Capital intensity and the real wage: a critical evaluation of Hayek's Ricardo Effect

Abstract

As any topic in capital theory, the Ricardo Effect has remained controversial and misunderstood. The object of this thesis is a clear exposition and concise criticism of the Ricardo Effect. The scope of the thesis is limited primarily to a theoretical discussion, although relevant empirical studies are reviewed. The thesis is divided into four major parts. The first part provides the general background necessary for understanding the development of the Ricardo Effect. The traditional Austrian theory of capital, as developed by Böhm-Bawerk and Wicksell, is examines with emphasis upon the critical assumptions and conclusions of their analysis. This background provides the overall framework upon which this thesis is based. The work of Hayek is then interpreted as an attempt to extend and modify the traditional Austrian model. Hayek specifically rejected the concepts of circulating capital and the average period of production. He also relaxed the traditional assumption of a stationary state, and dealt with a changing economy. The Ricardo Effect is introduced by Hayek in order to obtain the neoclassical proposition, which was the central result of traditional Austrian capital theory. ...