I find it truly amazing that Matias Vernengo would be unable to read an 
inverse wage-quantity-of-labor demanded relation in Ricardo's chapter on 
machinery, worse yet to have declared that the downward sloping demand 
curve was alien to "Ricardo and other classical authors."  How sad.  
Would that Vernengo took the trouble to read carefully classical price 
(value) theory.

Indeed, in the following paragraph from which I quoted Ricardo's 
explanation of the consequence of the RISE of wages on labor's 
employment, Ricardo also says: "The same cause that *raises* labour, 
does not raise the value of machines, and, therefore, with every 
augmentation of capital [funds], a greater proportion of it is employed 
on machinery.  The demand for labour will continue to increase with an 
increase of capital, but not in proportion to its increase; the ratio 
[labor to machinery] will necessarily be a diminishing ratio" (my 
emphasis).  And Vernengo doesn't recognize a discussion of the choice of 
techniques in that passage?

In fact, Ricardo may be understood here to have been elaborating a 
similar point Adam Smith makes in the _Wealth of Nations_. Smith 
explains: "So very heavy a tax upon the first necessary of life, must 
either reduce the subsistence of the labouring poor, or it must occasion 
some *augmentation* [rise] in their pecuniary wages, proportionable to 
that in the pecuniary price of their subsistence.... So far as it 
operates in the [latter], it must reduce the ability of the employers of 
the poor, to employ so great a number as they otherwise might do, and 
must, so far, tend to restrain the industry of the country" (_WN_, 2:14; 
my emphasis).  I see in Smith's argument, a downward sloping labor 
demand curve.  I also recognize in his explanation what we do with the 
isoquant-isocost diagram.  In it, we show a reduction in the quantity of 
labor demand when the wage rate rises relative to the rental rate for 
capital equipment, and also a reduction in output when the funds 
(capital) employed in production are unchanged.

Now if Robert would try to answer for himself, why the labor demand 
curve would shift to the right, following a leftward movement along it 
when the wage rate increases, he might be led to drop that line of his 
inquiry.  Simply put, who buys more of something just because it has 
become more expensive?  Don't we teach our introductory economics 
students never to shift the demand (or supply) curve because a product's 
own price changes but rather to move along the curve?

James Ahiakpor

Matias Vernengo wrote:
> I find the notion that Hayek, even if claimed to do so, used Ricardian 
> theory to be preposterous. Ricardo's discussion of the introduction of 
> machinery is within the context of a given (exogenously) real wage 
> (contrary to the supply and demand approach used by Hayek), and 
> concerned with the process of accumulation. For him, a new machine was 
> adopted if it allowed the innovator to reduce the unit cost of the 
> commodity and reap “extra profits.” For a given real wage rate and 
> given output levels, technical change would rise the rate of profits 
> if the technological change took place in industries that directly or 
> indirectly contribute to the production of commodities that enter the 
> real wage rate, so-called “necessaries,” whilst it will remain 
> constant if the technological change took place in industries that 
> contribute to the production of “luxuries.” There is no discussion of 
> an inverse relation of remuneration and the intensity of capital, nor 
> a conception of production as a choice of techniques using factors of 
> production. All concepts alien to Ricardo and other classical (not 
> marginalist) authors.
>
> Matías Vernengo
>
> ------------------------------------------------------------------------
> *From:* Societies for the History of Economics [[log in to unmask]] on 
> behalf of Colander, David C. [[log in to unmask]]
> *Sent:* Tuesday, November 12, 2013 6:47 AM
> *To:* [log in to unmask]
> *Subject:* Re: [SHOE] Hayek and trade unions
>
> I think the issue depends in part of whether the analysis is being 
> done in a closed economy or an open globalized economy.  In a closed 
> economy one has many more feedbacks, and capital labor ratios in 
> capital industries need to be compared to capital labor ratios in 
> consumption industries.  One also needs assumptions about technical 
> progress and growth.  I see no definite result coming from this analysis.
>
>                 In an open economy, however, the forces are quite 
> different—more micro in structure.  High wages (costs) in one country 
> will encourage production to go abroad, other things equal.  In a 
> globalized economy real wages become relative wages, and the argument 
> that high wages cause unemployment is much more defensible.
>
> Dave
>
> David Colander
>
> [log in to unmask] <mailto:[log in to unmask]>
>
> 802-443-5302
>
> *From:*Societies for the History of Economics [mailto:[log in to unmask]] 
> *On Behalf Of *Steve Kates
> *Sent:* Monday, November 11, 2013 10:58 PM
> *To:* [log in to unmask]
> *Subject:* Re: [SHOE] Hayek and trade unions
>
> Once again I find myself replying in support of James Ahiakpor.
>
> In Australia where I was involved in our National Wage Cases on behalf 
> of employers, there was an argument we continually had to deal with 
> which came from the bench and not the unions. It was that raising 
> wages would be good for the economy since it would force businesses to 
> become more capital intensive. The assumption here was that the higher 
> productivity forced on employers would lead to increases in the 
> economy's ability to finance the higher real wage being imposed.
>
> Marginal productivity theory is part of micro and will tell you what 
> an individual firm will do in the face of higher real labour costs. It 
> does not, however, tell you what will happen across the economy. 
> Forcing real wages higher than the underlying productivity of the 
> economy will support will drive some people out of work. This seems to 
> me so obvious that both then and now it leaves me nonplussed to see it 
> even mentioned, but then I, like James, think about these questions 
> using classical forms of analysis. Unfortunately, like Hayek said, it 
> still seems to be a completely new argument to most people.
>
> The only difference between myself and James is that I would send you 
> to Mill rather than Ricardo.
>
> On 11 November 2013 23:51, Robert Leeson <[log in to unmask] 
> <mailto:[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
>
>
>
> -- 
>
>
> Dr Steven Kates
> School of Economics, Finance
>     and Marketing
> RMIT University
> Building 80
>
> Level 11 / 445 Swanston Street
> Melbourne Vic 3000
>
> Phone: (03) 9925 5878
> Mobile: 042 7297 529
>


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

(510) 885-3137 Work
(510) 885-7175 Fax (Not Private)