145. Harrod to D. H. Robertson , 10 January 1928
[Answered in the margin 1 ]
Unfortunately this transcription cannot be displayed as the copyright holder did not grant viewing rights in electronic format for this material. (see, however, Robertson's reply to Harrod's letter, written on the same sheet [a])
This document, however, can be read in The Collected Interwar Papers and Correspondence of Roy Harrod, edited by D. Besomi, Cheltenham: Elgar, 2003.
This seems the easiest way of answering your letter! For which many thanks. I hope you've had some real holiday. I wonder if you have been able to start on I[nternational].T[rade]. 
I look back with much pleasure to my week-end. 
2. Need then even in the long period be a correspondence between retail prices in different [countries] [b] ?Surely, acc[ording] to the orthodox theory of i.t., which assumes immobility of capital and labour, there can be a permanent difference of price-levels of those things into which services enter largely? [Robertson's note at the top of the leaf. He marked the last two sentences with a vertical line in the margin].
3. I admit this in the main (p. 579 bottom). But I don't think one can quite rule out the possibility of cases where cost of "enterprise" enters as a prime cost into particular transactions, i.e. where an entrepreneur would accept a contract if offered £100 net for his risk & trouble, but would not judge it worth accepting if only offered £80 net (see p. 573, note 1)! [Robertson's note in the margin].
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34 Campden Hill Gardens, W8 [London]
10 January 1928
I have just read your magnificent article on the Colwyn report.  I was convinced by your arguments; I was also greatly perturbed because I had thought that the doctrine which you criticize was both true and supported by the highest authorities. 
May I make one or two quite minor criticisms. (i) I think that you brush aside the objection derived from the Quantity Theory too brusquely.  For a gold standard country the price level depends on the world value of gold. A falling of production in a particular high income tax country might have some effect but would probably not have an appreciable effect on the world value of gold. If your views are correct what I think you can say is not that prices will be higher but that less goods will be produced in the high income tax country as a result of the imposition of the tax and that consequently the income tax will fall on the general consumer in the sense that his income will be reduced. But is it the general consumer? The rentier need not be hit at all. Is not the incidence really on the other factors of production who can only secure the co-operation of capital and enterprise on more onerous terms and whose prospects of remuneration will consequently be reduced. I should have thought the truth was that the business man can only shift the I.T. on to the general consumers to a very small extent, but that he may be able to shift a considerable part of it onto his co-agents in production.
The only real sense in which it goes onto the consumer, I should contend, is that those goods of which enterprise forms a large part of the cost will rise in price relatively to those in which it only forms a small part. The tax goes onto the consumers of the former class of goods.
A reader of JMK's article  in front of yours might object that in these days prices in any country are only loosely connected with world prices. True for a short period. But there must be a correspondence in the long period which is I think what you were discussing. 2
(ii) I dont agree that Pigou supposes monopoly conditions. (E.J. p. 574 bottom  ). I dont agree that a tax on enterprise acts in the same sort of way as raw materials.  These two points are connected. It appears to me that the only way in which the I.T. could curtail supply is by checking new enterprise, either checking new entrepreneurs or checking the new undertakings of those already there. I doubt, for instance, if it could cause the output of an existing factory to be curtailed. 3
I have regarded the orthodox view to be that all firms marginal or other applied fluid resources to their fixed plant in such quantities that the marginal net product of each kind of resource was equal to its supply price. The I.T. would have no effect on the amount of output the entrepreneurs would extract from existing plant whether he were the marginal entrepreneur or not. A tax on one of his raw materials would check his use of that raw material and would at once reduce his output. The I.T. would only reduce his output if and when it hindered him from installing new fixed plant. The exploitation of existing plant is rigidly fixed by (a) the selling price of the product and (b) the cost price of the fluid resources. I dont think that you can conceive of enterprise as a fluid resource in this sense. Cf. Edgeworth's formula for the reward of enterprise. Bk I Essay 2. 
I seem always to be levelling criticisms at your theories; I never produce any of my own!
I looked out for you on Saturday afternoon at the tutor's conference but ... 4 I look forward to seeing the new statement which you have extracted from the Prof.  I jog on. I envy you surveying the emptiness of the Great Court. I had to dash up to this beastly town as soon as term was done.
3. D. H. Robertson, "The Colwyn Committee, the Income Tax and the Price Level", Economic Journal XXXVII, December 1927, pp. 566-81.
5. Robertson, "The Colwyn Committee", p. 575.
6. J. M. Keynes, "The Colwyn Report on National Debt and Taxation", Economic Journal XXXVII, June 1927, pp. 198-212.
7. On p. 574 of his article, Robertson cited Pigou's evidence as reported in the minutes of evidence of the Colwyn Committee.
8. Robertson, "The Colwyn Committee", p. 575.
9. F. Y. Edgeworth, "The Theory of Distribution", in Papers Relating to Political Economy, vol. I, London: Macmillan, 1925 (originally published in Quarterly Journal of Economics, February 1904).
10. On 7 December 1927 (letter 144 R) Robertson had mentioned that he had induced Pigou to write a new article on marginal and average cost ("An Analysis of Supply", 1928).