632. Harrod to J. M. Keynes , 17 February 1937 [a]

[Answered by 633 ]

Christ Church, Oxford #

17 February 1937

Dear Maynard

1. May I elaborate my doubt about your second source of demand for capital. [1] Under (ii) you classify increase of consumption, under (iii) more roundabout process of production whether due to inventions specifically favouring that or a fall in the rate of interest. You gave reasons for thinking (ii) more important quantitatively than (iii). [2] It is important then to consider whether (ii) does absorb any saving at all.

Abstracting from changes under (iii), consumption goes up because the factors of production become more efficient. If inventions and improvements are not biased (if they were they would fall under (iii)) [b] , we may suppose labour etc. to increase in efficiency in consumption goods industries and capital goods industries equi-proportionally. Suppose by an improvement of organization and subsidiary gadgets, 6 looms instead of 4 can be looked after by 1 man. 1 man's efficiency on the side of the consumption goods process is raised 50%. Must we not also suppose that a similar improvement occurs in the machine making industry, so that a given labour unit will be able to produce 6 instead of 4 looms? If this is so, the cost price of 6 looms will be the same as that of 4 looms before. 6 looms can be bought out of the fund designed to replace the 4. No saving will be absorbed in the purchase of the extra 2 required to keep the whole previous labour force employed and to raise consumption of the product by 50%. This argument re-inforces your main position in such a striking manner that it seems a pity that you should define your terms in such a way as to obscure the point.

I put the matter thus. More capital can only be employed (i) if the quantity of the other factors employed increases (your point (i)) (ii) if the quantity of capital employed per unit of the other factors employed increases. This clearly covers the whole ground. I claim that my point (ii) is wholly covered by your point (iii). If more capital is employed per unit of the other factors I say that the productive process has become more capitalistic.

2. Did you really invent the word reflation? I have been carrying on a correspondence with the Oxford dictionary about it. [3] I provided them with the definition and examples given in the Supplement. But they independently did a different definition in the Shorter Dictionary which includes the expression "wrongly for re-inflation" which I strongly object to. [4] I have argued that reflation is a better formation than re-inflation and that re-inflation would mean something different. I wont go over the long arguments. But I should be interested to know if you really invented the word. If so, when did you first use it?



  1. 1. Harrod is referring to the Galton Lecture on "Some Economic Consequences of a Declining Population", delivered by Keynes on 16 February 1937 before the Eugenics Society (originally published in The Eugenics Review, April 1937, reprinted in The Collected Writings of John Maynard Keynes, vol. XIV, pp. 124-33). Keynes's reference to his speech rather than to a written text (letter 633 , [jump to page] ) indicates that Harrod was in the audience.

    Keynes's argument runs as follows (p. 126): "The demand for capital depends, of course, on three factors: on population, on the standard of life, and on capital technique. By capital technique I mean the relative importance of long processes as an efficient method of procuring what is currently consumed, the factor I have in mind being conveniently described as the period of production, which is, roughly speaking, a weighted average of the interval which elapses between the work done and the consumption of the product. In other words the demand for capital depends on the number of consumers, the average level of consumption, and the average period of production."

    2. Keynes suggested that since "the average period [of production] may be tending to diminish", while population is falling off, "the demand for a net increase of capital goods is thrown back into being wholly dependent on an improvement in the average level of consumption or on a fall in the rate of interest" (p. 127).

    3. Harrod corresponded with Wyllie and especially Onions on the entry on reflation in the 1933 supplement of the Oxford English Dictionary: see letters 256 R, 539 R and 627 R.

    4. The 1933 Supplement of the Oxford English Dictionary indicates: "f. Re-: after Inflation and Deflation"; the Shorter Oxford English Dictionary, 1936 (2nd edition) suggests: "Badly f. Re- + In(flation".

    1. a. ALS, five pages on three leaves, in JMK GTE/2/2/71-75.

      b. Ms: Harrod forgot to close the bracket.

Welcome page

top of page

Return to index of this section

Go to previous page

Go to next page