socialism, which replaces
entrepreneurs with central planning by the people as a whole or by a
board or bureau appointed by the people. Under socialism, however,
there is no trade among competing entrepreneurs to generate the prices
that, under capitalism, allow economic calculation to begin. “Without
economic calculation,” Mises writes, “there can be no economy.
Hence, in a socialist state wherein the pursuit of economic calculation
is impossible, there can be—in our sense of the term—no economy what-
soever” (ibid., ).
Under capitalism, “monetary calculation affords us a guide through the
oppressive plenitude of economic potentialities” (ibid., ). It works as
follows. Competing entrepreneurs compare the prices for which they
expect to be able to sell their products to consumers with the prices of
the inputs they might employ in the production process. If the expected
sale price of the completed product is higher than the costs an entrepre-
neur expects to pay out for the factors of production, she can expect to
earn profits associated with producing that good. Only projects that she
 Critical Review Vol. , No. 

expects to at least break even will tend to be pursued. Without a compara-

tive calculation of the cost of producing potential consumer goods and of
doing so in various ways, “all production … would be gropin[g] in the
dark” (ibid.) By banning private ownership of the means of production,
socialism would abolish the means used, under capitalism, to compare
methods of production. Socialist central planners would have to
compare technologically feasible production processes without a rational
basis for doing so.
Thus, Mises contended that

as soon as one gives up the conception of a freely established monetary

price for [production] goods … rational production becomes completely
impossible. Every step that takes us away from private ownership of the
means of production and from the use of money also takes us away from
rational economics. Nothing that could perform this function appears
within the socialist economic system, meaning that decisions about pro-
duction must be made without the capacity to make the determinations
needed to economize upon factors of production. (Ibid., )

Only in what Mises called an imaginary “static state,” where the econ-
omic situation does not change and all factors of production are already
employed in the most economical way, does this weakness of the socialist
system fade away (ibid., ). This is not because static-state socialism
overcomes the calculation problem, but because the theorist’s construc-
tion of the static state assumes the problem away by taking as the econo-
my’s starting point the rational prices that have evolved under capitalism,
and then freezing society’s demands and resources, so that these prices can
be used forever. In the static state, there is no need, nor will there ever
arise a need, to alter the structure of production in order to produce differ-
ent goods than are already being produced or to use different inputs than
are already being employed. Thus,

the static state can dispense with economic calculation. For here the same
events in economic life are ever recurring; and if we assume that the first
disposition of the static socialist economy follows on the basis of the
final state of the competitive economy, we might at all events conceive
of a socialist production system which is rationally controlled from an
economic point of view. But this is only conceptually possible. … [In
the real world,] we must assume that the transition to socialism must, as
a consequence of the levelling out of the differences in income and the
resultant readjustments in consumption, and therefore production,
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

change all economic data in such a way that a connecting link with the final
state of affairs in the previously existing competitive economy becomes
impossible. But then we have the spectacle of a socialist economic order
floundering in the ocean of possible and conceivable economic combi-
nations without the compass of economic calculation. (Ibid.)

Mises’s insistence that the “static state” in no way describes any practic-
able economy would be echoed by Schumpeter’s critique of orthodox
neoclassical theories of economic growth, which he replaced with the
theory of creative destruction. In response to the notion that the principle
of perfect competition characterizes capitalism, Schumpeter would
contend that this principle “applies to a state of static equilibrium,”
while “capitalist reality is first and last a process of change” (Schumpeter
, n). However, Mises’s and Schumpeter’s emphases were differ-
ent, with Schumpeter arguing that the grand ambitions of entrepreneurs
fuel change under capitalism, while Mises was concerned, in effect, with
the checks on entrepreneurs provided by the pricing of the means of pro-
duction, which guards against innovations that are overly ambitious. As
Don Lavoie (, ), the leading scholar of the socialist calculation
debate, would later restate Mises’s view, “If the central planning board
does not have the knowledge necessary to differentiate bold initiative
from reckless gambling, it could not allocate incentives among managers
to encourage the one and discourage the other.”

II. DID SCHUMPETER MISUNDERSTAND MISES?

Schumpeter states his official position on socialism at the very start of Part
III of Capitalism, Socialism and Democracy (entitled “Can Socialism
Work?”). Here are the opening sentences of the first chapter in Part III,
Chapter :

Can socialism work? Of course it can. No doubt is possible about that once
we assume, first, that the requisite stage of industrial development has been
reached and, second, that transitional problems can be successfully
resolved. One may, of course, feel very uneasy about these assumptions
themselves or about the questions whether the socialist form of society
can be expected to be democratic and, democratic or not, how well it is
likely to function. All that will be discussed later on. But if we accept these
assumptions and discard these doubts the answer to the remaining question
is clearly Yes. (Schumpeter , , emph. added)
 Critical Review Vol. , No. 

One can immediately see that Muller may have a point. Almost in the
same breath in which Schumpeter declares that socialism can work—in
the very next sentence—he begins piling up qualifications, among
which is the possibility that it may “work” while functioning poorly.
Mises, of course, had argued in  that, indeed, socialism would func-
tion poorly. He did not deny that the existence of a socialist economy is
possible; or that socialism could, in that sense (the sense of merely exist-
ing), “work.” He could hardly have been clearer that a socialist
economy could exist and could work—but badly:

One may anticipate the nature of the future socialist society. There will be
hundreds or thousands of factories in operation. Very few of these will be
producing wares ready for use; in the majority of cases what will be man-
ufactured will be unfinished goods and production-goods. All these con-
cerns will be interrelated. Every good will go through a whole series of
stages before it is ready for use. In the ceaseless toil and moil of this
process, however, the administration will be without any means of
testing their bearings. … How will it be able to decide whether this or
that method of production is the more profitable? (Mises [] , )

Plainly, then, Mises did not claim that socialism is impossible. Rather, he
denied that rational (well-functioning) socialism is possible, i.e., that social-
ism could work well. “In place of the ‘anarchic’ mode of production”
characteristic of capitalism, as he put it, under socialism “recourse will
be had to the senseless output of an absurd apparatus. The wheels will
turn, but will run to no effect” (ibid.).
Thus, one has to wonder who Schumpeter had in mind as answering
“No” to the question of whether socialism could work. Who, exactly,
had denied what Schumpeter affirmed: that socialism could work
poorly? Certainly not Mises. Yet it is Mises whom Schumpeter names
as his intellectual adversary on the first page of Chapter , “The Socialist
Blueprint.” In that chapter, Schumpeter lays out Mises’s socialist calcu-
lation argument and his reply to it, so it is the chapter in Part III to
which we shall devote the most attention.
Just before mentioning “Professor L. von Mises” in the fourth para-
graph of the chapter, Schumpeter writes:

Given a socialist system of the kind envisaged, is it possible to derive, from its
data and from the rules of rational behavior, uniquely determined decisions
as to what and how to produce or, to put the same thing into the slogan of
exact economics … equations which are independent, compatible—i.e. free
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

from contradiction—and sufficient in number to determine uniquely the

unknowns of the problem before the central board or ministry of pro-
duction? The answer is in the affirmative. (Ibid., , emphases added)

By “exact economics,” Schumpeter means orthodox mathematical econ-

omics. This suggests that the problem raised by Mises and the problem
being considered by Schumpeter, or ostensibly being considered by
him, are quite different. Stipulating that the socialist planners would
know the relevant data and could then determine what to do on the
basis of mathematical equations, as orthodox economists stipulate is the
case for the managers of capitalist businesses, forecloses a discussion of
the problem Mises described, where the data provided by market prices
for factors of production are exactly what the planners lack. Conversely,
Mises had conceded that if the central planning bureau possessed those
data, it could rationally plan the economy under static conditions (that
is, as long as the data remained applicable because the economy did not
change). Thus, it makes little sense for Schumpeter to appeal to a static-
state economy as a rebuttal of Mises.
One possibility, then, is that Schumpeter misunderstood Mises.
Schumpeter was pointing out the formal similarity between the way
orthodox neoclassical economists model the perfectly competitive
economy in general equilibrium and the social-welfare maximization
problem facing a central planning bureau (ibid., ). According to
Schumpeter, this similarity shows that rational socialist calculation, as
opposed to socialism itself, is possible, in the sense of logical possibility
(i.e., it is imaginable without self-contradiction). Rational socialist calcu-
lation is logically possible because it is logically possible that the necessary
data would be “given” to the socialist planners. However, in terms of
logical possibility, Mises’s argument would have to be restated as
follows: rational calculation under socialism is logically possible, but it is
impracticable unless an heroic epistemic assumption is made, i.e., the
assumption that the data would be given to the central planning bureau.
Schumpeter goes on to present a fair summary of Mises’s argument:

Starting from the proposition that rational economic behavior presupposes

rational cost calculations, hence prices of cost factors, hence markets which
price them, he concluded that in a socialist society, since there would be no
such markets, the beacon lights of rational production would be so absent
that the system would have to function in a haphazard manner if at all. To
this and similar criticisms or perhaps to some doubts of their own, the
 Critical Review Vol. , No. 

accredited exponents of socialist orthodoxy had at first not much to oppose

except the argument that the socialist management would be able to start
from the system of values [i.e., prices] evolved by its capitalist predecessor
—which is no doubt relevant for a discussion of practical difficulties but not
at all for the question of principle. (Ibid., , emphases added)

As we have seen, in discussing the static state, Mises had denied the rel-
evance to his “impossibility” argument of the solution Schumpeter attri-
butes to the early “accredited exponents of socialist orthodoxy”: that of a
socialist economy that takes on board capitalist prices. Notice, however,
that in the second sentence of the extracted passage, Schumpeter suggests
that the lack of realism of the static state poses mere “practical difficulties”
for socialism, as opposed to “the question of principle” that, he implies,
Mises had asked. Yet the first sentence in the passage suggests that
Schumpeter understood perfectly well that Mises had in fact asked a ques-
tion about practical difficulties, for he had argued that socialism outside of
the static state (i.e., in the real world) would be either entirely dysfunc-
tional or would operate, at best, “in a haphazard manner,” as Schumpeter
puts it. By starting with the real world and the inherently practical ques-
tions that we ask about it but then subtly shifting to “the question of prin-
ciple,” Schumpeter manages to introduce the reader to Mises’s argument
about the impracticability of socialism; to point out the unrealistic nature
of the initial socialist answer (the static state); and then to open the door to
a “better” answer, “in principle”—the mathematical (equilibrium) answer
—that, as we shall see, he considers just as unrealistic, when applied to the
real world, as the static-state answer. This constitutes his “affirmative
answer” to the question of whether socialism is “possible.”
Schumpeter next explains that the mathematical answer to the ques-
tion of principle was first articulated by the early neoclassical economists
Friedrich von Weiser () and Enrico Barone (), who were even-
tually followed by what have come to be known as the “market social-
ists,” in particular Abba P. Lerner (, , , , and )
and “especially” Oskar Lange (, , and ) (Schumpeter
, n and n). Unlike Weiser and Barone, the market socialists
were responding directly to Mises, responses that comprised a large
portion of the socialist calculation debate. They suggested that a socialist
society could produce consumer goods in just the way that these would be
produced in a perfectly competitive capitalist economy, even while col-
lective control over the means of production was introduced.
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

As Lange (, ) put it in what turned out to be the decisive con-
tribution to the socialist calculation debate,

The decisions of the managers of production are no longer guided by

the aim to maximise profit. Instead, there are certain rules imposed
on them by the Central Planning Board which aim at satisfying consu-
mers’ preferences in the best way possible. One rule must impose on
each production plant the choice of the combination of factors of pro-
duction and the scale of output which minimizes the average cost of
production.

This was an a priori application of what Lange calls “textbook” equili-

brium economics (ibid., ) to a problem (the problem of socialist calcu-
lation) that is produced, in Mises’s estimation, by economic ignorance in
the real world. Consistent with the textbook model of perfect compe-
tition under capitalism, Lange simply assumes away the real-world episte-
mic problem, as if ordering plant managers to choose the perfect
combinations of factors of production would conjure into existence the
knowledge of what those combinations are. It is clear, then, that Lange
and his fellow market socialists, at least, did misunderstand Mises, for
their attempt to answer him failed to grapple in any way with the episte-
mic problem to which he had pointed (see Lavoie , ch. ). By endor-
sing the market socialists’ “answer” to Mises’s question, “in principle,”
Schumpeter suggests that socialism could be run in the same fashion as
capitalism in the perfect-competition model of general equilibrium. But
to employ the technical jargon that Schumpeter utilized, pointing out
that a social-welfare function, conditional upon its existence, has,
within the (presumptively) bounded domain of possible productive com-
binations, some maximal value offers no reply to Mises’s core objection
that such a function needs to take a definite form that can be identified
as rational only by the market process. Absent market exchanges of the
factors of production, the central planning bureau is given no information
from which the correct function could be identified from among the infi-
nitude of alternatives.
Schumpeter concludes his endorsement of market socialism as follows:

This … completes our case for the rationality of socialist planning in a

stationary process of economic life in which everything is correctly fore-
seen and repeats itself and in which nothing happens to upset the plan.
(Schumpeter , )
 Critical Review Vol. , No. 

One reading, then, is that Schumpeter misconstrued Mises as radically as

the market socialists had, by attributing to him a critique of the logical
possibility of socialism in a static state; and that Schumpeter agreed with
the market socialists in thinking that by imputing the necessary knowl-
edge to a central planning bureau, they had successfully answered this cri-
tique. Let us now begin to consider a different possibility: that
Schumpeter’s “endorsement” of market socialism was entirely ironic.

III. TAKING IT ALL BACK:

SCHUMPETERIAN IRONY ABOUT SOCIALISM

Immediately after concluding his putative defense of market socialism,

Schumpeter begins backtracking:

No great difficulties arise if we go beyond the precincts of the theory of the

stationary process and admit the phenomena of industrial change. So far as
economic logic is concerned, it cannot be held that socialism of the kind envi-
saged, while theoretically capable of coping with the recurrent tasks of the
administration of a stationary economy, would necessarily fail in the solution
of the problem presented by “progress.” We shall see later why it is never-
theless important for the success of the socialist economy that it should
embark upon its career not only as richly endowed as possible by its capi-
talist predecessor—with experience and technique as well as with resources
—but also after the latter has sown its wild oats, done its work and is
approaching a stationary state. But the reason for this is not in any inability
of ours to devise a rational and uniquely determined course for the socialist
society to take whenever the opportunity for an improvement in the
industrial apparatus presents itself. (Ibid., , emphases added)

Again, Schumpeter is repudiating a position that he seems to be attribut-

ing to Mises, the position that rational calculation in a static state could not
occur—a position that is the opposite of the one Mises took. At the same
time, however, Schumpeter lays the groundwork for showing, later on,
that the success of the market-socialist “blueprint” will depend at least
on achieving the initial condition of the static state, prior to which social-
ism would be premature. And, just after this passage, he begins to contend
that the operation of the blueprint itself would require the reintroduction
of nothing less than real-world (as opposed to textbook) capitalism.
Let us first consider the static state, which will require us to go back to
Part II of Capitalism, Socialism and Democracy, “Can Capitalism Survive?”
According to Schumpeter in Part III,
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

exactly as today every firm in a perfectly competitive industry knows what and
how much to produce and how to produce it as soon as technical possibi-
lities, reactions of consumers (their tastes and incomes) and prices of means
of production are given, so the industrial managements in our socialist com-
monwealth would know what to produce, how to produce and what
factor quantities to “buy” from the central board as soon as the latter’s
“prices” are published and as soon as the consumers have revealed their
“demands.” (Ibid., , emphases added)

Schumpeter is treating the relevant knowledge as given to the central

planning board before it publishes the (non-market) prices of factors of
production, just as it is given to capitalists in orthodox economists’
model of perfect competition under capitalism. But did Schumpeter
really think that perfectly competitive industries existed “today,” as
suggested at the beginning of the passage—which would transform
market socialism from a textbook exercise that assumes away the knowl-
edge problem into an eminently feasible blueprint for an economy in the
real world? No reader of Part II could think so, as Schumpeter had con-
structed there a lengthy and impassioned defense of modern capitalism as
oligopolistic—in explicit contrast to the model of perfect competition.
In Part II, as we shall now see, perfect competition served as Schump-
eter’s foil. This was the same role served by Mises in Part III, even though
Mises denied the relevance to reality of the model of perfect competition
—which is what Schumpeter, too, had denied in Part II.

Schumpeter’s Defense of Imperfect Capitalism

Schumpeter first brings up the subject of perfect competition in Part II’s
second chapter, Chapter , entitled “Plausible Capitalism.” He begins by
explaining that under perfect competition, each firm is small enough,
and is faced with enough competitors, that it has no effective control
over the prices it charges for its products. Prices, then, are, “from the stand-
point of the individual firm, not variables but parameters”; this is precisely
the language with which Lange refers to prices in his model of perfect com-
petition (Schumpeter , ; Lange , ). However, the parametric
function of prices indicates the passivity or “determination” of the capitalist
entrepreneur, a situation that Schumpeter immediately denies has ever
characterized capitalist reality. “Practically all the finished goods and ser-
vices of industry and trade” and “every grocer, every filling station,
every manufacturer of gloves or shaving cream or handsaws has a small
 Critical Review Vol. , No. 

and precarious market of his own” over which he attempts, and to some
extent succeeds in attempting, to exercise active control. “Thus we get a
completely different pattern [from that of textbook economics] which
there seems to be no reason to expect to yield the results of perfect com-
petition and which fits much better into the monopolistic schema. In these
cases we speak of Monopolistic Competition” (Schumpeter , ).
Moreover, when we turn from the behavior of the corner grocer to
that of “the largest scale firms,” which are so important in contemporary
capitalism, we find again that “the monopoly schema, suitably adapted”
to the case of oligopoly (a few dominant firms rather than a single one),
“seems to fit” capitalist “behavior much better than does the schema of
perfect competition” (ibid.). Consequently, “the fundamental concept
of equilibrium, i.e., a determinate state of the economic organism,” has
no application to most real-world capitalism. “In the general case of oli-
gopoly there is in fact no determinate equilibrium at all and the possi-
bility presents itself that there may be an endless sequence of moves and
countermoves, an indefinite state of warfare between firms” (ibid.,
emph. added)
To argue for the indeterminacy of capitalist behavior in the real
world is to argue against the applicability to reality of the perfect-com-
petition model. According to orthodox neoclassical economics, as
articulated by Wieser, Barone, Lange, and Lerner, a capitalist firm
faces a limitless supply of competitors, so it cannot charge its customers
more than the marginal cost of producing what is being sold: if it does
so, one of its competitors will undercut its price. Thus, “the data” that
determine the marginal cost of production—which is to say, the mar-
ginal cost of all the factors of production that are inputs into the item
being produced by the firm, and the marginal cost of all the factors
that go into the production of the inputs used by the firm (for
example, the factors of production out of which aluminum is made,
such as the mining and smelting operations and all the machinery and
labor used therein, and, in turn, the factors of production out of
which those factors of production are made, etc.)—are the ultimate
determinants of each capitalist firm’s behavior. According to the neo-
classical economic orthodoxy, these very same data can, under market
socialism, be used to legally determine the various branches of industry
to perform optimally. Schumpeter, however, is explicitly denying that
this is how capitalist behavior is determined, for he is denying that it
is determined at all.
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

Still, Schumpeter ends Chapter  by pointing out that the indetermi-

nacy of capitalism may suggest its irrationality. The moves and counter-
moves of maneuvering oligopolies had long been criticized by
neoclassical economists, and by lay observers, as “so many sources of
social waste” (ibid., ), and Schumpeter echoes these criticisms on
the last two pages of the chapter. However, Chapter , “The Process of
Creative Destruction,” and Chapter , “Monopolistic Practices,” set
about systematically dismantling these criticisms, arguing that the depar-
tures of reality from the model of perfect competition, while wasteful
from a short-run perspective, have been essential to producing the
material wealth that is the chief justification of capitalism.
Schumpeter begins Chapter  by pointing out that even though, in
principle (given the reasoning that produces the equilibrium model of
perfect competition), oligopoly represents social waste—that is, in com-
parison to a perfectly competitive economy—in reality “the modern stan-
dard of life of the masses evolved during the period of relatively unfettered
‘big business’” (ibid., ). Here Schumpeter is reminding the reader of
what he had said in the first chapter of Part II, Chapter , a recitation
of the gigantic gains for the masses that the period of big business had
produced:

Electric lighting is no great boon to anyone who has money enough to buy
a sufficient number of candles and to pay servants to attend to them. It is
the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so
on that are the typical achievements of capitalist production, and not as a
rule improvements that would mean much to the rich man. Queen Eliza-
beth owned silk stockings. The capitalist achievement does not typically
consist in providing more silk stockings for queens but in bringing them
within the reach of factory girls in return for steadily decreasing amounts
of effort. (Ibid., )

In Chapter  he applies this lesson, about the gains in the ordinary person’s
standard of living, to the perfect-competition model. “A shocking suspi-
cion dawns upon us,” he writes. “Big business,” i.e., oligopolistic business,
“may have had more to do with creating that standard of life than with
keeping it down” (ibid., ). If so, then

the conclusions alluded to at the end of the preceding chapter [Chapter ]

are in fact almost completely false. … Both economists and popular writers
have once more run away with some fragments of reality they happened to
grasp. These fragments themselves were mostly seen correctly. But no
 Critical Review Vol. , No. 

conclusions about capitalist reality as a whole follow from such fragmentary

analyses. (Ibid.)

This is what Schumpeter proceeds to try to show.

Why do the theorists of perfect competition see in oligopoly pointless
waste rather than the source of material liberation for the masses? Here
Schumpeter introduces his theory of creative destruction. Orthodox the-
orists “overlook the fact that in dealing with capitalism we are dealing
with an evolutionary process.” Capitalism “is by nature a form or
method of economic change and not only never is but never can be
stationary”; for “Creative Destruction is the essential fact about capital-
ism” (ibid.). The success of a given business, especially of a big business,
is usually built on the ruins of previously dominant competitors. The
destruction of these competitors is brought about by revolutionary
advances in methods of production that make it possible to make better
and cheaper products for the masses. Creative destruction is wrought
not by numerous small firms leaping to close gaps between prices
charged and the marginal cost of production, but by the introduction
of brand-new methods of production—“competition from the new com-
modity, the new technology, the new source of supply, the new type of
organization (the largest-scale unit of control for instance)—competition
which commands a decisive cost or quality advantage and which strikes
not at the margins of the profits and the outputs of existing firms but at
their foundation and their very lives” (ibid., ). In this light, the waste
inherent in intra-oligopolistic maneuvering is, at the very least, vastly out-
weighed by the progressive changes that oligopolies introduce, at each
step making more and better goods available to the masses for less effort
(which is to say, improving the economic rationality of the use of society’s
resources). But this is not all. The apparent waste inherent to big-business
capitalism may actually be instrumental to the material advances it fosters.
“A system,” such as perfect competition, “that at every given point of time
fully utilizes its possibilities to the best advantage may yet in the long run
be inferior to a system that does so at no given point of time,” such as oli-
gopoly capitalism, “because the latter’s failure to do so may be a condition
for the level or speed of long-run performance” (ibid., ).
Chapter , “Monopolistic Practices,” explains in detail how the short-
term “waste” seized upon by orthodox economists and untutored observers
is essential to the long-run performance of big business. The “well-known
moves and counter-moves within [oligopoly] that seem to aim at nothing
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

but high prices and restrictions of output” actually work to the long-run
benefit of the populace, for these maneuvers enable big businesses to intro-
duce innovations that require intensive and long-range capital investment.
This often requires charging higher prices in the short run so as to bring
down prices and improve quality in the long run. Under perfect compe-
tition, however, the moment a firm charges prices higher than marginal
costs, a competitor will swoop in to undercut it. The “largest-scale plans”
executed by big business “could in many cases not materialize at all if it
were not known from the outset that competition will be discouraged
by heavy capital requirements or lack of experience, or that means are avail-
able to discourage or checkmate it so as to gain the time and space for
further developments. … Enterprise would in most cases be impossible if
it were not known from the outset that exceptionally favorable situations
are likely to arise which if exploited by price, quality and quantity manipu-
lation will produce profits adequate to tide over exceptionally unfavorable
situations” (ibid., ). Thus,

The introduction of new methods of production and new commodities is

hardly conceivable with perfect—and perfectly prompt—competition
from the start. And this means that the bulk of what we call economic pro-
gress is incompatible with it. As a matter of fact, perfect competition is and
always has been temporarily suspended whenever anything new is being
introduced. (Ibid., )

By the conclusion of Chapter , then, Schumpeter has made a case for

the value of unfettered capitalism that is rhetorically contingent on its
contrast with the short-sighted lack of realism embodied in the ideal of
perfect competition. While it is true that “a perfectly competitive
economy is comparatively free from waste,” he emphasizes repeatedly,
“this does not tell us anything about how its account looks under the con-
ditions set by the process of creative destruction” (ibid., ). The model
of perfect competition, by “excluding the most characteristic forms of
capitalist reality,” blinds us to the tremendous achievements of real-
world capitalism and, at the same time, creates unrealistic expectations
for a socialism modeled after perfect competition (ibid.). Thus, “socialists
should rely for their criticisms on the virtues of a socialist economy rather
than on those of the competitive model” (ibid., ).
What, then, are we to make of Schumpeter’s argument in Chapter ,
to the effect that socialism could work by mimicking what happens
“today,” when, supposedly, “every firm in a perfectly competitive
 Critical Review Vol. , No. 

industry knows what and how much to produce and how to produce it as
soon as technical possibilities, reactions of consumers (their tastes and
incomes) and prices of means of production are given” (ibid., )?
There is no other conclusion than that this “endorsement” of market
socialism is ironic, for Schumpeter had, in previous chapters, forcefully
denied that such firms are typical of “today” or of any past period.

The Socialist Future That Is Actually Capitalist

It is not surprising, then, that in Part III, when Schumpeter moves beyond
his “endorsement” of market socialism, he begins qualifying it to death.
Consider how he explains what would happen under market socialism
when “a new and more efficient piece of machinery has been designed
for the productive process of industry X” (ibid., ). The management
of the industry, under the guidance of the central planning board, must
perforce “adopt the new machine,” Schumpeter says. “Additional invest-
ment” in the new method of production, he contends, will “sugges[t]
itself” to the central planning bureau (ibid., ). But where will the
investment come from? That’s easy, Schumpeter says: the bureau will
simply offer “premiums for overtime and—what shall we call it?—well,
let us say saving.” So it seems that income inequality, and perhaps even
a rentier class, will have to be created by socialism. And even this
would not suffice “to produce the rate of investment that capitalist
society produces in the average of cyclical phases” (ibid.). So, in addition,
a socialist society would have to allow “accumulation [of savings] out of
‘profits’ which could be allowed to materialize” (ibid., ). Thus, the
socialist authorities would have to introduce the very aspects of imper-
fect-competition (monopoly) capitalism that Schumpeter had defended
as realistic and beneficial departures from perfect competition in Part II.
Income inequality, rentier income, monopoly profits—has Schump-
eter left any element of capitalism out of his picture “socialism”? Yes:
in a socialist society, labor would have to be rationally allocated
somehow. The imposition of slavery being off the table, the central plan-
ners would have to create

a system of inducements—premiums again being offered, in this case not

only for overtime but for all work, so as to secure everywhere the
“offer” of labor of all types and grades appropriate to the structure of con-
sumers’ demand and to the investment program. These premiums would
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

have to bear an obvious relation to the attractiveness or irksomeness of each

job and to the skill that must be acquired in order to fill it, hence also to the
wage schedule of capitalist society. Though the analogy between the latter
and such a socialist system of premiums should not be pushed too far, we
might speak of a “labor market.” (Ibid.)

In like vein, Schumpeter goes on to explain why rent, too, would be

necessary under socialism (ibid., ). We need not go into the details;
the irony is plain enough. But, Schumpeter rushes to assure us, these
radical departures from any socialism recognizable as such to its advocates
“would not affect the determinateness of the socialist system. Its formal
rationality would in fact stand out more strongly” (ibid., -). It
seems clear that Schumpeter is suppressing his laughter, or hoping to
prompt ours.
However, lest the reader think that Schumpeter has somehow imposed
capitalism on the coming socialist society by fiat or legerdemain, he now
explains:

Socialism borrows nothing from capitalism, but capitalism borrows much

from the perfectly general logic of choice. … In the sphere of economic
behavior the molding influence of mere rationality goes pretty far, at
least with regard to the pure theory of it. … For only the most naïve
mind can feel disappointed at the fact that the socialist miracle does not
create a logic of its own. (Ibid., )

This passage may explain why Schumpeter went to such lengths to

embrace, or “embrace,” the unrealistic model proposed by the market
socialists. By ostensibly taking their side, he is able to show that economic
rationality itself—the rationality that Mises had denied is practicable under
socialism—will lead socialists back to capitalism. It would seem, then, that
Schumpeter’s defense of market socialism has been a sham. Mises has
been thrown under the bus, and the market socialists embraced, so that
Mises’s antisocialist conclusion could be vindicated—but persuasively so.
In support of this interpretation is the fact that, having explained the
inescapability of the economic logic of capitalism for market socialism,
Schumpeter now turns against market socialism and its proponents with
venom. “Some socialist as well as non-socialist economists,” he begins,
“have been not only willing but anxious to recognize a particularly
strong family likeness between a socialist economy of the type envisaged
and a commercial economy of the perfectly competitive type. We might
 Critical Review Vol. , No. 

almost speak of a school of socialist thought that tends to glorify perfect

competition and to advocate socialism on the ground that it offers the
only method by which the results of perfect competition can be attained
in the modern world” (ibid., , emph. added). After having called the
market socialists “anxious,” which suggests that they have a defensive and
non-scientific motivation, Schumpeter proceeds to explain what this
motivation is:

The tactical advantages to be reaped by placing oneself on this standpoint

are indeed obvious enough to explain what at first sight looks like surpris-
ing broad-mindedness. A competent socialist who sees as clearly as any
other economist all the weaknesses of Marxian and of popular arguments
[weaknesses delineated by Schumpeter in Part I] can thus admit whatever
he feels should be admitted without compromising his convictions because
the admissions refer to a historical stage [i.e., the stage of perfectly competi-
tive capitalism] that (so far as it ever did exist) is safely dead and buried; he is
enabled, by judiciously confining his condemnatory verdict to the non-
competitive case [i.e., modern oligopolistic capitalism], to lend qualified
support to some indictments, such as that in modern capitalism production
is for profit and not for the consumption of the people, which otherwise
would be merely silly [as Schumpeter had argued in Part II, by pointing
to the vast expansion of goods available to workers due chiefly to
modern, oligopolistic capitalism]; and he can baffle and puzzle good bour-
geois by telling them that socialism will only do what they really wanted all
along and what their own economic ulemas always taught them. But the
analytic advantages of stressing that family likeness are not equally great. (Ibid.,
, emphases added)

Before turning to the reasons Schumpeter gives for suddenly discount-

ing the analytic advantages of market socialism, it may be worth noting his
personal situation during the years he was completing Capitalism, Socialism
and Democracy, after emigrating to the United States in  and taking up
a position in Harvard’s economics department. Muller (, ) fills in
some of the relevant context:

At Harvard, Schumpeter faced an audience of graduate students that, as one

of them recalls, was “super-saturated with Keynes, Marx, and Veblen.”
Although they were reflexively hostile to his message, he nevertheless
“slyly ‘got across’ one point after another.”

It happens that the two most important proponents of market socialism,

Lange and Lerner, visited Harvard as post-doctoral fellows during these
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

very years (Backhouse , ). In defense of Muller’s argument about

Schumpeterian irony, then, we might speculatively make a slight amend-
ment to his account. For it would seem that Lange and Lerner were two
students at Harvard to whom Schumpeter did not get his points across—
and whose resistance he attributed, in Capitalism, Socialism and Democracy,
to their ideological precommitments.
This digression prepares us to consider what Schumpeter meant when
he closed his attack on the market socialists by denigrating the “analytic
advantages” of their comparison of the socialist blueprint to the model
of perfectly competitive capitalism—the comparison that Schumpeter
himself had just devoted most of Chapter  to elaborating. The compari-
son, he now says, is analytically overrated by the market socialists, because
“the bloodless concept of perfect competition that economic theory has
framed for its purposes” bears little or no resemblance to modern capitalist
realities (Schumpeter , )—the very realities that had been so deci-
sive, in Schumpeter’s view, in delivering bounty to the masses.
On the next page, Schumpeter writes that market socialism “will come
nearer than any other, for instance the method of decision by majority
vote, to giving each individual comrade what he wants” (ibid., ).
Read carelessly, it might seem that Schumpeter is now reversing
himself again and defending market socialism, by saying that it will
come nearer than any other economic system to giving the people what
they want. But in specifying that the people in question are “comrades,”
he suggests that he means only that market socialism will come closer than
any other form of socialism to giving the residents of a socialist society what
they want—which is not very close, given that the chief merit of market
socialism, i.e., its parallelism with the orthodox model of perfectly com-
petitive capitalism, turns out to be of little analytic significance. In that
light, if market socialism is indeed the variant of socialism that will
come the closest to giving the comrades what they want, they are not des-
tined to get it.
Schumpeter now drives home this point. Market socialism, he continues,
will—more closely than any other type of socialism—“result in a
‘maximum of satisfaction.’ But this maximum is only a short-run one [foot-
note omitted] and, moreover, is relative to the actual desires of the comrades
as they are felt at the moment” (ibid., ). Here is the omitted footnote:

It is however a provable maximum and as such establishes the economic

rationality of that type of socialism [i.e., market socialism] exactly as the
 Critical Review Vol. , No. 

competitive maximum establishes the rationality of competitive economy.

And in neither case does this mean very much. (Ibid., n)

In other words, while the market socialists may have established the
“rationality” of their system in contradistinction to the claim (put in the
mouth of Mises) that the rational allocation of the factors of production
would be impossible under socialism, this is of no consequence, because
market-socialist “rationality” is irrelevant to the performance of either
capitalism or socialism in the real world.
We might also bear in mind that the Schumpeterian entrepreneur’s
motivation is not rational in the respects Schumpeter finds important.
As Muller (, -) puts it, quoting Schumpeter’s paper on entre-
preneurial capitalism from , the entrepreneur cannot “be explained
with reference to any hedonic calculus,” for the entrepreneur’s objectives

included “the dream to found a private kingdom,” often a transgenera-

tional dynasty; the will to prove oneself superior to others, for which finan-
cial gain is “mainly valued as an index of success and as a symptom of
victory”; and “the joy of creating, of getting things done, or simply of exer-
cising one’s energy and ingenuity. … As [Schumpeter] later put it, in
explaining the dynamics of capitalist development “utilitarianism can
only be described as a complete failure since its rationalistic conception
of individual behavior and of social institutions is obviously and radically
wrong.”

There is still more in Chapter  to support Muller’s thesis. Consider

the remainder of the sentence with the footnote advising that the rationality
of market socialism does not mean very much. Schumpeter had just told us
that the “maximum of satisfaction” produced by market socialism, relative to
other variants of socialism, is not only a short-run thing, but is merely “rela-
tive to the actual desires of the comrades as they are felt at the moment”
(Schumpeter , ). In the next sentence, Schumpeter applies the
label “beefsteak socialism” to any variant that—like market socialism, with
its aim of meeting consumer demand—merely tries to cater to the comrades’
present low desires. Then, in the guise of dismissing beefsteak socialism in
favor of something higher, he subtly attacks socialism as an authoritarian
project if it has any value at all. “I cannot blame any socialist for despising”
such a materialistic doctrine as beefsteak socialism, he writes, or for

dreaming of new cultural forms for the human clay, perhaps of a new clay
withal; the real promise of socialism, if any, lies that way. Socialists who are
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

of this mind may still allow their commonwealth to be guided by the com-
rades’ actual tastes in matters that present no other than the hedonist aspect.
But they will adopt a Gosplan not only, as we conditionally did ourselves
[in the exposition of market socialism], for their investment policy but for
all purposes that do present other aspects. They may still let the comrades
choose as they like between peas and beans. They may well hesitate as to
milk and whisky and as to drugs and improvement of housing. And they
will not allow comrades to choose between loafing and temples—if the
latter be allowed to stand for what Germans inelegantly but tellingly call
objective (manifestations of) culture. (Ibid.)

In short, the higher socialism for which Schumpeter professes sympathy

would require forcing the people to consume the goods and the culture
chosen by the authorities. “There would have to be an authority to do
the evaluating, i.e., to determine the indices of significance for all consu-
mers’ goods. Given its system of values, that authority could do this in a
perfectly determined manner,” i.e., again, in the “rational” manner
described by the market socialists (ibid.).
There is more plenty more grist for Muller’s mill elsewhere in Part III.
Prior to embarking upon his comparison of capitalist and socialist “blue-
prints” in Chapter , Schumpeter informs us once again that perfect com-
petition bears no resemblance to capitalist reality, such that it is “meaningless”
to ask “how modern capitalism would work under perfect competition.”
Therefore, he will “not trouble about the competitive case [that is, the theor-
etical abstraction that the market socialists held up as their blueprint] except
incidentally” (ibid., ). As for socialism, Schumpeter suggests that its advo-
cates do not really care about beefsteak, or even bread:

Convinced socialists will derive satisfaction from the mere fact of living in a
socialist society. [footnote omitted] Socialist bread may well taste sweeter
to them than capitalist bread simply because it is socialist bread, and it
would do so even if they found mice in it. If, moreover, the particular
socialist system adopted happens to agree with one’s moral principles …
this fact and the consequent gratification of one’s sense of justice will of
course be listed among that system’s titles to superiority. For the
working of the system such moral allegiance is by no means indifferent.
… But beyond that all of us had better admit that our phraseology about
justice and so on reduces largely to whether we like a certain form of
society or not. (Ibid., -)

Again, the footnote is worth reproducing: “We are in fact sometimes

invited to overlook admitted shortcomings of the socialist plan for the
 Critical Review Vol. , No. 

sake of the privilege of becoming members of a socialist society. This

argument, frankly formulating as it does the truly socialist feeling, is by
no means as unreasonable as it may sound. It really renders all other argu-
ments superfluous” (ibid., n).
Yet Schumpeter persists in examining the superfluous question of beef-
steak socialism, as if he himself is one of the philistines who cares about the
beef, the bread, and the possibility of mice. Once again, he asks whether
socialism will produce more welfare than capitalism. And he once again
begins by conceding that it will—in principle. Here, however, the prin-
ciple is of a different sort: the principle of diminishing marginal utility.
Socialism, with its equal distribution of consumer goods, would, by
taking advantage of the declining marginal satisfaction brought by
greater increments of wealth, boost the sum total of welfare in comparison
to the unequal distribution of the same quantity of goods under capital-
ism. However, Schumpeter immediately points out that this conclusion
is relevant only if capitalism and socialism can indeed be expected to
produce the same quantity of consumer goods. To assume that they
will, though, would be “question-begging” (ibid., )—even though
an unwary reader might have thought this question had already been
answered in the affirmative by Schumpeter’s “defense” of market social-
ism in Chapter . Schumpeter does not elaborate, but by this point he
may be assuming that the reader will get the message.
As Chapter  continues, Schumpeter finds other ways to emphasize
the purely theoretical nature of the merits of market socialism. For one
thing, he points out that while Chapter  suggested, in the end, that
the case for market socialism is “of doubtful validity as long as capitalist
evolution is in full swing,” it also suggested that the case for market social-
ism “will be decisive as soon as [capitalist progress] permanently slackens
down, whether from reasons inherent in or external to its economic
mechanism” (ibid., , emph. original)—producing a stationary state.
But later in Chapter , Schumpeter will contend that capitalist progress
has been slackening because of “external” factors, namely, the bourgeois
governments of the early twentieth century, which attempted to solve the
perceived problems of industrialization by throttling capitalism with regu-
lations and high taxes (ibid., , , ). In short, then, Schumpeter is
saying that the case for market socialism will eventually be decisive, in sig-
nificant part, because capitalism is being “fettered” by “government inter-
ference” (ibid., , ), which “hamper[s] and paralyze[s] the private
engine of production” (ibid., ). By implication, unfettered capitalism
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

would postpone the relevance of the socialist blueprint by delaying the

permanent slackening-down.
We encourage readers to inspect Chapters  and  for themselves.
Almost every sentence reads differently once the possibility of irony is
kept in mind. For reasons of space, we omit further detail and move on
to Chapter , “The Human Element.” It includes an important discus-
sion of bureaucracy, which, Schumpeter casually reports, is the only
barrier to “failure and breakdown” under socialism (ibid., ).
This discussion begins with a seemingly unrelated subject: the fate of
the bourgeoisie under socialism. Schumpeter mentions that the bourgeoi-
sie “is causally associated with practically all the cultural achievements of
the capitalistic epoch and with as much of its economic achievements as is
not accounted for by the growth of the laboring population” (ibid., ).
Harnessing bourgeois talents to the socialist project, however, will be “the
most difficult task of all” (ibid.), because this would require allowing
members of the former bourgeoisie to exercise their talents. Standing in
the way of this exercise would be “a huge and all-embracing bureaucratic
apparatus,” which seems to be required by socialism (ibid., ). He had
earlier explained that this bureaucracy would be necessary, in part, to
(somehow) manage the complicated task of determining how the
economy should be run (ibid., ). “The bureaucratic method of trans-
acting business and the moral atmosphere it spreads,” he now notes,
“often exert a depressing influence on the most active minds,” giving
“little scope for initiative and much scope for vicious attempts at smother-
ing it” (ibid., ). Not to worry, though: “it is not difficult however to
insert the stock of bourgeois extraction into its proper place” (ibid.).
How? By giving the most talented members of society not only “prefer-
ential treatment in terms of real income,” as he had suggested in Chapter
, but preferential treatment in kind, as exemplified in the Soviet practice
of creating “official residences staffed at the public expense, allowances for
‘official’ hospitality, the use of admiralty and other yachts, special pro-
visions for service on international commissions or in the headquarters
of the army and so on” (ibid., , ). A necessary counterweight to
the stifling socialist bureaucracy, then, will be yet another corruption of
egalitarian ideals, the creation of a nomenklatura—which will allow
society to function, at some level, despite being turned into a mountain
of red tape.
Part III is replete with similar “defenses” of socialism that turn out to be
ironic. For example, Schumpeter suggests that the socialist system is
 Critical Review Vol. , No. 

certain to be viewed as more generally legitimate, as the present dissatis-

faction with capitalism is mainly the result of socialist agitation and intel-
lectuals’ cultivation of class conflict. Not only will socialism not have to
struggle against this headwind, but it will also have access to a far
greater capacity to suppress and discourage dissent, as shown again by
the Soviet experience:

Dismissal spelling privation, shifts amounting to deportation, “visits” by

shock brigades and occasionally also by comrades of the Red Army are,
whatever their legal construction, practically independent means in the
hands of the government by which to safeguard performance. There is
motive to use them and, as a matter of universally admitted fact, they
have been unflinchingly used. Sanctions which no capitalist employer
would think of applying even if he had the power frown sternly from
behind all gentler psycho-technics. (Ibid., , emph. added)

Any sinister overtones to these advantages of socialism, Schumpeter

assures the reader, are unintentional, for in times and places different
from Russia, atrocities may not be needed in order to establish social dis-
cipline. Thus, opposition to Soviet totalitarianism is not, in the first
instance, an objection to the economic structure Schumpeter refers to
as “socialism per se,” but to features of historically particular socialisms
(ibid., -). All of this is couched as a continuation of Chapter ’s dis-
cussion of the economic efficiency of market socialism, as seen in the ita-
licized phrase of the extracted quotation. Yet when we remember that this
chapter had hinted at the paltry supply of beefsteak to be produced by a
low version of market socialism, and had belittled the importance of the
comparison of socialism to perfectly competitive capitalism, while ques-
tioning the motives of the market socialists who emphasized this compari-
son, we must wonder if we are to take seriously the efficiency gains that
would be accomplished by horrific measures of socialist discipline.

IV. DID SCHUMPETER’S IRONY EXTEND TO

THE CALCULATION ARGUMENT?

It seems to us evident that Muller was right. Schumpeter opposed social-

ism, and he conveyed this opposition through an ironic endorsement of a
completely unrealistic variant of it. What is less clear is what this means for
Schumpeter’s critique of the socialist calculation argument, as opposed to
socialism itself.
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

The objections to socialism that Schumpeter raised in Part III are not
epistemological. Bureaucracy and totalitarian discipline, along with the
main topics famously considered in Part IV—the suppression of democ-
racy, of the private sphere, and of civil liberties—are, in his view, probable
outcomes of socialism, but they are not offshoots of the epistemic conun-
drum that, according to Mises, will face central planners. Likewise, the
need for a labor market, interest, profits, and investment income are pre-
mised on the incentives necessary, in Schumpeter’s estimation, if labor and
saving are to be called forth in the necessary amounts and applied to the
necessary economic projects. But a lack of incentives is not equivalent to a
lack of knowledge. Had Schumpeter wondered how the central planning
bureau would determine the necessary amounts of labor and saving, he
would have been echoing Mises, but he failed to do so. And in continually
emphasizing the “determinateness” of the market-socialist “solution,”
Schumpeter suggests that he may not have seen the acquisition of such
knowledge as a problem. Mises, after all, was saying that, faced with the
bewildering variety of combinations of productive factors that might be
used to produce consumer goods, the decisions of central planners would
be underdetermined. Schumpeter never affirms this contention, even ironi-
cally, despite his intricate attack on the otherworldliness of central planning
for relying on a stationary state that, had it been enforced in capitalist
societies, would have stymied the material advancement of the masses.
Moreover, “the parametric function of prices” means, as we have seen,
that the actions of the competitors under perfect competition are comple-
tely determined exogenously (Lange , ). This is critical to Lange’s
argument for the equivalence of the central planning board’s decisions and
those made under capitalism. “As a result of the parametric function of
prices,” he writes, there is, under competitive capitalism, “generally only
one set of prices which satisfies the objective equilibrium conditions, i.e.
equalizes demand and supply of each commodity” (ibid., , emph. original).

The same objective price structure can be obtained in a socialist economy if

the parametric function of prices is retained. … In a socialist economy, pro-
duction and ownership of the productive resources outside of labour
being centralised, the managers certainly can and do influence prices by
their decisions. Therefore, the parametric function of prices must be
imposed on them as an accounting rule. All accounting has to be done as if
prices were independent of the decisions taken … as they are treated by
entrepreneurs on a competitive market. … Once the parametric function
of prices is adopted as an accounting rule, the price structure is established
 Critical Review Vol. , No. 

by the objective equilibrium conditions. For each set of prices a definite

amount of each commodity is supplied and demanded. … Thus the
accounting prices in a socialist economy, far from being arbitrary, have
quite the same objective character as the market prices in a régime of com-
petition. (Ibid., -, emphases original)

In other words, the planning board will force its production managers to
act as if they are price-taking, parameter-bound capitalists in a perfectly
competitive economy. Now Schumpeter, in his discussion of oligopoly,
is quite explicitly defending a variant of capitalism in which entrepreneurs
are not price takers. They have the ability to set prices, to some extent:
their market power frees their pricing decisions from being fixed exogen-
ously. This makes their pricing decisions indeterminate—just as would be
the decisions of socialist managers unbound by the accounting rule.
In effect, then, Schumpeter is admitting that Mises is right about socialism
—in the absence of the socialist accounting rule. Without the rule, socialist
managers’ decisions would be indeterminate. The rule serves the determin-
ing function served under capitalism by imperfect market prices for the
factors of production. However, as we saw earlier, this rule requires the
central planning bureau to somehow “know,” in the absence of market prices,
what it would need to know to escape a bewildering indeterminacy, begging
the epistemic question. Schumpeter, keenly attuned to the similarities and
differences between market socialism and oligopoly capitalism, surely
could have pointed out this flaw in market socialism (ironically, of
course)—if he had seen it as a flaw, i.e., if he believed that the indeterminacy
enjoyed by oligopolists gives them an epistemic advantage over a central
planning bureau, such as the advantage conveyed to them by imperfect
market prices of the means of production, which they can use to calculate
the cost of various ways to make consumer goods. But Schumpeter failed
to do this. This suggests that he did not agree with Mises about the epistemic
advantage of the determinateness of market prices in the means of pro-
duction—or at least that he did not think this advantage significant in the
process of creative destruction.
Perhaps the more important suggestive evidence on this score comes
from Schumpeter’s analysis of entrepreneurship. Mises’s epistemological
focus enabled economists who followed in his footsteps, such as Israel
M. Kirzner (), to attribute to entrepreneurs an epistemic function,
that of “alertness” to profit opportunities. Much as Schumpeter extols
the importance of entrepreneurs, however, he gives little sign of attributing
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

to them such an epistemic function. In Chapter  he does emphasize that

they must have “superior brains” (Schumpeter ,  and passim), but
while intelligence may be a prerequisite to spotting profit opportunities,
it is not sufficient, nor is it distinctive. Intelligence may as easily suit
someone to being a scholar or a bureaucrat as an entrepreneur, and
indeed Schumpeter’s worry is that the entrepreneurial function is increas-
ingly being mechanized by bureaucratic managers—which would not be
possible if this function involved not mere intelligence, but the ability to
spot possibilities that others might miss. Similarly, while Schumpeter says
that “alertness and energy” are required of entrepreneurs, these qualities
are needed in order to retain, not in order to achieve, a “monopoly pos-
ition” (ibid., ). He also says that the entrepreneur must “act with con-
fidence beyond the range of familiar beacons,” and that “to overcome …
resistance requires aptitudes that are present in only a small fraction of the
population” (ibid., ). But we may perhaps infer that “confidence”
here is an extra-rational personality trait, not a function of the conviction
that one has seen what others haven’t, for Schumpeter then boils down
the role of the entrepreneur to “getting things done” (ibid.).
Likewise, Schumpeter goes on to suggest that the increasing “rational-
ization and specialization” of business “will eventually blot out personal-
ity, the calculable result, the ‘vision.’ The leading man no longer has the
opportunity to fling himself into the fray. He is becoming just another
office worker” (ibid.) The force of the entrepreneur’s personality again
seems to be the main thing in Schumpeter’s mind, although “vision”
might conceivably have an epistemic dimension. An equally interesting
implication is that what the visionary sees is “the calculable result,”
which could be read either as epistemic or its opposite. Mises, of
course, had (in effect) attributed to entrepreneurs the ability to calculate
the results of various courses of action, based on market prices in the
factors of production. So one might take this passage to be an indirect
endorsement of Mises’s argument, although we can find no other
textual support for such a suggestion, and another interpretation is that
the calculable result is simply the obvious one. In the same paragraph
Schumpeter denies that “the entrepreneurial function” consists “in
either inventing anything or otherwise creating the conditions which
the enterprise exploits” (ibid.). The weight of the scanty evidence
suggests, then, that Schumpeter saw the entrepreneur as, at best, a calcu-
lator of innovative possibilities, not an inventor of them, who could,
through force of personality, get things done.
 Critical Review Vol. , No. 

Inasmuch as Mises might have agreed, we can say that Schumpeter’s pos-
ition is congruent with Mises’s contention that calculability under capital-
ism is crucial. However, Schumpeter’s inattention to epistemic issues
suggests a number of ways of viewing this congruence. (a) He might
have agreed with Mises about the importance of calculability and agreed,
too, that this was provided by market prices for factors of production. He
does not say this, but he does not deny it, and something about the entrepre-
neur’s situation apparently makes it a matter of calculation. (b) He might
have agreed about the importance of calculability but disagreed that it
was provided by market prices. This position seems more likely than (a),
since Schumpeter does seem to envision the advent of a socialism that
lacks market prices in the means of production but that nevertheless
spawns a vast calculating bureaucracy. (c) He might have agreed about
the importance of calculability under capitalism while also believing that
personality was far more important, such that while Mises was right, his
argument against socialism was not all that significant. Each of these possi-
bilities is consistent with Schumpeter’s official position on Mises’s argu-
ment, once we take into account Schumpeter’s clear rhetorical intentions.
More interesting than Schumpeter’s attitude toward Mises’s argument,
however, is the logic of his position. As we have seen, Schumpeter insisted
on the indeterminacy of the entrepreneur, who is not merely a passive
respondent to the determinants of perfect competition. Schumpeter
may not have believed that when the entrepreneur decides what to do
in the space opened up by indeterminacy, idiosyncratic instincts or
guesses (as opposed to calculations) may play a significant role, as
Kirzner later would suggest, but Mises did not believe this either.
Indeed, Mises is more deterministic than Schumpeter, as he does not con-
template the entrepreneur’s freedom from the dictates of the calculations
of price, nor the possibility that the entrepreneur might introduce new
products (as opposed to calculating the prices of various techniques for
producing existing products). Mises reduced the epistemic function of
the entrepreneur to that of a calculator, omitting any role for idiosyncratic
interpretations of price “data” in deciding what to produce or how to
produce it. Schumpeter’s emphasis on the indeterminacy of oligopolistic
decision making, at least when it comes to pricing, allows more potential
space for idiosyncratic interpretations of possibilities than Mises did, even
if Schumpeter did not develop the implications of this potential. On the
other hand, in allowing some epistemic role for the entrepreneur, unlike
Schumpeter, Mises did not foreclose interpretive possibilities; in fact, in
 Boettke, Stein, and Storr • Schumpeter, Socialism, and Irony 

the event, he opened them up, as the example of Kirzner indicates, along
with the example of Lavoie, who threw himself into the investigation of
hermeneutics after he completed his study of the calculation debate (e.g.,
Lavoie a and b). In focusing on the entrepreneur’s personality,
Schumpeter did not foreclose interpretive possibilities either, even
though he may not have recognized them. But the subsequent develop-
ment of Schumpeterian economics has not had an epistemic dimension.
In this respect, Schumpeter was the more conservative of the two critics
of socialism we have considered. Orthodox neoclassical economics has a ten-
dency to fixate on the dichotomy between rationality and irrationality, and
to construct models, institutional designs, and policy recommendations on
the basis of agents’ assumed rationality. But this approach is not incompatible
with the recognition of irrationality, as neoclassical economists’ warm
embrace of behavioral economics demonstrates. In this sense Schumpeter
can be seen as a Kahneman avant la lettre, which may explain why Schump-
eter, too, has been embraced by many orthodox neoclassical economists.
Missing from the rationality/irrationality dichotomy is any place for rational
but uninformed and therefore suboptimal behavior, rational but unimagina-
tive and therefore suboptimal behavior, or rational and imaginative behavior
—that is, for an epistemic dimension as opposed to a calculative one. In
Mises’s socialist-calculation argument the two dimensions were merged,
but the very fact that he broached an epistemic issue marked a departure
from orthodoxy that later grew into the alienation of Mises’s students, and
their students, from the mainstream of economics itself (Boettke ).

NOTE

. The subsequent understanding of the socialist calculation debate among econom-

ists studying comparative economic systems, however, basically took Schumpeter’s
position at face value. Schumpeter’s irony, to the extent he intended his pro-
fessional peers to recognize it, was a colossal failure, as if A Modest Proposal had
been received and adopted as practical policy recommendation.

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