Friedrich August von Hayek, “Der Ricardo-Effekt” (1942)

This file is a single-author theoretical chapter/essay in seven sections. Hayek’s scope is deliberately narrow but foundational: to reconstruct the “Ricardo effect” and show why disputes over it distort capital and cycle theory. The thesis is that a general change in wages relative to product prices is not neutral among techniques; it shifts profitability between labor-using, fast-turnover methods and slower, more capitalistic ones.

Der Lehrsatz, der hier als Ricardo-Effekt beschrieben wird, sagt aus, daß eine allgemeine Änderung der Löhne im Verhältnis zu den Preisen der Erzeugnisse die verhältnismäßige Rentabilität der verschiedenen Industrien oder Produktionsmethoden, die Arbeit und Kapital («indirekte Arbeit») verwenden, in verschiedenen Verhältnissen ändern wird.

English translation: The proposition here described as the Ricardo Effect states that a general change in wages relative to the prices of products will alter the relative profitability of the various industries or methods of production that employ labour and capital (‘indirect labour’) in different proportions.

Hayek concentrates on the inverse case most relevant to booms and crises: consumer-goods prices rise while money wages remain fixed, so wages fall relative to output prices. To isolate the mechanism, he first excludes borrowing. His key conceptual move is to use Umschlagsgeschwindigkeit as a measure of capital intensity: slow turnover marks “more capitalistic” methods, rapid turnover less capitalistic ones. A price rise adds to the margin earned at each sale; the annual gain depends on how often capital is turned over.

Der Begriff der Umschlagsgeschwindigkeit des Kapitals bietet einen besonders nützlichen Ausgangspunkt für unsere Erörterung, weil Veränderungen in dem Verhältnis zwischen Löhnen und Preisen offenbar in erster Linie den Gewinn beeinflussen, der jedesmal erzielt wird, so oft das Produkt gegebener Aufwendungen verkauft werden kann.

English translation: The concept of the turnover velocity of capital offers a particularly useful starting point for our discussion, because changes in the relationship between wages and prices evidently affect, above all, the profit that is realised each time the product of given outlays can be sold.

The short-run consequence is practical, not merely comparative-static. Firms need not replace their whole plant; they reallocate current funds for replacement, maintenance, overtime, shifts, auxiliary labor, old machines, or cheaper machines. What matters is the flow of new outlays, not the inherited stock.

Wir interessieren uns nicht für die Verhältnisse zwischen den bestehenden Beständen von festem und zirkulierendem Kapital sondern für die Verhältnisse, in denen Firmen ihre laufenden Auslagen für die Erneuerung (oder Vermehrung) der beiden Arten von Kapitalien verwenden werden.

English translation: We are not interested in the ratios between the existing stocks of fixed and circulating capital, but in the ratios in which firms will apply their current expenditures to the renewal (or increase) of the two kinds of capital.

Thus falling wages relative to consumer-goods prices push current expenditure toward labor and circulating capital, away from longer, machine-heavy investment. Demand for certain capital goods may stop, producing unemployment among workers specialized in machinery even while consumer-goods demand is strong.

The fourth section restores credit. Hayek rejects the idea that a market loan rate automatically governs all investment: successive loans to one borrower are not identical commodities, because collateral, equity, and risk change. A firm’s internal rate of return can therefore exceed the money rate and still guide technique choice. Sections 5 and 6 test the extreme case of perfectly elastic credit. Even then, Hayek argues, money cannot abolish real scarcity.

Solange ungenützte Reserven von Arbeitern zu unveränderten Preisen zur Verfügung stehen, bedeuten unbegrenzte Geldmittel unbegrenzte Verfügungsmacht über die Produktionsmittel. Aber das sind nicht die Bedingungen, die im Zustand der Vollbeschäftigung relevant sind, die nahe am Höhepunkt einer Hochkonjunktur bestehen wird.

English translation: So long as unused reserves of workers are available at unchanged prices, unlimited monetary means signify unlimited command over the means of production. But these are not the conditions relevant in a state of full employment, which will prevail near the peak of a boom.

Against Kaldor and Wilson, Hayek’s objection is that they compare techniques only after the additional equipment exists. But producing that equipment absorbs labor and time; the decision must count profits sacrificed now by not using faster, dearer methods.

Die Gewinne von jetzt an, nicht bloß Gewinne, nachdem die zusätzliche Ausrüstung geschaffen wurde, müssen bei der Entscheidung in Betracht gezogen werden, ob jene zusätzliche Ausrüstung überhaupt angeschafft werden soll.

English translation: The profits from now on, not merely the profits after the additional equipment has been created, must be taken into account in deciding whether that additional equipment should be acquired at all.

The final section is cautious about verification. The relevant variable is not ordinary “real wages” as workers’ purchasing power, but employers’ labor cost relative to the prices and marginal products of the goods produced; industry composition, wholesale prices, imports, raw materials, and technical change complicate measurement.

Ein Versuch, aus den verfügbaren statistischen Daten festzustellen, ob der Ricardo-Effekt sich wirklich so auswirkt, wie diese Überlegungen darlegen, begegnet beträchtlichen Schwierigkeiten.

English translation: An attempt to ascertain from the available statistical data whether the Ricardo effect actually operates as these considerations suggest encounters considerable difficulties.

The essay’s relevance lies in linking relative prices, capital scarcity, credit expansion, and the temporal structure of production. In a boom, rising consumer-goods prices and low real wages make faster, less capitalistic methods temporarily superior, revealing limits that monetary ease can obscure but not remove.