Emil Lederer, Price Dislocations versus Investments (1938)

Emil Lederer’s journal article examines how price structures and investment jointly determine recovery from depression. Its four sections move from criticism of competing recovery doctrines, through a theoretical analysis of price rigidity and deflation, to evidence from 1929–1937 and proposals for public policy. Lederer rejects both restoring the supposedly “normal” relative prices of 1926 and treating investment expenditure as a sufficient remedy. Prosperity at a particular price structure does not establish its soundness: unchanged prices can conceal changing production costs and industrial imbalances.

I propose to analyze the problem of prices during the business cycle in conjunction with the problem of investments.

This conjunction requires distinguishing cyclical disturbances from secular changes, such as agricultural price declines caused by altered export markets and technical development. It also requires examining prices against costs, quantities, demand, and the phase of the cycle. Neither a price index nor an isolated comparison between industries can establish which adjustments would restore productive activity.

Section II dismantles the apparently simple opposition between rigid and flexible prices. A price is rigid when it fails to respond to relevant changes in costs or demand; an unchanged price reflecting unchanged prime costs is instead stable. Lederer distinguishes overhead from current production costs and separates long-run, short-run, and “momentary” market situations. Short-run competitive prices reflect marginal prime costs, whereas long-run viability requires covering average costs, including overhead. Once production expenditure has been incurred, however, unexpected market conditions may force sales below prime costs. Uncertainty and the interval between production and sale therefore complicate the theoretical account of price adjustment.

Wages cannot be treated straightforwardly as another commodity’s marginal production cost: labor’s maintenance depends substantially on historically and institutionally established living standards. Nor does monopoly necessarily imply rigidity. Monopoly prices can decline with shrinking demand if demand elasticity remains unchanged; resistance to reductions becomes more likely when demand also loses elasticity. Modern mass production further complicates the competitive benchmark. Large firms may charge more than perfect competition would permit with the same technique, yet less than small-scale production using older methods could achieve. Lederer thus avoids identifying every departure from competitive pricing with economic harm.

Section III asks whether universal flexibility would actually remedy depression. Beginning with declining demand for producers’ goods, Lederer traces how reduced prices, wages, and receipts diminish demand for consumption goods, which then further depresses investment demand. The demand curve cannot be held constant while the incomes supporting it are falling. Expectations of continued price declines also encourage postponed purchases.

Rigidities may thus be considered brakes on the downslide.

The claim reverses the conventional presumption that rigidity necessarily obstructs recovery. Complete flexibility can destroy profits and capital values through cumulative deflation; maintained wages and some resistant prices can limit that process. Savings expenditure, producers’ reserves, and public deficits also sustain demand. This is not a general defense of rigidity: Lederer’s question becomes which particular rigid prices block industries whose revival is essential to recovery.

Section IV addresses that question through wholesale-price movements and production evidence. Farm products and raw materials fell sharply during depression and responded strongly to recovery and renewed recession. Finished commodities fluctuated less. Basic materials, especially building materials and iron and steel, regained approximately their 1929 prices during recovery and resisted the contraction late in 1937. Hourly wage increases do not by themselves establish rising unit labor costs, since productivity and production methods also changed.

A mechanical comparison of relative prices is of little value.

The decisive issue is the strategic position of particular prices. Higher consumption-goods prices during expansion can sustain profits and capital formation without preventing consumption from growing alongside income. Higher investment-goods prices can instead narrow manufacturers’ expected profit margins and deter new projects. Their effect depends on the strength of expansion, available opportunities, confidence, and the speed of price increases. Prices tolerable in vigorous growth may precipitate breakdown during a hesitant recovery. Apparently inelastic investment demand may itself result from excessive investment costs.

Lederer consequently challenges producers’ argument that price reductions would merely sacrifice receipts without stimulating orders. Such reasoning overlooks interactions across industries and successive phases of recovery. Yet intervention also poses a genuine difficulty: forcing prices down to marginal prime costs during depressed demand can impose losses, while leaving prices untouched can prevent investment from reviving.

Public works may thus be indispensable, in order to launch an expansion.

Public spending remains justified because favorable relative prices alone may not generate sufficient investment. But public works can also raise basic-material prices and undermine the private expansion they are intended to initiate. Lederer therefore advocates combining expenditure with a careful price policy. Public orders improve capacity utilization and lower average costs; those gains should reach purchasers of basic materials rather than support price increases that restrict subsequent investment. His conclusion leaves wages and interest rates for further investigation. The article’s lasting conceptual contribution is its refusal to choose between investment stimulus and structural adjustment: recovery requires sustaining aggregate demand while controlling the strategically placed costs through which expansion can defeat itself.