es rise faster than money wages in the upswing of the business cycle. Labor will be replaced with machinery, if this higher price-wage ratio persists. Therefore, Hayek draws a conclusion that The fall in real wages leads to changes in the relative profitability of different methods of production in favor of shorter or less roundabout methods. At some point, investment demand for "capital widening" in response to expanding consumer demand for current output - the demand for more machines of exactly the same type as before - is more than offset by this type "capital shallowing", and total investment demand in the economy falls off (Blaug, 571).Controversy, when there is a depression "the rising level of real wages brings about a revival of investment as "capital deepening" - the tendency to adopt more durable machines - begins to offset the decline in induced investment" (Blaug, 571). The Ricardo-Hayek effect is dynamic because it deals with transient phase. It includes fixed and circulating capital assets. The essence of this effect is that Profits will be higher on the method with the higher rate of turnover, not because they would accrue at a higher rate after the new equilibrium but because the profits on the less capitalistic method will begin to accrue earlier than those on the more capitalistic method (Palgrave, 199).In other words, the new position, which will be achieved, depends on time because during the transition the behavior of the firms is affected by the profits accruing to them as the adjustment process progresses.There is no doubt about Hayek's theory. It provides an adequate basis for understanding modern cycles. In his statement, Hayek points out various psychological and technological factors such as entrepreneur anticipations, consumption habits, and industrial structure. Hayek saw the business cycle " as resulting from the noncorespondance of plans of savers and investors when important market signa...
