The Ricardo Effect

“The Ricardo Effect.” Economica N.S. 9 (1942).


“When in a recent essay on industrial fluctuations the author introduced “the familiar Ricardian proposition that a rise in wages will encourage capitalists to substitute machinery for labor,” this was done under the illusion that thus an argument he had long employed could be stated in a more familiar and readily acceptable form. That illusion has been dispelled by the various comments on that essay; and re-examination of the earlier literature on the subject has revealed a rather peculiar situation: while the proposition has been supported and used by numerous writers ever since it was first enounced by Ricardo, it never seems to have been adequately expounded. In particular, although it is fundamental to the discussions of interests in the works of Bohm-Bawerk, Wicksell, and Mises, none of these authors developed it any length. The frequent brief references to it in other general theoretical works in modern times, which seemed to confirm the impression that it was widely accepted, prove on examination not only to be inadequate but often to be based on faulty reasoning. Although used to be treated as a common place in realistic studies of the influence of high wages and on the use of machinery, there, too, we search in vain for a reasoned argument.”

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