526. Harrod to H. D. Henderson , 23 February 1936 [a]
[Replies to 524 , follows on from 525 , answered by 527 ]
Christ Church, Oxford #
23 February 1936
My dear Henderson
1. The negative part of my statement about non-capitalists, competitors and monopolists was certainly too hasty. I am glad you drew attention to it.  That is just the sort of thing I want. Under the influence of Marshall I was assuming that capitalist competitors normally experience rising marginal costs from the application of a greater quantity of prime factors to a given quantity of fixed equipment for a considerable range inside of full capacity working, and that a fall of prices could cause them to reduce output. If they equate price to marginal cost in the old and new circumstances my proposition holds. But I agree with you that productive methods are probably more rigid than Marshall beguiled us into believing and that in most cases marginal costs probably <rem[ain]> constant to full capacity, and that in normal full capacity conditions competitors probably have a price above marginal cost (tho of course this is diametrically opposed to Marshallian doctrine). 
I still think that the way in which the behaviour of competitors and monopolists is often contrasted is quite fallacious.  But that would mean going into the whole question more fully than is necessary or would be convenient in that part of my book.
But you rather confused me by taking my over hasty statements there, which certainly illustrates the pitfalls of reasoning when not constantly checked by the facts, as a text to inveigh against the use of exact reasoning altogether.
2. My section on profits and prices.  I want to emphasize that this is independent of the general theory of the cycle advanced in the book. None the less I attach considerable importance to it. It accounts in a coherent way for a number of observed facts on the assumption that entrepreneurs endeavour to maximize their profit (which of course includes maximizing the prospect of future profit).
You say-- entrepreneurs dont endeavour to maximize their profit.  Of course they dont. That is a fact we must take account of. But we cant take account of it to much purpose until we have reduced the ways in which they deviate from the path of self-interest into some sort of systematic form. The maximizing profit formula is only a first approximation. I should urge that it is that--that by trial and error and by all sorts of funny rules of thumb and mystic formulae  that is the leading thing that entrepreneurs are trying to do. And that to work out what will happen if they do do that is not a wholly useless occupation. And when the consequence of doing this leads to results which conform in a number of respects with observed facts, one may be encouraged that the first approximation method is not wholly fruitless. I am all in favour of getting a closer approximation. But that is not possible without further sifting, analysing and sorting of the facts. I see no reason to put the results of my first approximation in the waste paper basket, especially when they work out so nicely. You did use the word false in conversation yesterday; but I dont think you have pointed but anything false in that section except the presupposition itself, which is false in the sense that it is a first approximation only, that entrepreneurs do the best for themselves. I am most willing to take into account any observed and established bias in any particular direction away from self-interest.
3. The main doctrines of imperfect competition were worked out largely independently by myself and Joan Robinson, by me in some rather brief articles (summarized in Q.J.E. May 1934) and by her in her book.  The main motive prompting me was to get nearer to reality. Orthodox theory had its monopoly theory and its theory of competition: the latter assumed an infinite number of producers working for a perfect market. This seemed so highly unrealistic that it seemed worth exploring what would happen if one made some intermediate assumption. No doubt any theory of this sort is only an abstract skeleton, a structure that will have to be revised in many particulars, only a very imperfect model of reality. But I do think it is an immense improvement on the old doctrine. And since the main object was to get nearer the facts, it is rather unkind to be scolded for turning one's back upon them.
When you say that it is not worth your while to get it up, you may be right from your own point of view, but you cant expect me to agree!
4. My conversation with you yesterday  has led to a considerable revulsion of feeling (which may only be temporary) about Marshall. I had a voluminous correspondence with Maynard about his book, in which I urged and begged him not to be so rude to the old chap.  I said that he was very good so far as he went and that it was really quite irrelevant to pick holes in him. Why not get on with the job?
But I am not sure that I feel that now. When I find someone [b] like you supposing that there really is enshrined in Marshall a theory about the way things work themselves out in the long period, that will wash, that will do, that really works and holds together, then I feel that Maynard is amply justified. I begin to understand why he fusses so much about Marshall. He lives in Cambridge and probably comes in touch with other people like yourself who take him au grand serieux. Nothing is more dangerous than to lull oneself into believing that one has stored up somewhere in the less-used brain-cells a theory that does explain the main working of the system when that is not the case. If we are naked, let us know it. Far be it from me to disparage Marshall. I have the highest regard for him. But do not let us suppose that he has provided a coherent theory of the long period working of economic forces that is in any sense complete.
5. I think it may quite probably be the case that what actually causes the cycle is something which the ordinary man, even the well-educated man is unable to understand without a severe course of mental discipline. I do not think that economists should refuse to take cognisance of it on that account.
2. In The Trade Cycle, Harrod added a note specifying that his argument related "to the distinction between capitalist and non-capitalist producers, and not to that between perfectly competitive producers and those working for an imperfect market" ( 1936:8 , p. 34n).
3. Harrod had already emphasized the gradual transition from monopoly to competition in his criticism to Chamberlin's "break": Harrod, "Theory of Monopolistic Competition" ( 1933:8 ), p. 664.
4. Harrod, The Trade Cycle ( 1936:8 ), pp. 75-88; letter 524 , [jump to page] .
5. Letter 524 , [jump to page] .
6. Harrod probably refers to Scott-Stokes's formula for the price of their products: "In pricing next year, the cost of each article in terms of raw materials and wages are computed; an addition is then made, equal to
¥ direct wages cost to the article. This gives the cost in the factory. To this is added 50% for dead charges to make the sales price" (Harrod, minutes of the "Visit of Mr. H. F. Scott-Stokes on 31.i.36", in HCN 5/1/7 ).
7. Harrod, "Doctrines of Imperfect Competition" ( 1934:3 ; the short articles are 1930:3 , 1931:2 , 1932:6 and 1933:7 ). J. V. Robinson, The Economics of Imperfect Competition (1933).
8. Harrod and Henderson met for lunch on 22 February: see letter 525 , [jump to page] .
9. This exchange took place between June and September 1935. On Harrod's complaints about Keynes's way of dealing with Marshall see, in particular, letters 459 ( [jump to page] ), 462 ( [jump to page] ), and 473 ( [jump to page] ).
- a. ALS, nine pages on five leaves, in HHP 22A/6. Photocopy in HPBL Add. 72764/53-61.
b. Ms: «some one».
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