Economics Dictionary of ArgumentsHome
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| Ricardo Effect: The Ricardo Effect in economics refers to the idea that when wages increase in a specific industry, it leads to a reduction in labor demand for that industry. As wages rise, production costs increase, making it less competitive. This encourages firms to seek labor-saving technologies or shift resources to more profitable industries, potentially reducing employment in the affected sector. See also Innovation, Technology, Progress, Investment, Production costs._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Friedrich A. von Hayek on Ricardo Effect - Dictionary of Arguments
Rothbard III 718 Ricardo Effect/efficiency/Hayek/Rothbard: One common prounion argument is that unions benefit the economy through forcing higher wages on the employers. At these higher wages the workers will become more effcient, and their marginal productivity will rise as a result. >Efficiency, >Productivity. RothbardVsRicardo effect: If this were true, however, no unions would be needed. Employers, ever eager for greater profits, would see this and pay higher wages now to reap the benefits of the allegedly higher productivity in the future. As a matter of fact, employers often train workers, paying higher wages than their present marginal product justifies, in order to reap the benefits of their increased productivity in later years. >Unions/Rothbard. Ricardo effect/Hayek: A more sophisticated variant of this thesis was advanced by Ricardo and has been revived by Hayek. This doctrine holds that union-induced higher wage rates encourage employers to substitute machinery for labor. This added machinery increases the capital per worker and raises the marginal productivity of labor, thereby paying for the higher wage rates. RothbardVsRicardo/RothbardVsHayek/RothbardVsUnions: The fallacy here is that only increased saving can make more capital available. >Saving/Rothbard. Capital investment is limited by saving. Union wage increases do not increase the total supply of capital available. Therefore, there can be no general rise in labor productivity. Instead, the potential supply of capital is shifted (not increased) from other industries to those industries with higher wage rates. And it is shifted to industries where it would have been less profitable under nonunion conditions. The fact that an induced higher wage rate shifts capital to the industry does not indicate economic progress, but rather an attempt, never fully successful, to offset an economic retrogression - a higher cost in the manufacture of the product. Hence, the shift is "uneconomic." >Wages/Rothbard, >Production/Rothbard. Rothbard III 719 Innovation/technology/efficiency: A related thesis is that higher wage rates will spur employers to invent new technological methods to make labor more effcient. Here again, however, the supply of capital goods is limited by the savings available, and there is almost always a sheaf of technological opportunities awaiting more capital anyway. Furthermore, the spur of competition and the desire of the producer to keep and increase his custom is enough of an incentive to increase productivity in his firm, without the added burden of unionism.(1) 1. On the Ricardo effect, see Mises, Human Action, New Haven, Conn.: Yale University Press, 1949. Reprinted by the Ludwig von Mises Institute, 1998. pp. 767–70. Also see the detailed critique by Ford, Economics of Collective Bargaining, pp. 56–66, who also points to the union record of hindering mechanization by imposing restrictive work rules and by moving quickly to absorb any possible gain from the new equipment._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Hayek I Friedrich A. Hayek The Road to Serfdom: Text and Documents--The Definitive Edition (The Collected Works of F. A. Hayek, Volume 2) Chicago 2007 Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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