Note II


See accompanying letter


P. 108. [7] For income to be redistributed in favour of profit it is not sufficient, as you state, that profit per unit of output should rise; but profit per unit of output must rise in a greater proportion than prime cost per unit of output. In other words the ratio and not the difference between Marginal Price and Average Price must increase, if a larger proportion of income is to go to profit.

If a larger proportion of total receipts is to go to profits, then must increase; for Marginal Cost ¥ output - Average cost ¥ output = total profit, so that the proportion of income going to profit = . If x = output & y = average cost, it follows that , where e is the elasticity of the average prime cost curve. will therefore only increase with an increase in x, if this elasticity decreases as x increases. But just because there is Diminishing Returns to prime factor, we have that is positive [e] , but not that is positive.

On page 112 you argue that "An increase of marginal cost related to an increase of output tends to raise average cost, but the consequential rise in average cost is less in proportion than the rise in marginal cost." The "in proportion" is surely wrong, as I have just argued. [8] "The matter of simple arithmetic" is that the marginal cost rises by a greater absolute amount than the average cost, but this is quite compatible with a fall in the ratio of marginal to average cost. You conclude this paragraph quite rightly with "Consequently a rise of marginal cost connected with an increase of output raises the amount of profit per unit." But you go on to argue that this necessarily increases the proportion of income going to profit, which is quite wrong.

This confusion continues throughout your discussion of the shift to profit; it is not the Law of Diminishing Returns which causes a shift to profit, but only--if it exists--the Law of the Diminishing Elasticity of the Average Prime Cost Curve which would prove your point. For example on p 118, when discussing the movement of prices and profits in the boom, you say of profits "here also the shift to profit is not in full proportion to the rise in marginal cost, but only to the excess of that rise over the associated rise in average prime; here we have {two reasons} a reason for expecting profits to move less than prices." [9] But if prices rise (e.g.) by 10% and the average prime cost remains constant, then profits will have increased by more than 10%. It is only if prices and the average prime cost rise both by 10%, that profits will also rise by 10%. Surely it is wrong to suggest that any rise in average prime will cause profits to rise by less than prices; it is only a rise in average prime which is in a greater percentage [f] than the rise in prices, that causes profits to rise in a smaller proportion than prices.

  1. 1. The typescript of the first draft of chapters I and II of Harrod's Trade Cycle ( 1936:8 ). This document does not survive.

    2. In The Trade Cycle, Harrod called "Relation" the acceleration principle. Only later he learned that this is a "well-established term of art" (see letter 607 , [jump to page] ). However, Harrod had certainly met the term before, for he discussed the "acceleration of derived demand" with Haberler: see letters 378 ( [jump to page] , and note 4 ) and following.

    3. Harrod, The Trade Cycle ( 1936:8 ), p. 54 bottom.

    4. Harrod, The Trade Cycle ( 1936:8 ), p. 55.

    5. Harrod, The Trade Cycle ( 1936:8 ), p. 59 top. A third proviso was inserted to account for Meade's point: see letter 511 , [jump to page] .

    6. Harrod's notion of "neutral" advances or recessions in the volume of production and consumption is given on pp. 54-55 and 91n of The Trade Cycle. Reference to the capital/labour ratio was not added.

    7. Harrod, The Trade Cycle ( 1936:8 ), p. 78. In the final version, Harrod chose the expression: "the relation of the marginal to the average prime cost of production," without specifying further.

    8. The argument seems to have been entirely recast, eliminating any reference to the proportionality between average and marginal costs.

    9. The Law of Diminishing Returns is discussed in The Trade Cycle ( 1936:8 ), pp. 82-85. Again, in the final version Harrod is more cautious as to the proportionality in the changes of prices and profits (see in particular p. 84).

    1. a. ALS, three pages on two leaves, in HP IV-745-767/3. The annexe autograph notes, unsigned, nine numbered pages on nine numbered leaves, are in HP IV-745-767/4: Note I is on pp. 1-6, Note II on pp. 7-9.

      b. Ms: «re read».

      c. Ms: «-ve».

      d. Ms: «-» (also in the next occurrence in the same sentence).

      e. Ms: «+ ve » (here and in the next occurrence in the same sentence).

      f. Ms: «%ge».

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