ABSTRACT
This is one of the main microeconomic explanations for additional savings tending to be invested in more roundabout and capital-intensive production processes. Increases in voluntary savings exert a particularly important, immediate effect on the level of real wages. The monetary demand for consumer goods tends to fall whenever savings rise. Hence it is easy to understand why increases in savings ceteris paribus are followed by decreases in the relative prices of final consumer goods. If, as generally occurs, the wages or rents of the original factor labour are initially held constant in nominal terms, a decline in the prices of final consumer goods will be followed by a rise in the real wages of workers employed in all stages of the productive structure. With the same money incomes in nominal terms, workers will be able to acquire a greater quantity and quality of final consumer goods and services at consumer goods’ new, more reduced prices. This increase in real wages, which arises from the growth in voluntary savings, means that, in relative terms, it is in the interests of entrepreneurs of all stages in the production process to replace labour with capital goods. Via an increase in real wages, the rise in voluntary savings sets a trend throughout the economic system towards longer and more capital-intensive productive stages. In other words, entrepreneurs now find it more attractive to use capital goods than labour. This constitutes a powerful effect tending toward the lengthening of the stages in the productive structure. According to Friedrich A. Hayek, David Ricardo was the first person
to analyse explicitly this effect, Ricardo concludes in his Principles (1817), that:
Every rise of wages, therefore, or, which is the same thing, every fall of profits, would lower the value of those commodities which were produced with a capital of a durable nature, and would proportionally elevate those which were produced with a capital more perishable. A fall of wages would have precisely the contrary effect.
