The "Relation" and the rate of interest
See accompanying letter
You agree with my four cases,  i.e. that the absorption of unemployed labour will only lead to an unavoidable crisis if there is at the start a greater volume of unemployed labour than capital. Starting from the bottom of a slump, it will there always be possible to absorb any levels of unemployment without danger up to the point at which capital is fully employed. Then any further advance leads to the danger of a collapse. Might not this danger be avoided if the rate of interest were so manipulated to control the substitution of capital for labour that the remaining unemployed were absorbed at a constantly diminishing rate? Suppose there are 1,000,000 unemployed to absorb; the proper policy would be so to adjust interest rates that--say--1% of the unemployed were absorbed in each year. In the first year interest rates would be raised or lowered so to affect the "capitalistic" nature of replacements and new investment and thus the volume of net investment that the unemployed were absorbed at the rate of 10,000 p.a. At the end of the year 990,000 unemployed would remain, and in the second year the rate of interest would be adjusted so that they were absorbed at the rate of 9,900 p.a. & so on (I have taken a ridiculously low %!). By this means each year more capital investment would have to take place to substitute capital for labour, since the savings of the community would presumably be rising and the amount of capital investment required to keep the proportion of capital to labour constant would be falling each year. Each year the rate of interest would have to fall so as to develope an increasing "substitution" demand for investment; but this process would be gradual. A sudden need for the whole of investment to be shifted by a fall in interest rates from that necessary to absorb unemployment to an equal amount of "substitution" investment would be avoided. Would you agree that theoretically at least a policy of this kind [f] does make it possible to absorb the unemployed without a consequent crisis? If so, is not the statement of the difficulty on page 153  for example an exaggeration of it?
2. Letter 514 , commenting upon letter 513 .
3. Harrod, The Trade Cycle ( 1936:8 ), pp. 110-25.
4. Letter 510 , Note I ( [jump to page] ), and letter 513 .
5. Harrod, The Trade Cycle ( 1936:8 ), pp. 125-45.
6. Letter 512 , [jump to page] .
7. Letter 514 , [jump to page] .
8. Harrod, The Trade Cycle ( 1936:8 ), pp. 112.
- a. ALS, two pages on one leaf, in HP IV-745-767/6. The annexe autograph note on "The Proportion Marginal Cost/Average Cost," two numbered pages on two leaves, is in file HP IV-745-767/7; the second annex note on "The `Relation' and the rate of interest," autograph, one page, is also in file HP IV-745-767/7.
b. Ms: «derivate».
c. Ms: «
» (also in the next occurrence).
- d. Ms: «possible either to accept» ... (no corresponding "or" clause follows).
e. Ms: «-ve».
f. Ms: «kinds».
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