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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Capital accumulation makes it possible to invest in capital goods, and, that causes higher "real" wages. But the profit earned due to more productivity is not eternal (consider competition, which rises wages, in nominal and real sense), that's why the cycle restarts again, with capitalists trying to improve productivity.
That's not what I'm asking. I understand that. My question is that Huerta de Soto claimed (drawing on Hayek, I believe) that as people refrain from consumption (this is before the increase in productivity from the lengthened capital structure) the price of goods drop due to a decrease in demand. This then has the effect of raising real wages.
However, he then proceeds to claim that this relative increase in real wages (which does not entirely offset the decrease in spending) makes it advantageous for entrepreneurs to lay off workers (to go elsewhere in the economy, e.g. to the higher stages) and to begin to use more capital goods. And, in fact, by doing this they needn't suffer accounting losses. It's this last leap from "real wages increase" to "it becomes advantageous to use more capital at the lower stages" that I don't see. Since surely an increase in real wages, while nominal wages remain constant, is immaterial to the entrepreneur.
well, from the entrepeneurial perspective increase in real wages are a negative, it increases their cost of production, if real wages increase more rapidly than capital costs (machine's etc) then this is another way of saying that capital appears to be getting cheaper. and so the entrepeneur has incentive to substitute expensive labourers for cheaper machines. does that address the point?
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nirgrahamUK: well, from the entrepeneurial perspective increase in real wages are a negative, it increases their cost of production, if real wages increase more rapidly than capital costs (machine's etc) then this is another way of saying that capital appears to be getting cheaper. and so the entrepeneur has incentive to substitute expensive labourers for cheaper machines. does that address the point?
Well, Huerta de Soto indicates that real wages rise because of a decrease in the prices of consumer goods. This much I understand. But does a decrease in the price of consumer good, and hence a rise in real wages, make it in the interest of the entrepreneur to use more capital?
GilesStratton:Well, Huerta de Soto indicates that real wages rise because of a decrease in the prices of consumer goods. This much I understand. But does a decrease in the price of consumer good, and hence a rise in real wages, make it in the interest of the entrepreneur to use more capital?
yes, because he's only got two things he can use to produce, capital and labour, and we are positing that labour is getting *relatively* more expensive than capital.
nirgrahamUK: GilesStratton:Well, Huerta de Soto indicates that real wages rise because of a decrease in the prices of consumer goods. This much I understand. But does a decrease in the price of consumer good, and hence a rise in real wages, make it in the interest of the entrepreneur to use more capital? yes, because he's only got two things he can use to produce, capital and labour, and we are positing that labour is getting *relatively* more expansive than capital.
yes, because he's only got two things he can use to produce, capital and labour, and we are positing that labour is getting *relatively* more expansive than capital.
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.
entrepeneurs dont care about why their labour costs are rising, they just notice that they do and adjust accordingly.
to put a human face on it; imagine a worker at burger king, he then comes into money, he is rich. burgerking might find that to keep him at his post producing burgers they need to offer him millions of dollars an hour. getting a cheap machine in to do his job starts look attractive...
nirgrahamUK: entrepeneurs dont care about why their labour costs are rising, they just notice that they do and adjust accordingly.
But that's my point. They would not be rising, they would be staying the same. Income would only rise from the point of view of the consumer, since he can consume more.
From the point of view of the entreprenuer, it doesn't matter in the slightest if the consumer can buy one more apple or a nicer bottle of wine.
GilesStratton: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.
Because the entrepreneur is going to look to optimize costs, and in this case your replacement machine will have gotten cheaper, even though you aren't costing him any more.
see my burger king example? the disutility of labour is an effect. the richer you are the harder it is to convince you to work. the more Expensive you are to hire.
nirgrahamUK: to put a human face on it; imagine a worker at burger king, he then comes into money, he is rich. burgerking might find that to keep him at his post producing burgers they need to offer him millions of dollars an hour. getting a cheap machine in to do his job starts look attractive...
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.
Stolz25:Because the entrepreneur is going to look to optimize costs, and in this case your replacement machine will have gotten cheaper, even though you aren't costing him any more.
But that's incorrect. Only consumer goods will have dropped due to decrease in demand as a result of greater savings.
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