What puzzles me about this thread is that though it began with a three sentence quote from Hayek, no one has made the point that if we are to understand Hayek’s remarks, it might be necessary to see the context, including the article that Hayek had in the Times, the reactions to it (presumably as letters to the Editor, which would be easy to locate) and other things he was writing at the time. The answer might even depend on the audience to whom Hayek (1978) was addressed, about which we are told nothing. Prima facie, this material would seem more important than things Hayek had written 45 years earlier.

RB


On 11 Nov 2013, at 12:51, Robert Leeson <[log in to unmask]> 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