Roy Harrod and the Oxford Economists' Research Group's inquiry on prices and interest, 1936-39.

1. Introduction(1)

In 1936, a group of economists in Oxford (Hubert D. Henderson as the chairman, Roy F. Harrod, James E. Meade, Redvers Opie, Henry Phelps Brown, Russell F. Bretherton, Jacob Marschak, Robert Hall, Charles Hitch, later joined by D. H. MacGregor, Maurice Allen, Eric L. Hargraves, Frank A. Burchardt, Marian Bowley, Philip W. Andrews, Arthur J. Brown, George L. S. Shackle, and others) initiated an empirical inquiry on various aspects of entrepreneurs' behaviour. Within a few years, they had gathered enough evidence to feel entitled to suggest two generalisations: the 'full cost principle', according to which, in conditions of oligopoly, firms tend to determine prices on the basis of average total rather than marginal costs; and the proposition that changes in the rate of interest are seldom considered when taking decisions as to expenditure on stocks and the expansion of equipment.

The group's procedures and conclusions have been described in the introductory notes to the articles in which its members published the results of their research (e.g. Meade and Andrews, 1938; Hall and Hitch, 1939; Harrod, 1953), and have subsequently been discussed in some detail in the literature (E. A. G. Robinson, 1939; Lee, 1981, 1991; Young and Lee, 1993, ch.5). However, a number of reasons suggest that it would be interesting to re-open the case. The first is methodological: historical assessments so far have been partially based on recollections of, and interviews with, some members of the group (Lee, 1981, 1991). But memory is often fallacious, not only because it fades with increasing distance from events but also, and especially, because the intervening time is filled with hopes, expectations (some realised, some disappointed), and unforeseen theoretical developments, which guide the interpretation of the past. Research should be based instead on contemporary documents, which reveal what people were actually doing and thinking.

Fortunately, a number of libraries have opened their archives, enabling scholars to collate documents from different sources and relate them to published documents. While it was believed that at the outburst of the war Harrod and Andrews burned all the evidence relating to the group's activities (Lee, 1981, p.348), it turned out that two voluminous batches of documents (minutes of meetings and of interviews, unpublished papers, questionnaires, replies, and other notes) survive among Andrews' and Harrod's private papers. The Andrews papers have been accessible for some time, but the Harrod collection, housed at the Nagoya University of Commerce and Business Administration, was only recently opened to researchers. Taken together, they complement each other, and form an almost complete set: judging from the cross-references, in fact, only a few questionnaires and minutes of meetings seem to be missing. These materials, together with the surviving correspondence and other documents, enable one to work out a chronology of the events, to characterise the actual procedures, and to understand the decisions which had to be taken at certain crucial points of the inquiry. The time therefore seems to be ripe for examining the group's activity in the light of these newly accessible documents.

Furthermore, the role of the individual contributions in shaping the analytical framework in which the group's work took place has not yet been defined with precision, nor is it always clear how far the group's research affected the members' subsequent theoretical approaches. In this paper I examine this issue with reference to one of the prominent members of the group, Roy Harrod, whose part in defining the notional framework in which the discussions took place seems to have been underrated. By this, I do not want to imply that the role of other members of the group was merely subordinate. However, his case is of special interest because of the particular interaction between the results of the group's research and Harrod's own approach to the trade cycle. On the one hand, the full cost principle seems to have contributed to Harrod's decision to abandon his attempt, in The Trade Cycle (1936), to use the price mechanism to explain how the macro-dynamic factors determining the oscillations of the magnitudes relating to the economic system as a whole are transmitted to the individual's decisions to expand or contract output. On the other hand, the results on the influence of the rate of interest on investment decisions strengthened Harrod's belief that the relationship between these two variables can only be very indirect, and induced him to drop, almost altogether, references to interest in the subsequent version of his theory.(2) Besides the historiographical purpose outlined above, this paper thus aims at exploring the mutual influences of Harrod's theoretical research and the empirical research of the OERG.

I will proceed as follows. In Section 2 I describe the activities of the Oxford Economists' Research Group in their chronological sequence, from the preliminary outlining of the premises of the inquiry and the discussions as to the kind of approach to be adopted to the outbreak of the war. This is necessary in order to provide a chronological framework within which to examine the extent to which the OERG research might have affected, and might have been affected by, the development of Harrod's line of thought. This is also offered as a partial guide through the documentary evidence scattered in a number of archives, some of which are located in remote parts of the world; as a complement to the existing literature on the group; as a correction of some inaccurate impressions resulting from the interview method; and as a brief history of the origin of Oxford Economic Papers.

In Section 3 I begin by examining how far Harrod's nicknaming of the OERG as 'the trade cycle group' was appropriate to characterise the group's approach and interests. I continue by showing how Harrod influenced the notional and conceptual framework of debates internal to the group concerning the trade cycle, and conclude by pointing out how the group's results - suggesting that oligopolistic firms tend to maintain somewhat rigid prices during depressions - introduced an additional difficulty to Harrod's explanation of the adaptation of individual entrepreneurs to the dictates of the global dynamic forces determining the fluctuation of output, which was based on the flexibility of the general price level.

Finally, in Section 4, I show how the results of the group's research into the rate of interest could not have affected Harrod's formulation in The Trade Cycle, although it strengthened his belief that the main cause of fluctuation of investment lies elsewhere and also induced further pessimism about the possibility of providing a remedy to the depression by means of monetary policy alone.

2. The OERG research: a chronology

The actual inquiry began in January 1936. However, the activity of the OERG was preceded by an intense phase of preparation, in which the scope and method of the research were discussed (Section 2.1). The collection of businessmen's opinions, by means of personal interviews at first, and a printed questionnaire at a later stage, was undertaken until 1939. Two topics emerged as suitable for inquiry: price policy (Section 2.2) and the influence of the rate of interest on entrepreneurs' decisions. The first attempts to draw some conclusions were made at the end of 1936, and by the summer of 1937 the first results were made public (Section 2.3).

2.1 Methodological premises

The preliminary phase of preparation to the activity of the OERG during 1934 and 1935 and the climate of 'grounded empiricism' prevailing in Oxford among the young tutors in the early 1930s is described by Young and Lee (1993, pp. 119-30). Here it is only necessary to focus on Harrod's role and on the significance of empirical research in his methodology.

Harrod welcomed the other tutors' interest in empirical research with enthusiasm,(3) and actually seems to have contributed to stimulate it (Phelps Brown to Harrod, 5 November 1930 and 19 January 1931, in KHLM 198 and HPBL 71190/148). He saw in these developments an escape from the decreasing returns of purely deductive methods (Harrod, 1937b, p.761). This view stemmed from his adherence to the logical positivist interpretation of theoretical statements, with which Harrod became familiar at first through his frequent contact with Frank Ramsey and later via the appointment of Alfred Ayer at Christ Church. According to this line of thought, a meaningful (non metaphysical) proposition is either purely deductive or empirical. Harrod explained his position to Robertson as follows:

A valid generalization, in my view, is either a tautology or based on empirical evidence. Unhappily the number of generalizations in economics based on empirical evidence is extremely small. And if you decry tautology, you are decrying almost the whole of economic theory. (Harrod to Robertson, 15 November 1935, in DHR 3/2(5-6))

Harrod's problem was that of reconciling the logical stringency of pure deduction with the necessity of providing empirical content to economic theorems. His solution consisted in a peculiar interpretation of the role of induction as providing the empirical generalisations from which further deductive systems could be developed. This theme was fully developed in Harrod 1938, in an unfinished book at which he worked in 1940-41 (The Known and the Unknown, in HP V/70-71) and of course in his 1956 monograph on the Foundations of Inductive Logic. But the division between the fields of pure theory, where theorems are developed, and empirical work, where concepts are given quantitative content, is already reflected in Harrod's 1934 'Memo. On Economic Studies in Oxford' (in RAC, RF 1.1, series 401S, box 75, fld 984). In the same year, we already find precise hints as to the direction in which his thought was moving: for instance, he considered the downward sloping curve of demand as 'a notable instance of the assistance which the inductive method may give to the course of a priori reasoning', and praised 'the notable and useful part' which tautologies have played in economic theory (Harrod 1934b, p.443, and 1934c, p.477; see also 1934a, p.21).

It is against this background that in June 1934 Harrod proposed to Henderson a meeting to examine whether 'specific problems which are susceptible of factual inquiry might emerge'. Harrod offered to himself write a memorandum 'to define the limits & purpose of some subsequent enquiry, which could be conducted by ourselves severally or jointly or by others, at a later stage' (Harrod to Henderson, 11 and 17 June 1934, in HHP 22 A/6 and JMP 2/4/9-11).Analogously, he wrote to Meade suggesting the formation of a committee 'to discover what subjects of investigation would yield results actually required by working theorists', and offered himself to act as Secretary (4 October 1934, in JMP 2/4/12-14). In November, Harrod suggested to Henderson as a possible topic of investigation for their proposed institute 'how far [the demand of major capital consumers] is dependent on gilt-edged rates' (letter of 20 November 1934, in HHP 22A/6).(4) The surviving correspondence thus indicates that Harrod played an essential role as the proposer of the research, which has not so far been recognised, while often credits have been attributed (also by Harrod himself, in his 1953 tribute) almost exclusively to Henderson (Lee, 1991).

However, the actual team-wide investigation into 'issues of fact upon which the major economic controversies of the day really turn', by means of interviews with businessmen, was proposed by Henderson. As a possible topic of inquiry, Henderson suggested verification of Hawtrey's point that the bank rate of interest is an important determinant of wholesalers' volume of stocks (letter to Harrod of 20 February 1935, in HHP 22A/6).(5) This idea was greeted with enthusiasm in the sub-faculty meeting (Harrod to Henderson, 25 February 1935, in HHP 22A/6), and the actual inquiry began at the end of January 1936.

2.2 The inquiry

Descriptions of the interviewing process have been given in the literature (Harrod, 1953, p.60, and 1952, pp.x-xi; Lee, 1981, p.340) and will not be repeated here. It is interesting, instead, to show how the two main topics of inquiry emerged from the original unfocused set of questions. Several questionnaires and revised versions survive.(6) Although they only provided guidelines for the interviews rather than rigid formats, an examination of their sequence proves interesting in revealing the intentions and expectations of the interviewers. The questions in the first questionnaire concerned the determination of profits and their distribution between dividends, reserves, purchase of securities, and extension or improvements of plants. Another question focused on the importance of the short- and long-term rates of interest on capital extension and on the level of stocks. A third set of questions looked at the determination of prices, the computation of costs - with special attention to overheads - and of depreciation allowance, price policy during depressions (in particular, the OERG was interested in the response of demand to price cuts), and marketing policies and costs.

This first questionnaire was revised several times.(7) The ultimate version is dated 12 March 1936, and was used as a generic basis for interviewing a number of entrepreneurs till the end of 1938. Although it covered the same ground as the first questionnaire, the questions were rearranged and there was a shift of emphasis. While the first questionnaire asked impersonal questions on 'the average business concern', the revised questionnaire directly addressed the entrepreneur. As a preliminary, entrepreneurs were asked about the factors affecting their business during the last ten years. The questions on the determination of prices and costs were asked first and were much more precise, particularly those regarding the composition of costs and the marketing of the product; a reference to the degree of competition was introduced.(8) Questions …