Emil Lederer, The Problem of Development and Growth in the Economic System (1935)

Emil Lederer’s journal article examines how an economy with unemployed workers, unused productive capacity, and available capital can resume growth. Its central distinction is between innovations that create new wants and industries and technical improvements that merely reduce the labor required for existing production. Development requires more than resources or unsatisfied needs: it requires profitable outlets that reconnect idle resources through effective demand. Moving from a critique of equilibrium assumptions to an account of industrial expansion, Lederer then tests that account against transportation, foreign trade, changes in consumption, and public works.

Lederer begins by distinguishing the forces initiating development from the dynamics of an economy already expanding. Theories of evenly proportioned growth largely assume away the problem: labor, capital, output, and money increase together, leaving prices and the allocation of resources undisturbed. Uneven development instead raises the question of how displaced resources are reabsorbed. Conventional answers presuppose continuous demand for capital, stable monetary circulation, and exceptionally rapid adjustment. Depression exposes the weakness of these premises:

In the absence of investments the circular process of the economic system reaches a dead point which cannot be overcome by the spontaneous economic forces.

This impasse gives limited significance to Rosa Luxembourg’s argument about capitalism’s dependence on noncapitalist markets. Lederer rejects her general theory because expanding monetary purchasing power can absorb additional production during an upswing. Nevertheless, her concern with inadequate outlets illuminates the situation after severe depression, when overcapacity discourages investment. Unlike Mill’s account of accumulation arrested by falling returns, Lederer emphasizes interest rates that remain too high to restore sufficient demand for capital.

His principal alternative is the creation of industries through “spontaneous inventions.” Bicycles, telephones, electric lighting, automobiles, and other innovations enlarge the range of wants, even where they also replace older commodities. Their developmental significance depends on additional demand, not novelty alone. Labor-saving machinery, by contrast, immediately displaces workers whose reemployment cannot be assumed:

The theory of automatic compensation finds hardly any support today, even if the completely free mobility of all economic elements is assumed.

Lederer explains the incorporation of a new industry through the circulation of purchasing power. Established consumers divert expenditure from existing goods to the new product; the newly employed workers and entrepreneurs then purchase those existing goods. Their spending counterbalances the initial reduction in established consumers’ demand. Provided the new industry recruits idle resources, this additional circuit can expand production without contracting the older industries. The argument concerns an economy capable of employing additional producers, not simply reallocating a fully employed workforce.

The monetary analysis supports this account without making an increase in the money supply indispensable. Investment capital may become available through depression-era liquidation or be diverted from construction. Working capital can come from bank lending against existing deposits; alternatively, a modest acceleration of monetary circulation can accommodate the additional transactions. Lederer distinguishes repayable credit circulating through successful production from new currency issuance or advances supporting goods that find no market. Monetary accommodation alone, however, cannot establish the profitable opportunities that depressed economies lack.

Growth also has secondary effects. Established producers may seek to recover their former consumption while retaining access to new goods, increasing output and drawing on unused capacity. Purchases financed from savings can reduce inventories and stimulate production. New industries generate demand for raw materials, transport, commerce, administration, and housing, so their employment effects exceed their own payrolls. Once reserves are absorbed, further expansion can call forth investment in productive capacity.

Railroads illustrate how an apparently labor-saving improvement can nevertheless create a new economic sphere. Lower transport costs made exchanges feasible that had previously been prohibitively expensive, extending reciprocal markets rather than merely displacing existing transport labor. Lederer applies a similar distinction to foreign trade: imports satisfying previously unmet wants can stimulate additional export production, whereas cheaper imports replacing domestic goods chiefly redistribute employment. Consumer gains do not guarantee immediate jobs for displaced workers.

The discussion of fashion, coal demand, and services extends the argument beyond invention. A shift in expenditure may activate unemployed producers whose subsequent consumption sustains demand elsewhere. Yet this possibility rests on a decisive condition:

This chain of reasoning rests upon the assumption of the existence of a reserve of labor power and a reserve of productive capacity.

Without reserves, altered demand principally transfers resources and changes consumption. Nor is redirecting expenditure an easy policy instrument: necessities and social customs bind much consumption, while the desire to consume more cannot itself connect unemployed people with idle productive capacity.

Public works are assessed through the same distinction between activation and displacement. Loans financed from idle capital can increase production; income-financed projects expand employment only under conditions in which newly employed workers’ consumption offsets the lenders’ reduced purchases. Replacement industries likewise offer temporary investment stimulus without necessarily increasing permanent employment. Public works may additionally create socially valuable institutions whose benefits do not appear as monetary income.

Lederer concludes by identifying new demand-generating industries as the strongest available stimulus:

They cannot be decreed since they depend entirely on technological innovations.

The article’s relevance lies in its discrimination among forms of technical change and expenditure. Growth is not an automatic consequence of saving, innovation, or greater efficiency. It depends on whether new production establishes effective demand, activates idle resources, and widens the economic circuit rather than merely redistributing its existing activity.