In discussing the effect an increase in savings has on the structure of capital, Huerta de Soto gives three reasons why it leads to a more productive capital structure. The third reason being the Ricardo effect, descirbed as follows:
Professor Jesus Huerta de Soto: This increase in real wages, which arises from the growth in voluntary saving, means that, relatively speaking, it is in the interest of entrepreneurs of all stages in the production process to replace labor with capital goods. To put it another way, via an increase in real wages, the rise in voluntary saving sets a trend throughout the economic system toward longer and more capital-intensive productive stages. In other words, entrepreneurs now find it more attractive to use, relatively speaking, more capital goods than labor. This constitutes a third powerful, additional effect tending toward the lengthening of the stages in the productive structure. It adds to and overlaps the other two effects mentioned previously.
This increase in real wages, which arises from the growth in voluntary saving, means that, relatively speaking, it is in the interest of entrepreneurs of all stages in the production process to replace labor with capital goods. To put it another way, via an increase in real wages, the rise in voluntary saving sets a trend throughout the economic system toward longer and more capital-intensive productive stages. In other words, entrepreneurs now find it more attractive to use, relatively speaking, more capital goods than labor. This constitutes a third powerful, additional effect tending toward the lengthening of the stages in the productive structure. It adds to and overlaps the other two effects mentioned previously.
and also:
Professor Jesus Huerta de Soto: Hence it is easy to understand why increases in saving are generally followed by decreases in the prices of final consumer goods.
Hence it is easy to understand why increases in saving are generally followed by decreases in the prices of final consumer goods.
How does it follow that higher real wages, as a result of low prices of consumer goods, will make labour more expensive relative to capital goods and hence, more attractive to the entrepreneur?
Or am I missing something.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
By, the way I plan on reading Hayek's papers on this tonight (The Ricardo Effect and Three Elucidations of the Ricardo Effect). I am not arguing with you for any reason other than that I don't understand the issue.
nirgrahamUK:super subtle point, nominally you might not cost him more, but as your real wages rose, you really are costing him more, its a real cost that the employer bears. the same number of gold ounces he pays you, could buy more now than they could before, they are worth more. this is a real cost increase to the employer
Only if he plans on spending them on consumer goods, which, we've assumed he won't.
GilesStratton:But that's incorrect. Only consumer goods will have dropped due to decrease in demand as a result of greater savings.
Well you've got me then. I knew I shouldn't have tried answering a question on here.
GilesStratton:But, if real incomes increase entrepreneurs could simply cut wages accordingly and real income would go to the level it was previously. And even if this doesn't happen, there exists no sudden advantage in the use of capital goods.
entrepeneurs cut wages, precisely by not employing as many people, and getting their work performed by machines. entrepeenurs cant keep the same number of workers employed at a lowered wage, otehrwise they would have lowered the wages before, the wages are set in line with the workers productivity given the supply and demand for labour.
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
GilesStratton:Only if he plans on spending them on consumer goods, which, we've assumed he won't.
this is only possible if he has zero time preference. if he has positive time prefences, some new wealth that he has will be consumed whilst the remainded reinvested in capital.
further, given the deflation, and rising purchasing power of gold, its ability to buy capital is increased as well as its ability to buy consumers goods, so even a super low time preference entrepenuer would benefit from maximizing his real wealth. the desire of entrepeneurs to maximise their real wealth isnt the sticking point here is it?
nirgrahamUK:entrepeneurs cut wages, precisely by not employing as many people, and getting their work performed by machines. entrepeenurs cant keep the same number of workers employed at a lowered wage, otehrwise they would have lowered the wages before, the wages are set in line with the workers productivity given the supply and demand for labour.
But this doesn't seem to answer my question, as to why Huerta de Soto and Hayek claim that the use of labour will decrease in comparison to that of capital.
Stolz25: GilesStratton:But that's incorrect. Only consumer goods will have dropped due to decrease in demand as a result of greater savings. Well you've got me then. I knew I shouldn't have tried answering a question on here.
I'm really not trying to "get" anybody, I just want to understand this myself.
nirgrahamUK:this is only possible if he has zero time preference. if he has positive time prefences, some new wealth that he has will be consumed whilst the remainded reinvested in capital.
No it's not. Since you're positing that he spends it on capital anyway, which doesn't make sense given this answer of yours.
because as labour gets more expensive, alternatives to it look more attractive. like if oil got more expensive alternative energy sources would be used increasingly.
of course, the very process of entrepeneurs bidding for capital, and reduce their bidding for labour, is a process whcih causes fall in demand for labour relative to capital, and makes labour relatively more attractive.............
nirgrahamUK:further, given the deflation, and rising purchasing power of gold, its ability to buy capital is increased as well as its ability to buy consumers goods,
But the same applies to labour, since from the perspective of the entrepreneur, real wages of the labourer does not matter. Although, this is not what Huerta de Soto is trying to explain.
nirgrahamUK:because as labour gets more expensive, alternatives to it look more attractive. like if oil got more expensive alternative energy sources would be used increasingly.
But labour does not become more expensive. Only if the choice were between labour and consumers goods, which, it isn't.
GilesStratton: nirgrahamUK:further, given the deflation, and rising purchasing power of gold, its ability to buy capital is increased as well as its ability to buy consumers goods, But the same applies to labour, since from the perspective of the entrepreneur, real wages of the labourer does not matter. Although, this is not what Huerta de Soto is trying to explain.
it does not apply to labour equally as to capital and consumer goods.
why do you say the entrepeneur doesnt care that his labour costs rise?
earlier i missed the opportunity to directly confront your understanding
GilesStratton: Well yes, he can produce with capital, labour and natural resources. But I still don't see why it matters to the entrepreneur that real incomes have increase given that it is the result of a decrease in the prices of consumer goods. In other words why does it matter to the entrepreneur that I can now consume three apples instead of two. As long as he has to pay me the same amount, that is.
Well yes, he can produce with capital, labour and natural resources. But I still don't see why it matters to the entrepreneur that real incomes have increase given that it is the result of a decrease in the prices of consumer goods.
In other words why does it matter to the entrepreneur that I can now consume three apples instead of two. As long as he has to pay me the same amount, that is.
I have somewhat paraphrased your questioning statemetn that you bolded; here to try for clarity:
I would ask you whether you agree that it could matter to an entrepeneur that real incomes have increased given that it is the result of an increase in the productivity of labour; and hence an increase in the cost of purchasing the labour ?
GilesStratton:I'm really not trying to "get" anybody, I just want to understand this myself.
Yeah, I really didn't mean it like that. I just meant I was stumped. Joking doesn't come across well on the internets without using the smileys and I hate the smileys.