Emil Lederer, Social Control versus Economic Law: An Old Dogma and a New Situation (1934)

Emil Lederer’s journal article reconsiders the limits of economic intervention through a critique of Böhm-Bawerk’s account of power and economic law. Its central move is to replace a static question—whether organized interests or governments can alter the distribution of a fixed social product—with a dynamic one: whether deliberate policy can mobilize unused productive powers and enlarge that product. An introductory discussion of reserves establishes this distinction; three numbered sections examine recovery, malfunctioning price relationships, and economic psychology. The conclusion connects these mechanisms to the expanded capacities and political responsibilities of the modern state.

Lederer reconstructs Böhm-Bawerk’s position carefully. Particular monopolies can gain at other groups’ expense, but capital or labor as a whole cannot permanently increase its share beyond the proportions determined by economic forces. Artificially high interest leaves capital uninvested; artificially high wages reduce profits and employment. These reactions tend to undo intervention. Lederer’s objection concerns the assumptions underlying this sequence:

One of the important presuppositions upon which this chain of reasoning rests is the assumption that our system of production operates without any reserves.

Reserves create room for action that equilibrium reasoning overlooks. Lederer distinguishes accumulated equipment, durable goods, and inventories from unutilized productive potentialities: better organization, new methods, and increased division of labor. Using up existing assets alone cannot sustain a permanently improved position. Activating unused capabilities, however, can expand output and leave real incomes higher even if distributive proportions subsequently return toward their former relationship. Economic control thus becomes a problem of growth and cyclical coordination, not simply compulsory redistribution. Its success depends on timing: the same change in wages or interest may facilitate expansion in one phase and obstruct it in another.

Section I explains both the strength and the limits of automatic recovery. In an ordinary crisis, inefficient firms disappear, interest rates fall, and investment becomes attractive again. Construction and capital-intensive public utilities are especially important because interest charges dominate their costs. Lederer therefore shifts attention away from Böhm-Bawerk’s emphasis on longer, more roundabout production toward the cost structure of investment. Renewed investment creates employment and consumer demand, which then stimulates wider production.

Where this mechanism works promptly, intervention may be unnecessary or harmful. Subsidies and artificially cheap credit can divert capital toward inferior projects, accelerate price increases, and exhaust the possibilities of credit expansion prematurely. Yet restored equilibrium does not itself guarantee renewed activity:

A revival of business, however, does not automatically follow a restoration of the equilibrium during the depression.

Recovery requires net capital accumulation and available investment opportunities. A prolonged depression can undermine both. Losses consume savings, excess capacity discourages investment, and unemployment or declining urban population weakens housing demand. Lower interest rates cannot resolve these obstacles. Public works consequently acquire a different significance from that assigned them by a simple depletion-of-capital argument:

In other words, public works not only use up existing capital reserves but also provide for the accumulation of new; it would be difficult to say which of these effects is more potent.

Public employment partly offsets relief expenditure, while renewed production accelerates monetary circulation and facilitates saving. Lederer does not claim that these effects can be ranked with certainty. His point is that public spending must be assessed dynamically, including the activity and reserves it helps generate.

Section II turns to failures of price adjustment. Monopoly impedes the response of prices to demand, sustaining high prices through restricted output. Competition itself can also produce destructive reactions, as when falling agricultural prices induce increased acreage. In a severe crisis, continued adjustment may increase unemployment and production costs rather than restore efficiency. Governments already intervene through tariffs, orders, tax concessions, and subsidies, but such assistance can reward maladjustment. The argument therefore calls for a general plan capable of distinguishing useful intervention from indiscriminate rescue.

Section III examines expectations as mechanisms through which reserves become active. Consumers postpone purchases when they expect further price declines and advance them when they anticipate increases. Earlier spending can permit debt repayment, fresh lending, expanded output, and additional employment. Nevertheless, a purchasing campaign risks uneven expansion: consumer-goods industries respond before equipment producers or construction. Producer expectations matter still more. Firms with unused credit and cash reserves may collectively create the demand they anticipate by expanding employment and output.

In other words, an economic policy whose effectiveness is dependent upon the existence of reserves in the system may operate primarily through psychological channels.

Psychology is thus economically effective because it changes the use of existing resources, not because confidence abolishes material constraints. The concluding discussion extends this argument to governmental authority. Wartime organization demonstrated capacities for directing a modern economy; the subsequent world crisis made governmental leadership an urgent public demand. Publicity could reinforce changing expectations, but expanded state power carried dangers as well as benefits, including those associated with dictatorship. Economic laws remained operative.

The article’s relevance lies in its conditional defense of planned recovery. Collective action need not defeat economic law: it can remove impediments to growth within the possibilities that those laws allow. By enlarging output rather than merely reallocating a fixed total, policy may also reduce the intensity of distributive conflict. Lederer’s case rests throughout on identifiable reserves, investment opportunities, monetary circulation, and coordinated expansion—not on an unlimited capacity of political power to command prosperity.