325. Harrod to J. E. Meade , 13 November 1933 [a]

[Continues at 339 ]

Christ Church, Oxford #

13 November 1933

Dear Meade

I need hardly say how greatly I admired and enjoyed your book. [1] I sincerely think that it is a brilliant work, and contains a number of points that one will need to remember.

I have a few little criticisms of varying degree of importance--none of them very serious.

1. I dont like the first few sentences of ch II. [2] I see that you really need the conception of neutral money which you give, to facilitate solving certain problems which you set yourself later. But in these sentences you seem to imply that the system of constant final incomes is the only one which would interpret the wishes of individuals simply. This, however, you dont prove. And I cant believe that this is so. If real incomes are rising, people can simultaneously decide to spend and save more. Why not? And a rising money income would enable them to give effect to their decision simply. The fact is I believe that there are a number of different arrangements which might ideally fulfil your first sentence definition of neutrality. You are entitled to the one you select--ultimately because it enables you to conduct subsequent proofs simply--but you ought not, I think, to claim uniqueness.

p. 35, line 12. [3] Surely "partial" is the wrong word. You mean demand curve of neg[ative]. inclination. All competitors--even perfect ones--are confronted with a partial curve. In perfection the part is so small that it looks horizontal.

p. 38. This figure is only valid for imperfect competition. I dont think you say so. In perfect competition the amount of plant used at a single centre (firm, or what not) tends to the optimum amount, irrespective of the state of demand or price.

In perfect competition interest variations could only affect the number of plants--or the amount of capital used by substitution of other factors. But there could never be an equilibrium, even a short period one, at D in your figure. [4]

p. 44. sentence begins line 9 from bottom. [5] I dont think that this will do simpliciter. It would be a good point against wage-reducers if it would! I think there are cost schedules of which it would be true. But it is not universal, I think. E.g. with cheaper labour the amount of labour which it would be proper to use with the old amount of capital might be greater, and the rate at which capital could profitably be substituted for labour in response to a fall in the rate of interest might be the same. Your sentence takes cognisance of the effect of the diminished price of labour on possible increments of labour & capital employed, but seems to omit reference to the increased amount of labour that would be co-operating with capital at the starting point of capital expansion.

I dont seem to have any queries on the later pages.


R. F. H.

  1. 1. J. E. Meade, The Rate of Interest in a Progressive State (1933).

    2. Chapter II on "A Neutral Money System" begins as follows:

    • A neutral money system is one which simply interprets the decisions of individuals, of companies or of the government without, by its own action or inaction, making the effects of such decisions different from what they would have been in a non-monetary economy. A neutral money system is then, on the assumption of a constant population, one which maintains Final Income constant. (Meade, The Rate of Interest in a Progressive State, p. 11).

    Final Income is defined as Expenditure + Net Investment (ibid., p. 7)

    3. The passage runs as follows: "When the firm is faced with a partial demand curve, either because there is a buyer's preference between rival sources of supply of the commodity or because the firm produces an appreciable proportion of the total output of the commodity, the Marginal Revenue of the firm will fall with every increase in its output."

    4. Meade's diagram represents average and marginal rates of net profit as hump-shaped functions of the fixed capital of a firm, and is used for comparison with the market rate of interest. The point D represents the marginal rate of profit corresponding to a number of units of fixed capital larger than the amount maximizing the average rate of profits. Joan Robinson had pointed out to Harrod the similarity of the curves drawn by Meade with her own ones: see letter 315 , [jump to page] .

    5. The passage runs as follows: "For the advantages of substituting capital for the other factors would be diminished by the fall in the price of these other factors."

    1. a. ALI, four pages on two leaves, in MP 2/4(7-8). Photocopy in HP (NC).

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