Emil Lederer’s Theory of Economic Fluctuations and the Role of Financial Institutions

Abstract

Emil Lederer was characterized as the “leading academic socialist of Germany in the 1920’s” by Joseph Schumpeter and was a highly respected economist of his time. However, most aspects of his work remain totally unexplored. This paper focuses on Emil Lederer’s theory of economic fluctuations defending the thesis that certain aspects of Lederer’s conceptualization of economic fluctuations underwent considerable modifications when his 1925 article Konjunktur und Krisen is compared with his 1938 book Technical Progress and Unemployment, a shift unacknowledged so far in the literature. In his first attempt to tackle the issue, in Konjunktur und Krisen (1925), Lederer had constructed an explanation consistent with the so-called “disproportionality theory” introduced by Tugan-Baranowsky (codified as “early Lederer”). However, Lederer’s conception of the business cycle during the 1930s and especially in his major work Technical Progress and Unemployment underwent considerable modifications. Lederer’s (1938) analysis is, apparently, very ‘Schumpeterian’ (codified as “late Lederer”). In this version of his theory, the cycle is explained by supply-side factors, and more specifically by technical change. Additionally, Lederer’s view on the role of financial institutions (credit and banks) with regards to business cycles is analysed. Lederer avoided attributing a causative role to monetary factors. The interrelation between ‘real’ factors and financial institutions constitutes an essential element in his analysis of the business cycle.

Keywords:

• lederer
• schumpeter
• hilferding
• tugan-baranowsky. economic fluctuations
• credit

JEL classifications:

• B15
• B25
• B31
• B52

Acknowledgement

The authors would like to thank the Editors, the anonymous Referees, Harald Hagemann and the participants of 14th Annual Conference of the European Society for the History of Economic Thought (ESHET), Amsterdam, 2010 for useful comments and discussion. The usual disclaimer applies.

Notes

1 For Lederer’s attempt to sociologically understand the main features of war, especially World War I, see Lederer (2006).

2 Odegard (1941, p. 203) characterized it as a “profound analysis of modern fascism”.

3 It should also be noted that Lederer’s major work on Technological Unemployment was published by the International Labour Office rather than an academic publisher.

4 Disproportional developments in the producer and consumer goods sectors in the course of the business cycle constitute a common point between Lederer’s 1925 analysis and Schumpeter’s work on business cycles (Allgoewer 2003, p. 333). While Schumpeter acknowledged the importance of disproportionality (“[T]his idea […] is moreover easy to substantiate from certain very obvious facts” [Schumpeter 1954, p. 1133]) he avoided attributing a causative role to it. He stressed the importance of looking for “the definite factors that are to account for it” and concluded that “those factors and not disproportionality per se will individuate an author’s theory” (ibid, p. 1133).

5 Lederer was especially concerned with what he considered to be a weak point of Marxist theory, namely the dipolar class struggle between capitalists and workers. Together with other socialist theoreticians of the period he sought to develop a conceptual framework within which to analyse the complex stratification of the inter-war German society and especially the increasingly important middle class (Mayer 1975). However, Lederer’s views on this issue did not remain unchanged. While in 1907 he wrote that the formula “capitalist—proletarian blurs all contrasts within the economic order and thus obscures all distinctions outside of and within the process of production” (Lederer 1912), in an article written in 1926 (jointly with J. Marschak) he expressed the view the that salaried employees are seemingly becoming aware of the “fundamental incompatibility between capital and labor” and consequently are joining themselves with the working class (see further Burris 1986; Hagemann 2000).

6 Lederer mentioned the decrease in employment as the most reliable leading indicator for a phase change in the economic cycle. More specifically, a deceleration of demand, either in the capital or the consumer’s goods sector, will inevitably lead to dismissal of workers.

7 Certain passages in Lederer’s work are of an underconsumptionist character. In his 1934 article on technology he wrote: “The question of equitable distribution of the social product is a difficult one because of the antinomy in capitalist production whereby wages not only figure as costs of production but are at the same time also a source of purchasing power. Whereas the lowering of wages up to a certain level is often a necessary condition for the realization of profits, it may likewise involve a danger for profits” (Lederer 1934, p. 554).

8 In an earlier article from the 1930s, Lederer had noted that “it is certain that the dynamics of capitalist economy is bound up intimately with modern technology” (Lederer 1934, p. 553).

9 Lederer’s distinction between these two forms of technical change reminds us of the one proposed in the (neoclassical) literature between process and product innovations (see e.g. Acemoglu 2009).

10 Lederer mentioned the mechanical spindle and loom as a great historical example of the disturbances caused by this type of technical change (Lederer 1933, p. 5).

11 See also Moszkowska’s critique on Grossman (Moszkowska 1935, Chapter IV).

12 Of course, Lederer’s approach could be explained in association with other economists’ works (mostly German speaking) such as Hilferding, some members of the so-called German Historical School, and several others, whose works covered a broad theoretical spectrum. See, for instance, Michaelides and Milios (2005), Michaelides and Milios (2009), Michaelides et al. (2010) and Vouldis et al. (2011). In fact, Lederer seems to have incorporated insights from his political involvement in Social Democratic circles to his theory, trying to combine his Marxist views with interwar German economic realities (Krohn 1981).

13 The following excerpt is typical: “Heavy demands on the credit market are therefore only likely to arise as the result of sudden prospects of large profits, created in particular by the opening up of new markets, the manufacture of new products, and improved methods of production in the broadest sense of the term” (Lederer 1938, p. 230).

14 Lederer’s vision of the role of the state in alleviating the impact of economic fluctuations underwent a change after his emigration in the United States: “[Lederer] adopted a less pessimistic view of the ability of market mechanisms to compensate for the labor displacement effects of technological change; and he moved away from his earlier insistence on the need for comprehensive economic planning, advocating instead a greater reliance on traditional policy interventions such as deficit spending and public works. Hischange of stance on these matters no doubt reflected an increased concern about the State’s potential to abuse its power” (Mongiovi 2005, p. 431). See also Allgoewer (2003, p. 337).