2012

Article
Journal of Classical Sociology

Fiscal crisis and creative 12(3-4) 526­–543

© The Author(s) 2012
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DOI: 10.1177/1468795X12454472
reflections on Schumpeter’s jcs.sagepub.com

contemporary relevance

Barry Smart
University of Portsmouth, UK

Abstract
Two matters addressed in the analyses of Joseph Schumpeter, namely fiscal crises to which modern
‘tax states’ are vulnerable and processes of ‘creative destruction’ intrinsic to modern capitalism,
have grown steadily in significance since the mid-twentieth century. Schumpeter anticipated
a continuing growth in demand for public services and forms of social provision and drew on
aspects of Rudolf Goldscheid’s innovative designation of a critical new field of inquiry, ‘fiscal
sociology’, to discuss fiscal limits to the state’s capacity to respond to needs and demands for social
provision. The fiscal crisis symptoms identified by Schumpeter are argued to be bound up with
much broader and more substantial underlying economic processes and tendencies exposed by
Marx, in particular with social and economic costs arising from the necessity for continual rounds
of ‘creative destruction’ which constitute an intrinsic feature of all phases in the development
of the capitalist mode of production and have become even more prominent in ‘late’ globalized
capitalism.The paper concludes by comparing Schumpeter’s unidirectional view of the state–capital
relationship with views outlined by other social and economic analysts for whom the contradiction
between capitalist economy and the public household or common good is paramount.

Keywords
Creative destruction, debt crisis, fiscal crisis, fiscal sociology, Goldscheid, Marx, predator state,
Schumpeter, Sombart, tax state

Introduction: Schumpeter, fiscal crisis, and creative

destruction
Two sets of concerns addressed in the analyses of the Austrian-American social scientist
Joseph Schumpeter (1883–1950) have grown steadily in significance since the

Corresponding author:
Barry Smart, School of Social, Historical & Literary Studies, University of Portsmouth, Milldam, Burnaby
Road, Portsmouth PO1 3AS, UK.
Email: Barry.Smart@port.ac.uk
Smart 527

mid-twentieth century. They are, respectively, (i) fiscal crises to which modern ‘tax
states’ have become increasingly vulnerable as levels of state expenditure have grown
and the sovereignty of national economies has been eroded and (ii) the increasing fre-
quency of processes of ‘creative destruction’ intrinsic to a modern capitalist system of
production. The latter, through the devaluation, degradation, and displacement of exist-
ing economic assets and productive capacities by virtue of innovation and the develop-
ment of new forms, have, alongside the creation of undoubted benefits, devastated
industries and businesses and disrupted the lives and careers of individuals, affecting
their families and communities, cities, regions, and national economies, contributing, in
turn, to a growing demand for welfare and social security provision. While not specifi-
cally considered by Schumpeter there is a close connection between these two sets of
concerns. The necessity for and consequences of processes of creative destruction,
occurring with increasing rapidity in a globalized capitalist economic system wedded to
competition, growth, and capital accumulation, and fiscal crises confronting modern
states are closely articulated and of increasing contemporary relevance.
In the aftermath of the First World War, with European nations in substantial debt to
the US Treasury, having borrowed in the region of US$11.5 billion (US$ 206 billion in
2002 dollars) (Schukera, 2003), Joseph Schumpeter responded to Rudolf Goldscheid’s
identification of a potential new field of study – ‘fiscal sociology’ or ‘financial sociol-
ogy’ (Goldscheid, 1958 [1925], 1976 [1917]) – by reflecting on the fiscal measures
potentially available to what he termed ‘the tax state’ (Schumpeter, 1954a [1918]). A
prominent concern expressed at the time was that underlying fiscal problems exacer-
bated by the war could not be resolved within the existing economic order. Schumpeter
notes that opinions were divided: some considered ‘high capitalism’ to be on the verge of
collapse, while others emphasized the need for greater economic freedom and competi-
tion, or, in contrast, ‘an “administered economy” fashioned by … intellectuals’ (1954a
[1918]: 5). Reflecting critically on the tendency for a variety of unscientific opinions to
be expressed on complex economic matters, Schumpeter (1954a [1918]: 6) argues that,
at most, the war merely brought to the surface basic ‘structural weaknesses’ and prob-
lems associated with ‘providing for the wants of the community’ in a modern capitalist
society, and that it was these that received expression in the notion of a fiscal crisis of the
tax state.1
Fiscal issues and problems have continued to preoccupy nation-states as they have
sought to cultivate capitalist economic growth within their territorial boundaries, nurture
conditions conducive to investment, influence income and wealth distribution through
taxation and social policy, underwrite programmes of scientific and technological
research and development, and in addition offer social welfare provision to promote
social inclusion and maintain a degree of social cohesion, all in the face of the increasing
turbulence produced by global economic flows (Chomsky, 2010). But there have been
relatively few social analyses of the fiscal difficulties faced by the state, few attempts to
generate sociological analyses of the public finances (Bell, 1976; Block, 1981; Martin
et al., 2009; Musgrave, 1992; O’Connor, 1973).
The steady growth in the course of the twentieth century in commitments assumed by
the state was associated with the implementation of measures to achieve a greater degree
of regulation or management of the economy, address some of the social and economic
528 Journal of Classical Sociology 12(3-4)

consequences arising from processes of creative destruction, and respond to increasing

expectations and a rising sense of entitlement to various ‘social’ or ‘public’ provisions,
protections, and rights. The associated expansion of public provision and services has, in
turn, led to concerns being expressed about fiscal matters, in particular how to balance or
reconcile the public interest in increasing provision to meet social needs, with growing
private wants, aspirations, and expectations (Bell, 1976: Ch. 6; Galbraith, 1969: 348–349).
As Daniel Bell presciently observed in the course of reflecting on such matters:

How much the government shall spend, and for whom, obviously is the major political question
of the next decades … [but] the pressure to increase services is not necessarily matched by the
mechanisms to pay for them, either a rising debt or rising taxes.

(Bell, 1976: 227)

The fiscal problems identified by Goldscheid and Schumpeter, and reaffirmed and devel-
oped by later analysts, have only grown in scale and intensity as time has passed and, in
consequence, the question posed above has lost none of its relevance.
During the Second World War Schumpeter produced his best known study Capitalism,
Socialism and Democracy (2010[1943]) in which, in the course of deliberating on the
prospects for capitalism (‘Can capitalism survive?’), he elaborated on a defining feature
of its form of economic life, namely the necessity for recurring processes or rounds of
creative destruction. The continual necessity under capitalism for innovation or creativ-
ity and the simultaneous inevitability of older or prevailing ways of producing things, as
well as the stock of existing commodities, continually being subject to obsolescence, to
displacement, replacement, and destruction, had been identified earlier by Karl Marx and
Friedrich Engels in The Communist Manifesto (1968 [1848]), with the process of cre-
ative destruction receiving further clarification from Marx in Grundrisse (1973 [1857–
1858]). More controversially, the notion is argued also to have been briefly invoked by
Werner Sombart (1863–1941) in Krieg 1968[1848]: 83). und Kapitalismus (War and
Capitalism, 1913; see Reinert and Reinert, 2006).

Marx, Sombart, and Schumpeter

In the Manifesto, Marx and Engels (1968: 83) noted the persistent processes of transfor-
mation to which ‘instruments of production … relations of production and with them the
whole relations of society’ were subject within modern capitalism (1968[1848]: 83). It
was a matter to which Marx returned in Grundrisse, where he commented in greater
detail on capitalism’s destructively creative and expansive character, how it tended to
treat the world and everything in it as expendable economic resources in the course of
creating the ‘world market’, continually expanded existing consumption by relentlessly
producing new needs and new use values, explored ‘the earth in all directions, to dis-
cover new things … raw materials etc.’, and increasingly employed advances in science
and technology to innovate and develop material production (1973 [1857–1858]: 409,
705). In the Manifesto, reference is made to relentless ‘revolutionizing of production,
uninterrupted disturbance of all social conditions’ (Marx and Engels, 1968[1848]: 83),
Smart 529

and, in anticipation of aesthetic and engineered obsolescence, to old products being

swept away by new, which themselves, in turn, are quickly displaced as innovations in
design and production endlessly fashion even newer lines of the very latest commodity
forms. Reflecting in Grundrisse on capital’s restless innovatory spirit, Marx adds:

In accord with this tendency, capital drives beyond national barriers and prejudices … as well
as all traditional, confined, complacent, encrusted satisfactions of present needs, and
reproductions of old ways of life. It is destructive of all of this, and constantly revolutionizes it,
tearing down all the barriers which hem in the development of the forces of production, the
expansion of needs, the all-sided development of production, and the exploitation and exchange
of natural and mental forces.

(Marx, 1973 [1857–1858]: 410, emphasis added)

It is primarily from Marx’s analytic exposure of the economic logic of capitalism that
Schumpeter derives the basis of his concept of creative destruction (Elliott, 1978–1979,
1980; Harvey, 2010). Ideas about the emergence of new forms of life being closely bound
up with the passing of existing or older forms do have a longer history and have been
argued to be present in ancient civilizations, as well as in the works of other German
thinkers, including the philosopher Nietzsche (Reinert and Reinert, 2006). But while an
interesting and reasonably convincing general ‘history of ideas’ case can be made for a
series of connections existing between various views expressed on creativity, innovation,
and regeneration, on the one hand, and decay and destruction, on the other, in selected
texts from ancient Egypt and Greece, in Hindu mythology, as well as in the literary nar-
ratives of Goethe and the philosophical deliberations of Nietzsche, it is only really in the
works of Marx that creative destruction, albeit before the term was coined, is recognized
to be an economic imperative for a competitive, growth-orientated modern capitalism.
There is what appears to be a later reference to the phenomenon in a sentence in
Sombart’s Krieg und Kapitalismus (War and Capitalism), but it is a relatively brief and
enigmatic comment suggesting that a ‘spirit’ of creation emerges phoenix-like from
destruction:

… from destruction a new spirit of creation arises; the scarcity of wood and the needs of
everyday life … forced the discovery or invention of substitutes for wood, forced the use of
coal for heating, forced the invention of coke for the production of iron … these events … made
possible the enormous development of capitalism in the 19th century.

(Sombart, 1913: 207)

Two brief comments are appropriate here. First, the context in which Sombart makes
his observation about destruction–creation is in a consideration of responses to wood
shortages in Europe in the nineteenth century following the destruction of forests. The
emphasis seems to be placed on scientific discovery and invention rather than on the
inexorable logic of an economic system which, of necessity, continually unleashes waves
of creativity and innovation that leave, as an inevitable corollary, wreckage and destruc-
tion in their wake.
530 Journal of Classical Sociology 12(3-4)

Second, the sequence outlined, destruction leading to a ‘new spirit of creation’, is the
reverse of the process Marx and Engels identified as intrinsic to the dynamism of modern
capitalism, in which a competitive culture or ethos of innovation and creativity is imper-
ative and continually leads to new forms of production and organization, as well as new
commodities, producing as a by-product the destruction of ‘old-established … industries
…[and] old wants’, as well as precipitating the displacement of old or existing forms of
‘local and national seclusion and self-sufficiency’ (1968 [1848]: 83–84).
Given the prominence accorded to Sombart’s ideas within economics in Germany at
the time, it is not surprising to find reference being made to the influence his work might
have exerted in Schumpeter’s formative years (Reinert and Reinert, 2006). But a far
stronger case can be made, and has been made, for the influence of the writings of Marx
and even Weber on Schumpeter’s works. Indeed it has been argued that while
Schumpeter’s writings clearly display ‘esteem for Marx’ and that ‘Weberian themes
reverberate through … [his] texts’, Sombart, in contrast, is taken to task by him for
‘shoddy scholarship and lack of theoretical sophistication’ (Osterhammel, 1987: 108,
109, 112; see also Grundmann and Stehr, 2001: 259), as well as for making ‘“method-
ological” pronouncements [which] followed fashions too closely to be interesting’
(Schumpeter, 1954b: 818).
In consequence the proposition that the notion of ‘ “creative destruction” enters the
late 19th century Zeitgeist through the works of Friedrich Nietzsche’ and the contention
that it was ‘brought into economics not by Schumpeter but by Werner Sombart (1863–
1941)’ appear at best misguided (Reinert and Reinert, 2006: 55). Nietzsche (1844–1900)
was born into a world in which capitalism was routinely producing creative destruction
at an increasing rate and on an expanding scale, as Marx had quite clearly recognized.
The idea of creative destruction does not derive from Nietzsche’s work; as noted above,
it was already firmly present in Marx’s critical analysis of capitalism from the mid-
nineteenth century (Elliott, 1978–1979, 1980). Furthermore, closer consideration of
Schumpeter’s work, especially his discussion of ‘the process of creative destruction’ and
his expressed interest in and opinion of Marx’s works, serves to further confirm the prov-
enance of the term (1949: 210; 2010 [1943]: 71–75).

Creative destruction
In a discussion of Marx’s contribution to economic analysis in the opening pages of
Capitalism, Socialism and Democracy, Schumpeter notes that, more than any other
economist of his era, he had grasped the significance of the relentlessly transformative
character of capitalism, namely that existing economic structures, forms of organization,
business conditions, and product lines were subject to frequent, if not continual, change.
Capitalism cannot stand still because it is a dynamic system, it is perpetually in motion,
and in consequence, as Schumpeter notes in comments that recall passages from the
Communist Manifesto, ‘[e]very situation is being upset before it has had time to work
itself out. Economic progress, in capitalist society, means turmoil’ (2010 [1943]:
27–28).
In a series of more detailed comments on the changing character of capitalist eco-
nomic life, Schumpeter states that it is not due to external factors, to changes in the
Smart 531

‘social and natural environment’, population, or ‘the vagaries of the monetary system’
(2010 [1943]: 72). Rather it is intrinsic to the capitalist economic system itself, essential
to its DNA, a corollary of its competitive character, its pursuit of increasing capital accu-
mulation through the cultivation of increasing growth in productive capacity and com-
mensurate stimulation of rising levels of consumption:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the
new consumers’ goods, the new methods of production or transportation, the new markets, the
new forms of industrial organization that capitalist enterprise creates.

(2010 [1943]: 73)

Following to some extent in Marx’s footsteps, and with the benefit of an additional six
decades of evidence to draw on, Schumpeter proceeds to note how in one sector of the
economy after the other an incessant process of ‘industrial mutation’ gives rise to ‘dis-
crete rushes’ of significant forms of transformation and then periods of absorption and
accommodation to the consequences, followed in due course by yet more mutations,
more rounds of innovation and transformation. Taking stock of the process, Schumpeter
comments:

The opening up of new markets, foreign or domestic, and the organizational development from
the craft shop and factory to such concerns as US steel illustrate the same process of industrial
mutation … that incessantly revolutionizes the economic structure from within, incessantly
destroying the old one, incessantly creating a new one. This process of Creative Destruction is
the essential fact about capitalism. It is what capitalism consists in and what every capitalist
concern has got to live in.
(2010: 73, 395 n. 2, emphasis in original)

For example, ‘creative’ innovations in information technology and related move-

ments of capital contributed to a pronounced shift from manufacturing to services
in the USA and UK economies from the 1970s (Bell, 1973; Castells, 1996). While
this stimulated the development of new ‘postindustrial’ industries, businesses, and
jobs, it simultaneously brought ‘destruction’ in its wake in the form of deindustrial-
ization, declining industries and businesses, and unemployment, making necessary
commensurate increases in public expenditure to provide a measure of redress and/
or compensation and support for affected regions, cities, communities, and indi-
viduals (Harvey, 2010: 149–150). And as capitalist economic production became
increasingly more global in scope, as well as more competitive and innovative, in
the course of the twentieth century, particularly in the closing decades, the capacity
to offshore and outsource production of goods and services grew and ‘the perennial
gale of creative destruction’ identified by Schumpeter (2010: 73) increased in fre-
quency, intensity, scale, and, in consequence, impact and cost, not least to the tax
state confronting increasing demands on the public purse. With the promotion of
neoliberal economic policies advocating global ‘free trade’ through deregulated
markets, some if not many of the benefits to be derived from processes of creative
532 Journal of Classical Sociology 12(3-4)

destruction – the generation of new industries, businesses, technologies, and forms

of employment – may now be found, as Marx and Engels (1968 [1948]: 83) antici-
pated, ‘over the whole surface of the globe’, increasingly in offshore, lightly regu-
lated, low-wage, and low- or no-tax locations, while the social and economic costs
are borne by ‘old-established national industries [which] have been destroyed or are
daily being destroyed’ and by tax states facing demands to maintain if not increase
levels of public expenditure and support in the face of a declining revenue base
(Galbraith, 2008; Harvey, 2010).
Schumpeter argues that the tendency too often has been to focus on ‘the momentary
situation as if there were no past or future to it’, a characteristic response attributed to
many economists, governments, and policy commissions. In contrast it is suggested that
it is in relation to the prominent background process of creative destruction that specific
manifestations of business strategy and associated industry moves and countermoves
need to be situated:

… the problem that is usually being visualized is how capitalism administers existing structures,
whereas the relevant problem is how it creates and destroys them. As long as this is not
recognized the investigator does a meaningless job. As soon as it is recognized, his outlook on
capitalist practice and its social results changes considerably.

(Schumpeter, 2010 [1943]: 74, emphasis added)

It is competition in respect of innovation, and not just in reality but also in prospect and
as potential, which counts most in Schumpeter’s view. Innovation in various possible
forms, including products made, technologies employed, sources of raw materials and
supplies/suppliers used, as well as in the ways in which production itself is organized,
not only leads to significant competitive ‘cost or quality advantage’ for initiators, but
potentially threatens the very foundations of other existing enterprises left behind,
perhaps temporarily, possibly terminally, in the wake of the gale of creative destruc-
tion. As Schumpeter notes of competition along these lines, it ‘acts not only when in
being but also when it is merely an ever-present threat. It disciplines before it attacks’
(2010 [1943]: 74). To put it another way, competition in respect of innovation is inte-
gral to the logic of capitalist economic activity, intrinsic to its business culture and
practice. It ensures continual change is the norm, that fluidity is the rule in economic
life – in short, that creativity in respect of product(ion) research, design and develop-
ment, and, as a necessary corollary, forms of obsolescence and destruction, are at the
very hub of the capitalist process.
But it is in his appraisal of the place and significance of the Communist Manifesto
in economics and sociology, especially in passages where he is reflecting on the
recognition given by Marx and Engels to ‘bourgeois achievement’, that Schumpeter
most clearly reveals the provenance of his concept of creative destruction. Noting
Marx and Engels’ acknowledgement of the achievements and accomplishments of
‘bourgeois class culture’ and the `business class’, Schumpeter emphasizes that while
they recognized that creativity in respect of innovation in production was constant
and revolutionary, they simultaneously critically noted the downside, the inevitable
Smart 533

corollary, namely ‘obsolescence and consequent destruction of any industrial struc-

ture of production that exists at any moment’ (1949: 210).
Elaborating on the wider consequences of the process of creative destruction identi-
fied with the advent of capitalism and breakup of medieval environments and forms of
traditionalism by Marx and Engels, Schumpeter lists a range of significant transforma-
tions to social, political, and economic life. These include how ‘the mind of society’
changed with the increasing prominence accorded to ‘egotistical calculation’, a ‘utili-
tarian attitude to life’, and the reduction of ‘personal worth into exchange value’. And
further how, with relentless economic revolutionizing, honored, traditionally valued
occupations have been transformed and undermined, if not destroyed, and individuals,
families and communities have become more vulnerable as everyday life has become
subject to ‘haste and insecurity’ (Schumpeter, 1949: 210, emphasis in original).2
There is now a rapidly accumulating body of scientific research that is concentrat-
ing attention on the processes through which capitalist growth creates and destroys
structures, and increasing consideration is being given to the social, economic, and
environmental consequences that inexorably follow (Jackson, 2009; Latouche, 2009;
Starke and Mastny, 2010). These are recognized to be of critical importance and there
are now a growing number of agencies calling for a radical change of policy on the
part of governments and international organizations to put an end to ‘business as
usual’, which in a global capitalist economy, predicated on endless growth and relent-
less processes of creative destruction, is destined to deliver more financially costly
economic crises and inflict increasingly costly forms of despoliation and destruction
on the environment (Bauer et al., 2009; Gardner and Prugh, 2008; Jackson, 2009;
Spratt et al., 2009).
Schumpeter did tentatively acknowledge potential problems arising from the pro-
cess of creative destruction, although he did not pursue such matters in much detail.
Reference is made to how some businesses seek to conserve their established position
through restrictive practices of various kinds, including ‘patents’ and secrecy con-
cerning production processes, as well as through securing long-term contracts, and
that these ‘may do much to steady the ship and to alleviate temporary difficulties’,
perhaps even serving to protect the prospects for long-term expansion by creating
conditions favorable to enterprise and investment (2010 [1943]: 76, 77). Schumpeter
notes that in periods of accelerated creative destruction, some businesses that have the
potential to ‘live on vigorously’ fail to do so simply because they cannot survive
short-term difficulties. Accepting that attempts ‘to conserve obsolescent industries
indefinitely’ are doomed to fail and mindful of the social and economic impact of
processes of creative destruction, Schumpeter argues that ‘orderly retreat’ is prefera-
ble to ‘a crash’ becoming ‘a rout’ which might then precipitate ‘cumulative depressive
effects’ (2010 [1943]: 79). A parallel preference is expressed for the ‘orderly advance’
of created industries and enterprises that find themselves currently (and in all likeli-
hood only temporarily or until further notice) in the ascendant. A strong implication,
acknowledged by Schumpeter (2010 [1943]: 79), is that to achieve an appropriate
measure of orderliness in respect of ‘retreat’ and ‘advance’, regulation by government
or public authority will be warranted in some circumstances, but, hedging his bets, he
adds that it constitutes ‘an extremely delicate problem’.
534 Journal of Classical Sociology 12(3-4)

Economics and/or sociology

In the late nineteenth century and early twentieth century the boundary between the
established intellectual discipline of economics and an emerging new field of sociology
was not well defined. Some of the most celebrated works of classical social science fig-
ures, including Max Weber, Georg Simmel, and Thorstein Veblen, effectively call into
question a clear distinction between economics and sociology, indeed in good part their
works derive their scientific value and continuing contemporary relevance from the
respects in which their practice implies that drawing such a distinction is counterproduc-
tive, if not irrelevant, to the achievement of a more effective understanding of the com-
plexity of social and economic phenomena. Certainly when Schumpeter was a student,
as Richard Swedberg notes, ‘the line between economics and sociology was much more
fluid than it is today’ (1989: 509). As with the other classical figures identified above,
Schumpeter’s work is acknowledged to range across a number of disciplinary fields,
including ‘economics, sociology, economic history, political science and methodology’
(Osterhammel, 1987: 107).
Operating across what subsequently has become a virtually impenetrable intellectual
boundary between the disciplines of economics and sociology, Schumpeter placed
emphasis on the close articulation of social and economic processes, and in a paper origi-
nally presented to the Sociological Association in Vienna, he sought to outline the
respects in which fiscal issues have a significant sociological dimension and to lend sup-
port to the idea of a potential new field of study, ‘financial sociology’ or ‘fiscal sociol-
ogy’ (Backhaus, 2002; Goldscheid, 1958 [1925]; Swedberg, 1989).

Fiscal sociology
Schumpeter drew on the views of Austrian writer and social economist Rudolph
Goldscheid (1958 [1925], 1976 [1917]) regarding the sociological import of the fiscal
needs of the modern state and the tax measures and policies introduced to meet and man-
age them.3 While endorsing the value of fiscal economy (Finanzwissenchaft) for secur-
ing tax contributions for the modern state, Goldscheid argued that a broader sociological
knowledge of finance was required to provide a more comprehensive perspective on
developing social democratic welfare societies:

Only sociology can show how social conditions determine public needs and the manner of their
satisfaction by more direct or indirect means, and how ultimately the pattern and evolution of
society determine the shaping of the interrelations between public expenditure and public
revenue.

(1958 [1925]: 202)

The focus of the proposed sociology of finance (Finanzsociologie) was designated to

include analysis of ‘the pattern of public finance’, the struggles over taxation policy
and measures to meet common needs, and ‘the immanent contradiction between capi-
talist economy and socially productive public economy’ (Goldscheid, 1958 [1925]:
202: 212).
Smart 535

Reflecting on Goldscheid’s innovative identification of a neglected field of inquiry,

Schumpeter remarks that

[a]n enormous influence on the fate of nations emanates from the economic bleeding which the
needs of the state necessitates, and from the use to which its results are put. … The spirit of a
people, its cultural level, its social structure, the deeds its policy may prepare – all this and more
is written in its fiscal history … [which provides insight] into the laws of social being and
becoming and into the driving forces of the fate of nations. … The public finances are one of
the best starting points for an investigation of society.

(1954a [1918]: 6–7)

The issues outlined constitute a distinctive field of inquiry, designated ‘fiscal sociology’,
the central focus of which is the modern tax state, the genealogy of which, following
Goldscheid, Schumpeter tracks from fiscal crises faced in the Middle Ages by feudal
estates through to later modern states. Schumpeter describes the respects in which the
financial difficulties encountered by princes in the fourteenth and fifteenth centuries aris-
ing from mismanagement and poor administration of personal affairs, the costs of culti-
vating and maintaining a ‘pliable court’, but with insufficient means to do so, and most
significantly ‘the growing expenses of warfare’, including paying for mercenary armies,
inevitably led to debt and demands being made of feudal estates that would in due course
become tax liabilities (1954a [1918]: 13). Schumpeter remarks that increasing acknowl-
edgement on the part of some estates that wars did not constitute personal affairs of the
prince but rather matters of ‘common exigency’ led to tax concessions being accepted,
and this in turn signified the emergence of a ‘a private sphere’ which was ‘ confronted by
the public sphere as a distinguishable element’ (Schumpeter, 1954a [1918]: 15).
In his account of the embryonic emergence of the tax state, it is the ‘fiscal element’ to which
Schumpeter accords priority, for it constitutes the ‘driving element’ in the development of the
state and its bureaucratic apparatus or ‘machinery’ (1954a [1918]: 15–16). The emergence of
the modern state is bound up with the meeting of ‘financial need’ through taxation. Indeed the
very form of the state and its subsequent institutional development are considered to have been
shaped by the tax system, which intrudes into those ‘private economies’ that have grown in
significance with the fragmentation of ‘all-embracing community’ and, in turn, has the capac-
ity to transform ‘social structure’ (Schumpeter, 1954a [1918]: 16–18, see also n. 17).
But while the emergence of the tax state is deemed to be bound up withfiscal demands and
the associated constitution and growth of a personal or private sphere, comprising individuals
and families, and a public sphere of ‘common need’ or ‘common purposes’ necessitating tax
revenues, once established as a social institution the state’s field of action increases in scale and
scope and it can no longer be accounted for from a purely fiscal standpoint: ‘If the finances
have created and partly formed the modern state, so now the state on its part forms them and
enlarges them – deep into the flesh of the private economy’ (Schumpeter, 1954a [1918]: 19).

The tax state and the `free economy’

What most preoccupies Schumpeter is the relationship between state and private econo-
mies, in particular the limit to the state’s ‘fiscal potential’ (1954a [1918]: 21), which is
536 Journal of Classical Sociology 12(3-4)

explored through a consideration of the socio-cultural and economic parameters within

which taxation, both indirect and direct, and including in respect of the latter all the dif-
ferent ‘individual types of income’, is located. The key issue for Schumpeter is that
individual interest is the economic driving force in ‘bourgeois society’ and that insofar as
‘everyone works and saves for himself and his family, and perhaps for some ends he has
chosen himself’ (1954a [1918]: 20), then there are limits to the revenue the state can
extract through taxation from the private economy. In short it is argued that there is a
need to preserve the incentive to work and the commitment to productive activity: ‘…
the tax state must not demand from the people so much that they lose financial interest in
production or at any rate cease to use their best energies for it’ (Schumpeter, 1954a
[1918]: 20). A more specific example concerns the contribution of entrepreneurs to capi-
talist industrial development. Schumpeter remarks that innovation or the process of cre-
ative destruction leading to the successful introduction of ‘a new method of production,
a new commercial combination or a new form or organization’ is fundamental to capital-
ism and is duly accorded a premium in the form of entrepreneurial profit – ‘by far the
most important individual motive for work toward industrial progress’ (1954a [1918]:
22). Reflecting on the impact of different possible levels of taxation on entrepreneurial
profit, Schumpeter cautions that there is a risk that the incentive to innovate will be
reduced and the pace of industrial development will be slower, and that ‘there is a limit
to the taxation of entrepreneurial profit beyond which tax pressure cannot go without
first damaging and then destroying the tax object’ (1954a [1918]: 22).
Schumpeter emphasizes that there are always limits to the fiscal capacity of the state
and acknowledges that the level of taxation people will accept varies according to his-
torical and social circumstances. The critical issue anticipated is how to manage ‘rising
social expenditures’, for it is this rather than other costs that is ultimately recognized to
threaten the fiscal integrity of the tax state (Schumpeter, 1954a [1918]: 24–25). At vari-
ous stages in his discussion of the fiscal limits on the tax state, Schumpeter reveals a
degree of antipathy towards the institution and a clear preference for its private counter-
part, the ‘free economy’, with its innovative entrepreneurial zeal and capacity for cre-
ative destruction. For example, the tax state is portrayed as ‘peripheral … alien …
hostile’, even parasitical in relation to the ‘proper purpose of the private economy’, while
in contrast the worker is described as owing his livelihood to the ‘competitive economy’
rather than ‘government measures’ and there is an affirmation of the positive value of
entrepreneurial activity and the benefits that flow from ‘the private economy … given a
completely free rein’ (1954a [1918]: 20, 35–36). In a series of reflections on the chal-
lenges presented by the need for post-war reconstruction, Schumpeter promotes the ben-
efits of the ‘free economy’ over ‘state direction’, claiming ‘that the hardships involved in
the method of a free economy are essential motors of success, [and] that these hardships
mean benefits for the future and coming generations’ (1954a [1918]: 36).
While Schumpeter (1954a [1918]: 6) refers to the ‘enduring merit’ of Goldscheid’s
work and affirms the idea and value of a fiscal sociology, his discussion of the relation-
ship between the private ‘free’ economy and the tax state is unidirectional in that it
explores the respects in which the state derives revenue from the private economy, ‘lives
as an economic parasite’ (1954a [1918]: 20), but gives no sustained consideration to the
ways in which the private sector is dependent upon the public sphere, the benefits private
Smart 537

enterprise and private capital derive from the state, or the possibility that the dependence
of public finances on the private economy may fundamentally compromise the state and
prevent it ‘from assuming the functions which it should have assumed in a changing
society’ (Goldscheid, 1958 [1925]: 211; see also Chomsky, 2010: 27, 87, 105–106).

A vulnerable state at the mercy of capital

Although Goldscheid (1958 [1925], 1976 [1917]) appears to proceed in a comparable
manner to Schumpeter, there are important differences between the two analysts. While
Goldscheid also considers the tax state to be fiscally limited or constrained, far more
emphasis is placed on its vulnerability and openness to exploitation by capital because of
its need to ensure that the private economy, its principal source of taxation revenues,
remains viable, a matter that has been significantly exacerbated with the subsequent
increased global mobility of capital and proliferation of tax havens (Murphy et al., 2005;
Palan 2002). The problem identified by Goldscheid is that, in the absence of ‘ownership
of the nation’s material wealth’, not only is there a limit to the state’s sources of revenue,
but in the final instance ‘the ruling classes wield the tax power’, influencing tax rates and
regulations, indeed in important respects they constitute a state ‘within the state’ in the
sense that ‘private capital’ and ‘finance magnates’ exercise control over the ‘public
household’, exerting unrivalled influence over state policy (1958 [1925]: 209–210; see
also Chomsky, 2010: 15, 27; Smith, 2010 [1776]: 162–163).
In contrast to Schumpeter, who, while addressing the limits to the fiscal capacity of
the tax state, extols the virtues of entrepreneurial activity in the ‘free economy’,
Goldscheid draws attention to the respects in which the tax state serves to facilitate the
interests of capital and notes ‘how strongly tax exploitation and capitalistic exploitation,
the turn of the tax screw and the turn of the profit screw, reinforce each other’ (1958
[1925]: 211). Marx and Engels described the state executive as ‘a committee for manag-
ing the common affairs’ of capital (1968 [1848]: 82), and in his later elaboration on the
relationship between public finance and private enterprise Goldscheid remarks in a com-
parable manner that

[f]iscal exploitation is an indispensable adjunct of exploitation by private enterprise; it

constitutes the legal foundation of capitalism and an element of its fulfillment. … Always
the capitalists have needed the State to establish profits on a really grand scale, never have
they been able to consolidate their … dominant position without the backing of the public
finances. … Capitalists have used the public household on the largest scale to enhance their
profits and extend their power since capitalism has emerged triumphant in the form of
finance capital.

(1958 [1925]: 210–211).

Goldscheid argues that, lacking sufficient funds, the state is ‘at the mercy of private capi-
tal’, and that there is hostility towards it from powerful vested interests who continually
strive to ‘keep it economically impotent and unable to take too much from them without
damage to itself’ (1958 [1925]: 211–212). While much has changed in the near nine
538 Journal of Classical Sociology 12(3-4)

decades since Goldscheid reflected on the problems of public finance, the state has con-
tinued to cultivate conditions conducive to capital accumulation and the expansion of
markets, has intervened to stabilize economic conditions when and where necessary, and
has consistently nurtured the educational, scientific, energy, and communication infra-
structures vital for research and development, innovation, and the generation of growth
in productive capacity (Chomsky, 2010: 87).

Concluding remarks: The ‘predator state’ within the state

Following the implementation of privatization measures and the generation of a growing
revenue stream from state to capital, there has been an increasing erosion of ‘the bound-
aries between Big Government and Big Business’ (Klein, 2007: 15). Systematic out-
sourcing of some public services to the private sector has transformed non-profit public
provision into profitable business and has contributed to the transfer of public wealth to
the private domain. The transformed relationship between private corporate enterprise
and finance capital, on the one hand, and the state, on the other, has been likened to that
of ‘predator to prey’ (Galbraith, 2008: 127ff). By virtue of what Goldscheid refers to as
‘the mechanism of exploitation’ there is now a ‘a State within the State’ (1958 [1925]:
210), or, as Galbraith later designates it, a Predator State,

… a coalition of relentless opponents of the regulatory framework, on which public purpose

depends, with enterprises whose major lines of business compete with or encroach on the
principal public functions. … It is a coalition … that seeks to control the state partly in order to
prevent the assertion of public purpose and partly to poach on the lines of activity that past
public purpose has established. They are firms that have no intrinsic loyalty to any country.
They operate as a rule on a transnational basis, and naturally come to view the goals and
objectives of each society in which they work as just another set of business conditions, more
or less inimical to the free pursuit of profit.

(2008: 131)

The modus operandi of transnational corporations, including the growing tendency ‘to
migrate to countries of lower taxation’, undoubtedly has further exacerbated the limits to
the fiscal capacity of the state noted by Schumpeter (1954a [1918]: 23) and perfectly
illustrates Goldscheid’s concerns about the respects in which the state is perpetually ‘at
the mercy of private capital’ (1958 [1956]: 211).
In the wake of the first ‘Great Crash’ of the twenty-first century, a number of late
modern ‘tax states’ faced serious fiscal crises, primarily as a result of essential measures
taken to recapitalize credit-bereft financial institutions whose privatized ‘winning
streaks’, deriving principally from unregulated, highly speculative, ‘creative’ financial
instruments, came to an end, rendering a substantial number of loans bad or ‘toxic’,
levels of debt unsustainable, and leaving the public household as the lender of last
resort. The subsequent transfer of debts and risks to the state and decline in taxation
revenues following the Crash, in turn, led to a ‘sovereign debt crisis’ and in due course,
from 2009/10 in Europe in particular, to the implementation of wide-ranging public
Smart 539

expenditure cuts to redress the fiscal deficit. But while the losses and risks of the finan-
cial sector have been ‘socialized’, profits have remained ‘private’ and taxation measures
have continued to be largely regressive, prompting one critical observer to remark that
‘[a]n economic war is being fought. … Wealth is being transferred from the poor and
middle to the rich at stupefying speed and on a stupefying scale’ (Monbiot, 2011; see
also Bawden, 2007; Chomsky, 2010: 94, 114; Stiglitz, 2010: 135).
The scale of the public sector and public expenditure, expectations about present
and future provision of public services, and the level and impact of existing and pro-
posed public spending cuts are now at the centre of social and political debate and in
some instances have provoked public demonstrations and forms of social conflict.
Joseph Schumpeter anticipated a continuing growth in demand for public services and
forms of social provision but argued that there were fiscal limits to the state’s capacity
to respond and, in consequence, that social tensions and conflicts over resources would
be likely to increase and might in due course trigger the collapse of the tax state. The
imposition of public expenditure cuts in reaction to the sovereign debt crisis led to
demonstrations and strikes in a number of European countries, including Greece, the
Republic of Ireland, Portugal, Spain, and the UK. The fiscal crisis tendencies identi-
fied by Goldscheid and Schumpeter, and even more evident today, are bound up with
broader economic processes, especially the competitive pursuit of rising capital accu-
mulation and associated necessity for increasingly frequent rounds of creative destruc-
tion, an intrinsic feature of the capitalist mode of production, which whilst engendering
new industries and businesses, as well as new forms of work and commodities and
services for consumption, leaves in its wake the debris of destroyed industries, jobs,
and lives in devastated communities burdened with debt, for which the public house-
hold, the tax state, needs must assume responsibility.
Goldscheid and Schumpeter deliberated in different ways on the difficulties encoun-
tered by the tax state, but they each confirmed the existence of a new field of study, fiscal
sociology, and briefly speculated on possible futures. In concluding his consideration of
the fiscal crisis confronting the tax state, Schumpeter anticipated a future in which capi-
talism would have completed its ‘creative destruction’ work and the economy would be
‘satiated with capital’ (1954a [1918]: 38; see also 2010 [1943]: Part II). The early signs
were already considered to be present: ‘Society is growing beyond private enterprise and
tax state’ (1954a [1918]: 38). But after almost a century of further economic develop-
ment and considerable growth in social provision, private enterprise has not lost its
‘social meaning’, as Schumpeter suggested it would; to the contrary, capitalism, now
global in scale and scope, continues to deliver all manner of innovations and remains
both creative and destructive. And states still strive to cultivate conditions conducive to
capital investment and job creation within their territories, frequently through fiscal
inducements, whilst simultaneously facing fiscal dilemmas arising from the continually
contested character of taxation, the increased global mobility of capital and prospect of
flight to low-labour cost locations and tax havens, and the cost of meeting rising social
expectations and escalating claims for rights and entitlements from a reduced fiscal rev-
enue base. The hour still ‘belongs to private enterprise … [and] the tax state’, as
Schumpeter (1954a [1918]; 38) observed early in the twentieth century, but following the
financial crisis that erupted in 2007 and the sovereign debt crisis that it subsequently
540 Journal of Classical Sociology 12(3-4)

triggered, there is now a greater appreciation of the ‘immanent contradiction’ highlighted

by Goldscheid (1958: 212) between capitalist economy and the public purpose or com-
mon good.
The predatory influence exercised by capital over state policy and the public interest
was recognized by Adam Smith in The Wealth of Nations in a series of cautionary remarks.
Smith warns that merchants, manufacturers, and dealers by virtue of their capital wealth
receive ‘the greatest share of the public consideration’, are concerned with ‘the interest of
their own particular branch of business [rather] than … that of the society’, and that any
legislative proposals emanating from this order ought to be viewed with ‘great precaution’
because their interest is ‘never exactly the same with that of the public’ and that they have
‘generally an interest to deceive and even oppress the public, and … accordingly have,
upon many occasions, both deceived and oppressed it’ (2010 [1776]: 162–163). Predation
is also implied in the reference by Marx and Engels in The Communist Manifesto to the
way in which, with the development of modern industry and the world market, the bour-
geoisie exercises ‘exclusive political sway’ through the modern state (1968 [1848]: 82).4
In turn, Goldscheid’s discussion of the ‘State within the State’ describes the predatory
manner in which capital draws on and feeds off the state, relying on the bail-out ‘backing
of the public finances’ (1958 [1925]: 211). Contemporary criticisms outlined by Chomsky
on the respects in which government interventions have served to compensate corpora-
tions for their losses and ‘rescue collapsing financial institutions’ (2010: 105–106),
Stiglitz’s comments on ‘ersatz capitalism’ in which rescue packages socialize losses and
allow gains to remain privatized (2010: 135), Galbraith’s critical observation that in the
‘Predator State, nothing is done for the common good or interest of the public. To date it
seems to be a matterof ‘plus ça change plus c’est la même chose’, but as Alain Badiou
observes, ‘there are many signs suggesting that this reactionary period is coming to an
end’ (2010: 258).

Notes
1. Schumpeter’s essay `The Crisis of the Tax State’ was of considerable relevance to concerns
expressed at the time in the United States of America and Western Europe about the scale of
public sector expenditure, and the issues he outlined in the essay have continued to preoccupy
governments and political policy makers, corporations and businesses, media commentators,
tax-paying citizens in their capacities as workers and consumers, and some social and eco-
nomic analysts (Bell, 1976; Economist 1983; O’Connor, 1973). Indeed with the sovereign
debt crisis that followed inexorably from the policy measures introduced to cope with the
financial and banking crisis that erupted in 2007, it might be argued that Schumpeter’s ana-
lytic reflections on the fiscal constraints on the tax state have become even more relevant.
2. In his reflections on the significance of the Communist Manifesto, Schumpeter draws atten-
tion to the increasing insecurity and uncertainty that Marx and Engels recognized to be a cor-
ollary of the development of modern capitalism, a feature that has only grown in prominence
with its continuing mutation and expansion, as later analysts have observed (Beck, 2000;
Castells, 1996; Harvey, 2010).
3. From 1907, Goldscheid (1870–1931), a socialist, was a member of the Sociological Society
in Vienna, and in 1909 he was one of the founding members of the Deutsche Gesellschaft für
Soziologie (German Society of Sociology) (Exner, 2004: 286).
Smart 541

4. Thorstein Veblen offers a comparable observation on the relationship between business inter-
ests and the state in The Theory of Business Enterprise:

Representative government means, chiefly, representation of business interests. The gov-

ernment commonly works in the interest of the business men with a fairly consistent sin-
gleness of purpose … constitutional government has, in the main, become a department of
the business organization and is guided by the advice of business men.
(2005 [1904]: 136)

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Author biography
Barry Smart is Professor of Sociology in the School of Social, Historical & Literary
Studies, University of Portsmouth, UK. His most recent publications include Consumer
Society: Critical Issues and Environmental Consequences (Sage, 2010) and Post-
Industrial Society (4 volumes, Key Debates in Sociology series; Sage, 2011). Observation
Methods (4 volumes, edited with Kay Peggs and Joseph Burridge, Sage Benchmarks in
Social Research series) is in press for 2013 publication. Barry Smart’s current research
includes projects on the contemporary relevance of classical social thought, the political
economy of sport, and consumerism and the environment.