Money, Bank Credit, and Economic Cycles - The Ludwig von Mises ...

Bank Credit Expansion and Its Effects on the Economic System 329THIRD: THE RICARDO EFFECTAll increases in voluntary saving exert a particularlyimportant, immediate effect on the level of real wages. ChartV-2 shows how the monetary demand for consumer goodsfalls by one-fourth (from 100 m.u. to 75 m.u.), due to the risein saving. Hence it is easy to understand why increases in savingare generally followed by decreases in the prices of finalconsumer goods. 49 If, as generally occurs, the wages or rentsof the original factor labor are initially held constant in nominalterms, a decline in the prices of final consumer goods willbe followed by a rise in the real wages of workers employed inall stages of the productive structure. With the same moneyincome in nominal terms, workers will be able to acquire agreater quantity and quality of final consumer goods andservices at consumer goods’ new, more reduced prices.This increase in real wages, which arises from the growthin voluntary saving, means that, relatively speaking, it is inthe interest of entrepreneurs of all stages in the productionprocess to replace labor with capital goods. To put it anotherway, via an increase in real wages, the rise in voluntary savingsets a trend throughout the economic system toward longerand more capital-intensive productive stages. In other words,entrepreneurs now find it more attractive to use, relativelyspeaking, more capital goods than labor. This constitutes athird powerful, additional effect tending toward the lengtheningof the stages in the productive structure. It adds to andoverlaps the other two effects mentioned previously.49 As Hayek indicates, these reductions in prices may take some time,depending upon the rigidity of each market, and at any rate, they willbe less than proportional to the fall in demand that accompanies saving.If this were not the case, saving would not entail any actual sacrifice andthe stock of consumer goods necessary to sustain economic agents whilemore capital-intensive processes are completed would not be leftunsold. See F.A. Hayek, “Reflections on the Pure Theory of Money ofMr. J.M. Keynes (continued),” Economica 12, no. 35 (February 1932):22–44, republished in The Collected Works of F.A. Hayek, vol. 9: ContraKeynes and Cambridge: Essays, Correspondence, Bruce Caldwell, ed. (London:Routledge, 1995), pp. 179–80.