435. Harrod to G. Haberler , 28 February 1935 [a]

[Replies to 429 , answered by 436 ]

Christ Ch[ur]ch, Oxford

28 February 1935

Dear Haberler

I dont understand why you suppose that your question puts me into a difficulty or why I should be likely to give an answer involving V = 0 or . Everything is going well when the banks make an inflation of £1000. This, we agree, only raises income when it is paid to factors of production. Suppose that they dont spend the money at first. The income is up £1000, I is up £1000 and S is up £1000. Then suppose at the end of a certain period they spend the whole £1000 on consumption goods. We may either suppose (a) that this depletes stocks by £1000 or (b) that stocks are simultaneously replenished by fresh production. The argument would apply mutatis mutandis to intermediate cases. This event on supposition (a) constitutes dis-saving of £1,000 and dis-investment of £1000. Still I = S. On supposition (b) there is dis-saving of £1000, there is a rise of income of £1000 (paid to factors making consumption goods required to replenish stocks) and there is a saving of £1000 [b] by the factors receiving this extra income. Still I = S. Where is the difficulty? And where the supposition that V = 0 or ? So much for the [b] definition of S, that S = I.

With regard to definition 4 of my Rejoinder, [1] you speak as if my saying it absurd amounted to the same thing as saying that it was inconsistent. But there is a radical difference between these two allegations, any confusion about which must lead to hopeless troubles in economic analysis. A definition may be self-consistent and yet absurd because it violently offends against reasonable use of language. I suggested that definition IV did this, because according to it if A and B get an equal increment of income coming on top of an equal income and if A spends the whole income of his previous period while B spends the whole income of his present period they are said to save the same amount. This appears to me to do violence to ordinary usage.

Alas, Hicks' article is waiting to be read by me, but is not yet read. [2] I will let you know what I think of it.

Yours sincerely

Roy Harrod.

  1. 1. Harrod, "Rejoinder to Drs. Haberler and Bode" ( 1935:1 ), p. 83.

    2. J. R. Hicks, "A Suggestion for Simplifying the Theory of Money", Economica, February 1935, pp. 1-19.

    1. a. ALS, two pages on one leaf, in GH Box 66. CcT transcription, two pages on two leaves, typed at the League of Nations and attached to letter 436 , marked "Copy" at the top of the first page, in HP IV-395-422. Further Cc in GH Box 66.

      b. Ms: «the the».

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