The second reason [for why there is not a direct connection between aggregate demand and employment] is what Hayek termed the “Ricardo effect”: the permanence of a productive structure requires the permanence of a parallel structure of relative prices. Hayek noticed that Keynesian demand policies have the special feature of modifying the pricing structure so as to promote investments with reduced maturity periods (i.e., less intensive capital investments). Hayek explains that, after applying Keynesian demand policies, this peculiar modification takes place in relative prices, and as a result, many entrepreneurs will modify their production strategies and will try new, less capital intensive (and therefore more profitable in relative terms given the new pricing structure) production strategies. This change in production strategies will result in a change in the composition of the demand for capital goods of those entrepreneurs, and will also reduce the aggregate amount of money devoted to buying higher-order capital goods in the market. Therefore, Hayek notes, many entrepreneurs will stop buying capital goods from their usual suppliers. As a result, these suppliers will lose part of their market and many will be forced to lay off workers or even to cease business. Hayek named this phenomenon the Ricardo effect. Thus, the change in relative prices caused by Keynesian demand policies will encourage a spontaneous process of disinvestment and, therefore, many of the business firms and jobs that were needed before to produce these specialized capital goods (which now will have significantly lower demand) will become useless. Hayek concludes that the demand policies proposed by Keynes will lead to an absolute reduction in the volume of employment.
—David Sanz and Juan Morillo, “Hayek’s Hidden Critique of The General Theory,” in “Hayek, Keynes and the Crisis: Analyses and Remedies,” ed. Carmelo Ferlito, special issue, Journal of Reviews on Global Economics 4 (2015): 216.
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