J Evol Econ (2015) 25:117–131

DOI 10.1007/s00191-014-0358-4

REGULAR ARTICLE

Capitalist development, innovations, business cycles

and unemployment: Joseph Alois Schumpeter and Emil
Hans Lederer

Harald Hagemann

Published online: 24 May 2014

© Springer-Verlag Berlin Heidelberg 2014

Abstract Emil Lederer and Joseph Schumpeter became life-long friends in their stu-
dent days at the University of Vienna. The life and work of both economists took
place in three states and four political cultures. After a short biographical information
with emphasis on the linkages between Schumpeter and Lederer, section II addresses
the influence of Böhm-Bawerk’s famous seminar in 1905–06 where both Schumpeter
and Lederer first developed a greater interest in Marxian analysis. Next the role of
the Archiv für Sozialwissenschaft und Sozialpolitik is covered, which in the years of
the Weimar Republic was edited by Lederer with Schumpeter as an associate editor.
Among many important papers in the Archiv we find also Kondratieff’s famous arti-
cle on the long waves in economic life which had a strong impact on Schumpeter’s
Business Cycles (1939). Lederer and Schumpeter both shared the view that capitalist
economies normally are in dynamic disequilibrium. Business cycles are seen as an
integral part of capitalist development. Emphasis in economic theory should there-
fore be put on the analysis of the short-run and particularly the long-run dynamics of
the economy. In section IV Schumpeter’s analysis of business cycles and capitalist
development is compared with Lederer’s analysis. In section V Lederer’s treat-
ment of technological unemployment is analyzed and compared with the analysis of
Schumpeter who considered technological unemployment as a special case aris-
ing from disturbance by innovations within the economic system. Finally, some
reflections are made how far Schumpeter and Lederer were social economists.

Keywords Business cycles · Capitalist development · Innovations · Socialist

calculation · Technological unemployment · Lederer · Schumpeter

JEL Classifications B31 · E24 · E32 · Q33

H. Hagemann ()
Institute of Economics (520), University of Hohenheim, 70593 Stuttgart, Germany
e-mail: hagemann@uni-hohenheim.de
118 H. 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 aca-
demic 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 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 in Bonn which he held until September 1932 when he
moved to Harvard. Whereas the first year 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

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).
Capitalist development, innovations, business cycles and unemployment 119

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 Ser-
vice Act’ on April 7, 1933 to dismiss scientists from their academic positions for
racial 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 col-
leagues 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 anti-fascist 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 eco-
nomic crises, Schumpeter (1910) started to engage himself in the investigation of this
subject, which three decades later culminated in his monumental two-volume work

5 For greater details see Schumpeter’s Letters (2000: 189–219) and Stolper (1994: 311-2).
6 Schumpeter (2000: 246).
7 Ibid: 247. In attributing the succession of Schmoller to Sombart, Schumpeter is confusing the two central

chairs in Berlin.
120 H. Hagemann

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 pub-
lications was a 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 accumu-
lation 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 devel-
oped 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 Austro-
marxists Otto Bauer (1881–1938), Rudolf Hilferding (1877–1941) and Otto Neurath
(1882–1945) were among Schumpeter and Lederer’s fellow students. 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 substan-
tial 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 con-
trol 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 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 bank-
ing) 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

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).

9 See Schumpeter (1942: chpt. XII.3).
Capitalist development, innovations, business cycles and unemployment 121

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 dou-
ble 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 Uni-
versity 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 Cap-
italist Development (1942) established the author as a leading figure in Western
Marxism, had 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 social-
ization 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 Socializa-
tion 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 suggest-
ing 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

10 Streissler
(1994: 30).
11 SeeSection 3 ‘Economics of Socialism’ in the obituary of Lederer by Marschak et al. (1941: 93–100).
For greater details on Schumpeter’s role see Stolper (1994: 202–214) and Swedberg (1991: 54–58).
122 H. Hagemann

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 social-
ism 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 rep-
resentatives 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 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 effi-
ciency 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 Ger-
man 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-editors Schumpeter and Alfred Weber. During the Weimar years the num-
ber of articles focusing on economic issues significantly increased. There had been

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).
Capitalist development, innovations, business cycles and unemployment 123

important articles before as, for example, Bortkiewicz’ two famous articles on ‘Value
and Price in the Marxian System’ (1906), 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 scien-
tific 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 com-
monwealth 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 Eco-
nomic 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 the-
ory 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 cal-
culation, 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 Leontief whose Berlin PhD thesis was also published in the
Archiv (Leontief 1928). Marschak’s first major publication was his article on eco-
nomic 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 require-
ments 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 num-
ber 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 effi-
ciency 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

14 See Marschak (1924: 514).

124 H. Hagemann

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 critique with its emphasis on dynamic factors later inspired Hayek
to elaborate the problems of socialist calculation with particular emphasis on the dis-
persion 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
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
elaborate 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 capi-
talist 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

15 SeeHayek (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).
Capitalist development, innovations, business cycles and unemployment 125

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 busi-
ness cycles and crises, as developed in Lederer (1925), as “an example of an analysis
that stresses certain types of disproportionalities”. Although he recognizes that dis-
proportionality 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 ana-
lyzing business cycles “means neither more nor less than analyzing the economic
process of the capitalist era” (Schumpeter 1939: V). His theory of economic devel-
opment 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 pro-
ductive 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 com-
petition 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 neces-
sary 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 inno-
vating entrepreneurs 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 tem-
porary 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 fac-
tor, namely the productivity-enhancing effects of innovations. Interest thus becomes
the product of economic development. Schumpeter makes it very clear that addi-
tional credit has to be spent for innovative investment activities, not for increased
126 H. Hagemann

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 eco-
nomic 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’ for 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 [1932]2005). Looking at Lederer’s writings, it becomes
very clear that his 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 com-
pensation 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

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

Capitalist development, innovations, business cycles and unemployment 127

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 perma-
nent 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 per-
manent ‘industrial reserve army’.” In his analysis of technological unemployment
Lederer combines central elements of Marx’s theory of accumulation with Schum-
peterian 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 intro-
duction 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 real-
location 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 disequilib-
rium 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 carteliza-
tion. 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 possi-
ble 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 for-
mation 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 accu-
mulation 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 has been emphasized
by Eßlinger (1993), can also be identified in his studies on the employment con-
sequences of technical progress. Thus Lederer (1938) puts more weight on product
innovations and 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

18 For a more detailed analysis of Lederer’s studies on technological unemployment see Hagemann (2009).
19 See,for example, Lederer (1931: VI).
20 Lederer (1931: 72n, my italics).
21 See Lederer (1938: 198–214).
128 H. Hagemann

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 in profits and interest being smaller than
the decline in wage income.
Interestingly, in his reference to a superior technique developed by modern eco-
nomic 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 employ-
ment 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 cap-
italist 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
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, identi-
fies 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

22 See Hagemann (2008).

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).
Capitalist development, innovations, business cycles and unemployment 129

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.25
Lederer was less strict concerning the position that theoretical economics should
not take a political stance26 , although he knew from his student days in Vienna that
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 classi-
cal 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.

25 On Schumpeter’s relationship with Max Weber, who had created the new discipline of economic socio-

logy and also the notion of social economics, see Swedberg (1991: 92–3) and Perlman ([1994](1996): 184).
26 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).
130 H. Hagemann

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