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

330 Money, Bank Credit, and Economic CyclesThe first to explicitly refer to this third effect was DavidRicardo. He did so in his book, On the Principles of PoliticalEconomy and Taxation, the first edition of which was publishedin 1817. Here Ricardo concludes that[e]very rise of wages, therefore, or, which is the same thing,every fall of profits, would lower the relative value of thosecommodities which were produced with a capital of adurable nature, and would proportionally elevate thosewhich were produced with capital more perishable. A fall ofwages would have precisely the contrary effect. 50In the well-known appendix “On Machinery,” which wasadded in the third edition, published in 1821, Ricardo concludesthat “[m]achinery and labour are in constant competition,and the former can frequently not be employed untillabour rises.” 51The same idea was later recovered by F.A. Hayek, who,beginning in 1939, applied it extensively in his writings onbusiness cycles. Here we will for the first time use it, integratedwith the prior two effects, to explain the consequencesan upsurge in voluntary saving has on the productive structureand to detract from theories on the so-called “paradox ofthrift” and the supposedly negative influence of saving oneffective demand. Hayek offers a very concise explanation ofthe “Ricardo Effect” when he states that[w]ith high real wages and a low rate of profit investmentwill take highly capitalistic forms: entrepreneurs will try tomeet the high costs of labour by introducing very labour-savingmachinery—the kind of machinery which it will be profitableto use only at a very low rate of profit and interest. 5250 See David Ricardo, The Works and Correspondence of David Ricardo, vol.1: On the Principles of Political Economy and Taxation, Piero Sraffa and M.H.Dobb, eds. (Cambridge: Cambridge University Press, 1982), pp. 39–40.51 Ibid., p. 395.52 See Hayek, “Profits, Interest and Investment” and Other Essays on theTheory of Industrial Fluctuations, p. 39. Shortly afterward, in 1941, F.A.Hayek briefly touched on this effect in relation to the impact an increase