92R. Margaret Cleeve to Harrod, 13 November 1925 [a]

Cleeve, the secretary of the British Institute for International Affairs, sends a mimeograph (12 pages) of Harrod's memorandum on international cartels, [b] to be eventually sent out to all members of the Economic Group. [1]

  1. 1. The memorandum was meant to provide a common ground for the resumption of the discussion. It opens by summarizing the resolution of the preceding meeting (see note 1 to letter 89 R), and by suggesting that two experts from Germany and from the United States should come and answer the Group's questions on the experience of their own countries.

    Part 1 of the memorandum sketches the different kind of cartels to be considered according to the degree of interconnection between the constituent members, and describes the chief methods used for regulating their economic position (price fixing, quota systems, limitation of total output, allocation of districts, tendering arrangements). The specificity of the British case are discussed with reference to the International Railmakers Association.

    Part 2 attempts to elucidate the principal economic problems that the Group will have to discuss. Firstly, "Would the formation of cartels in certain industries reduce the real cost of production?" Harrod suggests that cartels tend to be more efficient (economies in production, in the organization of research and in selling), but from the static point of view this does not seem to make much difference.

    The second question, regarding the stimulus to improvement, is the dynamic counterpart of the first. In Harrod's view, the benefit to be gained by progressively reducing costs remains. But how are the bad firms weeded out? The problem of British export trade is that of contracted markets and excessive capacity, so that inefficient firms must be eliminated; under competition, they are killed by competitors; under cartels, they may be eliminated gradually. But in the case of international trades this is too expensive. Therefore, the survival of the fittest is slower that in conditions of competition.

    To maintain a market abroad (which might be necessary in order to maintain a scale of production large enough to keep low costs), international cartels sometime maintain permanently low prices (under cost) in a particular market. The reason for this is that certain British industries are organized for production on that scale. But is there not another way of getting cheap production, namely, by re-organizing the industry for a smaller output. How far is a broad market necessary for cheapness absolutely, and how far merely relative to our existing organization?

    The next question regards the possible benefits cartels would imply for the foreign trade of Great Britain. This is discussed having in mind the temporary stabilization of Britain's share in the world trade and its permanent effects, with respect to both existing competitors and nascent manufacturing nations. Harrod is particularly interested in the implications of permanent dumping, viz. the case in which "the cartel makes it a habit of selling at a lower price in the threatened market than in the home market". Four objections are advanced to this kind of strategy: it is unlikely to be successful in face of determined national ambitions, since it can be met by raising the tariff wall; permanently higher tariff barriers would be a very high cost for a temporary success; it is likely to lead to political friction; and the alternative of re-organizing the industry for a smaller output could be more convenient, and more vital in the long run.

    The final question regards the wage-cutting competition. The view which prevailed during the first meeting was that a nation does not suffer through low wages in other countries, because national wages are proportional to the productivity of national labour. Harrod, however, pointed out that the matter may be more intricate. Firstly, an international cartel can, by regulating the supply of goods, influence the terms of trade. Secondly, if in a regime of competition one country is willing to accept lower wages and profits per unit of product while its competitor does not, it would be able to gain an immediate advantage in terms of a larger share of the world's trade. However, in the long run this could reduce the efficiency of workers by lowering their standard of life, and therefore set in a vicious circle by requiring a further reduction of wages to keep the pace with the reduced productivity (Harrod resorted to the same argument in his 1925 essay on "The Trade Cycle & the Theory of Distribution", essay 2 , [jump to page] , and in the 1927 "Memo on the Effect of Falling Prices on Employment", essay 4 , [jump to page] ).

    The correspondence on the inquiry on cartels is resumed at 108 R.

    1. a. 1 page TLS, from The British Institute of International Affairs, Chatham House, London # , in HP V-114.

      b. Three versions of the memorandum survive (all filed in HP V-114). The oldest one is a TD of 20 pages, with numerous corrections in Harrod's hand (one of which on a separate sheet), the last of which summarizes the questions to be discussed. The second version is a typescript (18 pages) which incorporates the previous corrections, to which however further autograph corrections have been added. The final version incorporates the preceding corrections; it is mimeographed and consists of 12 pages, the first of which on BIIA inscribed paper.

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