462. Harrod to J. M. Keynes , 6 August 1935 [a]

[Follows on from 461 , answered by 463 ]

Porthminster Hotel, St. Ives, Cornwall #

6 August 1935

Dear Maynard

Herewith some more occasional notes. I have finished the first reading of what you sent me, [1] and am greatly impressed with its power & convincing-ness. Do you want my copy back at once? Or may I keep it a little longer?--so that I may look it over and see how the various things fit together.



Galley 52. [2] On re-reading I again feel that you do less than justice to Marshall (and the traditional view). I dont think he failed to appreciate the distinctness of the concepts of marginal efficiency of capital and the rate of interest. [3] He knew that there was a schedule of marginal efficiencies, & he thought that interest was determined by this and the schedule of the propensity to save. Now you use both these schedules--but to determine the level of income, 1 the relevance of whose variations in this nexus he did not appreciate.

I dont like your last para of II on Galley 52 [4] both because I think it wrong, in the sense that it seeks to attribute some dubiety & fluctuation of view to Marshall which isnt there and also because this line of attack is likely to lead to barren controversy--defence of the orthodox view against an unjustified attack 2 --which may detract attention from your essential point and lead to much waste of words & thoughts.

Personally I dont think this II is necessary. But I especially dislike the last para. of it.

Your position is clear. The two schedules supposed to determine the rate of interest by classical theory, in fact determine the level of income of which it gives no satisfactory account, while the rate of interest is determined by the schedule of liquidity preference & the quantity of liquid medium. What do you gain by attributing a logical defect to the traditional view, when all you need to attribute is in-correctness?

Galley 64. 2nd para. last sentence. [5] 3 This embodies the crux of what I object to. Especially the words "makes no sense". You are saying that if the amount of something produced necessarily equals the amount consumed it makes no sense to say that a price brings demand into equality with supply. And that, I am confident, wont do. 4

I dont believe you can dispose of the traditional theory until you have stated your view. And I suggest deletion of words from "Broadly speaking ..." to end of I. Anyhow the statement that traditional answers follow two lines is quite obsolete, because for decades all decent economists have held that both lines, viz. supply & demand, are necessary to the determination of the rate of interest. Both lines are present in Böhm-Bawerk [b] , Cassel, Marshall etc. [6]

Suppose after equilibrium the 5 marginal efficiency of capital rises. Orthodox theory says that the rate of interest will rise to limit investment and encourage saving. Namely ordinary supply & demand analysis. 6 There is a new marginal efficiency of capital curve which intersects the propensity to save schedule higher and further to the right. Your answer to this is no--the rate of interest is determined by liquidity preference & the quantity of money, both of which may be unchanged and \ the rate of interest will not necessarily rise. What happens? Total income is increased by the extra investment operating through the multiplier, until--in the mathematical not temporal sense of until-- [c] with the old rate of interest and the existing propensity to save, saving is up by the same amount as investment. Your own doctrine as to what determines the rate of interest is necessary in order to rebut the orthodox view, which cannot be refuted out of hand like this.

You seem to me to be on quite sure ground in your criticism of classical theory on Galley 65 para I. [7]

The hour is late & I wont attempt to grapple with Ch. 15 now, but I will let you have my reflections to-morrow.

I feel that the only way I could possibly be of any assistance is not in the elaboration of your own view, but in endeavouring to restrain you in your criticism [d] . I feel that you have been thinking so much about your own views that you are inclined to do less than justice to the existing doctrines. Yet it is these very existing doctrines that have been intensively chewed upon by the economists who are not path-breakers, but none the less endowed with some intellectual power. They have pondered on them again & again from many points of view, lectured on them, taught them, considered many possible lines of attack & defence, and finally embraced and endorsed them, and here you come rushing in and in the most airy way accuse them of logical inconsistency and suggest that they havent thought much about them. Suppose your reasons in the constructive and critical parts were equally good, you would have a far greater chance of carrying conviction in the former because your adversaries have not had years of thought in which to prepare an answer. But I dont think they are equally good--and for the same reason--namely that your years of thought have been mainly given to the constructive part.

Now from the practical point of view I do think it very important that you should not light-heartedly ride roughshod over cherished convictions unless you are certain and doubly certain that you are right. 7 And for your argument you don't need to do so! What I think is important from the point of view of the effect and influence of the work is that you should minimize and not maximize the amount of generally accepted doctrine that your views entail the scrapping of. A general holocaust is more exciting. But anything you write now has such immense réclame [e] that you no longer require these artificial stimulants to secure attention. Everyone will be all attention in any case. Dont go out of your way to provoke dogged resistance on the part of professional economists! Well, I shall come on to ch. 15 to-morrow in my most critical mood.

R. F. H.

  1. 1. Refers to the proofs of Keynes, The General Theory (1936) with the exception of the last three chapters: see letter 451 , [jump to page] .

    2. Keynes, Collected Writings, vol. XIV, pp. 461-63; General Theory (1936), pp. 139-40.

    3. Harrod considered the marginal efficiency of capital as a different title for the marginal productivity of capital, the only improvement consisting in the stress upon expectations without, however, entailing important modification in the traditional theory: "Mr. Keynes and Traditional Theory" ( 1937:4 , pp. 76-77). Keynes did not accept this interpretation: see letter 470 , [jump to page] .

    4. General Theory (1936), p. 140, paragraph after the quote.

    5. Collected Writings, vol. XIV, pp. 470-71; General Theory, p. 165. Keynes's argument was restated and the reference to the two lines of thought abandoned.

    6. Harrod had already commented on this passage along these lines in letter 459 , [jump to page] .

    7. Collected Writings, vol. XIV, p. 471; General Theory (1936), p. 166, last full paragraph.

    1. a. ALS, one page, with IN, partly in pencil, four pages on four leaves, numbered from the second, in JMK GTE/1/300-304. The letter is printed in Keynes, Collected Writings, vol. XIII, pp. 535-37. Reproduced by kind permission of the Provost and Scholars, King's College, Cambridge.

      b. Ms: «Bohm-Bawerk».

      c. The clause here reproduced between dashes was originally scribbled between the lines as an afterthought.

      d. Ms: possibly «criticisms».

      e. Ms: «reclame».

1. Keynes marked the last two sentences with two vertical lines in the margin.

2. Keynes marked the remark within dashes with a vertical line in the margin.

3. Keynes marked this line with three vertical lines in the margin.

4. Keynes marked the last two sentences with an undulated line in the margin.

5. At this point, Keynes pencilled in the words "schedule of".

6. Keynes noted: "quantity of investment will change[;] but it won't". The last two sentences are marked with a vertical line in the margin.

7. Keynes marked this sentence with a vertical line in the margin.

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