631. R. G. Hawtrey to Harrod , 16 February 1937 [a]
[Replies to 617 , crossed in the mail with 629 , answered by 638 ]
18 Elm Park Garden, [London] S. W. 10
16 February 1937
I must ask you to forgive me for having delayed so long answering your letter, and particularly your invitation for the week-end. I have been working under great pressure to get my book through the final stages, as Longmans want it to appear on the 1 st March. I only succeeded in completing a terribly complicated and voluminous index yesterday.
With regard to the week-end, I am sorry to say my wife has been laid up for some time with a nervous upset and I do not like to leave her more than I can help, even for week-ends, as she does not go about or see friends. So I would rather not fix a week-end at present, much as I should have enjoyed it. But do let me know next time you are in London so that you can come and have a talk, and lunch if possible.
I am very grateful for your comments. I return the proof with the resulting alterations pencilled in, also an extract from the page proof containing a new passage inserted at the foot of galley 3.  You will see that I had been led once more to accuse you of forgetfulness, but altered the passage! 
I cut out the sentence about a "statistical picture".  But your objections to it are not altogether well founded.  The point is that, if the deepening process fills the gap between the widening process and the available savings, the dis-equilibrium never begins at all. The statistical illustration shows that in any case the deepening process is assumed to be in operation, and that, if it has to be intensified, the difference is only one of degree and very moderate at that.
Another point on which I find your criticism unconvincing is as to the efficacy of the investment market in adjusting the amount of capital outlay to its resources.  I agree of course that those resources are liable to be reinforced by a creation of credit, whether by advances to traders for extension of plant or by advances to speculators and others for holding securities. But this is an excess of capital outlay over saving, whereas the case you are dealing with in the passage criticised is an excess of saving over capital outlay. The excess of capital outlay over saving is a matter not for the investment market but for the banks to counteract, and I do not think they have any difficulty in doing so. Nor is there anything in your book to suggest that they have. 
In your letter you express scepticism as to whether "entrepreneurs desist during the boom for actual lack of money."  But I do not think you need feel any doubts on the subject. At a time of credit stringency the kind of advances that bankers are most likely to stop are those either for extensions of fixed plant or for the purchase of securities. And whenever flotations outstrip savings, the effect is to load up underwriters with unsold securities.
I should quite admit that the banks do sometimes fail to keep advances of this kind within bounds. But they always have available the other resource of applying credit restriction to working capital, and making traders less willing to buy commodities all along the line. The consequent contraction of demand and of output reacts on the investment market itself.
You say that "with a limited population the rate of increase which obtains during the recovery simply cannot go on indefinitely. If there is a strong pressure driving it on, prices will begin to soar and profits to get greatly inflated and the tendency to over-saving will occur."  But these conditions imply an excess of capital outlay over saving, quite a different hypothesis from that in your book.
According to my own theory the soaring prices and inflated profits are not necessarily due to an excess of capital outlay, but may be brought about by a relaxation of credit through the channel of working capital.
You will observe that I have left unaltered one of my accusations of forgetfulness, "M r Harrod is, I think, forgetting that his subject is the trade cycle".  I do not think that the passage in Chapter IV, section 3, to which you refer, makes any difference. 
I have put in a footnote (galley 4) referring to your article on the Law of Decreasing Cost.  I ought to have remembered the article and to have referred to it in an earlier passage in which I dealt with profits, but which it has not been possible to alter.
Your theory of profits based on marginal selling cost comes very near to mine.  I regard profit as the gain resulting from selling power. But I do not think that in practice traders (whether dealers or producers) ever aim at spending up to the margin on producing sales. I should say that in those cases where there is any disposition to spend up to the limit, the limit is invariably fixed at a point at which the marginal pound is expected to yield two pounds or something like it. The yield of such expenditure is of course always extremely conjectural, but I believe the result of the uncertainty is to make the margin greater than it would otherwise be.
R G Hawtrey
P.S. I enclose your letter, as you may want to refer to it. 
2. Capital and Employment, pp. 327-28.
3. Capital and Employment, pp. 321-22.
4. Letter 617 , [jump to page] .
5. Letter 617 , [jump to page] .
6. Refers to The Trade Cycle (Harrod 1936:8 ).
7. Letter 617 , [jump to page] .
8. Letter 617 , [jump to page] .
9. Capital and Employment, p. 318.
10. Letter 617 , [jump to page] .
11. Capital and Employment, p. 329. Harrod, "The Law of Decreasing Costs" ( 1931:2 ).
12. Harrod discussed marketing expenses in the "The Law of Decreasing Costs"; thereafter, as Shackle acutely noted, "marketing costs [were] thrown overboard" (The Years of High Theory. Invention and Tradition in Economic Thought 1926-1939, Cambridge: Cambridge University Press, 1967, pp. 33-34).
13. Harrod eventually kept the letter, which was found among his papers: see source note a to letter 617 .
- a. ALS, six pages numbered from the second, on six leaves, in HP IV-448.
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