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

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1 Groupe de REcherche en Droit, Economie, Gestion UMR CNRS 7321 CAPITALIST DEVELOPMENT, INNOVATIONS, BUSINESS CYCLES AND UNEMPLOYMENT: JOSEPH ALOIS SCHUMPETER AND EMIL HANS LEDERER Documents de travail GREDEG GREDEG Working Papers Series Harald Hagemann GREDEG WP No Les opinions exprimées dans la série des Documents de travail GREDEG sont celles des auteurs et ne reflèlent pas nécessairement celles de l institution. Les documents n ont pas été soumis à un rapport formel et sont donc inclus dans cette série pour obtenir des commentaires et encourager la discussion. Les droits sur les documents appartiennent aux auteurs. The views expressed in the GREDEG Working Paper Series are those of the author(s) and do not necessarily reflect those of the institution. The Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate. Copyright belongs to the author(s).

2 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) Stuttgart Germany harald.hagemann@uni-hohenheim.de

3 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 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, 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 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, For greater details see Hagemann (2000).

4 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, 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 wellknown 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 , 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: ) and Stolper (1994: 311-2).

5 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 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 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).

6 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 ( ) the Austromarxists Otto Bauer ( ), Rudolf Hilferding ( ) and Otto Neurath ( ) 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

7 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 Schumpeter 9 (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 ( ), 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 coauthors 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 ( ) 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).

8 6 got enormous inspirations by Schumpeter s writings and teaching on the long-run development of capitalist economies at Harvard. Eduard Heimann ( ), 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 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: ). For greater details on Schumpeter s role see Stolper (1994: ) and Swedberg (1991: 54-58).

9 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 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 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 in the conference volume for the debate on Lederer s contribution. 13 See Lederer (1919: 111).

10 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

11 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).

12 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).

13 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

14 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: 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 50 th 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).

15 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).

16 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).

17 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: ). 22 See Hagemann (2008).

18 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 stance 25, 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).

19 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 , 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. References Allgoewer, E. (2003), Emil Lederer: Business Cycles, Crises and Growth, Journal of the History of Economic Thought, 25(3): Arrow, K.J. (1979), Jacob Marschak, in D.L. Sills (ed.), International Encyclopedia of the Social Sciences, Vol 18: Biographical Supplement, New York and London: Macmillan Baran, P.A., Sweezy, P.M. (1966), Monopoly Capital, New York: Monthly Review Press. Bauer, O. (1904-5), Marx Theorie der Wirtschaftskrisen, Die Neue Zeit, 23.

20 18 Böhm-Bawerk, E. (1896), Zum Abschluss des Marxschen Systems, in: O.v. Boenigk (ed.), Staatswissenschaftliche Arbeiten. Festgaben für Karl Knies, Berlin: Haering; Engl. transl. as Karl Marx and the Close of his System, London 1898: Fisher Unwin. Boianovsky, M., Trautwein, H.-M. (2008), Frictions in Schumpeter s theory of unemployment, in Y. Shionoya, T. Nishizawa (eds.), Marshall and Schumpeter on Evolution. Economic Sociology of Capitalist Development, Cheltenham, UK, Northampton, Mass. Bortkiewicz, L.v. (1906-7), Wertrechnung und Preisrechnung im Marxschen System, Archiv für Sozialwissenschaft und Sozialpolitik, 23: 1-50, and 25: Ellis, H.S. (1934), German Monetary Theory: , Cambridge, Mass.: Harvard University Press. Eßlinger, H.U. (1993), The Impact of Emigration on Lederer s Work on Economics, History of Economic Ideas, 1: Hagemann, H. (2000), Emil Lederer ( ): Economical and Sociological Analyst and Critic of Capitalist Development, in P. Koslowski (ed.), The Theory of Capitalism in the German Economic Tradition, Berlin/Heidelberg/New York: Springer. Hagemann, H. (2003), Schumpeter s Early Contributions on Crises Theory and Business-Cycle Theory, History of Economic Ideas, 11: Hagemann, H. (2008), Capital, Growth and Production Disequilibria: On the Employment Consequences of New Technologies, in: R. Scazzieri, A.K. Sen, S. Zamagni (eds.), Markets, Money and Capital. Hicksian Economics for the 21 st Century, Cambridge: University Press, Hagemann, H. (2009), Emil Lederer s Untersuchungen Technischer Fortschritt und Arbeitslosigkeit: eine Theorie struktureller Arbeitslosigkeit, in G. Chaloupek et al., Rationalisierung und Massenarbeitslosigkeit. Otto Bauers Theorie der Rationalisierung im Kontext der Zeit, Graz: Leykam. Hahn, A. (1920), Volkswirtschaftliche Theorie des Bankkredits, Tübingen: J.C.B. Mohr. Hayek, F.A. (1940), Socialist Calculation: the Competitive Solution, Economica, 7: Hicks, J. (1932), The Theory of Wages, London: Macmillan.

21 19 Hilferding, R. (1904), Böhm-Bawerks Marx Kritik, in M. Adler, R. Hilferding (eds.), Marx Studien, Vol. 1, Vienna; Engl. transl. Böhm-Bawerk s Criticism of Marx, ed. by P.M. Sweezy, New York 1949: Kelley. Hilferding, R. (1910), Das Finanzkapital. Eine Studie über die jüngste Entwicklung des Kapitalismus, Vienna; Engl. transl. Finance Capital. A Study of the Latest Phase of Capitalist Development, London 1981: Routledge&Kegan Paul. Kaldor, N. (1932), A Case Against Technical Progress?, Economica, 12: Kondratieff, N.D. (1926), Die langen Wellen der Konjunktur, Archiv für Sozialwissenschaft und Sozialpolitik, 56: ; shortened Engl. transl. The long waves in economic life, Review of Economic Statistics, 17, 1935: Lederer, E. (1906), Beiträge zur Kritik des Marxschen Systems, Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 15: Lederer, E. (1919), Probleme der Sozialisierung, in Schriften des Vereins für Sozialpolitik, Vol. 159, Munich: Duncker&Humblot. Lederer, E. (1925), Konjunktur und Krisen, in Grundriss der Sozialökonomik, Sect. IV, Part I, Tübingen: J.C.B. Mohr. Lederer, E. (1931), Technischer Fortschritt und Arbeitslosigkeit, Tübingen: J.C.B. Mohr. Lederer, E. (1938), Technical Progress and Unemployment. An Enquiry into the Obstacles to Economic Expansion, Geneva: International Labour Office. Lederer, E. and Lederer-Seidler, E. (1929), Japan-Europa. Wandlungen im Fernen Osten, Frankfurt am Main: Societät; new edition Japan in Transition, New Haven, Conn. 1938: Yale University Press. Leontief, W. (1928), Die Wirtschaft als Kreislauf, Archiv für Sozialwissenschaft und Sozialpolitik, 60: Marschak, J. (1924), Wirtschaftsrechnung und Gemeinwirtschaft. Zur Mises schen These von der Unmöglichkeit sozialistischer Wirtschaftsrechnung, Archiv für Sozialwissenschaft und Sozialpolitik, 51: Marschak, J., Kähler, A., Heimann, E. (1941), Emil Lederer, II. The Economist, Social Research, 8: Mises, L. (1920), Die Wirtschaftsrechnung im Sozialistischen Gemeinwesen, Archiv für Sozialwissenschaft und Sozialpolitik, 47:

22 20 Perlman, M. [1994](1996), On Schumpeter s History of Economic Analysis, 40 Years After, in M. Perlman, The Character of Economic Thought, Economic Characters and Economic Institutions. Selected Essays, Ann Arbor: The University of Michigan Press. Philippovich, E.v. (1893), Grundriss der politischen Ökonomie, I: Allgemeine Volkswirtschaftslehre, Freiburg. Polanyi, K. (1922), Sozialistische Rechnungslegung, Archiv für Sozialwissenschaft und Sozialpolitik, 49: Schumpeter, J.A. (1908), Das Wesen und der Hauptinhalt der theoretischen Nationalökonomie, Leipzig: Duncker&Humblot. Schumpeter, J.A. (1910), Über das Wesen der Wirtschaftskrisen, Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 19: Schumpeter, J.A. (1911), Theorie der wirtschaftlichen Entwicklung, Munich and Leipzig: Duncker&Humblot, 2nd revised ed. 1926; Engl. transl. as The Theory of Economic Development. An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle, Cambridge, Mass. 1934: Harvard University Press. Schumpeter, J.A. (1939), Business Cycles. A Theoretical, Historical and Statistical Analysis of the Capitalist Process, 2 vols, New York: McGraw-Hill. Schumpeter, J.A. (1942), Capitalism, Socialism, and Democracy, New York and London: Harper&Brothers. Schumpeter, J.A. (1954), History of Economic Analysis, London: Allen&Unwin. Schumpeter, J.A. (2000), Briefe/Letters, sel. and ed. by U. Hedtke and R. Swedberg, Tübingen: Mohr Siebeck. Schumpeter, J.A. [1932](2005), Development, with an introduction by M.C. Becker, H.U. Esslinger, U. Hedtke and T. Knudsen, Journal of Economic Literature, 43(1): Shionoya, Y. (1997), Schumpeter and the Idea of Social Science. A Metatheoretical Study, Cambridge: Cambridge University Press. Stolper, W.F. (1994), Joseph Alois Schumpeter. The Public Life of a Private Man, Princeton, N.J.: Princeton University Press.

23 21 Streissler, E.W. (1994), The Influence of German and Austrian Economics on Joseph A. Schumpeter, in Y. Shionoya and M. Perlman (eds.), Schumpeter in the History of Ideas, Ann Arbor: The University of Michigan Press. Swedberg, R. (1991), Schumpeter. A Biography, Princeton, N.J.: Princeton University Press. Tisch, C. (1932), Wirtschaftsrechnung und Verteilung im zentralistisch organisierten sozialistischen Gemeinwesen, Wuppertal-Elberfeld: Scheschinski.

24 DOCUMENTS DE TRAVAIL GREDEG PARUS EN 2012 GREDEG Working Papers Released in Frédéric Marty Les clauses environnementales dans les marchés publics : perspectives économiques Christophe Charlier Distrust and Barriers to International Trade in Food Products: An Analysis of the US- Poultry Dispute Gérard Mondello The Equivalence of Strict Liability and Negligence Rule: A Trompe-l Œil Perspective Agnès Festré & Pierre Garrouste Somebody May Scold You! A Dictator Experiment Dorian Jullien & Nicolas Vallois A Probabilistic Ghost in the Experimental Machine Gérard Mondello Ambiguity, Agency Relationships, and Adverse Selection Flora Bellone, Kozo Kiyota, Toshiyuki Matsuura, Patrick Musso & Lionel Nesta International Productivity Gaps and the Export Status of Firms: Evidence from France and Japan Tiziana Assenza & Domenico Delli Gatti E. Pluribus Unum: Macroeconomic Modelling for Multi-Agent Economies Catherine Guillemineau Financial Reforms, International Financial Flows, and Growth in Advanced Economies Dino Borie Social Decision Theory and Non-Strategic Behaviour Edward Lorenz Social Capital and Enterprise Innovative Performance: A Multi-Level Analysis of Developing Nations Agnès Festré & Pierre Garrouste The Economics of Attention : A New Avenue of Research in Cognitive Economics Harald Hagemann Capitalist Development, Innovations, Business Cycles and Unemployment: Joseph Alois Schumpeter and Emil Hans Lederer