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397. Harrod to G. Haberler , 9 November 1934 [a]

[Replies to 395 , continues at 398 ]

Christ Church, Oxford

9 November 1934

Dear Haberler

I hesitate to reply to your letter of Nov. 6 1. because I do not wish to add to your burden of correspondence and 2. because I do not wish to offer arguments which might distract your attention from the first point in my last. [1] If you feel at all convinced on that, I feel we shall have made great headway towards clearing the ground and that the time of neither will have been wasted.

But to turn to this other point. The relation of an increase of MV without increase of M to over-investment. [2] My contention is that the over-investment in these circumstances (or indeed in any, but I think the point is particularly clear here) cannot be expressed by the formula investments > savings, on ordinary definitions. You say, if V increases, someone must dishoard. Yes, but if M is constant, this must be offset by someone [b] else hoarding. 1 You want to argue that investment > saving, because investment = saving + dishoarding and dishoarding > 0. But dishoarding 0. \ investment saving.

Of course if you argue the matter in real terms you get a different result. If V increases the real value of monetary stocks may go down.You may call this decrement an act of dishoarding. But if you do this you are back at the position of my Economist letter, [3] which I, in deference to your argument am prepared to abandon. [4] If, when prices rise and the value of monetary stocks with M constant declines, there is an act of dishoarding, then, when prices fall, and the value of monetary stocks with M constant raises, there is an act of hoarding. Yet this is precisely the point of view which you challenged. It implies a curious definition of hoarding, (which makes the dictum that savings should be equal to investment require stable prices), which I flew as a kite, but am prepared to withdraw. But if I do withdraw it, you cannot claim that with M constant there can be any dishoarding.

But if there is no dishoarding and no increase of M, how can investment be greater than saving?

Then there is Keynes' kite that saving should not include profit. [5] If you accept that definition investment can exceed savings. There is more to be said in favour of Keynes' definition than in favour of mine. Yet just because it leads to a paradoxical use of language and so to confusion of thinking, he would probably do well to withdraw it, and clothe the truths he was seeking to express in the Treatise in a new dress.

I take it that we all agree that there is over-investment in a boom. The problem is now to define that in scientific terms.

Yours very sincerely

Roy Harrod

  1. 1. Letter 394 of 5 November.

    2. Letter 395 , [jump to page] .

    3. Harrod, "Banking Policy and Stable Prices" ( 1934:9 ), here as press item 8 .

    4. See Harrod's rejoinder to Haberler in The Economist ("Banking Policy and Stable Prices (2)", 1934:10 , press item 9 , [jump to page] ).

    5. J. M. Keynes, A Treatise on Money (1930), book I, chapter 9 (in The Collected Writings of J. M. Keynes, vol. V, pp. 113-14).

    1. a. ALS, two pages on one leaf, in GH Box 66.

      b. Ms: «some one».


1. Haberler marked this passage with an exclamation and a question marks in the margin.


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