Economics Questions

Re: The Ricardo Effect and Austrian Capital Theory

Raoul — Fri, 01 Mar 2013 13:53:57 GMT

Thanks for ressurecting this thread.

Re: The Ricardo Effect and Austrian Capital Theory

Neodoxy — Thu, 28 Feb 2013 23:00:23 GMT

Did they really need to Jargon? This thread was made back when economists were economists and Austrian Capital theory was discussed freely and hardcore theory was actually uttered in the forums... It was a more advanced and simpler time.

Re: The Ricardo Effect and Austrian Capital Theory

Jargon — Thu, 28 Feb 2013 22:03:04 GMT

Am I crazy or did no one address HayekianXYZ's question?

Re: The Ricardo Effect and Austrian Capital Theory

JamezHenry — Mon, 11 Jan 2010 17:57:24 GMT

More capital will be invested in high stages of production thereby bidding up wage rates. And because labor and capital goods are always in competition in those higher stages of production, once labor's wages increase they will face increased competition from capital goods. The capital goods prices will also be bid up, so in answer to your question, I guess they will both see more competition with one another, but I'm not sure why wages would be more attractive relative to capital goods. We should email de Soto on that one. I'm just reading his book now, quiet good.

Re: The Ricardo Effect and Austrian Capital Theory

Esuric — Wed, 02 Dec 2009 06:45:14 GMT

hayekianxyz:
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.

Savings (investment) and consumption (aggregate demand, or price of consumption goods--lower order goods) are tradeoffs. When aggregate demand falls, savings increases, lowering the natural and market rate of interest, allowing for more capital intensive roundabout methods of production (forced investment). This is demonstrated by the Hayekian triangle (lengthened--or one firm becoming two). More capital means higher labor productivity, and therefore higher labor demand, translating into higher real wages. Wages and income are functions of capital (the way the capital is ordered also effects real wage rates); it causes the PPF to shift outwards. Nominal wages may fall, but the price of goods falls faster (purchasing power of money increases PP=1/p increases). Remember, goods are not bought with money, or with labor, capital, or land, but only with other goods (Say's law--productions bought with productions).

So causally, it goes like this: Increases savings => original means of production released from lower stages => interest rate falls => investment is directed towards producer goods (relative increase in the price of producer goods--though they may still fall) => more capital, higher labor demand => original means of production and fixed capital goods moved towards higher stages => higher real incomes.

Real wages can rise as the purchasing power of money falls, but most of that will have to be liquidated.

Re: The Ricardo Effect and Austrian Capital Theory

Evan Stephen — Wed, 02 Dec 2009 06:25:40 GMT

What is the specific paper by Hayek that you are referring to? I am currently working on the book by De Soto: “Money, Bank Credit, and Economic Cycles”. I have wrestled with the concept of the Ricardo Effect myself, and followed a thread where you were discussing it in detail. Below is a clip of your post on March 12 2009, after your reading Hayek's paper.

The term real wages does not so much refer to the prices of goods in comparison to the wages received by the workers as it refers to the relationship between the costs of wages and the prices of goods, from the perspective of the entrepreneur. In the case of an increase in savings, the prices of consumer goods decreases and hence the business on the stages closest to production will begin to suffer losses. As a result of this they will attempt to turn over their capital less frequently and to employ more machines and heavy capital in order to produce the same amount, thus employing less labour.

I guess Hayek is comparing the COST of wages to the reduced consumer prices from the prospective of the entrepreneur. I'd like it if you could elaborate on that a little. I suppose if an employer is paying some employees $10.00 per hr., that doesn't exactly paint the whole picture as far as what it cost him to pay that????? Is Hayek focusing on cost in the form of lost opportunity? Also, I guess the consumer price, from the perspective of the entrepreneur would be thought of as the selling price, or his return on investment. Am I headed down the right road here?

Also, I'm not following too well about the lower stage businesses who after starting to suffer losses, “attempt to turn over their capital less frequently.” I'm not too clear just what “capital” you are referring to here, or why they would want to slow down their operation.

Even Stephen

Re: The Ricardo Effect and Austrian Capital Theory

hayekianxyz — Thu, 12 Mar 2009 12:55:05 GMT

I finally got around to reading Hayek's paper and now understand how it occurs. I believe Professor Huerta de Soto used somewhat unclear language in his very brief exposition of the effect, in fact Hayek makes this very point. The term real wages does not so much refer to the prices of goods in comparison to the wages received by the workers as it refers to the relationship between the costs of wages and the prices of goods, from the perspective of the entrepreneur. In the case of an increase in savings, the prices of consumer goods decreases and hence the business on the stages closest to production will begin to suffer losses. As a result of this they will attempt to turn over their capital less frequently and to employ more machines and heavy capital in order to produce the same amount, thus employing less labour.

Actually it's a great paper by Hayek, it's well worth reading, as is Huerta de Soto's book.

Re: The Ricardo Effect and Austrian Capital Theory

nirgrahamUK — Wed, 18 Feb 2009 19:19:10 GMT

GilesStratton:
I think you're missing the point of my question. I'm not trying to understand why labour becomes more productive, that much I know. What I'm trying to understand is, why, before labour becomes more productive (e.g. before the capital structure has had time to adjust) it becomes less preferable to hire them.

where does soto say that the moment 5 year projects to build factories are adopted, this voluntary savings instantly increases real wages etc.etc?

actually i dont know what book you are reading, it wouldnt hurt for me to read the PDF!

Re: The Ricardo Effect and Austrian Capital Theory

hayekianxyz — Wed, 18 Feb 2009 19:07:49 GMT

nirgrahamUK:

any unit of gold that they have would buy more, hence it is necessary that this adjust their nominal wage rates; there is less gold to be paid nominally, its in the definition of this branch of the analysis, there has been no more productivity. their nominal wage must decrease so as to maintain the real wage rate, a money unit only has the power to bid for the purchase of that which can be purchased, and that which can be purchased has not changed. there are not a larger supply of consumer goods.

to paraphrase you; The real wages of workers does not increase, since their reduced gold income can not buy any more goods, than the goods that are available after every production cycle, even though the nominally lesser gold they do earn, by virtue of an offsetting increase in purchasing power leaves their real wage unchanged

Ah, yes, you're correct here, but that was a tangent anyway.

nirgrahamUK:
i thought that rather than trying to understand why labour becomes more productive; you wanted to understand how labours increasing productivity through extension of capital structute, leads to incentives to labour being substituted for capital ....(this is because of change in costs)

I think you're missing the point of my question. I'm not trying to understand why labour becomes more productive, that much I know. What I'm trying to understand is, why, before labour becomes more productive (e.g. before the capital structure has had time to adjust) it becomes less preferable to hire them.

Re: The Ricardo Effect and Austrian Capital Theory

nirgrahamUK — Wed, 18 Feb 2009 18:48:17 GMT

GilesStratton:
The real wages of workers does increase, since their gold can buy more goods. Since as you said it's purchasing power increases.

any unit of gold that they have would buy more, hence it is necessary that this adjust their nominal wage rates; there is less gold to be paid nominally, its in the definition of this branch of the analysis, there has been no more productivity. their nominal wage must decrease so as to maintain the real wage rate, a money unit only has the power to bid for the purchase of that which can be purchased, and that which can be purchased has not changed. there are not a larger supply of consumer goods.

to paraphrase you; The real wages of workers does not increase, since their reduced gold income can not buy any more goods, than the goods that are available after every production cycle, even though the nominally lesser gold they do earn, by virtue of an offsetting increase in purchasing power leaves their real wage unchanged

GilesStratton:

nirgrahamUK:
the second way, is if productivity of labour has increased, through the presence of an extended capital structure (more capital per labourer etc.) , then Soto's quote applies. labour is more productive, labour is more expensive, this is an incentive to find alternatives to labour.

But we're trying to explain why labour becomes more productive!

we are? i thought you were comfortable with the idea that labour that has access to better tools, greater capital, is more productive than labour without it.

i thought that rather than trying to understand why labour becomes more productive; you wanted to understand how labours increasing productivity through extension of capital structute, leads to incentives to labour being substituted for capital ....(this is because of change in costs)

Re: The Ricardo Effect and Austrian Capital Theory

hayekianxyz — Wed, 18 Feb 2009 18:34:45 GMT

nirgrahamUK:
one is an arbitrary increase in demand for money. e..g through a sudden destruction of gold. this is entirely nominal in its effects, as decribed by rothbard as above. the real wages of workers does not increase, it must stay the same, nominally it will fall as 1 dollar does the job that two used to before. This does not explain at all capital increases nor does it relate to the ricardo effect.

The real wages of workers does increase, since their gold can buy more goods. Since as you said it's purchasing power increases.

nirgrahamUK:
the second way, is if productivity of labour has increased, through the presence of an extended capital structure (more capital per labourer etc.) , then Soto's quote applies. labour is more productive, labour is more expensive, this is an incentive to find alternatives to labour.

But we're trying to explain why labour becomes more productive!

Re: The Ricardo Effect and Austrian Capital Theory

nirgrahamUK — Wed, 18 Feb 2009 18:29:39 GMT

there are only two ways the value of money, or purchasing power per unit of money can increase.

one is an arbitrary increase in demand for money. e..g through a sudden destruction of gold. this is entirely nominal in its effects, as decribed by rothbard as above. the real wages of workers does not increase, it must stay the same, nominally it will fall as 1 dollar does the job that two used to before. This does not explain at all capital increases nor does it relate to the ricardo effect.

the second way, is if productivity of labour has increased, through the presence of an extended capital structure (more capital per labourer etc.) , then Soto's quote applies. labour is more productive, labour is more expensive, this is an incentive to find alternatives to labour.

Re: The Ricardo Effect and Austrian Capital Theory

hayekianxyz — Wed, 18 Feb 2009 17:54:42 GMT

nirgrahamUK:

you meant what about any given unit of money?

That the purchasing power of any given unit of money will increase if prices decrease (say, a huge amount of gold suddenly disappears).

Re: The Ricardo Effect and Austrian Capital Theory

hayekianxyz — Wed, 18 Feb 2009 17:53:59 GMT

nirgrahamUK:
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.

The point is he is trying to explain how this capital growth occurs, one of the explanations is the Ricardo effect, so this doesn't really help since this presumes the capital structure has already adjusted to the new rate of savings when that is exactly what we are attempting to describe.

nirgrahamUK:
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

Once again this is what we're trying to explain.

Re: The Ricardo Effect and Austrian Capital Theory

nirgrahamUK — Wed, 18 Feb 2009 17:19:42 GMT

you meant what about any given unit of money?