It is this process that raises labor's productivity and hence real wages. In turn, these capital goods are produced out of savings with the intention of creating a greater quantity of future goods. It should be plain, even to Long, that the supply of capital goods is strictly limited by the supply of savings, including forced savings, and thus absolutely independent of wages rates 2 . The whole history of economic growth in the West has been one of rising real wages, showing that labor was becoming increasingly scarce. Of course, if the process is reversed and dissavings take place, i.e., capital is consumed, then real wages will fall as labor becomes more abundant relative to capital.
Firms consist of capital combinations.
These combinations are determined not only by the current price of capital goods and labor but also by their expected prices, including the price of the firm's product. If unions in one line of production force wage rates above their market price it is quite possible that capital combinations will be rearranged and expanded to compensate for increased labor costs. But this can only be done by attracting capital from more efficient lines of production. In other words, union price-fixing has brought about a suboptimal allocation of capital goods. But many observers have succumbed to the fallacy of composition and assumed that the firm's actions actually increased the quantity of capital goods.