396. G. Haberler to Harrod , 7 November 1934 [a]
[Follows on from 395 , replies to 394 , the exchange continues at 401 ]
League of Nations, Geneva #
7 November 1934
My dear Harrod,
Many thanks for your letter of November 5th. Unfortunately it has not convinced me at all. I think, if you could bring yourself to conceive of saving, investment, income etc., as flows of money in time, you would get things straight. Then you would not be tempted illicitly to mix up successive periods, as you do now--in my opinion. I think Robertson cleared up this point in his article on Saving and Hoarding in the E.J. 
The mistake which you make in your letter is on p. 2,  where you say "Simultaneously, then, with the investment of £100, there is an increase of consumers' income of £100." For argument's sake, I agree to that. (It is not quite correct, because only a fraction of this money becomes at once income--but I won't complicate matters). You continue: "What do the consumers do with it? You might suppose that simultaneously they do nothing with it (spending it somewhat later). But in that case there is an increase of saving of £100". There is the mistake, which has its source in an illicit confusion of successive periods. Suppose a static state of affairs. Nobody saves, by assumption. Nevertheless money remains always for some time in individual pockets. (i.e. velocity of circulation is not infinite). If, now, a person gets more money on the first day of the week and he spends the additional money with his ordinary income, we can surely not say that he saves, just because he keeps the money on the average (say) half a week in his pocket. You say, however, that the consumer saves in these circumstances.
But even [b] if we allow ourselves for a moment to confuse successive periods illicitly (which, if carried too far comes to assuming velocity of circulation as infinite, or k [c]  as zero  ), we could assume that consumers spend the new money at once, in this period. Then investment exceeds saving. But, you will say, the money must now be somewhere, and the receiver will perform the necessary saving to balance your book. You will, however, admit that this brings you into the next period. Therefore, in the present period, the books are not balanced.
I am absolutely convinced, and I was able to get my conviction confirmed by a number of friends, that I am right about this. According to Keynes' definitions is identical with profits or losses and nothing is gained by substituting for the simple terms "profits" and "losses" the complicated expressions "excess-savings" or "excess-investment". This has been pointed out by Hawtrey  and Hansen in the "Econometrica". 
I am afraid we must leave things here, for the moment, at least. But I am still convinced that, if you do not neglect the time element by confusing successive periods, you will reach the same conclusion as I.
Yours very sincerely,
R. Harrod, Esq., Christ Church, Oxford. [d]
2. Letter 394 , [jump to page] .
3. Refers to k in the Cambridge equation: see note 11 to letter 384 .
4. Haberler had already raised a similar point in his review of Harrod's International Economics (Economica, February 1934, p. 101), where he contested Harrod's conclusion that the transition from one equilibrium to another is instantaneous if consumers spend all and no more than their income (Harrod, International Economics, 1933:10 , p. 115) by referring to Neisser's distinction between "Kassenreserven" and "Betriebsfonds", which implies the existence of a "period of payment" of finite length (H. Neisser, Der Tauschwert des Geldes, Jena: Fisher, 1928). This was taken up again in Bode's and Haberler's reply to Harrod's Economica article ( 1934:8 ): "Monetary Equilibrium and the Price Level" (1935), p. 77.
The matter was never settled, and the debate on this point protracted to the end of the correspondence: see letters 401 , 414 , 421 , 427 , 429 , 435 .
5. R. G. Hawtrey, The Art of Central Banking, London: Longmans, 1932, pp. 343-44.
6. A. Hansen and H. Tout, "Annual Survey of Business Cycle Theory: Investment and Saving in Business Cycle Theory", Econometrica 1, April 1933, pp. 117-47; see in particular pp. 126-27.
- a. TLS with autograph corrections, two pages on two leaves; in HP IV-395-422. Cc, not signed nor corrected, in NKP NK3//5/13. Further Cc in GH Box 66.
b. Ts: «even,»
c. Ts: «"k"».
d. Harrod's address was typed, in capital letters, at the bottom of page 1.
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