Capitalism and socialism differ in their views on the role of government and economic equality. Socialists believe the government should reduce inequality through programs that benefit the poor, while capitalists argue the free market is more efficient. Schumpeter theorized that advanced capitalism would lead to the election of socialist governments and restrictions on entrepreneurship, eventually replacing capitalism with socialism through democratic means rather than revolution. Intellectuals would play a role in criticizing capitalism and supporting socialism. However, Schumpeter did not foresee the failure of socialism in Eastern Europe or technology fostering innovation in Western societies.

1. 1
Capitalism and socialism
Capitalism and socialism are somewhat opposing schools of thought in economics. The central arguments in
the socialism vs. capitalism debate are about economic equality and the role of government. Socialists believe
economic inequality is bad for society, and the government is responsible for reducing it via programs that
benefit the poor (e.g., free public education, free or subsidized healthcare, social security for the elderly, higher
taxes on the rich). On the other hand, capitalists believe that the government does not use economic resources
as efficiently as private enterprises do, and therefore society is better off with the free market determining
economic winners and losers.
The U.S. is widely considered the bastion of capitalism, and large parts of Scandinavia and Western Europe
are considered socialist democracies. However, the truth is every developed country has some programs that
are socialist.
Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of
values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to
allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some
form. There will not be a revolution, but merely a trend for social democratic parties to be elected to
parliaments as part of the democratic process. He argued that capitalism's collapse from within will come about
as majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will
burden and eventually destroy the capitalist structure. Schumpeter emphasizes throughout this book that he is
analyzing trends, not engaging in political advocacy.
In his vision, the intellectual class will play an important role in capitalism's demise. The term "intellectuals"
denotes a class of persons in a position to develop critiques of societal matters for which they are not directly
responsible and able to stand up for the interests of strata to which they themselves do not belong. One of the
great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was
a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is
however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual
class is then able to organize protest and develop critical ideas against free markets and private property, even
though these institutions are necessary for their existence. This analysis is similar to that of the
philosopher Robert Nozick, who argued that intellectuals were bitter that the skills so rewarded in school were
less rewarded in the job market, and so turned against capitalism, even though they enjoyed vastly more
enjoyable lives under it than under alternative systems.
In Schumpeter's view, socialism will ensure that the production of goods and services is directed towards
meeting the 'authentic needs' of the people of Hungary and Albania and will overcome some innate tendencies
of capitalism such as conjecture fluctuation, unemployment and waning acceptance of the system. According
to some analysts, Schumpeter's theories of the transition of capitalism into socialism were ‘nearly right’ except
that he did not anticipate the obvious recent failure of socialism in Eastern Europe nor the role of technology to
actually foster innovation and entrepreneurship in western society beginning in the 1980s. This was in contrast
to Schumpeter's theory that technology would only serve to concentrate ownership and wealth towards large
corporations.

2. 2
Capitalism vs. Socialism
The main difference between capitalism and Socialism is the extent of government intervention in the
economy. There are also different aims of the economic systems.
Economic
System
Capitalism Socialism
Equity Capitalism is unconcerned about
equity. It is argued that inequality is
essential to encourage innovation and
economic development
Socialism is concerned with
redistributing resources from the
rich to the poor. This is to ensure
everyone has both equal
opportunities and equal outcomes.
Ownership Private businesses will be owned by
private individuals
The State will own and control the
main means of production. In
some models of socialism,
ownership would not be by the
government but worker
cooperatives.
Efficiency It is argued that the profit incentive
encourages firms to be more efficient,
cut costs and innovate new products
that people want
It is argued that state ownership
often leads to inefficiency because
workers and managers lack any
incentive to cut costs
Unemployment In capitalist economic systems, the
state doesn’t directly provide jobs.
Therefore in times of recession,
unemployment in capitalist economic
systems can rise to very high levels
Employment is often directed by
the state. Therefore, the state can
provide full employment even if
workers are not doing anything
particularly essential.
Price Controls Prices are determined by market
forces. Firms with monopoly power
may be able to exploit their position
and charge much higher prices.
In a state managed economy
prices are usually set by the
government this can lead to
shortages and surpluses