528. Harrod to H. D. Henderson , 24 February 1936 [a]

[Replies to 527 , answered by 532 ]

Christ Church, Oxford #

24 February 1936

My dear Henderson

I hope you dont mind my polemical style of writing. Let me assure that you are good for me and I greatly appreciate the trouble you are taking on my behalf. Dont please be impelled by your conscience to take more trouble than is good for you! If I write in a polemical vein, it is because at the moment and in the circumstances that comes most easily. Rest assured that it causes genuine gratitude. [1]

And while I am on the personal point, let me just explain the (quite superficial) feelings of irritation and wounded vanity from which I am suffering. It is possible (thought I dont quite agree to this) that your advice to me not to immerse myself in elasticities and increasing and diminishing costs etc. is jolly good long period advice, i.e. relating to the course of studies I should pursue for the next 10 or 20 years! And I welcome such advice--I have been 15 years at this beastly place without getting any advice from anyone about what is good line of work to pursue. I have been entirely on my own and unguided.

The regrettable [b] feelings are merely due to the moment at which it has come. I have in the last six years written a number of articles, one of which (Q.J.E. [2] ) has had certain recognition as the best standard authority on these very subjects. I say some recognition. Well, I have received requests for offprints of it for use in a seminar at Harvard and at another American university. [3] I have heard indirectly of its being used as the text in others also. I have recently received a request from a learned journal to write another on a similar subject. [4] My academic reputation, which is quite exiguous I grant you, does rest almost entirely on the work I have done in this field. On top of that I have just written a book with which I happen to be rather pleased. At that particular juncture you come and say in an airy way--all this stuff about elasticities and varying costs is a great waste of time and really injurious to the advance of economics. Well, perhaps. But it does happen to be my little treasure trove, a poor one but my own. Dont think I resent what you say. On the contrary I am intensely interested and grateful. I only want you to feel that the note of irritation is pardonable in these circumstances. (N.B. Joan Robinson gives handsome recognition to my title to a share in the treasure trove in her introduction [5] ).

Now to come to brass tacks [c] . I dont for a moment admit that the concept of elasticity of demand is one that is unfruitful or should be neglected. {Of course I recognize the importance of selling costs (which are discussed in the literature on the subject including one of said articles: [6] <+> [d] ): but they cannot be regarded as part of costs in the ordinary sense, since they are not a function of the amount produced, but of the state of demand: it is probably most correct and convenient therefore to subtract them from marginal revenue}.

Further, I think that my proposition that elasticity of demand is inversely related to the size of income ( law of diminishing elasticity of demand) is quite probably worthy to be erected into a fundamental proposition of economics, though I seem to recollect inserting provisos at several places that this was a generalization which would have to be tested and couldnt be taken as a demonstrable certainty. [7] Both our speakers have confirmed it. [8] Lee said in words that might almost have been taken from my book, that, as the world has grown richer, people had hardened in their buying habits and price differences were much less important. Stokes did not put it in this way, but said something the implications of which were the same, that price concessions on goods bought by richer people had far less effect (he suggested no effect) than those on goods bought by poorer people. [9] Neither, it is true, related this law to cyclical changes. It is possible of course that it is true in the long period but not in the short. But I suspect that it is true in the short. Put it this way: that the amount of custom a firm would lose taken as a percentage of its turnover as a result of having its price higher by a given percentage than its competitors would be greater in slump than in boom. I must say that this seems highly likely on the face of it.

Now for your point that entrepreneurs think more of the future than the present. [10] It may be. But will you tell me in general whether this tends to cause them to charge higher prices and sell less than the immediate position would justify or to charge lower prices and sell more? If you reply that it all depends on the circumstances and that one is as likely as [e] another, then we are left with my proposition as a first approximation. [11] If you say that their tendency to maximize profits is so weak that it is not a material consideration, well you do torpedo me, but you are left in an uncharted see in which you will find it extremely difficult to make any generalization whatever. There is something to be said for that. I greatly admire the extreme scepticism of Wesley Mitchell. But you will be caught out yourself jolly quickly, I bet.

Of course I will look most carefully at my passage about wage reduction [12] as at all passages commented on. I am not sure that I see that the non-equality of marginal revenue to marginal cost is favourable to wage reductions having a stimulating effect. If I show that with marginal revenue = marginal cost, wage reduction, with certain reservations, does not stimulate output, you will have to show that wage reduction causes entrepreneurs to move further away from the best position if initially they are producing at a cost above marg[inal]. rev[enue]. and nearer to it if they are producing at a cost below it. And I very much doubt if you can find any general argument to establish that. If we have no technique of analysis, then with regard to the effect of wage reduction we can only say, we do not know what its effects will be. Of course someone [f] might say, well we do not know in the case of a particular firm what the effect of a wage reduction or orders will be, but we do not know that its costs are reduced by a wage reduction, so in the absence of knowledge about orders we may assume that it will expand. I leave it to others to say that. I prefer to say, ignoramus. By the bye you are wrong in supposing that the arguments of Pt III [13] relate to changes in output by a particular firm. They relate to uniform changes of output in the whole system.

By the bye, surely it is not quite true to say that only the younger school bother their heads about elasticity. What about Pigou? [14] And that realist Maynard assumes in his last book that marginal cost = price (or marg. rev. in case of imperfect competition). [15] But I suppose even he no longer counts!

I shall go through my text most carefully having what you have said and anything else you may choose to say in mind. I do think it important to indicate that my dynamic argument is independent of the details of the static section (pt III).

Yours

Roy Harrod

  1. 1. But see letter 563 , [jump to page] .

    2. Harrod, "Doctrines of Imperfect Competition" ( 1934:3 ).

    3. See letters 360 R, 716 and 815 R.

    4. No documents were found relating to this request.

    5. J. V. Robinson, The Economics of Imperfect Competition (1933), pp. vi-vii (for the related correspondence see letters 311 and 312 ).

    6. Marketing costs are discussed in Harrod, "The Law of Decreasing Costs" ( 1931:2 ), pp. 568-69.

    7. The Law of Diminishing Elasticity of Demand is stated in The Trade Cycle ( 1936:8 ), pp. 21-22 and further discussed on pp. 82-85; Harrod's warning is on p. 19.

    8. Refers to the first two Oxford Economists' Research Group's interviews to entrepreneurs. H. F. Scott-Stokes was interviewed on 31 January, K. Lee on 21 February (the minutes of Scott-Stokes were drafted by Harrod and supplemented by Hall, in HCN 5/11--see letter 529 R and in particular note 1 . An engrossed copy of Harrod's report of the "Visit of Sir Kenneth Lee on 21.ii.36" is in ABP 46).

    9. Harrod reported that Scott-Stokes "explained that competition was keener in the case of cheaper goods than in that of the more expensive." He admitted that they [Scott-Stoke's company] might occasionally squeeze the price at the bottom (viz. for the cheaper qualities) and stick something on at the top, thus departing from the formula." (Harrod, "Visit of Mr. H. F. Scott-Stokes on 31.i.36", in HCN 5.1.7 ). Curiously, Lee's statement is not reported in Harrod's minutes of the interview.

    10. Letter 527 , [jump to page] .

    11. Letters 525 , [jump to page] , and 526 , [jump to page] .

    12. Harrod, The Trade Cycle ( 1936:8 ), p. 81; letter 527 , [jump to page] .

    13. Part III of chapter II of The Trade Cycle, pp. 75-88.

    14. See for instance A. C. Pigou, Economics of Welfare (1928), pp. 259-60 and appendix II, and The Theory of Unemployment (1933), pp. 33-34 and passim.

    15. Keynes, The General Theory, 1936 (in Collected Writings vol. VII; see in particular pp. 294-95, and the provisos in the appendix to chapter 6)

    1. a. ALS, nine pages on five leaves, in HHP 22A/6. Photocopy in HPBL Add. 72764/63-77.

      b. Ms: «regretable».

      c. Ms: «tacs».

      d. four illegible words.

      e. Ms: «than».

      f. Ms: «some one».


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