Roy Harrod

467 Pages·2019·6.014 MB·English

by  Esteban Pérez Caldentey

GREAT THINKERS IN ECONOMICS
SERIES EDITOR: A. P. THIRLWALL
RRooyy HHaarrrroodd
Esteban Pérez Caldentey
Great Thinkers in Economics
Series Editor
A. P. Thirlwall
School of Economics
University of Kent
Canterbury, UK
The famous historian, E. H. Carr once said that in order to understand
history it is necessary to understand the historian writing it. The same
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specific episodes in their lives, or particular events that took place in
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historical and contemporary economists by exploring the interaction
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Esteban Pérez Caldentey
Roy Harrod
Esteban Pérez Caldentey
Santiago, Chile
Great Thinkers in Economics
ISBN 978-1-4039-9633-6 ISBN 978-1-349-74085-7 (eBook)
https://doi.org/10.1057/978-1-349-74085-7
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2019
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Acknowledgements
I would like to express my deep gratitude to Tony Thirlwall for his
continuing support throughout the writing of this book and thank
him for his patience, and detailed comments to all its chapters. I am
indebted to my wife Nancy Hope and our three children Albertine,
Amilcar, and Alyosha for their support, understanding, and for giving
me the time to complete this project. I would like also to thank Carlo
Panico for the comments provided to the first chapter and Fabián
Barros, Gabriel Porcile and Claudia Vilches for providing essential
bibliographical material. The ideas contained in the book were much
improved from the exchanges that I have had over the years with Matias
Vernengo and Juan Carlos Moreno-Brid. Alejandro González Castillo,
Rodrigo Contreras, Nicole Favreau Negront, and Luis Méndez Lobos
provided valuable research assistance. Alejandro González Castillo
compiled and classified the literature on Harrod’s dynamics found in
the tables in Chapters 4 and 9. I greatly benefitted from discussions
on non-linear differential equations with Alejandro Pérez Caldentey,
Adrian Pérez Keilty, and Daniel Barraez. Finally, I would like to thank
Laura Pacey and Clara Heathcock from Palgrave Macmillan for guid-
ance and editorial support.
v
Contents
1 The Life, Times, and Contributions of Roy Harrod 1
1.1 Family Background and Early Beginnings 2
1.2 Oxford and Cambridge 5
1.2.1 World War I and the Experience
at New College (Oxford) 5
1.2.2 J. M. Keynes and Cambridge 7
1.2.3 Christ Church (Oxford) and F. Y. Edgeworth 11
1.2.4 Life at Christ Church 13
1.2.5 Wilhelmine (“Billa”) Creswell 14
1.3 The Trade Cycle, Imperfect Competition, and Dynamics 16
1.3.1 The Trade Cycle 16
1.3.2 Imperfect Competition 18
1.3.3 Paving the Way Toward Dynamic Economics 21
1.3.4 The Oxford Economists’ Research Group
(OERG) 24
1.3.5 Harrod, Logical Positivism, and Induction 26
1.4 Life in Politics 30
1.4.1 The Liberal Party, Frederick Lindemann (The
Prof), and the Leaning Toward the Political Left 30
vii
viii Contents
1.4.2 Harrod’s Turn to the Conservative Party
and Disillusionment with Politics 33
1.5 The Lessons of British Economic Policy and History 36
1.5.1 The Great Depression 36
1.5.2 Britain After World War II and the Balance-
of-Payments Constraint 39
1.5.3 The European Common Market 43
1.6 Harrod, the General Theory (GT), and the Legacy
of Keynes 45
1.6.1 International Economics 46
1.6.2 Harrod and the General Theory 47
1.6.3 Keynes’s Official Biographer 50
1.7 World War II and Reconstruction 56
1.7.1 World War II: Working at the Statistical
Department of the Admiralty (S Branch) 56
1.7.2 Post-World War II Reconstruction,
the Clearing Union, and Bretton Woods 58
1.8 Later Activities 61
References 65
2 The Early Writings on the Trade Cycle and Imperfect
Competition 77
2.1 The Trade Cycle 79
2.1.1 The Context 79
2.1.2 The Trade Cycle and the Theory of Distribution 82
2.1.3 The Effect of Falling Prices on Employment 87
2.1.4 The Trade Cycle 89
2.2 Stabilizing the Cycle 90
2.2.1 The Proposals 90
2.2.2 Federal Reserve Policy: A Primer
for Stabilizing the Cycle 94
2.3 Imperfect Competition 96
2.3.1 Origins, Debates, and the Role of Harrod 96
2.3.2 Notes on Monopoly and Quasi-Competition
(Notes on Supply) 100
2.3.3 The Law of Decreasing Costs 104
Contents ix
2.3.4 The Normal Rate of Profit and the Debate
on Excess Capacity 109
2.3.5 Imperfect Competition and the Trade Cycle 114
References 117
3 The Trade Cycle 125
3.1 Harrod’s Approach to the Trade Cycle 128
3.1.1 Setting the Problem for the Trade Cycle
and the Static Determinants 128
3.1.2 The Transition from Statics to Dynamics 134
3.2 The Dynamic Determinants of the Trade Cycle 135
3.2.1 The Propensity to Save and the Multiplier 135
3.2.2 The Shift to Profit 139
3.2.3 The Amount of Capital Used in Production
and the “Relation” 141
3.2.4 Harrod and the Accelerator 144
3.2.5 The Trade Cycle 147
3.3 Interest, Money, and the Foreign Balance 149
3.3.1 The Rate of Interest 149
3.3.2 The Foreign Balance 150
3.3.3 Money 152
3.4 Mitigating Trade Cycle Fluctuations 155
3.5 The Reaction to Harrod’s Trade Cycle 158
3.5.1 The Multiplier and the Relation 159
3.5.2 The Law of Diminishing Elasticity of Demand 162
3.5.3 Other Comments 163
3.6 Harrod, the Trade Cycle and the Oxford Economists’
Research Group (OERG) 164
References 168
4 The Essay in Dynamic Theory 173
4.1 The Fundamental Equation 175
4.1.1 The Fundamental Equation and Its Main
Implications 175
4.1.2 Influences on Harrod’s Fundamental
Equation: Keynes and Lundberg 179
x Contents
4.2 The Fundamental Equation in the Draft Essay (1938) 185
4.2.1 The Fundamental Equation and the Principle
of Instability 185
4.2.2 Autonomous Capital Expenditures
and the External Sector 188
4.2.3 The Natural and Normal Warranted Growth
Rates 191
4.3 A Sketch of the Trade Cycle 191
4.3.1 The Cumulative Divergence Between
the Actual and Warranted Rates of Growth 192
4.3.2 The Endogeneity of the Warranted Rate
of Growth 192
4.4 The Reactions to the Draft Essay:
The Correspondence with J. Marschak 195
4.4.1 Marschak’s Comments of the Use of Lags
and Non-linearities 195
4.4.2 Marschak’s Graphical Representation
of Harrod’s Dynamics 196
4.4.3 Marschak’s Formalization of Harrod’s
Dynamics 197
4.5 The Reactions to the Draft Essay: The Debate
with Keynes 200
4.6 The 1939 Essay on Dynamic Economics 202
4.7 The Policy Proposals 205
4.8 The Fate of the Essay in Dynamic Theory 207
References 211
5 Statics, Dynamics, and the History of Economic Thought 215
5.1 The Analogy Between Statics and Dynamics
in Classical Mechanics and in Economics 217
5.2 The Rise and Fall of Economic Dynamics
in the History of Economic Thought 221
5.2.1 Dynamics in Classical Economics 221
5.2.2 The Advent of the Marginalist Revolution,
Intertemporal Equilibrium, and the Neglect
of Dynamics 224