773. Harrod to N. Kaldor , 31 May 1938 [a]

[Replies to 771 , answered by 775 ]

Ch[rist]. Ch[urch, Oxford].

31 May 1938

My dear Kaldor

You say that a reduction in the rate of interest may induce entrepreneurs (i) to expand the scale of operations (widen) (ii) to deepen. [1] I agree to ii certainly. When you say cet. par. i.e. real wages being given, I take it you want to assume that real wages wont be consequentially changed. The new equilibrium being so defined, presumably fixed factors like land will be cultivated more intensively and there will be widening. But if you happened to mean, in accordance with the common assumption of static analysis, the supply of labour being given, then I should expect the opposite of widening, since I believe the supply schedule of labour to be backward-sloping.

As I re-read your letter it seems to me that to answer it I should have to provide [b] a complete account of economic theory. So I must desist and content myself with re-stating my point.

If you compare 2 states of equilibrium and find that the rate of interest in the market or the marginal supply price of capital to the representative firm is unchanged you can say unequivocally that, given also technology unchanged, the degree of round-aboutness will not be altered, whatever has happened to the real rate of wages.

Per contra if the real rate of wages remains unchanged while the rent of land or some other factor (other than waiting) changes, then substitution of that other factor for labour or labour for that other factor will have occurred. This is the fundamental a-symmetry. That there is this a-symmetry I have no doubt whatever.

On the other hand I am prepared to accept the view that a rise of real wages with the supply schedule of capital constant may on certain assumptions reduce the marginal supply price of capital and so via that route cause substitution. In the case where we suppose rent of land to rise and supply of labour to remain the same, a change in real wages is not a pre-condition of substitution.

I feel I have not done justice to your letter; but I feel that to do justice to it I should have to write a volume. We must discuss the matter further,


Roy Harrod

Put otherwise, a rate of interest is in a sense an absolute value and determines substitution regardless of the real rewards to other factors. The real reward to another factor is relative and has no meaning for determining substitution unless the real rewards to substitutable factors are also specified.

  1. 1. Letter 771 , [jump to page] .
    1. a. ALS, two pages on one leaf, in NKP NK/3/30/86/12-13. Photocopy in HP NC.

      b. Ms: «have to a complete».

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