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

Bank Credit Expansion and Its Effects on the Economic System 369in wages provokes the “Ricardo Effect,” which we have coveredin detail, but which now exerts an impact contrary to theone it exerted in our last example, where real growth tookplace in voluntary saving. In the case of voluntary saving, thetemporary decrease in the demand for consumer goodsbrought about a real increase in wages, which tended to giverise to the substitution of machines for labor and therefore tolengthen the productive stages, distancing them from consumptionand making them more capital-intensive. Howevernow the effect is just the opposite: the more-than-proportionalgrowth in the price of consumer goods with respect to the risein factor income drives this income, particularly wages, downin real terms, providing entrepreneurs with a powerful financialincentive to substitute labor for machinery or capitalequipment, in keeping with the “Ricardo Effect.” This resultsin a relative drop in the demand for the capital goods andintermediate products of the stages furthest from consumption,which in turn further aggravates the underlying problemof the fall in accounting profits (even losses) which begins tobe perceived in the stages furthest from consumption. 78In short, here the “Ricardo Effect” exerts an impact contraryto the one it exerted when there was an upsurge in voluntarysaving. 79 Then we saw that an increase in saving brought about78 As is logical, the fact that, due to coercion and union action, wagesmay rise at a rate similar to that of the increase in the price of consumergoods, in no way detracts from our argument, since the other five factorswe have mentioned in the text will continue to exert their influence.The “Ricardo Effect” may do so as well, given that, at least in relativeterms, the price of the factors of production employed in the stages closestto consumption will always be lower than that of the resources usedin the stages furthest from it, and therefore the “Ricardo Effect,” whichis based on a comparison of relative costs, will continue to operate(entrepreneurs of the stages closest to consumption will begin to use, inrelative terms, more labor than capital equipment). When coercion isused to improve the income of owners of the original factors, ultimatelythe only possible outcome is an important rise in involuntary unemploymentamong members of this group. This effect is especially acutein the stages furthest from consumption.79 The first time Hayek expressly mentioned the “Ricardo Effect” toexplain the process by which the initial effects of credit expansion