Joseph Schumpeter and the Economics of Imperialism

The Austrian economist Joseph Schumpeter believed that the triumph of socialism was inevitable, but he rejected the Marxist view of how capitalism works. His ideas are a stimulating challenge for those seeking an alternative to capitalism today.

Joseph Alois Schumpeter (1883–1950) is best known today as an historian of economic thought. (Getty Images)

Joseph Alois Schumpeter was one of the most prominent political economists during the first half of the twentieth century. He published prolifically in both German and English on questions of economic theory, economic sociology, economic and social policy, and the history of ideas. A phrase Schumpeter coined to describe the essence of capitalism as he understood it, “creative destruction,” has become one of the most familiar terms in the economic lexicon.

In politics, Schumpeter was a liberal conservative — or perhaps a conservative liberal — but he was also deeply influenced by his Marxian contemporaries. As a student at the University of Vienna, Schumpeter was a member of Eugen von Böhm-Bawerk’s legendary graduate seminar, along with three leading Austro-Marxists — Rudolf Hilferding, Otto Bauer, and Emil Lederer — and the free-market liberal Ludwig von Mises.

This experience no doubt encouraged Schumpeter to explore many of the same questions that his Marxist contemporaries had posed, although the answers that he formulated differed sharply from theirs. He disagreed with the Marxist view of capitalism’s inner contradictions while believing that the ultimate victory of socialism was inevitable anyway. For Schumpeter, the drive toward imperialism and war that was so evident in his own time stemmed from precapitalist social forces that were still at work in European society rather than the logic of capitalism itself.

Life and Work

Schumpeter was born into a prosperous middle-class family in the Moravian town of Triesch on February 8, 1883, a month before the death of Karl Marx. He died in Cambridge, Massachusetts on January 7, 1950. Schumpeter’s father, a merchant, had died in 1887, and his mother soon remarried. His new stepfather was a general in the Austro-Hungarian army, so the young Joseph grew up in a distinctly upper-class environment.

He was educated in Vienna at the prestigious Theresianum Academy of Knights of Vienna. Schumpeter went on to spend five years at the University of Vienna between 1901 and 1906, where he studied law, mathematics, and philosophy in addition to economics. His first publication came in 1906, when he was only twenty-three years of age.

From 1909 to 1911, Schumpeter was professor of economics at the University of Czernowitz, moving first to the University of Graz (1911–1921) and then to the University of Bonn (1925–1932). In addition to these academic posts, he worked as a lawyer and a financial speculator — not to mention a brief stint as minister of finance in the new post-Habsburg Austrian republic between March and October 1919 — and spent some time in Britain and the United States.

Schumpeter spent the last eighteen years of his life at Harvard University, where he was president of the Econometric Society (in 1942) and the American Economic Association (in 1948). Were it not for his unexpected death, Schumpeter would also have served as the founding president of the International Economic Association in 1950.

Although there is a substantial literature on Schumpeter’s life and work, no comprehensive edition of his works has yet been published, whether in English or in German. Richard Sturn suggests that this may reflect the absence of a specific “Schumpeter school” of economics. Probably best known today as a historian of economic thought, Schumpeter was the author of two hundred journal articles and several influential books, two of which ran to more than a thousand pages: the two-volume Business Cycles and the posthumously published History of Economic Analysis.

However, those interested in Schumpeter’s thinking, especially from the left, will probably turn first to his most celebrated work, 1942’s Capitalism, Socialism and Democracy, which is a mere 425 pages in length. The book consists of five parts, respectively titled “The Marxian doctrine,” “Can capitalism survive?” “Can socialism work?” “Socialism and democracy,” and “A historical sketch of socialist parties.”

It would be impossible in the space of a short article to give a satisfactory account of this complex, scholarly, and highly opinionated work. I will concentrate instead on Schumpeter’s analysis of the economics of imperialism, which provides an entry point into his broader approach to the capitalist mode of production, its history, and its prospects.

Explaining Imperialism

Twenty-three years before the appearance of Capitalism, Socialism and Democracy, Schumpeter published a lengthy article on “The Sociology of Imperialism” in a German-language academic journal, which did not appear in English until just after his death. In the version that I have consulted, there are ninety-six pages of text, amounting to perhaps 35,000 words.

Schumpeter began with a brief introductory section outlining the nature of the problem, in which he argued that aggressive attitudes on the part of states need not be a simple reflection of the population’s concrete economic interests. Indeed, in the case of imperialism, we might say that nations and classes seek “expansion for the sake of expanding, war for the sake of fighting, victory for the sake of winning, dominion for the sake of ruling.” In this spirit, he defined imperialism as “the objectless disposition on the part of a state to unlimited forcible expansion.”

The author did acknowledge that “neo-Marxist theory” had attempted to provide an economic explanation for imperialism, reducing it to “the economic class interests of the age in question” (emphasis in original, and hereafter). Although he conceded that the Marxist view was “by far the most serious contribution” that had been made to the analysis of imperialism and agreed that there was “much truth in it,” Schumpeter proceeded to criticize it at some length.

He began by describing the strongly anti-imperialist sentiments that had prevailed in mid-nineteenth-century Britain in a section with the strange title “Imperialism as a catchphrase.” After a lengthy account of the way imperialism had operated in ancient times, the medieval period, and the age of absolute monarchy, Schumpeter devoted the final third of the essay to discussing the relationship between imperialism and capitalism.

At the start of this concluding section, Schumpeter returned to the prevalence of “non-rational and irrational, purely instinctual inclinations towards war and conquest.” He believed that many — and perhaps most — wars throughout history had been waged without any adequate reason. According to Schumpeter, this in turn was strong evidence that “psychological dispositions and social structures acquired in the dim past . . . tend to maintain themselves and to continue in effect long after they have lost their meaning and their life-preserving function.”

On the strength of this analysis, Schumpeter rejected the argument of Vladimir Lenin and other Marxist thinkers that there was a necessary link between imperialism and capitalism. Imperialism was in fact “atavistic in character” and stemmed from “the living conditions, not of the present but of the past — put in terms of the economic interpretation of history, from past rather than present relations of production.” In political terms, we should see imperialism as the product not of capitalist democracy but rather of the earlier stage of “absolute autocracy.”

Schumpeter insisted that under capitalism, there was “much less excess energy to be vented in war and conquest than in any pre-capitalist society.” In a capitalist society, the pursuit of profit absorbed the energies of the population, with wars of conquest rightly seen as “troublesome distractions, destructive of life’s meaning, a diversion from the accustomed and therefore ‘true’ task.”

The economist cited what he considered to be strong evidence of the powerful anti-imperialist tendencies at work in capitalist society. Those tendencies included deep opposition to militarism, military expenditure, and war, which were most powerful among industrial workers but also manifested in large sections of the capitalist class.

It was no accident, he suggested, that of all the capitalist nations, the United States was the one least inclined toward imperialist adventures and also “the least burdened with pre-capitalist elements, survivals, reminiscences, and powerful factors.” We should look upon the imperialist tendencies that could indeed be found within capitalism as “alien elements, carried into the world of capitalism from the outside, supported by non-capitalist factors in modern life.”

Capitalism and Monopoly

Schumpeter then directly addressed the neo-Marxist claim that imperialism was the product of a new, dangerous stage of monopoly capitalism. He acknowledged that some sections of the capitalist class do indeed benefit from imperialism — most obviously entrepreneurs in the war industries. However, Schumpeter argued, “where free trade prevails no class has an interest in forcible expansion as such.”

In a lengthy discussion of the economic effects of tariffs and the broader political implications of protectionism, Schumpeter cited Otto Bauer and Rudolf Hilferding favorably, crediting them with having been the first to recognize and describe the importance of what was happening in this field. He also praised Hilferding for having taken his distance from a pessimistic view about the prospects of capitalism that he found in the work of Marx:

It is not true that the capitalist system as such must collapse from imminent necessity, that it necessarily makes its continued existence impossible by its own growth and development. Marx’s line of reasoning on this point shows serious defects, and when these are corrected the proof vanishes. It is to the great credit of Hilferding that he abandoned this thesis of Marxist theory.

A footnote to this passage anticipated one of the most striking arguments that Schumpeter later made in Capitalism, Socialism and Democracy:

Capitalism is its own undoing but in a sense different from that implied by Marx. Society is bound to grow beyond capitalism, but this will be because the achievements of capitalism are likely to make it superfluous, not because its internal contradictions are likely to make its continuance impossible.

Schumpeter was much closer to the neo-Marxist position on the role of financial capital in the growth of monopoly. He drew an interesting distinction between (financial) capitalists and (industrial) entrepreneurs: “Although the relation between capitalists and entrepreneurs is one of the typical and fundamental conflicts of the capitalist economy, monopoly capitalism has virtually fused the big banks and cartels into one.” This process had created “a social group that carries great political weight,” and which possessed

a strong, undeniable, economic interest in such things as productive tariffs, cartels, monopoly prices, forced exports (dumping), an aggressive economic policy, an aggressive foreign policy generally, and war, including wars of expansion with a typically imperialist character.

He also identified further motives for this group to support imperialism, including “an interest in the conquest of lands producing raw materials and foodstuffs, with a view to facilitating self-sufficient warfare,” and the profits to be derived from rising wartime consumption. While unorganized capitalists would “at best reap a trifling profit” from these activities, “organized capital is sure to profit hugely.”

And yet, Schumpeter warned, “the final word in any presentation of this aspect of modern economic life must be one of warning against over-estimating it.” The only capitalists with a real material interest in what he termed “export monopolism” were “the entrepreneurs and their ally, high finance.” Small producers and workers had nothing to gain.

His conclusion was that “export monopolism,” contrary to the arguments of Marxist thinkers, did not arise “from the inherent laws of capitalist development.” Capitalism remained intensely competitive, and it was “a basic fallacy to describe imperialism as a necessary phase of capitalism, or even to speak of the development of capitalism into imperialism.”

So what did explain the rise of imperialism? Once again, Schumpeter emphasized the survival of precapitalist interests, methods, and ways of thinking: “Established habits of thought and action tend to persist, and hence the spirit of guild and monopoly at first maintained itself, even where capitalism was in sole possession of the field.” In its everyday life, its ideology, and its politics, Europe remained “greatly under the influence of the feudal ‘substance’ . . . while the bourgeoisie can assert its interests everywhere, it ‘rules’ only in exceptional circumstances, and then only briefly.”

Schumpeter summarized what he considered to be the historical and sociological sources of modern imperialism, which he saw as

a heritage of the autocratic state, of its structural elements, organizational forms, interest alignments, and human attitudes, the outcome of pre-capitalist forces which the autocratic state has reorganized. It would never have been evolved by the “inner logic” of capitalism itself.

According to Schumpeter, the pro-military interests within the capitalist class joined up with these precapitalist forces in an alliance which “kept alive war instincts and ideas of overlordship, male supremacy, and triumphant glory — ideas that would otherwise long since [have] died.” He finished off the article by affirming “the ancient truth that the dead always rule the living.”

Last Stage or Birth Pangs?

Discussion of imperialism was rather limited in Schumpeter’s subsequent work. There were three references to the subject in his Business Cycles. They included a lengthy footnote on Rudolf Hilferding in which he stated that “the rule of the financier over industry, still more over national politics, is a newspaper fairy tale almost ludicrously at variance with facts.” The index of History of Economic Analysis did not contain the word “imperialism,” but Schumpeter used the term in his one substantial reference to the neo-Marxists, which largely consisted of an apology for the author’s inability to deal with their ideas in any great detail.

However, Schumpeter did devote six and a half pages to the question in Capitalism, Socialism and Democracy, where he summarized the Marxian theory of imperialism and commended its strong points before proceeding to offer some sharp criticism. While this analysis came in the chapter titled “Marx the teacher,” it also acknowledged the later contribution of neo-Marxist theorists such as Bauer, Hilferding, Max Adler, Rosa Luxemburg, and Fritz Sternberg. All of these writers drew on Marx’s account of the falling rate of profit as articulated in volume III of Capital.

According to Marx’s presentation, a rising organic composition of capital combined with a declining rate of exploitation in the advanced capitalist countries put constant downward pressure on the profit rate and created a powerful incentive for the export of capital to less developed parts of the world. If this framework was valid, Schumpeter observed, imperialism would have a strong economic basis, with colonization used to safeguard overseas investment and “internecine war between rival bourgeoisies,” an inevitable consequence. As he noted, the Marxists regarded this as “a stage, hopefully the final stage, of capitalism.”

This “Marxian synthesis,” Schumpeter conceded, did seem “to follow beautifully from two fundamental premises . . . the theory of classes and the theory of accumulation,” and also appeared to display a “close alliance with historical and contemporaneous fact.” Yet on closer inspection, he insisted, this was not the case. In fact, the “heroic time” of colonialism had been “precisely the time of early and innovative capitalism when accumulation was in its beginnings.” Such expansion benefitted the proletariat more than the capitalists, and it was never under the control of the latter:

As a matter of fact, very little influence on foreign policy has been exerted by big business. Capitalist attitudes towards foreign policy are predominantly adaptive rather than causative, today more than ever. Also, they hinge to an astonishing degree on short-run considerations equally remote from any deeply laid plans and from any definite “objective” class interests.

For Schumpeter, the Marxist theory of imperialism was ultimately a “superstition,” comparable to the conspiracy theories about Jewish influence propagated by antisemites. Continuing his practice in Business Cycles, Schumpeter pulled no rhetorical punches, referring to the neo-Marxian theory as “a horrible platitude” that consisted of “nursery tales.”

Schumpeter and Marxism

What do Schumpeter’s rather sparse writings on imperialism tell us about his attitude toward Marxian political economy as a whole? First, while Schumpeter viewed the capitalist system as being quite unstable, he did not think it was destined to collapse, still less to stagnate. In his perspective, capitalism was subject to cyclical fluctuations, but the upswings were every bit as strong as the downturns, with depressed conditions never lasting for very long.

In spite of this, Schumpeter still believed the triumph of socialism to be inevitable in the long run, although this was not a political prospect that he welcomed. However, this would be due to the victory of anti-capitalist ideology rather than the objective economic contradictions of the capitalist system.

Second, he argued that successive waves of intense innovation would ensure that competitive forces remained strong enough to prevent the emergence of a late stage of “monopoly capitalism,” as the Marxists claimed would happen. Moreover, the ability of many entrepreneurs to finance their innovations out of retained earnings would keep the power of the banks in check.

These two propositions led to a third: for Schumpeter, there was no irresistible pressure for imperialist expansion on narrowly economic grounds. Capitalist countries might or might not benefit from a particular instance of imperialism. But imperialism as such was not, contrary to the Marxist view, a necessary condition for the survival of the capitalist system.

In fact, according to Schumpeter, the mutual gains to be made from trade and international investment were so large that capitalism was in fact an innately peaceful system, as nineteenth-century liberals such as Richard Cobden had maintained. It was a fundamental mistake to identify twentieth-century capitalism with aggressive militarism and the annexation of overseas territories.

For Schumpeter, imperialism was thus an atavism: a survival of the precapitalist, feudal mode of production that was not motivated by any rational demand for the preservation of the capitalist one, which could survive — and indeed fare much better — without it. Even in predominantly capitalist states, it was noncapitalist, aristocratic social forces that largely determined foreign policy, with the same irrational elements that had prevailed in precapitalist societies serving as an ideological justification.

Finally, Schumpeter considered the entire Marxian approach to the capitalist mode of production to be deeply flawed on several levels. For him, the most crucial Marxist error was the assertion that the forces of production dominated everything else in society, including class relations, institutions of government, and political ideologies. Schumpeter insisted that society was much more complicated than that, even in its capitalist phase.

His encounter with the Austro-Marxists certainly had a heavy influence on Schumpeter, prompting him to ask many of the same questions. However, he came up with some very different answers, and would surely have been equally skeptical toward the economic, political, and social theories that are prevalent among Marxists today. A serious engagement with Schumpeter’s work can thus be an important and stimulating challenge for those who still identify with the Marxist critique of capitalism.