While Joseph Schumpeter and the Austrian School often find themselves at odds over fundamental questions in economic theory – particularly over value theory, capital, and the role of entrepreneurship – it would be a mistake to overlook the significant common ground they share when it comes to their diagnosis of the state and its dangerous proclivity to grow. Indeed, despite methodological and theoretical disagreements, Schumpeter’s critique of state power – especially as laid out in his 1918 essay “The Crisis of the Tax State” – resonates powerfully with the warnings issued by Austrian thinkers like Ludwig von Mises and Murray Rothbard.
For Schumpeter, the state is not some idealized public institution tending toward the public good, as the mainstream of both classical and progressive political thought might have it. Rather, it is a historically contingent formation, one whose size, shape, and role are primarily defined by its ability to raise revenue, especially through taxation. And it is in this fiscal core, Schumpeter argues, that the real nature of the state is revealed.
“The public finances,” he wrote, “are one of the best starting points for an investigation of society.” They are, in his view, more than a technical feature of governance; they are the very nerve center of political and social power. If the state can finance it, it can do it, and thus, it will try.
This brings us to his analysis of Rome, which Schumpeter employs as a historical case study of a state whose fiscal and military expansion ultimately sowed the seeds of its own ruin. In a passage with eerie relevance for modern Western societies, he observed how Rome’s transition from Republic to Empire brought not merely external conquest, but the internal transformation of the state’s machinery. War and territorial expansion required ever greater administration, taxation, and bureaucratization. The Roman state became, in effect, a parasite too bloated to be sustained by the very society that birthed it.
In this, Schumpeter was ahead of his time. His recognition that the expansion of state power, especially during and after wartime, tends not to recede, but to persist and deepen, prefigures the later work of Robert Higgs in Crisis and Leviathan. It also echoes Mises’s critique in Bureaucracy and the insistence of Rothbard and others that the state is, at base, a predatory institution thriving on coercion and extraction.
Schumpeter famously warned against what he called the “tax state” – a state no longer bound by limited aims or constitutional principles, but one that regards the fiscal apparatus as a tool of social engineering and class management. The modern state, unlike the medieval monarchy or the early liberal-constitutional order, does not merely tax to sustain itself or to defend the nation. It taxes to reshape society, to reward its clients, and to manage an increasingly restive population.
In that sense, the comparison between the Rome of the late Republic and the modern West is not merely poetic: it is structural. Just as the Roman state grew rich through conquest, and then found itself unable to retreat from the obligations and administrative burdens that conquest brought, so too has the modern American state entangled itself in global military commitments, welfare obligations, and regulatory labyrinths from which it cannot, or will not, withdraw. As Haskell noted in The New Deal in Old Rome, the American imperial state has come to resemble Rome not just in its global presence, but in its internal political logic: the bread-and-circuses welfare state, the clientelist politics of Congress, the imperial presidency, and the erosion of civic virtue.
What makes Schumpeter’s analysis especially poignant is his understanding that the fiscal capacity of the state, its ability to borrow, inflate, and tax, sets the boundaries for what it can attempt. And once the state masters these tools, it rarely restrains itself. Modern financial innovations, particularly fiat currency and central banking, have only accelerated this dynamic, allowing the state to postpone fiscal reckoning while deepening its hold on the economy and society.
Perhaps unsurprisingly, there is a certain pessimism in Schumpeter’s critique. He believed that capitalism, far from triumphing, would collapse not from its internal contradictions – as Marx had supposed – but because its success would breed the very social forces that would destroy it. Intellectuals, bureaucrats, and voters, he feared, would all conspire, knowingly or not, to replace the dynamic, risk-bearing entrepreneur with the passive security of the administrative state. In this, he anticipated James Burnham’s Managerial Revolution and shared Mises’s dread of the encroaching “planned economy.”
For those of us in the Austrian tradition, Schumpeter is thus a complicated but valuable ally. His insights into the fiscal foundations of state power, his historical realism, and his warnings about the bureaucratization of society remain essential reading. While we may part ways with him on equilibrium theory or his fatalism about capitalism’s demise, we should recognize the depth of his contribution to understanding the pathologies of state growth.
Rome, as Schumpeter reminds us, was not destroyed in a single act of barbarian conquest: it decayed from within, its political economy transformed from one of liberty and civic duty to one of imperial administration and parasitic privilege. That process, tragically, did not end with Rome. It merely began there.
Image credit: public domain via Wikimedia.
