327. Harrod to N. Kaldor , 17 November 1933 [a]

17 November 1933

My dear Kaldor

I enjoyed reading your paper and very much. [1] I think your discussion of co-ordination most interesting. [2]

To write about disagreement is more useful than about agreement and so here goes.

As you know I have some scepticism with regard to your notion of static equilibrium. [3] Changes of taste & means of production seem to me to be likely to grow greater not less and our studies should be directed towards the equilibrium not of a stationary state but of a regular advance. But this regularity will be accompanied by more frequent & more important changes-over among particular commodities & methods.

I think there is one point about large scale enterprise which you do not bring out. It may be that the limit to size is not due to increasing difficulty of entrepreneurship but to the increasing amount of loss due to wrong decisions. [4] Thus if a factory of 1000 men is no more difficult to run than that of 100, you still want an abler man for the former because the loss due to the same qualitative error of judgement is greater and it is \ more important to have a man who is less likely to make it.

Remembering this let us consider what happens if entrepreneurship becomes easier in the sense that the need for decision becomes less frequent. In the residual sphere of activity that still remains open for decisions, the same differences between losses incurred by big scale and small scale units due to wrong decisions remain. If the supply of entrepreneurs consists of men of varying ability their relative supply prices will be adjusted so that they can all be absorbed by firms of varying sizes. The consequence of a diminished need for decisions will be a drop in the supply price of the whole lot. It will still be proper to split the risks due to wrong decisions and if there are not enough a men to go round to employ some b men in firms of smaller scale.

One or two small points:--

p. 2. Line <6>. I dont see that the conditions you have laid down so far necessarily imply perfect competition. [5]

p. 3. Last line [6] "applied" should read "in application".

p. 6. bottom. [7] Not clear what latter and former refer to.

p. 17. Line 5. "remains" should read "remain".

p. 21. Line 5. must it be? only if profit is defined as normal in the Robinsonian sense. [8]

p. 6. Line 4. but cf. p. 567 bottom in E.J. 1931 Dec. [9]

I only have one copy which I am passing on to Allen.


Roy Harrod

  1. 1. A draft of N. Kaldor, "The Equilibrium of the Firm", Economic Journal XLIV, March 1934, pp. 60-76.

    2. Kaldor was concerned with the supply function of the components of the "entrepreneurial function", and in particular of co-ordination--"that part of the managerial function which determines what sort of contracts should be entered to" ("The Equilibrium of the Firm", pp. 67-70).

    3. By "equilibrium" Kaldor meant a state in which output is constant, and by long-period equilibrium he thought of Marshall's stationary state: "The Equilibrium of the Firm", pp. 61n and 70-71.

    4. Kaldor's paper, from p. 67 on, is concerned with entrepreneurship as a factor of production, including a discussion of its implications as to the size of the firm.

    5. The condition underlying the assumption that sellers respond to price stimuli in a definite and unequivocal manner is that "there exists a mechanism which translates technical and psychological resistance into cost computations in such a way that a definite amount of a commodity will be offered by each producing unit in response to any price". Kaldor thought this condition to be equivalent to the conditions that competition is perfect and that a definite cost function for each firm exists ("The Equilibrium of the Firm", p. 60). In a footnote to this passage, possibly added to meet Harrod's comment, Kaldor defined perfect competition as "a state of affairs where all prices are given to the individual firm, independently of the action of that firm".

    6. Kaldor, "The Equilibrium of the Firm", p. 62n.

    7. Kaldor, "The Equilibrium of the Firm", p. 63n.

    8. Kaldor, "The Equilibrium of the Firm", p. 74. Joan Robinson definition of "normal profits" is given in "Imperfect Competition and Falling Supply Price" (1932), p. 546. The matter was discussed by Harrod in "A Further Note on Decreasing Costs" ( 1933:7 ) (which is cited by Kaldor in a footnote to the passage referred to), and in correspondence with Robinson: see letters 295 , 296 , 297 , 298 , 299 .

    9. Kaldor claimed that the determinateness of the cost-schedule had never been called in question before ("The Equilibrium of the Firm", p. 63). In the passage referred to, Harrod had pointed out that "every demand schedule has its own supply schedule": "The Law of Decreasing Costs" ( 1931:2 ), p. 567.

    1. a. ALS, two pages on one leaf, in NKP NK/3/5/3-4.

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