Ricardo–Hayek Effect

Abstract

Dwelling on the familiar Ricardian proposition (ch. I, section V, of the Principles) according to which a rise in wages will encourage capitalists to substitute machinery for labour and vice versa, F. von Hayek (1939) coined the expression ‘Ricardo effect’ for the assertion that a general change in wages relative to the prices of final goods will alter the relative profitability of the different methods of production employing labour and capital in different proportions. To be sure, Schumpeter (1939, pp. 345, 812) refers to the influence of factor prices on the introduction of a new method of production as the ‘Hayek effect’. On the other hand, Hayek’s Ricardo Effect is not to be confused with the celebrated Ricardo machinery effect: the latter concerns the employment effects of the introduction of a new method of production; the former deals with the causes of its introduction. To avoid misunderstandings, it is therefore proper to use the expression ‘Ricardo–Hayek effect’.