783. N. Kaldor to Harrod , 16 June 1938 [a]

[Replies to 780 , answered by 784 ]

The London School of Economics, Houghton Street, W.C.2 #

16 June 1938

Dear Harrod,

I can't see what all your excitement is about. You say that on p. 3 of my letter, on the place marked with a cross, [1] I suddenly & without warning, introduce perfect competition & thus change my assumptions.

Well I do (or did) nothing of the sort, which I think you will yourself admit if you re-read my letter carefully (& calmly). My argument was that marginal real wages must rise, in order that the marg. rate of return should fall. You said in your last letter but one that you don't admit this & "don't see why should admit it". [2] In order to prove this proposition and secure your admittance, I proceed in the following way:-- Suppose marg. real wages do not fall (with an incr. in the scale of output) is there any reason, in the realm of physical productivity, which would enable the marg. rate of return to fall? The answer (my answer) was in the negative; hence the cause of the fall in the latter must be the rise in the former. In other words marg. rate of returns & marg. real wages must be functionally [b] & uniquely related to each other. Q.E.D. This is the meaning of the sentence, in the place marked with a cross. If prices are given, the marg. rate of return is constant. Therefore the reason why the marg. rate of return is falling is because prices are not given, irrespective of the scale of operations. What is wrong with that?

And needless to add, if the marg. rate of return is constant, the degree of roundaboutness will not change, unless prices change (i.e. real wages change) whatever happens to the supply schedule of capital.

I am afraid in this last letter you go back on every thing you admitted before; and this makes progress very difficult. In your previous letters, esp. the last letter but one, [3] you have already admitted that if real wages are constant (independent of output), a fall in the supply schedule of capital will not change roundaboutness. You now say the opposite (pp. 3 & 4, places marked with a cross [4] ). But you give no argument for this; nor any attempt to answer the arguments I have given, and repeated in my previous letters. You also involve yourself in contradiction. On p. 2 (place marked with two crosses [5] ) you say it is not relevant which part of the supply schedule of capital you are on (which depends on real wages) for determining the degree of roundaboutness. But on p. 4 (place marked with three crosses [6] ) you say exactly the opposite of this.

On p. 1 you say that if real wages rises (under perf. competition, etc.) the price will rise. [7] The price of what? A rise in real wages means to me a rise in wages in terms of the product; to say that the price will rise, is the same thing as saying that real wages cannot rise (except perhaps temporarily). But you dont really mean that do you?

But suppose real wages do rise, (i.e money wages rise more than money prices--you might admit this possibility, if only for the sake of the argument!) then, in the conditions explicitly assumed by you, the marginal rate of return must fall, not only for a particular output, but for all outputs. And if the marg. rate of return falls for all levels of output, what is the sense in assuming "no change in the marg cost of borrowing"? Since the two, in the new equilibrium, must be equal to another, the marg. cost of borrowing must fall. So how can you say that there will be no inducement to use more roundabout methods?

I am beginning to be very skeptical about the possibility of really making you to see my point. I could say, of course, the same thing about "psychological inhibitions" on your part which you say exist on my part; but since it is in the nature of such inhibitions that the inhibited is quite unaware of them (otherwise they would cease to be inhibitions!) neither of these accusations could be very helpful for the progress of the argument. All I can say is that I always read your letters carefully (& generally more than once) before replying to them; & if you adopted the same method, we both do our best to understand each other. In particular, I implore you to read carefully the place marked on p. 2 of my last letter. [8] I think it sums up the position admirably; & no further repetition could improve upon it. And do look up also my def. of "marg. real wages" in one of the previous letters! [9]

Yours

N. Kaldor

P.S. I return the last two products of the correspondence for your <consecution> [c] .

  1. 1. Letter 779 , [jump to page] (footnote [ii] ); for Harrod's comment see letter 780 , [jump to page] .

    2. Letter 776 , [jump to page] .

    3. Letter 776 .

    4. Letter 780 , [jump to page] (footnotes [ii] and [iii] ).

    5. Letter 780 , [jump to page] (footnote [i] ).

    6. Letter 780 , [jump to page] (footnote [iv] ).

    7. Letter 780 , [jump to page] .

    8. Letter 779 , [jump to page] .

    9. Letter 771 , [jump to page] .

    1. a. ALS, five pages on three leaves, in HP IV-669-688. Photocopy in NKP NK/3/30/86/108-12.

      b. Ms: «must functionally».

      c. Ms: «<consecuion>».


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