Emil Lederer, Is the Economic Frontier Closed? (1939)

Emil Lederer’s symposium article examines whether the Great Depression reveals a weakening of capitalism’s capacity for self-sustaining expansion. Its three sections distinguish types of economic growth, test the mechanisms supposedly ensuring automatic recovery, and draw limited conclusions for public intervention. Lederer contrasts an orthodox explanation—rigid prices and wages, monopolies, and government interference—with the hypothesis that the historical forces opening new investment opportunities have weakened. He favors the latter, but his conclusion is not that further growth is impossible. The economic frontier remains open to deliberate action even where spontaneous expansion has become unreliable.

It is my belief that the latter view is more tenable, that something is indeed wrong with the forces making for the growth of the economic system.

The article’s central conceptual distinction is between “horizontal” expansion, which enlarges existing branches of production, and “vertical” expansion, which establishes new industries. Expansion itself means an increase in aggregate production, including the renewed employment of idle resources. An industry remains new through its development, market introduction, diffusion among potential buyers, and achievement of an adequate production technique. Once mature, its further growth depends principally on population and general improvements in efficiency. Automobiles, Lederer argues, have largely reached this stage: replacement dominates demand, while emerging industries appear unlikely to reproduce the transformative scale of railways or electricity. This is a historically situated assessment of investment prospects, not a demonstration that invention has ended.

Section I grants that new industries would not be necessary in an ideal economy already sustaining full employment. If entrepreneurs expanded existing production, the additional employment would generate incomes validating their expectations. Innovation would then chiefly improve welfare by redirecting resources already employed. But this harmonious model assumes away the conditions requiring explanation: unused capacity, unemployment, and cumulative cyclical movements. Lederer therefore asks whether an economy emerging from severe depression can restore activity through existing industries alone.

There is no way of escaping the conclusion that recovery cannot be achieved by expansion in consumers’ goods production alone, that it has to be an all-around increase of output.

Section II develops the obstacle behind this claim. Unused plants discourage investment in additional capacity. Increased production within existing consumer-goods plants might create income, but not all of that income returns as demand for their products: some becomes profits, replacement reserves, or savings. Inventories consequently accumulate or prices decline, checking expansion. Neither higher nor lower wages supplies a straightforward escape within Lederer’s argument. Wage reductions redistribute purchasing power; increases may produce higher prices or losses. Investment in housing or other durables could break the deadlock, but would require unusually favorable cost relationships and expectations of future increases in costs. Horizontal recovery is therefore possible under particular conditions, not assured by a general tendency toward equilibrium.

Rapid mechanization compounds the problem. Lederer does not claim that productivity improvements necessarily cause unemployment; he argues that their employment effects depend on the system’s ability to absorb displaced workers. His numerical example makes this distinction concrete. A 20 percent reduction in labor requirements, where wages represent 30 percent of costs, permits a price reduction of only 6 percent. Reemploying all displaced workers would require demand to rise by 25 percent. If demand increases only proportionately to the price reduction, employment remains substantially below its former level. Retaining prices and investing the additional profits offers no automatic solution either: expenditure may be delayed, only part finances wages, and jobs may arise elsewhere or abroad.

New industries matter precisely because an economy with idle resources differs from one already at full employment. Their construction generates investment demand and their products attract consumption. Spending diverted toward new goods need not contract old industries, because newly generated incomes can offset that diversion. Lederer thus challenges the comforting historical inference that machines necessarily create more jobs than they destroy. Nineteenth-century adjustment depended on expansion of the whole system and still involved severe dislocation and misery.

During the nineteenth century the retardation of adjustments was caused by the lack of capital, while the demand for it was almost always brisk, but now, though the capital would be available, there are too few and too narrow outlets for it, too few working places.

This reversal from scarce capital to scarce investment outlets connects technological unemployment with stagnation. Technical displacement during a downswing aggravates overcapacity, while price reductions that preserve an individual producer’s market position do not necessarily restore aggregate expansion. The article’s relevance lies in this refusal to treat firm-level adjustment as proof of system-wide recovery.

Section III answers the title’s question by separating the exhaustion of automatic mechanisms from the exhaustion of economic possibility.

It means only that automatic developments can no longer be expected.

Lederer postpones detailed policy design but identifies monetary policy, selective subsidies, demand creation, and regional improvements in efficiency and purchasing power as possible interventions. Such measures need not amount to unlimited, reckless spending. His conclusion also concerns democratic understanding: inherited beliefs about thrift and self-denial may become destructive when deflation, rather than inflation, is the dominant danger. The closing appeal for a modern Mandeville expresses the article’s larger claim that economic virtues depend on historical circumstances. Preserving viable institutions requires recognizing how their conditions of operation have changed, rather than expecting yesterday’s mechanisms to restore prosperity.