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:it does not apply to labour equally as to capital and consumer goods.
Why not?
nirgrahamUK:why do you say the entrepeneur doesnt care that his labour costs rise?
I've not said that I've said the costs don't rise.
Let's say that E is an entrepreneur and W is a worker. The market price of bottles of wine is $10, the worker is paid $100 a week. As savings increase, the price of bottles of wine drops to $5. The worker can now afford more wine, and hence his real wages have risen. But how does this effect the entrepreneur?
it should be clear that the productivity of labour determines through supply and demand the price that labour can command.
Over time as the average worker productivity has increased, so has their real wealth, and so has the real cost of employing them.
i.e. a worker in an autofactory can make oh more many motors than 80 years ago.
a worker in an autofactory can thus purchase many more consumer goods than they could 80 years ago.
and it costs an autofactory owner( who employs an autoworker) money equivalent to the value of that much greater quantity of consumer goods that the money can buy.
so not only has the real income of worker increased. but the real cost of employing the worker from the perspective of the entrepeneur has also increased
nirgrahamUK: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 ?
But as far as I can tell, you're incorrect on both counts. In as much as we've been assuming that productivity of labour has remained the same (since what we're trying to do is explain the reason that entreprenuers use less labour). And also because the cost of purchasing labour won't change.
in you example the worker who could formerly affored 10 bottles of wine. can now afford 20bottles of wine.
in real terms, the boss would be paying him money equivalent to twice as much wine to keep him on the job. it costs the employer twice as much in real wealth (bottles of wine) to hire the same employee as previous, so a machine might have become relatively cheaper if it could produce as much wine as the fella but only cost 15 bottles of wine to rent.
GilesStratton: In as much as we've been assuming that productivity of labour has remained the same (since what we're trying to do is explain the reason that entreprenuers use less labour). And also because the cost of purchasing labour won't change.
no, the opposite, why claim that the productivity of labour has not increased. it must have, how could workers get more real wealth, if there has not been a change in wealth production? there has been a change of wealth production that explains the rising real wealth of workers.
But you're assuming the prices of all goods increase. They don't, only consumer goods. So the worker wouldn't really cost 20 bottles of wine.
nirgrahamUK:no, the opposite, why claim that the productivity of labour has not increased. it must have, how could workers get more real wealth, if there has not been a change in wealth production? there has been a change of wealth production that explains the rising real wealth of workers.
Because there has been a decrease in demand for consumer goods, as such prices have decreased (although not enough to compensate for inreased savings).
no, its prices of goods decreasing that we are talking of.
the wine example of mine does suffer because of it being a narrow market whose consuemr base does not normally consist entirely and completely of those themselves in the wine making iindustry. but it is very roughly illustrative, consider it on the largest scale, labour produces more, HENCE labour is more expensive, ceteris parabis.
nirgrahamUK:no, its prices of goods decreasing that we are talking of.
But only consumer goods. As such the trade off between labour and capital goods isn't effected.
GilesStratton:Because there has been a decrease in demand for consumer goods, as such prices have decreased (although not enough to compensate for inreased savings).
i think im getting a better idea of the confusion.
you suppose that productivity of labour is not increasing because a given worker in a factory is not *producing* any more per hour; merely the prices of the good he produces for his entrepeneur fall, because the entrepeneur class is demanding less of the good and choosing to invest instead.
but think about it, even though the falling prices is driven by the demand side rather than being supplied side driven, it is precisely equivalent to what would obtain if it HAD been supply side driven. i.e. if capitalists purchase less *wine* so the wines that a wine worker makes have a lowered demand since capitalist is avoiding it, and just workers in wine industry and other industries are bidding for the wine, this is equivalent from the perspective of a wine buyer to their being relatively more wine produced. i.e. it looks to me when i go buying, that there are more bottles of wine on the shop, more than when entrepeneurs were consuming, hence i see a greater supply!
i.e. you can think of the entrepeneur knocking over 10% of the wine that the worker makes, before it goes out to be sold and it breaking on the floor. and then the capitalist stops that practice of breaking. before and after the entrepeneurs behaviour change the worker isnt *producing * any more, in the technical sense, yet before and after, more is *produced*. THe productiviy of labour of a wine worker can be said to increase, when the winesmashing employer of his, improves his practice. Has this example made sense to you?
perhaps a diagram would help?
nirgrahamUK:you suppose that productivity of labour is not increasing because a given worker in a factory is not *producing* any more per hour; merely the prices of the good he produces for his entrepeneur fall, because the entrepeneur class is demanding less of the good and choosing to invest instead.
I am discussing what happens when, for whatever reason, savings fall. 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.
Thus, the real wages of labour increase.
The entreprenuer class is not demanding the good at all (or at least, not in their position as an entrepreneur).
nirgrahamUK:but think about it, even though the falling prices is driven by the demand side rather than being supplied side driven, it is precisely equivalent to what would obtain if it HAD been supply side driven.
But it isn't equivelant. if the productivity of labour had increased, their wages would increase nominally (ceteris paribus).
nirgrahamUK:. i.e. if capitalists purchase less *wine* so the wines that a wine worker makes have a lowered demand since capitalist is avoiding it, and just workers in wine industry and other industries are bidding for the wine, this is equivalent from the perspective of a wine buyer to their being relatively more wine produced. i.e. it looks to me when i go buying, that there are more bottles of wine on the shop, more than when entrepeneurs were consuming, hence i see a greater supply!
That's quite besides the point. The point is productivity of labour in the wine industry has not increased, and nominally wages therefore have not risen (ceteris paribus). If this were the case, I would grant you the point, but it isn't. My point is merely that when real wages increase due to nothing other than a decrease in prices of consumers good, it is irrelevant to the costs of the entreprenuer, in fact, I don't even see how he could record it in his accounting.
I'm reading Hayek's paper now though, so hopefully I can figure it out.
GilesStratton:I am discussing what happens when, for whatever reason, savings fall. 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.
doesnt square with your Huerto quote:
This increase in real wages, which arises from the growth in voluntary saving.
growing or falling ?
GilesStratton:The point is productivity of labour in the wine industry has not increased, and nominally wages therefore have not risen (ceteris paribus)
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 10 being destroyed after being produced but before being taken to distributers for sale and hence 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!)
Sorry, I actually meant growing.