The Ricardo Effect : Its Meaning and Validity

This paper is concerned with the meaning and validity of the 'Ricardo effect'. It is shown that the machinery substitution effect contemplated by David Ricardo (a) is not caused by a rise in the real wage rate, (b) is independent of the so-called 'price effect', and (c) presupposes very special assumptions about the available set of production methods. The paper also investigates whether Ricardo's machinery substitution argument anticipates the principle of factor substitution with regard to capital and labour in marginalist theory