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.
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nirgrahamUK: i think you are being too narrow in your concept of the productivity of labour. lets say that workers in a clothing factory produce 100 sweaters an hour. but moths lead to 1 in to being destroyed after being produced and never make it to market. ultimately if the weather changes and the moths day out. clothing factory productivty (what it delivers to consumers) increases to the full 100 sweaters. the productivty of the labourers in the fcatory, has gone up a tenth. ceteris parabis, the real wealth of the workers increase, and the cost of their labour to the entrepeneur increases. (but he still gets to profit!)
i think you are being too narrow in your concept of the productivity of labour. lets say that workers in a clothing factory produce 100 sweaters an hour. but moths lead to 1 in to being destroyed after being produced and never make it to market.
ultimately if the weather changes and the moths day out.
clothing factory productivty (what it delivers to consumers) increases to the full 100 sweaters.
the productivty of the labourers in the fcatory, has gone up a tenth.
ceteris parabis, the real wealth of the workers increase, and the cost of their labour to the entrepeneur increases. (but he still gets to profit!)
I don't see how the example is relevant. Since, output does not increase at all in the example we are discussion. Or, at least, that is the assumption. Consider that real wages can increase if the value of money increases, and this does not lead to an increase in productivity. It does not make sense to say that because people are holding on to a greater amount of cash, the productivity of workers increaeses.
GilesStratton:I am discussing what happens when, for whatever reason, savings grow. This leads to a decrease in the purchase of consumer goods. Assuming no increase in productivity yet, the prices of goods will still fall due to a decrease in demand.
at t1, there is 50 consumed and 50 saved. at t2A there is 40 consumed and 60 saver. at t2B there is 51consumed and 51 saved
now the latter (t2b) seems like an example of increased production , there is 2 more, and its being split.
in the formed (t2a) there is no more 'production', there is the same production, but it is demanded less, this means what is produced is less in demand; this is a RELATIVE overproduction (over the previous level of production, from the perspective of the valuations of those who form the subset that constitute the real demand for the goods at both before and after the capitalist class reduce their consumption) from the subjective standpoint of this subset that consititute the real demand for the product, the productive labour of the workers that have made the goods has increased; so have their incomes, so has the cost of employing them/
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GilesStratton: I don't see how the example is relevant. Since, output does not increase at all in the example we are discussion. Or, at least, that is the assumption. Consider that real wages can increase if the value of money increases, and this does not lead to an increase in productivity. It does not make sense to say that because people are holding on to a greater amount of cash, the productivity of workers increaeses.
i agree with you that Nominal wages increase if ceteris parabis the only change in the economy is an inflation of the money supply. real wages, and real costs will all stay the same, if money supply is doubled everywhere evenly with no cantillion effect, people get paid twice as much fiat money, but REAL nothing has changed.
i should perhaps go on to address your point more directl.
if real wages increase as the value of money increases this does not LEAD to an increase on productivity (productivity is the only consistent long term explanation barring bizare quirks like gold being dissapeared by a gold eating alien that lands).
stating that real wages increase as the value of money increases begs one to ask the question as to how the value of money comes to be increasing? is it not because of productivity? if it is not it is because something is disappearing the gold. yet the gold disappearer only explains value of money increase, which would explain a falling nominal wage whilst holidng a constant real wage (no change to productivity!) it would not go on to explain rising real wages.
nirgrahamUK: at t1, there is 50 consumed and 50 saved. at t2A there is 40 consumed and 60 saver. at t2B there is 51consumed and 51 saved now the latter (t2b) seems like an example of increased production , there is 2 more, and its being split.
I don't really see how it's possible that more is saved and consumed without an increase in production. But ignoring that it doesn't make sense anyway. The productivity of labour has not increased, We are assuming that nowhere in the economy is an hour of labour more productive than it was previously.
I don't really see how you can say their productive labour has increased. Since, they refrain from consumption (say from 100 monetary units worth to 90). Now, this will lead to a decrease in prices (decrease in demand), however, even at these new prices consumption will be more than 90 monetary units.
Keep in mind, that the whole, or at least, the vast majority of society are deciding to refrain from consuming as much as they could, not merely the capitalists.
nirgrahamUK:i agree with you that Nominal wages increase if ceteris parabis the only change in the economy is an inflation of the money supply. real wages, and real costs will all stay the same, if money supply is doubled everywhere evenly with no cantillion effect, people get paid twice as much fiat money, but REAL nothing has changed.
That's not really my point. My point is that by your own logic, if the purchasing power of money increases, say because people increase their demand for money, then productivity rises since prices will be depressed. This is all without any effect on the capital structure, I don't see how that makes sense.
GilesStratton:That's not really my point. My point is that by your own logic, if the purchasing power of money increases, say because people increase their demand for money, then productivity rises since prices will be depressed. This is all without any effect on the capital structure, I don't see how that makes sense.
ok, so admittedly, if we posit simply increasing productivity, then increasing demand for money and increased purchasing power of money, and increase real wages all follow ceteris parabis.
*** edited.**
now simply increasing demand for money and nothing else. would mean people want to hold back and not consume or invest as many monetary units from one period to the next. hence this change in nominal expenditure , will only effect nominal prices, will not alter real prices, or affect the capital structure. they are not chanign their ratio of real consumption/ real savings.
Rothbard MES: An increased demand for money, then, tends to lower prices all around without changing time preference or the pure rate of interest Thus, suppose total social income is 100, with 70 allocated to investment and 30 to consumption. The demand for money increases, so that people decide to hoard a total of 20. Expenditure will now be 80 instead of 100, 20 being added to cash balances. Income in the next period will be only 80, since expenditures in one period result in the identical income to be allocated to the next period.[9] If time preferences remain the same, then the proportion of investment to consumption in the society will remain roughly the same, i.e., 56 invested and 24 consumed. Prices and nominal money values and incomes fall all along the line, and we are left with the same capital structure, the same real income, the same interest rate, etc. The only things that have changed are nominal prices, which have fallen, and the proportion of total cash balances to money income, which has increased.
An increased demand for money, then, tends to lower prices all around without changing time preference or the pure rate of interest Thus, suppose total social income is 100, with 70 allocated to investment and 30 to consumption. The demand for money increases, so that people decide to hoard a total of 20. Expenditure will now be 80 instead of 100, 20 being added to cash balances. Income in the next period will be only 80, since expenditures in one period result in the identical income to be allocated to the next period.[9] If time preferences remain the same, then the proportion of investment to consumption in the society will remain roughly the same, i.e., 56 invested and 24 consumed. Prices and nominal money values and incomes fall all along the line, and we are left with the same capital structure, the same real income, the same interest rate, etc. The only things that have changed are nominal prices, which have fallen, and the proportion of total cash balances to money income, which has increased.
this is kind of digression though isnt it, since your first qoute, which started this, posited an increase in voluntary savings (Real, not nominal)
nirgrahamUK:ok, so admittedly, if we posit simply increasing productivity, then increasing demand for money and increased purchasing power of money, and increase real wages all follow ceteris parabis.
Why does increasing demand for money follow?
nirgrahamUK:you are critiqueing that the analysis runs the other way, that if we see an increasing demand for money, then ceteris parabvis, must we say productivity is increasing. and you challenge this.
Of course, although, it's more accurate to say that I am critiqueing the analysis you have provided that a decrease in demand for consumers good leads to an increase in productivity. To highlight the flaw in this, let's say that there exists a true free banking gold standard and a large amount of gold is destroyed. The PPM increases, you would have to say productivity increases, no?
nirgrahamUK:well.......an increasing demand to hold money, raising the purchasing power of money, is another way to say a desire to voluntarily save/invest and refrain from consumption, which is another way to say increase capital structure and by laying out more on capital, increase the productivity of labour.
You're missing the point. I've already posited that productivty as of yet remains the same. It takes time for the capital structure to adjust to the new rate of savings. In the meantime demand for consumer goods drops and real income increases. Productivity has not yet risen. Why does this matter to the entrepreneur, to get back to the orginial question.
im sorry, i reedited my last posting when i realised we were talking across each other over issues of real and nominal changes.
perhaps i should be bold and go back and say that this:
GilesStratton:Consider that real wages can increase if the value of money increases
is untrue.
if we are just adjust ing the value of money up, ceteris parabis, this does not necessarily increase real wages. if the value of money increases, because people find the print of the fiat paper more attractive, or the gleam of the gold prettier, their real wages wont change a jot; people will trade less gold, for the same products as ever, they will keep back some gold that they dont trade, dont invest, they just like it.
its true that when this happens productivity does not increase
nirgrahamUK:if we are just adjust ing the value of money up, ceteris parabis, this does not necessarily increase real wages. if the value of money increases, because people find the print of the fiat paper more attractive, or the gleam of the gold prettier, their real wages wont change a jot; people will trade less gold, for the same products as ever, they will keep back some gold that they dont trade, dont invest, they just like it.
If the value of money increases, so too does the amount it buys. This is also known as an increase in real wages. In fact, the economy of a free society would be characterized by such a process. It is likely that nomimal wages would be decreasing, despite this, the prices of consumer goods would be decreasing a faster rate, hence, a growth in PPM.
nirgrahamUK:its true that when this happens productivity does not increase
In which case your explanation seems to fall short of the mark .
GilesStratton:If the value of money increases, so too does the amount it buys.
no, as you insist that there has been no increase in productivy, there is no more stuff for all the money to buy. despite its increase in the subjective value alloted it to by the economic actors. it simply means people will hold back some money, and not offer a part of it, in trade for all the consumer goods that till then had been produced. it sits on the mantelpiece, it is art.
your soto quote:
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.
first we have voluntary saving, these investments go into capital growth, the structure of production is lengthened. there is more capital per labourer than before, hence the productivity of labour increase. real wages increase therefore, and so this further incentivises entrepeneurs to swap out labourers for capital goods.
Professor Jesus Huerta de Soto: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.
so, increased savings, relative to consumption in the economic system, does increase productivity, (thats why it seems a good idea to save/invest, rather than save/hoard, the intention is to be more productive than your competitors, and you need to invest in capital to be more productive) this increase of productivy per labourer, increase real wages. and
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.
or to put it another way. it is easy to understand why increases in saving relative to consumption are generally followed by increases inproductivey and in real wages
nirgrahamUK: GilesStratton:If the value of money increases, so too does the amount it buys. no, as you insist that there has been no increase in productivy, there is no more stuff for all the money to buy. despite its increase in the subjective value alloted it to by the economic actors. it simply means people will hold back some money, and not offer a part of it, in trade for all the consumer goods that till then had been produced. it sits on the mantelpiece, it is art.
I meant any given unit of money.