533. Harrod to H. D. Henderson , 27 February 1936 [a]
[Replies to 532 ]
Christ Church, Oxford #
27 February 1936
You have stated your point very clearly in your last letter and I will certainly reflect most carefully upon it when I come to revise and possibly re-construct.
The distinction between producing for orders and producing for a market corresponds closely I think to the distinction between imperfect and perfect competition. Perfect competition is defined as the state of affairs in which the individual producer can <+> no difference to the price he will get per unit by himself varying the amount of his output, or, in other words, one in which he can sell any amount he likes provided he is willing to take the given market price.
I appreciate that a lag is more likely to occur when producing for a market than when producing for order; I mean a lag due to mis-apprehension about what the market will be when he comes to sell his goods.
But such a lag does not seem sufficient to account for overproduction continuing throughout a prolonged slump, for the agriculturalists soon become aware that prices are down and not likely to rise in the immediate future.
Quite distinct from this lag due to mis-apprehension, is the lag due to there being no option but to go out of business altogether. I tried in my own way, tho' [b] probably with incomplete clarity and, possibly, faulty classification, to bring out the importance of this second kind of lag. 
Your point is that the line which divides those who are subject to this second kind of lag from those who are not is roughly the same as that which divides those who are subject to the first, and as I hold it, less important kind of lag.  Whereas for the second kind of lag I drew a distinction between non-capitalists and capitalists. My argument was based on the assumption which I am sure those brought up on Marshall--of whom I am one!--tend to make, which may be very unrealistic, that a considerable adaptation to a drop in market is possible by reducing marginal costs by reducing scale. Thus even a perfect competitor would tend to reduce output in response to a fall in price (knocking off his high marginal cost output) once he realized that the lower price was established. If he cannot do this his only course is, as you say, to clear out, and there will be a much greater lag, as I wrote, in such a case. My point was that the non-capitalist producer was unlikely to reduce output because of the special status of his own work as a cost [c] (whereas the competitive capitalist would knock off his high marginal cost output).
So I will ponder all this further.
Meanwhile I still feel that my point has not been rebutted that the producer working to order--and supposing like your competitive producer he cannot reduce marginal cost by restricting--will not accept a lower price unless elasticity becomes greater.  He will merely reduce his output and only accept orders for which he can get the old price. Oh, you may say, he will lose all his trade if he does that. And that is what I say but the words I use are that demand has become more elastic. If the demand was equally elastic before, the trade he would have been losing by charging the price he did would have been such as to make such a price unwise. Oh, but, you say, he didnt want more trade before and fall back on the time it takes to get new equipment. This argument may explain the price ruling just at the end of the boom, but will hardly explain a higher price ruling for a couple of years before the break. You would have to say that he is short of capacity for years together and this, on my side, I submit is unrealistic. My explanation seems to explain the facts more easily. I believe your real objection is to the language in which my point is couched. But you must remember that I dont want to exclude from the appeal that my book might make those younger type of readers, horrid creatures, who like this what I hope without disrespect I may call more precise terminology.
2. Letter 532 , [jump to page] .
3. Harrod, The Trade Cycle ( 1936:8 ), pp. 85-87
- a. ALS, six pages on three leaves, in HHP 22A/6. Photocopy in HPBL Add. 72764/72-77.
b. Ms: «thro».
c. Ms: «cost,».
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