Joseph A. Schumpeter, Die Arbeitslosigkeit (1927)

Schumpeter’s article examines the causes of unemployment in contemporary Germany and the institutional conditions under which economic explanations become applicable. Its argument moves from Gustav Cassel’s account of insufficient labour mobility through a critique of industrial concentration to a reluctant conclusion about economic planning. The governing distinction is between the validity of competitive theory and its usefulness in diagnosing an economy increasingly organized through cartels and trusts. Schumpeter accepts much of Cassel’s theoretical reasoning while arguing that its assumptions cannot simply be transferred to Germany’s actual economic order.

The opening treats public confusion about unemployment as a failure of political judgment rather than economic science. Organized interests replace investigation with moral accusation: assistance is either approved regardless of its effects or denounced as Bolshevism. Against both responses, Schumpeter demands an analysis whose conclusions need not be agreeable. His defence of Cassel likewise separates the intellectual merits of an argument from its political reception. Dismissing an explanation as excessively liberal does not refute it.

Cassel’s argument begins from the complementarity of production and demand. Abstracting from money, Schumpeter explains that overproduction in some branches implies underproduction elsewhere: productive resources have been misallocated. With free competition and fully mobile labour, workers could move toward the undersupplied branches, and persistent general unemployment would disappear at freely determined wages. Schumpeter regards this theoretical reasoning as sound, but insists on the distance between a theorem and a diagnosis:

Aber von dieser Erkenntnis bis zu ihrer praktischen Anwendung führt ein Weg, der genau so weit ist, wie der Weg von einem Theorem der reinen Mechanik bis zum Bau einer Brücke.

English translation: But from this insight to its practical application lies a path exactly as long as the path from a theorem of pure mechanics to the construction of a bridge.

The bridge analogy establishes the article’s method. Theory identifies mechanisms, but explaining an actual economy requires examining qualifications, occupational status, geographical obstacles, and political restrictions. Trade unions can also impede adjustment by sustaining wages above competitive levels and restricting entry. Yet Schumpeter rejects the inference that this necessarily damages workers collectively: a larger aggregate real wage might compensate for the cost of supporting unemployed members. He further judges that German wage levels make union policy a relatively weak explanation of Germany’s unemployment, unlike that of England and northern Europe.

The decisive qualification concerns employers rather than workers. Cassel’s conclusion presupposes competition among firms. Where employers act collectively, they need not expand output to the point required to employ the available workforce; restricting production can yield monopoly-like profits.

Die Folge kann sehr wohl dauernde Arbeitslosigkeit eines Teils der Arbeiterschaft sein.

English translation: The consequence may very well be permanent unemployment for part of the workforce.

Schumpeter distinguishes this structural possibility from an allegation of deliberate conspiracy. A unified employers’ association might benefit tactically from unemployment in wage negotiations, but he does not claim that existing associations consciously pursue that objective. His stronger point is that concentrated industry removes the competitive pressure that would otherwise make employment expansion necessary.

The same conceptual move transforms his treatment of rationalization. Machinery and Taylorization initially displace workers, whose reabsorption is difficult and painful. Under competition, however, technical improvement normally benefits workers over time. Concentrated employers can restrict output and prevent both reabsorption and the transmission of productivity gains to labour. Technological unemployment can consequently become persistent under institutional conditions that invalidate the usual adjustment mechanism.

Other explanations remain relevant, including postwar occupational displacement, changes in the world economy, and political insecurity. Schumpeter nevertheless assigns limited contemporary importance to monetary disturbances and the business cycle in Germany. He also warns that recorded unemployment is not directly comparable with prewar figures, owing to impoverishment, more comprehensive registration, and changed recourse to relief.

Gewiß ist Arbeitslosigkeit immer ein komplexes Phänomen, zusammengesetzt aus vielen Elementen, deren Bedeutung von Monat zu Monat schwankt und die, grundverschieden in ihrem Wesen, ganz verschiedene Behandlung verlangen.

English translation: Certainly, unemployment is always a complex phenomenon, composed of many elements whose importance fluctuates from month to month and which, fundamentally different in their nature, require quite different treatment.

This qualification prevents his emphasis on concentration from becoming a universal explanation. It also grounds his insistence that identifying the economic costs of relief does not entail allowing people to starve. Against a simple crowding-out objection to emergency public works, he notes that state initiative, foreign borrowing, credit expansion, or taxation of otherwise consumed income can increase investment and future labour demand.

The conclusion turns on a dilemma. Destroying cartels might restore competitive pressures, but Schumpeter considers large industrial organizations necessary for some technical advances and advantageous in Europe’s antagonistic international economy. If these organizations remain while their pricing and output policies sustain unemployment, unemployment assistance becomes an unavoidable component of the existing order. Alternatively, public authority must compel industry to pursue policies competition would otherwise enforce automatically—thereby assuming essential functions of industrial direction.

Deshalb, freilich nur deshalb, kann unter den gegebenen Umständen das Problem der Arbeitslosigkeit nur in einer – nicht notwendig staatlichen – Planwirtschaft gelöst werden.

English translation: Therefore, admittedly only for that reason, under the given circumstances the problem of unemployment can be solved only within a planned economy—not necessarily a state-run one.

Planning emerges here without enthusiasm, from the incompatibility between concentrated production and remedies premised on free competition. The article’s significance lies in this institutional reversal: Schumpeter preserves competitive theory while using its conditions of validity to explain why contemporary unemployment requires a different practical response.