Democracy and Exchange

Democracy and Exchange

Schumpeter, Galbraith, T.H. Marshall, Titmuss and Adam Smith

David Reisman

Democracy is the rule of the people. Exchange is supply and demand. Individualism, agreement, tolerance and choice are the underlying values that make possible the productive collaboration of the market and the state. This book assesses the theories of democracy and exchange of five interdisciplinary thinkers who tried to unite political and economic reasoning into a single theory of moderation and pragmatic management.

Chapter 5: Schumpeter: States and Systems

David Reisman

Subjects: economics and finance, economic psychology, history of economic thought, institutional economics, social policy and sociology, economics of social policy


Schumpeter anticipated that capitalism would give way to socialism once bureaucratic corporations had crowded out the independent entrepreneur. What he refused to say was that political democracy would simultaneously be eclipsed by the office holders and the commands. The three sections of this chapter explore the status of the vote motive when economic systems evolve. Section 5.1, ‘Capitalism and democracy’, situates the politician, the agenda, the bureaucrat and the charter in the context of the decentralised order. Section 5.2, ‘Socialism and democracy’, traces the same four preconditions through the centrally planned economy where most of the big decisions are made at the top. Section 5.3, ‘Democracy and welfare’, asks if the socialservices State was seen by Schumpeter as a credible halfway-house between the two polar systems. Schumpeter believed that democratic procedures were system-neutral. Democracy, he said, is a function of its own inner logic and not, capitalist or socialist, of economic ownership and coordination. This chapter assesses his contention that neither production nor leadership is nowadays the powerful locomotive, neither market nor State the passive carriage that is drawn forward from without. 5.1 CAPITALISM AND DEMOCRACY Democracy, historically speaking, has had a close and dependent association with exchange: ‘Historically, the modern democracy rose along with capitalism, and in causal connection with it’ (Schumpeter, 1942: 296). The push and the power went from economic basis to political superstructure: ‘Modern democracy is a product of the capitalist process’ (ibid.: 297). Friedman on the right, like Marx on the left, would be in...

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