527. H. D. Henderson to Harrod , 23 February 1936 [a]
[Replies to 525 and 526 , answered by 528 ]
All Souls College, Oxford #
23 February 1936
My dear Harrod,
Many thanks for your letter. I'm sorry to have caused you to take so much trouble; & I'm still more sorry to take up an attitude which is so unsympathetic, & therefore--in the main--so unhelpful to what you're trying to do. And I must apologise sincerely for any "scolding" form. I'm a bit tired & over-wrought; & I tended to unload on to you personally a long pent-up protest against methods & tendencies, which you share with most of the younger people working in the economic field to-day.
But I gave you a false impression on two points. (1) I've read quite a bit of Joan Robinson  --enough to see what she was getting at; & I don't mean that I've any rooted prejudice against reading more. As a logical structure, it's [b] obviously an able piece of work; but it is a toy, not a tool.
(2) Re Marshall. I've not, I think, an excessive veneration for the old man; & certainly no such feeling of the sacrosanctity & "completeness" of his theoretical structure as you attribute to me. We were really at cross-purposes here; as I took you to be justifying the pursuit of your method by an appeal to Marshall's "authority". & I merely sought to demur that he appreciated the mathematical stuff was only a toy by relegating most of it in later editions at least to an Appendix. But I entirely agree with you that many parts of Marshall's theory <+> that you mention are very unsatisfactory. I only differ in the moral I draw, namely that Marshall carried abstract semi-mathematical [c] analysis further than it would profitably go whereas your school carry it still further into (as it seems to me) aridities. This isn't a distaste for exact reasoning, but a different conception of the sort of reasoning that is appropriate to different problems. But I mustn't [d] ramble on. As a clue to my attitude, I would ask you to glance at my "Supply & Demand" written 15 years ago;  & to note that I do not there mention the word elasticity, or the phrases "diminishing returns" & "increasing returns." I give no demand or supply curve for the individual firm. Those omissions were part of a deliberate plan (which of course in an ostensibly introductory exposition does not get recognized) of putting in those parts of economic theory which I found helpful in interpreting the actual economic world, & omitting everything that seemed to me sterile or positively misleading. So you see my quarrel with elasticities is of old standing. The centre of my objection to the elasticity notion  --or the curves for the individual firm notion is this. If a firm seeks to expand its business under conditions of imperfect competition, where trade connections are essential, it doesn't as a rule do it by cutting its price below that of its competitors but by increased selling effort & expenditure. So that, on the advance, its far nearer the heart of imperfect competition to regard the marginal costs as rising sharply, owing to marketing costs, than to regard the demand as having a certain elasticity. (An attractive price is a condition of the selling effort being successful; but the extra business cannot be envisaged as a function of a price-cut.)
If, on the other hand, a firm is losing business to rivals, its marginal costs won't be concerned at all by that fact; so that the supply curve is quite different forwards from backwards. Moreover if in depression, it refuses to lower its prices when its competitors are doing so, it will lose business cumulatively, because its customers will get annoyed, & in much larger proportion than it could gain business by trying to undercut competitors (if you want a typist, & someone asks more than the standard rate, you won't, unless she has special qualifications take her on. But if a typist says Take me on instead of the one you've got & I'll accept less pay, you're not likely to agree. The same thing happens in the relations of business men to those with whom they have connections.) So the demand curve would be different forward from backward too.
I deny, by the way, that I'm trying to say that business men "deviate from the path of self-interest."  I say that it is not their self-interest to try & secure the maximum profit for a year to the disregard of their good-will.  And, after all, you are dealing with short-term problems: you attempt to deduce inferences as to relative movements of prices & profits in a trade cycle from the assumption that business men are trying to maximise profits in those years. Surely, I'm right in saying that that is a false premiss. I can't regard it as a legitimate "first approximation". And, even if it [e] were legitimate as such, you w[oul]d. not be entitled to draw conclusions so sweepingly, e.g. that wage-reduction could never help the employers,  on the basis of a first approximation. I hope, by the way, that you won't omit to read my [f] criticism on this wages assertion,  or to consider how much of your argument in general stands [g] , if you withdraw the assumption that marginal income cannot exceed marginal costs,  which is no more true, so far as I can see, indeed less true I think, of imperfect than of perfect competition.
I shall read the rest of the book, of course, with an interest unimpaired by these polemics, which I'm sorry to have reopened at such length,
The merit of Marshall, to my mind, was his central demand curve-supply curve relationship--the blades of scissors & all that.
2. H. D. Henderson, Supply and Demand, London: Nisbet, and Cambridge: Cambridge University Press, 1922.
3. Letter 524 , [jump to page] .
4. Letter 525 , [jump to page] .
5. Harrod later extensively discussed the appreciation of goodwill as a component of the rational judgement on pricing policy in imperfect competition in his "Notes on Interviews with Entrepreneurs" (here reproduced as essay 17 ), where he attempted to provide a theoretical framework for the apparently non-rational behaviour of entrepreneurs as it emerged from the Oxford Economists' Research Group's inquiry.
6. Harrod, The Trade Cycle ( 1936:8 ), p. 81.
7. See for instance Henderson, Supply and Demand, chapter IX § 2.
8. Harrod, The Trade Cycle ( 1936:8 ), p. 78.
- a. ALI, eight pages on two folded sheets, in HP IV-480-484.
b. Ms: «its».
c. Ms: «semi-mathematic».
d. Ms: «musn't».
e. Ms: «if were».
f. Ms: «<by>».
g. Ms: «stand».
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