Re: Keynes and Capital formation

["Esteban Perez" <eperez@xxxxxxxxxxxx>]

This is a late reply.
on 15/5. PD. wrote:
I had actually personally discussed this point with Roy Harrod personally
in the 1960s.  Roy's point was that the rate of growth dY/dt was a
differential calculus concept -- and as such the rate was taken at a moment
of time and could change from moment to moment.  Harrod was, in
essence,  specifying the current (differential) rate of growth at a single
point of time and NOT the average rate of growth over an accounting
period--.  The two would be the same only if the differential rate of
growth did not change over the whole accounting period. [ the illustration
Harrod used was that he was interested in the reading in miles per hour of
the speedometer of a car at any moment of time -- and was not discussing
the average speed (in miles per hour) over the length of a car trip.]

Nevertheless  Harrod recognized that the differential rate  of flow new
capital formation (I)  required expectations about FUTURE streams of
quasi-rents relative to the costs of producing this new capital -- Keynes's
marginal efficiency of capital! I am sorry to say that if Besomi said what
you attributed to him, then Besomi just misinterporeted Harrod -- and the
differential calculus.
--------------------------------------------
I did not say anything about the average rate of growth in an accounting period.  I clearly wrote in a previous message that his analysis relates to a single point in time. In Themes in Dynamic Theory Harrod writes: ´I we first concentrate attention on necessary relation in a regular advance we need and should consider one point of time only´ (EJ, 1963, September, 403) and then on p. 406 when he talks about the rate of interest: ´I would strongly call you attention to the fact that in this analysis...the optimum rate of savings is shown as governed by determinants operating at a given point in time, without any reference to the future course of events.´

Harrod was criticized by assuming that Cr (capital-output ratio) was rigid (and the usual portrayal is that he was working fixed coefficients). Harrod recognized that the rate of interest could affect Cr. In the same way as Keynes put in his comments to Harrod´s Essay (draft) : ¨As you say...the warranted rate of growth is itself a function of the level of employment¨(CW, Vol. XIV, p.325). But the validity of the warranted growth rate requiered the time interval to be infinitesimal small. It is as if he did not even take time into consideration. He wrote to Keynes: ¨I apply warranted to the unknown variable rate of growth, the value of which is found by solving the equation. It is again analogous to the equilibrium price or quamtity of output in static theory.¨ (CW, Vol XIV, p.337). He makes the same point in 1939 (Second essay): ¨...to begin with, we need to determine the rate of increase at one point. This is but applying in the realm of dynamics the procedure so well known...in the thoery of static equilibrium¨p.279. EJ. Why then as you point out (Financial Markets, p. 212-122) would Harrod have inquired into financial factors? It does not follow logically from his methodology. But he did inquire into fiscal factors (See Economic Dynamics. Last Chapter or p.338. Keynes CW. Vol XIV). In the same book he also addressed monetary policy but ´exogenously´  which is what his logic of dynamics allowed.  Also his 1934 Economica paper : The Expansion of Credit in An Advancing Economy¨. But this essay responds to another logic.

Esteban Perez