Capitalist Development, Innovations, Business Cycles and Unemployment: Joseph Alois Schumpeter and

1. Capitalist Development, Innovations, Business Cycles and Unemployment: Joseph Alois Schumpeter and Emil Hans Lederer Prof. Dr. Harald Hagemann, University of Hohenheim, Stuttgart

2. Outline • Joseph Alois Schumpeter and Emil Hans Lederer : Introduction • Boehm-Bawerk’s Seminar and the Marxian Challenge: The Formative Years • The Archiv für Sozialwissenschaft und Sozialpolitik • Business Cycles and Capitalist Development • Technological Unemployment • Schumpeter and Lederer: Two Social Economists

3. 1. Joseph Alois Schumpeter and Emil Hans Lederer : Introduction “In economic theory, Schumpeter was Lederer’s master.” Jacob Marschak, letter to Hans Speier, April 14, 1977. Hans Speier Papers, State University of New York at Albany. “Emil Lederer … may be described as the leading academic socialist of Germany in the 1920’s.” Schumpeter (1954, History of Economic Analysis, 884 n. 10).

4. Emil Lederer: Life and Work • 22 July 1882: Born in Pilsen • 29 May 1939: Lederer died in New York • 1905: Dr. jur. University of Vienna • 1911: Doctoral studies at the University of Munich. Thesis: Privatangestellte in der modernen Wirtschaftsentwicklung. Thesis supervisor: Lujo Brentano • 1912: Habilitation at the University of Heidelberg: Theoretical and statistical principals of modern issues of employees (Theoretische und statistische Grundlagen zur modernen Angestelltenfrage) • 1931-33: Lederer succeeded Heinrich Herkner (at the former chair of Gustav Schmoller) at the University of Berlin • 1933-39: Professor and Founding Dean of the University in Exile, later known as the Graduate Faculty of Political and Social Science, New School for Social Research, New York

5. 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. • where both Schumpeter and Lederer first developed a greater interest in Marxian analysis. • Besides Ludwig von Mises (1881-1973), the Austromarxists Otto Bauer (1881-1938), Rudolf Hilferding (1877-1941) and Otto Neurath (1882-1945) were among Schumpeter and Lederer’s fellow students. Otto Bauer (1904-5) wrote his first major essay on Marx’s theory of economic crises. Shortly before Hilferding (1904) had repudiated Böhm-Bawerk’s criticism of Marx and attacked the subjective theory of value. In 1905 Hilferding had already completed substantial parts of his opus magnum Finance Capital (1910)

6. Boehm-Bawerk’s Seminar and the Marxian Challenge: The Formative Years • As Streissler (1994) has observed 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 banking) control of the widely held joint stock company, a position later championed by Schumpeter(30-1).

7. Boehm-Bawerk’s Seminar and the Marxian Challenge: The Formative Years • Lederer and Schumpeter 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. • 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. • Paul M. Sweezy, whose The Theory of Capitalist 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.

8. 3. The Archiv für Sozialwissenschaft und Sozialpolitik • 1922-33: Lederer was the editor of the Archiv für Sozialwissenschaft und Sozialpolitik together with Joseph A. Schumpeter and Alfred Weber • Publications (inter alia): • 1920: Ludwig von Mises, Die Wirtschaftsrechnung im sozialistischen Gemeinwesen • 1926 Nikolai Kondratieff, Die langen Wellen der Konjunktur • 1928 Wassily Leontief, Die Wirtschaft als Kreislauf

9. The Archiv für Sozialwissenschaft und Sozialpolitik • Most important from a modern perspective is the contribution by Jacob Marschakon 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. 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.

10. The Archiv für Sozialwissenschaft und Sozialpolitik • 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). • 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).

11. The Archiv für Sozialwissenschaft und Sozialpolitik • 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 BusinessCycles (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

12. 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. 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.

13. Business Cycles and Capitalist Development • 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.

14. 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)

15. Technological Unemployment • 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.

16. Technological Unemployment • 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” (Lederer 1931: 72n, my italics).

17. Technological Unemployment

18. Technological Unemployment • 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).

19. Technological Unemployment • 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 category which, besides other types of unemployment comprises also technological unemployment.

20. 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. 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.

21. Schumpeter and Lederer: Two Social Economists • 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”.