I find nothing wrong with Hayek's argument.  He appears here to be using 
"capital" as in classical economics and in the language of the 
marketplace, namely, funds employed in production.  See, for example, 
David Ricardo's explanation in his chapter on machinery: "The 
consequence of a rise of food will be a rise of wages, and every rise of 
wages will have a tendency to determine the saved capital [funds] in a 
greater proportion than before to the employment of machinery. Machinery 
and labour are in constant competition, and the former can frequently 
not be employed until labour rises" (_Works_, 1: 395).

Furthermore, the substitution of capital goods or machinery for labor 
should be interpreted as a "decrease in the quantity of labor demanded" 
(a movement along the labor demand curve) rather than the "demand for 
labour will fall."  That will be the end of the analysis -- determining 
the consequence of a rise of wage rates.  There would then be no need to 
resort to a subsequent deflation in order to make meaning of Hayek's 
point.  Indeed, the increased marginal product of labor with the reduced 
quantity employed would also match the increased (real) wage rate.  
Perhaps it's the modern fixation with interpreting "capital" always to 
mean capital goods that creates the apparent confusion.

James Ahiakpor

Robert Leeson wrote:
> Can someone explain Hayek's (1978) logic:
>
> “I have just published an article in the London Times on the effect of trade unions generally. It contains a short paragraph just pointing out that one of the effects of high wages leading to unemployment is that it forces capitalists to use their capital in a form where they will employ little labor. I now see from the reaction that it's still a completely new argument to most of the people. [laughter]”
>
> Statically, Hayek may be right: capital and labour are, in large part, substitutable inputs – if labour becomes relatively more expensive, at the margin, demand for labour will fall. The time structure of production, however, appears to  render Hayek’s assertion false.  In a standard neoclassical model, an increase in capital per worker will, ceteris paribus, increase the marginal product of labour and thus the demand for labour - which will tend to raise the equilibrium real wage. Since in neoclassical equilibrium, the real wage is equal to the marginal revenue product of labour (the price of output, P times marginal physical product, MPP), the only mechanism by which Hayek’s assertion holds is by adding a missing link: deflation.
>
> Hayek (1939 [1933], 176, 178) claimed that he was seeking a return to “some sort of equilibrium” via labour liquidation: yet a fall in the price level (deflation) would increase labour market disequilibrium (liquidation) by increasing real wages (W/P) and reducing the marginal revenue product of labour (P times MPP) and thus the demand for labour.
>
> Is there some aspect of the reswitching debate which may validate Hayek's claim; or is there some aspect of Austrian capital/cycle theory that provides support?
>
> RL


-- 
James C.W. Ahiakpor, Ph.D.
Professor
Department of Economics
California State University, East Bay
Hayward, CA 94542

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