Prosperity and Depression.pdf

Recent Developments in Trade Cycle TheoryPart IIIless capitalistic methods when, other things being equal, product pricesrise? ( 2) What, according to Professor HAYEK, is the typical course ofan expansion which tends to bring the Ricardo effect into play? ( 3)'Is it at all realistic to assume that in the short run methods of productioncan be shifted sufficiently to bring about the contemplated results?(4) Is it really "one of the best established empirical generalisationsabout industrial fluctuations that at this stage r at a point somewherehalf-way through a cyclical upswing'l prices of consumers' goods doas a rule rise and real wages fall?" 1We shall take up these four points in order.(I) Professor I-IAYEK explains the Ricardo effect by means of thefollowing schematic example: Suppose that for the production of oneparticular product there are several methods available which differ withrespect to "the time which must elapse before the commodity can bebrought to the market" (RICARDO). The length of the productionperiod is 2 years, I year, 6 months, 3 months and I month, respectively.Suppose furthermore that at the outset these methods are equally profitable(on the margin)-6 per cent per annum. Now the price of theproduct rises by, say, two per cent, all other things-wages, rate ofinterest, etc.-remaining unchanged. In that case the per annum rateof profit of these various methods will rise, but it will rise by morefor the shorter than for the longer methods of production, as shown inthe following table:Initial amount of profiton each turnover inper cent.Add 2 per cent additionalprofit on eachturnover due to riseof price of product.Resulting profit rate perannum (compoundinterest neglected).2 yearsLabor invested forI year 6 months 3 months12 6 3 Ilh lh(all corresponding to 6 per cent per annum)14788 103~141 monthThere is nothing wrong or mysterious about this result; it is correctlydeduced from the assumptions. But let us make the situationquite clear by a more detailed example. We assume c