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Societies for the History of Economics <[log in to unmask]>
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Mon, 11 Nov 2013 04:51:16 -0800
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Societies for the History of Economics <[log in to unmask]>
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Robert Leeson <[log in to unmask]>
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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

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