CAPITALIST DEVELOPMENT, INNOVATIONS, BUSINESS CYCLES AND UNEMPLOYMENT: JOSEPH ALOIS SCHUMPETER AND EMIL HANS LEDERER

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Harald Hagemann

GREDEG WP No. 2012-13

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Groupe de REcherche en Droit, Economie, GestionUMR CNRS 7321

Capitalist Development, Innovations, Business Cycles and Unemployment:

Joseph Alois Schumpeter and Emil Hans Lederer

Harald Hagemann*

GREDEG-CNRS

22 November 2012

* Prof. Dr. Harald Hagemann

University of Hohenheim

Department of Economics (520)

70593 Stuttgart

Germany

harald.hagemann@uni-hohenheim.de

1

Capitalist Development, Innovations, Business Cycles and Unemployment:

Joseph Alois Schumpeter and Emil Hans Lederer

Harald Hagemann

“In economic theory, Schumpeter was Lederer’s master.”1

“Emil Lederer … may be described as the leading academic

socialist of Germany in the 1920’s.”2

1. Introduction

Emil Lederer, who was born in the Bohemian town of Pilsen on July 22, 1882 and

Joseph Schumpeter, who was born on February 8, 1883 in Triesch, now Trêst, in

Moravia became life-long friends in their student days at the University of Vienna

where Carl Menger, Eugen von Philippovich, Friedrich von Wieser and Eugen von

Böhm-Bawerk were among their major teachers.3 The life and work of both economists

took place in three states and four political cultures. Both were shaped in culture,

manners as well as intellectually by the Danube monarchy in the first three decades of

their life.

Lederer came to Germany already in 1910 where he made an impressive academic

career at the University of Heidelberg, a liberal enclave in Imperial Germany.4 When he

was appointed full professor in spring 1923, following Gothein on the chair for

economic and public finance, he became the indirect successor of Max Weber, whose

1 Jacob Marschak, letter to Hans Speier, April 14, 1977. Hans Speier Papers, State University of New

York at Albany. 2 Schumpeter (1954: 884 n. 10).

3 “I first ran up against him [Lederer] in Professor Philippovich’s seminar, if my memory serves me in

1903. Though life separated us it always brought us together again and we never lost contact completely.“

Schumpeter (2000: 331), letter to Alvin Johnson, March 17, 1941. 4 For greater details see Hagemann (2000).

2

younger brother Alfred was the founding director of the Institute for Social and State

Sciences. Both, Lederer and Alfred Weber, represented the unity of the social sciences,

and closely cooperated in the years of the Weimar Republic. In fall 1931 Lederer moved

to the University of Berlin where he succeeded Heinrich Herkner on the chair which

formerly had been held by Gustav Schmoller. After only three semesters the Nazis’ rise

to power in 1933 forced Lederer to emigrate to the United States where he became the

founding Dean of the new ‘University in Exile’, today’s Graduate Faculty of Political

and Social Sciences at the New School for Social Research in New York. Lederer died

of thrombosis at May 29, 1939.

Schumpeter, who had been appointed Associate Professor in Czernovitz in 1909 and

full professor at the University of Graz in 1911, came to Germany in 1925 after

depressing episodes as Austrian minister of Finance in 1919 and president of the

Biedermann Bank. Due to the efforts of his friend and colleague Arthur Spiethoff he got

the chair of public finance which he held until September 1932 when he moved to

Harvard. Whereas the first year in Bonn was overshadowed by personal tragedies, i.e.

the death of his mother, second wife and child, academically the Bonn period was a

successful one. Schumpeter had many committed students and disciples, such as August

Lösch, Erich Schneider, Hans Singer, and Wolfgang Stolper, who later became well-

known economists. Nevertheless the faculty at the University in the capital Berlin,

where the two central chairs in economics, which formerly had been held by Schmoller

succeeded by Herkner, respectively Adolph Wagner and Werner Sombart, became

vacant in 1931-32, was as successful in blocking Schumpeter’s appointment as had been

the Vienna faculty before.5 Schumpeter’s only supporters in the Berlin faculty were

Ladislaus von Bortkiewicz and Herkner who, however, died in 1931 and 1932, and after

his arrival Lederer, who drafted a nine-page minority report in July 1932 to defend both

Schumpeter’s honor and scientific importance against the intrigues of Schumpeter’s

life-long rival and enemy Sombart, yet without success.

Only nine months later, after the Nazis had launched the ‘Restoration of Civil Service

Act’ on April 7, 1933 to dismiss scientists from their academic positions for racial

5 For greater details see Schumpeter’s Letters (2000: 189-219) and Stolper (1994: 311-2).

3

and/or political reasons Schumpeter, on April 19, wrote a letter from Harvard to Wesley

C. Mitchell in New York asking for support of outstanding Hebrew colleagues in

Germany. “The men listed may all of them be described as “more than competent”.

I did on purpose not include any distinctly weak brothers.”6 Lederer, who was a leading

democratic socialist and exposed in the fight against the Nazis – in February 1933

Lederer had engaged himself, together with Albert Einstein and Heinrich Mann, in the

antifaschist congress “Das freie Wort” (free speech) – was among the first to be

dismissed by the Nazis in Berlin. In Schumpeter’s list sent to Mitchell, Lederer was

ranked fifth, after Gustav Stolper, Jacob Marschak, Hans Neisser and Karl Mannheim,

and before Adolf Löwe, Gerhard Colm, Karl Pribram and Eugen Altschul, with the

following assessment:

Professor of Economics at the University of Berlin. Successor of Sombart and farther on

of Schmoller, hence the incumbent of one of the two leading chairs of Germany.

Therefore his case is an especially tragic one. Certainly a more than competent

economist although he never published a well-rounded work, his innumerable books

and papers dealing mainly with employees’ unions, crises, socialism, wage questions,

sociological aspects of present-day civilization. He is 51 years of age and speaks

English very well.7

2. Boehm-Bawerk’s Seminar and the Marxian Challenge: The Formative Years

Of particular influence on Schumpeter as well as on Lederer was Böhm-Bawerk’s

famous seminar in 1905-1906. Schumpeter shared the basic idea of his admired teacher

that business-cycle theory constitutes the final stage of a fully developed system of

economic theory, and, beginning with his first article on the essence of economic crises,

Schumpeter (1910) started to engage himself in the investigation of this subject, which

three decades later culminated in his monumental two-volume work Business Cycles

(1939).8 Schumpeter also participated in the early debate on capital theory between

Böhm-Bawerk and John Bates Clark. One of Schumpeter’s first publications was a

6 Schumpeter (2000: 246).

7 Ibid: 247. In attributing the succession of Schmoller to Sombart, Schumpeter is confusing the two

central chairs in Berlin. 8 For a detailed analysis of Schumpeter’s early contributions on business-cycle theory and the

development of his views over time see Hagemann (2003).

4

review article of Clark’s distribution theory. The distinction between statics and

dynamics, which had been developed by Clark in his The Distribution of Wealth (1899)

also had a stronger influence on Schumpeter and is reflected in his two major works, his

Vienna habilitation thesis on Das Wesen und der Hauptinhalt der theoretischen

Nationalökonomie (The Nature and the Main Content of Theoretical Economics)

(Schumpeter 1908) and his The Theory of Economic Development ([1911] 1934) which

form an entity, although the second book can be read independently of the first one.

Whereas the first book focuses on the system of general economic equilibrium and is

inspired by Schumpeter’s great hero Walras, Marx’s views on the long-run development

of the capitalist economy and his emphasis on capital accumulation and technical

progress have formed a life-long challenge for Schumpeter, as is indicated in his vision

of economic development as a distinct process generated by the economic system itself.

It was Böhm-Bawerk’s seminar where both Schumpeter and Lederer first developed a

greater interest in Marxian analysis. Their own teacher, besides Knies, Schäffle and

Sombart, had been one of the few leading economists analysing Marx’s economics in a

scholarly way. In his famous essay on ‘Karl Marx and the Close of his System’, Böhm-

Bawerk (1896) had attacked the labour theory of value as the basis of all errors and

stated that interest would have to be paid independent of ownership of capital goods.

Besides Ludwig von Mises (1881-1973) the Austromarxists Otto Bauer (1881-1938),

Rudolf Hilferding (1877-1941) and Otto Neurath (1882-1945) were among Schumpeter

and Lederer’s fellow students. Otto Bauer (1904-5) wrote his first major essay on

Marx’s theory of economic crises. Shortly before Hilferding (1904) had repudiated

Böhm-Bawerk’s criticism of Marx and attacked the subjective theory of value. In 1905

Hilferding had already completed substantial parts of his opus magnum Finance Capital

(1910) in which he argued that the tendency of concentration and centralization of

capital, as emphasized by Marx, had led to the dominance of large banks over industry

and commerce. On the one hand, the development of large-scale industry requires

capital credit, on the other hand the most important branches of industrial production

thus are brought under the control of finance capital which reinforces cartelization and

monopolization tendencies. As Streissler (1994) has correctly observed in his

penetrating analysis, Hilferding’s Finance Capital had a strong influence on the

5

Austrian School, even on Mises and the old Wieser, “but of all of the Austrians, it is

Schumpeter who follows Hilferding most closely. … In fact, Hilferding, soon to be

followed in this respect by Wieser, is one of the first important economic authors to

stress pure managerial (and banking) control of the widely held joint stock company, a

position later championed by Schumpeter9” (30-1).

Lederer who was also strongly influenced by Marx’s analysis of accumulation and

technical progress and by Hilferding’s Finance Capital, published his first scholarly

paper on Marx’s system in the journal founded and edited by Böhm-Bawerk (Lederer

1906). Although Lederer remained a life-long critic of modern capitalist economies, he,

however, never became an orthodox Marxist. His views were shaped by the double

rationality of economic analysis, on the one hand in the Marxian tradition, on the other

hand by the liberal Vienna or Austrian School of economics. Among Lederer’s teachers

probably Eugen von Philippovich (1858-1917), Professor at the Vienna University from

1893 to 1917, who was a leading socialist of the chair but also author of the successful

textbook (1893) which until WW I was the most important medium to transport

Mengerian ideas in Germany, had the greatest influence on Lederer.

Lederer, and Schumpeter “with his truly Catholic appreciation of a wide range of

methodological positions in economics” and, “among orthodox economists … one of

those most strongly influenced by Marxism”10

, did not only find inspiration for their

own analyses in Marx but also inspired independent scholarly work of younger

researchers in the Marxian tradition. This can best be illustrated by the case of the co-

authors of Monopoly Capital (Baran and Sweezy 1966) which exerted a strong

influence on the New Left in the 1968 student movement, particularly on the group of

young scholars founding the Union for Radical Political Economics. Paul A. Baran

(1910-1964) was the only PhD student of Lederer who could finalize his thesis on

economic planning during his teacher’s short stay at the University of Berlin. As a

Jewish Marxist and a member of the Social Democratic Party he also had to leave Nazi

Germany soon after his teacher. Paul M. Sweezy, whose The Theory of Capitalist

Development (1942) established the author as a leading figure in Western Marxism, had

9 See Schumpeter (1942: chpt. XII.3).

10 Streissler (1994: 30).

6

got enormous inspirations by Schumpeter’s writings and teaching on the long-run

development of capitalist economies at Harvard.

Eduard Heimann (1889-1967), the general secretary of the first and second socialization

commission in Germany after WW I who himself had made his PhD with Alfred Weber

at Heidelberg in 1912, in his assessment of Lederer’s role in the socialization movement

states that “Lederer became a member, and practically the leader, of the socialization

commissions in Germany and Austria during the years 1918-20 … although

Schumpeter’s and Hilferding’s shares should not be neglected” (p. 94).11

Lederer was

director of the scientific section of the Austrian Socialization Commission which was

chaired by Otto Bauer. Chairman of the first German Socialization Commission was

Karl Kautsky. Lederer and Hilferding were original members appointed by the Ministry

of Economics. They were successful in suggesting Schumpeter who became a member

for the short period from January to March 1919, when he had to resign because he

became Austrian minister of finance due to the influence of Bauer and Hilferding. In the

meetings of the German Socialization Commission Schumpeter sided more with the

more radical propagators of integral and immediate socialization, to whom Lederer

belonged at that time, than with the more pragmatic socialists such as Hilferding. He

also signed the majority report favouring socialization, which in the contemporary

understanding included economic democracy and free initiative and individual

responsibility as basic principles rather than nationalization, i.e. transfer of ownership of

the factors of production to the state, and not the minority report of the two liberal

members.

“How could Schumpeter, the high priest of entrepreneurial genius, support socialism

when he obviously was not a Socialist?” (Stolper 1994:213). Apart from Schumpeter’s

often contradictory and ambiguous personal and political behaviour, one should not

forget the key war role of the heavy industries, whose leading representatives were

discredited by the disaster and caused a necessarily democratic response against the

formerly authoritarian rule. Furthermore, “socialization” in that period did not yet imply

11

See section 3 ’Economics of Socialism’ in the obituary of Lederer by Marschak, Kähler and Heimann

(1941: 93-100). For greater details on Schumpeter’s role see Stolper (1994: 202-214) and Swedberg

(1991: 54-58).

7

a Soviet understanding. So even the liberal members agreed to the socialization of the

coal industry and on the state to intervene.

Lederer, who always had been a democratic socialist, in open mistrust to any Bolshevist

experiences,

“relied exclusively on the participation of consumers and government-appointed experts

in the supervisory work of the Board of Directors to prevent excesses of monopolism.

This again is a social and institutional theory of how to determine price, rather than an

economic theory of where to fix it. He cared but little for the elaborate theory of a

socialist economy based on accounting costs: to engage in such highly speculative

inquiries would have been alien to his eminently practical instinct as an economic

theorist” (Heimann 1941: 97).

Lederer had been an initial proponent of socialization. However, he soon became

disappointed by the political and economic development and from 1920 onwards

regarded “socialization” and economic planning primarily as a means to increase

efficiency in the economy. All more radical forms of nationalization which link up with

war forms of organization to establish a fully planned economy are doomed to fail since

they treat socialism as a simple organization problem which excludes pluralism of

interest and settlement of conflicts. In a highly differentiated capitalist economy only a

cautious evolutionary change could be possible. Lederer’s theoretical position in this

period comes out best in his contribution to the 1919 Regensburg meeting of the Verein

für Sozialpolitik which focused on ‘Problems of Socialization’.12

There he states that in

contrast to Marx capitalism is not a sick economic system doomed to collapse, but a

well-constructed economic system whose substance is stable.13

3. The Archiv für Sozialwissenschaft und Sozialpolitik

The Archiv für Sozialwissenschaft and Sozialpolitik had been the most eminent German

journal in the social sciences ever since Edgar Jaffé, Sombart and Max Weber had

become the editors in 1904. Lederer had been involved with the journal since 1911, first

as an editorial assistant and since 1922 as the new managing editor, with the two co-

12

See Lederer (1919) and also pages 193-201 in the conference volume for the debate on Lederer’s

contribution. 13

See Lederer (1919: 111).

8

editors Schumpeter and Alfred Weber. During the Weimar years the number of articles

focusing on economic issues significantly increased. There had been important articles

before as, for example, Bortkiewicz’ two famous articles on ‘Value and Price in the

Marxian System’ (1906-7), which has remained a central reference point in the

controversial debates on the ‘transformation’ problem until today.

Although the Archiv published many papers by authors with socialist inclinations such

as Heimann, the journal had always been open to authors with different scientific and

political views, in particular to representatives of the liberal Austrian School of

economics. Thus the Archiv in the time of Lederer’s editorship published no less than

ten articles by his Vienna fellow student Ludwig Mises. It was Mises (1920) who in a

famous paper developed the thesis that economic calculation in a socialist

commonwealth is impossible because there is no price formation on free markets, and

thereby launched the socialist calculation debate in the German language area in the

1920s, which found its sequel in Britain in the 1930s when Hayek became involved in a

controversial debate with Lange, Lerner and Dickinson. In his History of Economic

Analysis Schumpeter (1954) classifies Lederer together with Maurice Dobb in the 1920s

and Oskar Lange and Abba Lerner in the 1930s as socialist economists with sympathies

for Marx who, however, have “learned the truth that economic theory is a technique of

reasoning” and that “the scientifically trained socialist is no longer a Marxist except in

matters of economic sociology” (p. 884). In the time of his co-editorship with Lederer

the Archiv published several articles on socialist calculation, such as Karl Polanyi’s

paper (1922) in which the later author of The Great Transformation applies a general

concept of value according to which the value of goods would depend on individual and

social evaluations concerning the utility of goods and painfulness of work also in a

socialist society.

Most important from a modern perspective is the contribution by Jacob Marschak who

in 1919 emigrated from Russia to Germany, where he first studied one semester with

Bortkiewicz in Berlin before he moved to Heidelberg where he became Lederer’s most

outstanding PhD student. Marschak was the first out of a larger group of Menshevists

and mainly well-trained mathematical economists including, among others, Wassily

9

Leontief whose Berlin PhD thesis was also published in the Archiv (Leontief 1928).

Marschak’s first major publication was his article on economic calculation and the

socialist commonwealth in which he critically inspects Mises’s impossibility thesis

(Marschak 1924). In that article, which Arrow (1979: 502) classifies as one of

Marschak’s “papers with the greatest permanent interest”, Marschak objects the

empirical validity of Mises’s argument, because the requirements of price formation on

free markets are less and less fulfilled in capitalist economies due to the high number of

cartels and trusts. The latter’s increasing number shows that the advantages of

monopolies lie exactly in those two areas which are most affected by Mises’s

scepticism: economic calculation for goods of higher order and dynamic pricing.14

Marschak’s argument corresponds with the increase in efficiency emphasized by his

mentor Lederer as well as with the view of Schumpeter to whom Marschak explicitly

refers. Schumpeter, who classified Marschak at the beginning of 1933 as “probably the

most gifted scientific economist of the exact quantitative type now in Germany”

(Schumpeter 2000: 247), had already pointed out in his Vienna habilitation thesis “that

the size, power and secure position, furthermore the far-sighted, more capable

management of many monopolies, in particular those of modern trusts, involves that the

future and conscious manoeuvring are much more visible in their pricing policy than

with a great mass of competitors who on a large scale only do what they must do”

(Schumpeter 1908: 268). It should be added that Marschak’s early critic with its

emphasis on dynamic factors later inspired Hayek to elaborate the problems of socialist

calculation with particular emphasis on the dispersion of knowledge and on decision

making under uncertainty (in particular with regard to technical progress) and imperfect

information in the British debate of the 1930s.

Schumpeter did not directly participate in the socialist calculation debate but he

supervised the PhD thesis of Cläre Tisch on ‘Economic calculation and distribution in

the centrally organized socialist commonwealth’ (Tisch 1932). Her critique of barter

socialism is as well founded as her own solution of the socialist calculation problem

which is based on a Walrasian general equilibrium system in the simplified version of

Cassel. Tisch thus can be regarded as a forerunner of the so-called ‘neoclassical

14

See Marschak (1924: 514).

10

socialists’, like Dickinson, Lange and Lerner, who dominated the British debate in the

1930s. It therefore comes to no surprise that Hayek in his later confrontation with these

authors also refers to Tisch’s work.15

The article published in the Archiv, during the period of Schumpeter’s co-editorship,

which had the greatest impact on his own work was Nikolai Kondratieff’s famous essay

‘Long Waves in Economic Life’ (1926) in which the author concluded that the

existence of price and output long waves is very probable but provided no theoretical

explanation. Schumpeter, with his habit to name phenomena after their discoverer, did

not only coin the term “Kondratieff cycle” but also, in his Business Cycles (1939)

presented a three-cycle schema, in which (the first three) Kondratieff long waves

constitute the framework where they are combined with the classical Juglar and the

shorter Kitchin cycles. Schumpeter also initiated the first abridged English translation of

Kondratieff’s article, which was done by his PhD student Wolfgang Stolper.

4. Business Cycles and Capitalist Development

Lederer and Schumpeter both share the view that capitalist economies normally are in

dynamic disequilibrium. Business cycles are seen as an integral part of capitalist

development.16

Emphasis in economic theory should therefore be put on the analysis of

the short-run and particularly the long-run dynamics of the economy. Lederer saw rather

early the importance of increasing returns to scale in production and their negative

implications concerning the simple application of the principle of marginal productivity.

In general, the interaction between dynamic changes and imperfect competition plays a

fruitful role in Lederer’s analysis. This holds for his business-cycle theory, where

increasing returns build a starting point, as well as for his analysis of the employment

consequences of technical progress or of changes in income distribution.

In retrospect, Schumpeter (1954: 1133, n. 25) mentions Lederer’s theory of business

cycles and crises, as developed in Lederer (1925), as “an example of an analysis that

15

See Hayek (1940: 128). 16

See, for example, Lederer (1925: 368) who explicitly refers to Schumpeter. For a modern assessment of

the development of Lederer’s analysis of business cycles, crises, and growth see Allgoewer (2003).

11

stresses certain types of disproportionalities”. Although he recognizes that

disproportionality theories overlap with his own theory, Schumpeter points out that

“disproportionality remains an empty phrase so long as it is not linked with definite

factors that are to account for it and because, so soon as it is so linked, those factors and

not disproportionality per se will individuate an author’s theory”.

In Schumpeter’s view not only chapter 6 but in fact any single page of his Theory of

Economic Development is dedicated to the problem of the business cycle, and analyzing

business cycles “means neither more nor less than analyzing the economic process of

the capitalist era” (Schumpeter 1939: V). His theory of economic development consists

of three essential elements: innovations which give rise to wave-like movements,

pioneering entrepreneurs as the agents of creative destruction, and bank credit as the

prerequisite for the foundation of new enterprises and the financing of innovative

investments. Economic development requires new combinations of productive means

brought about by entrepreneurs as the carriers and credit as the means of innovation.

Innovations which are of an endogenous nature and occur in bursts are at the root of

cyclical fluctuations and give rise to great ups and downs in investment demand.

Whereas in Marx there are systemic forces such as the pressure of competition which

give the capitalist economy its innovative drive, Schumpeter makes the pioneering

entrepreneurs with his will and energy the Demiurg of economic change and

development. Schumpeter attributes central elements of the elite theories of his time to

these pioneering entrepreneurs, a group he clearly distinguishes from inventing

engineers and capitalists alike, and in which a very special blend of the methodological

individualism of the Austrian School, in particular the influence of his teacher Wieser,

may be identified.

The emergence of temporary monopoly profits are the main driving force for

entrepreneurs to innovate. The financing of innovations by means of credit is the

function of the banking system. Although in Schumpeter’s view the banker is not the

trader but the producer of purchasing power, and credit creation is a necessary condition

for development, the banking system is not the decisive producer of business cycles but

plays a rather passive role adapting itself to the demand by innovating entrepreneurs

12

which fluctuates pro-cyclically. Schumpeter’s assumption that available resources are

fully utilized in the circular flow implies that the putting of new combinations into

practice requires some reallocation of these resources. The effect of credit creation, that

is, of new purchasing power not rooted in previous savings, is an increase of aggregate

demand in monetary terms which implies temporary inflation and a reallocation of

resources towards the innovating entrepreneurs. Schumpeter thus makes forced savings

an integral part of his theory. Although interest on capital is a monetary phenomenon, it

is ultimately based on a real factor, namely the productivity-enhancing effects of

innovations. Interest thus becomes the product of economic development. Schumpeter

makes it very clear that additional credit has to be spent for innovative investment

activities, not for increased consumption, so that the quantity of new purchasing power

is supported and limited by future goods.17

Schumpeter’s views found the strongest resonance in the contemporary German

literature in L. Albert Hahn’s Economic Theory of Bank Credit (1920). Hahn wanted to

overcome the classical doctrine that every credit has to be financed by means of savings

deposited with the banks, which he regarded as inappropriate for a modern economy. A

key sentence reads: Capital formation is not the result of saving but of credit (Hahn

1920: 120). It therefore is no surprise that Howard Ellis (1934) in his classical study on

German Monetary Theory: 1905-1933 distinguishes between “The Schumpeter-Hahn

Type of Cycle Theory” and “The Mises-Hayek Analysis of Cycles”. Whereas the first

two authors emphasized the importance of credit for economic development, the latter

two pointed out the inflationary danger of any credit not rooted in previous savings thus

leading to a monetary overinvestment theory.

Lederer, too, had a central vision of economic development according to which cyclical

fluctuations are an endogenous phenomenon inseparably linked with the long-run

growth process of a capitalist economy. Interestingly, Schumpeter wrote an essay on

‘Development’ as his contribution to the Festschrift for Emil Lederer on his 50th

birthday in 1932 which, however, was only published more than seven decades later

(Schumpeter 2005). Looking at Lederer’s writings, it becomes very clear that his

17

See chapter 3 on ’Credit and Capital’ in Schumpeter [1926](1934).

13

analyses share many aspects with the Schumpeter-Hahn approach. For example, the

forced-saving argument comes out pretty clear in Lederer (1931: chpt. VI).

5. Technological Unemployment

The analysis of technological unemployment had highest priority for Lederer, who

published numerous articles and two monographs on this issue, of which Technical

Progress and Unemployment. An Enquiry into the Obstacles to Economic Expansion

(Lederer 1938) is a widely extended and modified version of his earlier German book

on Technical Progress and Unemployment (Lederer 1931). Schumpeter, on the other

hand, regarded “[t]he controversy [on the machinery problem] that went on throughout

the nineteenth century and beyond, mainly in the form of argument pro and con

‘compensation’” as “dead and buried … it vanished from the scene as a better technique

filtered into general use which left nothing to disagree about” (1954: 684, my italics).

With a wave of rationalization and high unemployment the spectre of technological

unemployment entered centre stage again in the late 1920s. This led to a revival in the

old controversy between labour displacement pessimism and compensation optimism.

Lederer, who regarded mass unemployment as a decisive threat to the democratic

institutions of the Weimar Republic, now focused in his research on the employment

consequences of technological change. In the preface to his first monograph Lederer

(1931: III) states that the question of technical progress and its effects belongs to the

“darkest problems of a theory of capitalist dynamics” and substantiates this with the

dominance of the equilibrium approach in economics which had called forth the

conception that technical progress cannot cause permanent disturbances. However, this

conception had been shaken by the severity of unemployment.18

According to Schumpeter (1954: 685) “Marxist unemployment is essentially

technological unemployment. This technological unemployment had to create a

permanent ‘industrial reserve army’.” In his analysis of technological unemployment

Lederer combines central elements of Marx’s theory of accumulation with

18

For a more detailed analysis of Lederer’s studies on technological unemployment see Hagemann

(2009).

14

Schumpeterian ideas of innovation and credit in long-run development. Lederer

elaborates a two-sectoral model comprising a dynamic sector with only one industry

with large firms which produce capital goods, and a static sector with a large number of

small industries and firms growing in line with the rate of labour supply. Due to the

introduction of more mechanized new production processes, particularly in boom

periods, the firms in the dynamic sector can generate higher profit rates which lead to a

reallocation of capital from the static to the dynamic sector thus undermining the ability

of the economy to maintain full employment. The basic factor to cause disequilibrium

identified by Lederer is the profit-motivated drive of the large firms to realize

economies of scale, which causes a growing tendency to concentration and cartelization.

This tendency has also implications for income distribution which is changed in favour

of the capitalists. Monopolistic market structures prevent prices from falling in

proportion or faster than money wages. The decreasing purchasing power of wage

earners causes a lack of demand for consumer goods which indirectly reduces the

demand for capital goods. Instead of a movement along a balanced growth path the

economy ends up in relative stagnation.

Despite the impression given by Kaldor (1932), Lederer did not make a case against

technical progress, since he never denied that technical progress makes possible a great

expansion of production and increasing employment with growing income of the

masses.19

However, in contrast to many economists, starting with Ricardo, who put

emphasis on a process of real capital formation as a necessary condition for a successful

compensation of displaced workers, Lederer points out “that capital formation on its

own does not guarantee growth in the number of jobs. If the speed in the increase of the

organic composition becomes so fast that despite the capital accumulation the demand

for workers falls permanently behind the supply of workers, then unemployment

becomes structural”20

.

A certain impact of Lederer’s emigration to the USA, as first emphasized by Esslinger

(1993), can also be identified in his studies on the employment consequences of

technical progress. Thus Lederer (1938) puts more weight on product innovations and

19

See, for example, Lederer (1931: VI). 20

Lederer (1931: 72n, my italics).

15

their positive employment effects. He now also sides with Wicksell, Kaldor and Hicks

(1932) against Ricardo’s view that a viable invention can reduce the total of real output

after all competitive prices have adjusted to clear all markets.21

This is a remarkable

contrast to the numerical examples constructed in chapter 4 of his earlier book (Lederer

1931), which are characterized by a loss in the total value of the national output with a

net increase on profits and interest being smaller than the decline in wage income.

Interestingly, in his reference to a superior technique developed by modern economic

theory, Schumpeter (1954: 684) explicitly refers to chapter VI ‘Distribution and

Economic Progress’ of Hicks’s Theory of Wages (1932). However, Hicks himself later

regarded his own approach as inadequate for the investigation of the employment

consequences of new technologies. By the late 1960s, almost two decades after

Schumpeter’s death, Hicks became fascinated by the Ricardo machinery effect and set

out to defend what he considered the core of Ricardo’s analysis, namely that there exist

important cases in which the introduction of a new type of machinery can lead to a

temporary reduction of real output and employment.22

Schumpeter considered technological unemployment as a special case arising from

disturbance by innovations within the economic system, “which has always been

intended to cover displacement of workmen by machinery. We make it cover a much

wider range and include not only the effects on employment of every kind of change in

industry and commerce – organizational change, for instance – but also the effects

which changes have on employment in firms or industries that are completed with by

the firms of industries that introduce new production functions” (Schumpeter 1939, II:

514). Schumpeter goes on to stress that “cyclical unemployment is technological

unemployment”, a view to which, with high probability, neither Marx nor Keynes

would have subscribed. In Schumpeter’s approach it follows from the dominating role

of innovations causing wavelike movements in the development process of capitalist

economies. “Technological unemployment … is of the essence of our process and,

linking up as it does with innovations, is cyclical by nature.” (Ibid: 515). In

Schumpeter’s view the concept of frictional unemployment becomes the overarching

21

See Lederer (1938: 198-214). 22

See Hagemann (2008).

16

category which, besides other types of unemployment comprises also technological

unemployment.23

Whereas Lederer recognizes a too high speed of technical progress as the main cause of

technological unemployment, Schumpeter, on the other hand, identifies technological

unemployment as a temporary phenomenon and an unavoidable by-product of capitalist

development.

6. Schumpeter and Lederer: Two Social Economists

As Yuichi Shionoya and Richard Swedberg have repeatedly and convincingly reminded

us, Schumpeter’s economics consists of four essential elements: economic theory,

economic history, statistics and economic sociology.24

Thus the recognition that

Schumpeter’s concern for development and his belief in the unity of social life and the

inseparable relationship among its components led him to create a social economics, i.e.

a more broadly-based science of economics, constitutes a key to understand his work.

Schumpeter “grasped at the olive branch proffered by Max Weber” after the dispute on

method between Menger and Schmoller, namely social economics as “something in

between historical and purely theoretical economics. Schumpeter espoused this concept

and made it his own, and in this respect became more of a traditional “German” than an

“Austrian” economist. On the other hand, he remained completely “Austrian” in his

thorough theoretical grounding” (Streissler 1994: 38). This is a very precise assessment

by Streissler, who is also right in his pointing out that Schumpeter is thoroughly

Weberian in his view to keep out value judgements from theoretical economics.

Lederer was less strict concerning the position that theoretical economics should not

take a political stance25

, although he knew from his student days in Vienna that

23

See Schumpeter (1954: 944 n. 57) and Boianovsky and Trautwein (2008) for a more detailed analysis

of Schumpeter’s theory of unemployment. 24

See, for example, Shionoya (1997) and Swedberg (1991). 25

With all his disappointment and frustration about the failing offer to come from the University of

Berlin, Schumpeter was surely unjust to Lederer and exaggerated when he wrote in a letter to Keynes on

December 3, 1932, discussing the issue who could follow Schumpeter as the German correspondent of

The Economic Journal, after Schumpeter’s move to Harvard: „he [Lederer] is a party man of the type

which obeys orders without asking a question. And in all matters which can be brought into any relation

at all with politics he is absolutely unable to see except through party glasses“ (Schumpeter 2000: 230).

17

economics means exact and strong thinking. He also did not share Schumpeter’s high

praise for Walras but was more attracted by some of the key issues of classical political

economists, above all the machinery problem. However, there are also strong elements

of similarity with the views and positions of his friend Schumpeter. Lederer remained

convinced throughout his life that the important dynamic changes in economy and

society also include factors which fall into the areas of sociology, political science,

history, psychology or engineering. Their inclusion is necessary to raise economics

from a status of hypothetical deductions and to make it a genuine social science.

Consequently, Lederer called himself a Sozialökonom, and it is in this area, social

economics, that he made his strongest contributions. This begins with his early and

pioneering, theoretical and empirical analyses of the working conditions and political

attitudes of the modern salaried employees, the “new middle classes”. It also holds for

his socioeconomic study of the Japanese industrialization process, jointly written with

his first wife Emy Seidler after holding a Visiting Professorship at the University of

Tokyo from 1923-25, which in a period of increasing political tensions was republished

in a completely revised version as Japan in Transition in the United States (1938).

Lederer’s love for Japan was shared by Schumpeter, who made a first extended visit to

Japan in January-February 1931 which had a tremendous impact on the emerging

Japanese School of modern economics through a younger generation of economists.

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