776. Harrod to N. Kaldor , 4 June 1938 [a]

[Replies to 775 and 771 , answered by 779 ]

Christ Church, Oxford #

4 June 1938

My dear Kaldor

I foresee that I may have to come back to your long letter. [1] It may have been the pressure of work--still going on--which prevented my saying more about it.

You ask [2] 1. whether I agree that a reduction in the rate of interest must always lead to widening irrespectively of whether it leads to deepening or not. Given an unchanged demand for the individual firm's product, I should have thought that it must, since it reduces the firm's cost cum interest. (The expansion may not be a big one).

2. Do I agree that marg[inal]. real wages must change in order that there should be a change in the degree of round-aboutness? No; I dont see why I should. A drop in the rate of interest would surely be sufficient. The firm will, if real wages remain the same, widen until the marginal net product is the same as before (vide last para).

I did in my last letter [3] trespass into the field of general equilibrium. But I hope I have answered these two questions within the limits of your enquiry.

You say "I certainly agree that a change in real wages can leave methods unaltered, provided marg. real wages remain the same. In the same way a change in the rate of interest can leave it unaltered, provided this does not imply a change in the marg. cost of borrowing". [4] I agree to both of these.

The difference is this. A change in marg[inal] real wages cannot alter roundaboutness unless it is accompanied by a change in the marg cost of borrowing, whereas a change in the marg cost of borrow can alter roundaboutness even if marg. real wages remain the same.

The a-symmetry may best be shown by approaching the matter in a slightly different way. Suppose we put the question--what is the cheapest way of producing a bushel of wheat given a certain state of technology? If one says that real wages are so and so, this tells us nothing towards knowing how labour is to be mixed with land unless the rent of land is also specified. But if one says that the rate of interest is so and so (or the supply schedule of capital to the firm is such and such) this gives unequivocally the proportions in which waiting on the one hand and labour land etc. on the other should be mixed, regardless of what the real rate of wages etc. are.

Yours

Roy Harrod

  1. 1. Letter 771 of 28 May.

    2. Letter 775 .

    3. Letter 773 .

    4. Letter 775 , [jump to page] .

    1. a. ALS, three pages on three leaves, in NKP NK/3/30/86/14-16. Photocopy in HP NC.


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