Roy Harrod

Roy Harrod (1900–1978) was one of the most prolific economists of the twentieth century in terms of the number of contributions, their diversity, and originality. He grew up in poverty and was marked by his mother’s chronic depression, from which Harrod would also suffer, taking a significant toll on his emotional life. Despite his family circumstances, Harrod won a teaching position as a Reader at Oxford University (Christ Church) where he spent his entire professional career. His economics were shaped by his long-standing friendship with Keynes and by his relationship with F. Y. Edgeworth. Harrod took part in the creation of the Oxford Statistical Institute and played a leading role in the creation of the Oxford Economists’ Research Group (OERG). He was also actively involved in politics and policy making contributing to shape Keynes’s Currency Union proposal, acting as an advisor to the Conservative Prime Minister Harold McMillan and the IMF, and was a member of the renowned Bellagio Group. He was knighted and appointed editor of the Economic Journal as well as President of the Royal Economic Society. Despite his successful professional life, he retired from Oxford without reaching the status of professor. Harrod is generally identified with the balanced growth Harrod–Domar model which is a clear misrepresentation of his views on dynamics, a central concern of his intellectual life, but for which he is partly responsible.

The Trade Cycle (1936a) provided the first articulated version of Harrod’s dynamics. It is based on the interaction between the multiplier and the relation (i.e., the accelerator) and their respective dynamic determinants. The interaction between the accelerator and the multiplier produced a cumulative upward or downward deviation from a steady advance. Harrod’s book had a wide reading, but several of the reviews were unfavorable. The most significant criticisms focused on the two major innovations of the trade cycle: the multiplier–accelerator interaction and the significance and stabilizing role of the law of diminishing elasticity of demand. At the time he started to work on the trade cycle, Harrod also played a key role in the creation, organization, and work of the Oxford Economists’ Research Group (OERG) in 1936. The most important research of the OERG focused on the effect of interest rates on investment and on entrepreneur’s pricing policy over the course of the business cycle.

“The Essay in Dynamic Theory” (1939) developed further the principle of instability and the idea of endogeneity and inevitability of the trade cycle. However, the conception of dynamics and instability in the Essay differs from that of the Trade Cycle (1936) in two important aspects. Instability is no longer the result of the interaction between the multiplier and the accelerator, but of assuming the independency of the rate of growth, the propensity to save and the incremental capital-output ratio. Also imperfect competition is no longer seen as a microfoundation of the trade cycle. In the Essay, Harrod articulated his dynamics and its central core, the instability principle, around the fundamental equation. He defined it in terms of the warranted rate of growth: that rate of growth that validates the capital accumulation decisions of entrepreneurs. Along with the warranted rate of growth, Harrod introduced the natural and actual rates of growth. The draft Essay (1938) received comments for J. Marschak and J. M. Keynes who pointed out that the model required additional hypotheses that were not made explicit. Marschak also provided the first mathematical formulation of Harrod’s dynamics and raised several important points including the lack of clarity in the definition of the warranted rate of growth. Keynes’s comments led Harrod to compress his discussion of the application of the dynamic determinants to the cycle that give rise to instability of the moving equilibrium and the non-linearities of the trade cycle. This facilitated the interpretation of the fundamental equation as a constant coefficient model.

Harrod not only introduced seminal concepts in the theory of imperfect competition, the trade cycle and dynamics, but also made key conceptual contributions to the development of international trade and finance. These are included in his book International Trade first published in 1933 and include the foreign trade multiplier, the Balassa–Samuelson effect, the crawling peg, the transfer problem and the combination of an adjustment mechanism combining both the elasticities and multiplier as adjustment mechanisms. He also introduced the asymmetry of adjustment between creditor and debtor which was pivotal to Keynes’s Clearing Union proposal. Furthermore, Harrod provided a plan for world monetary stability without a world money. Finally, he also addressed the problem of the world trade cycle using a central concept of his dynamics, a steady advance.

Roy Harrod actively participated in the design and reform of the international financial architecture in the aftermath of World War II. On the basis of the ideas presented in the first edition of International Economics (Harcourt, Brace and Company, New York, 1933), Harrod developed a plan for reform which contributed, in no small manner, to shape Keynes views on his Clearing Union Plan (CU). Harrod’s plan was more comprehensive than that of Keynes focusing on a range of issues from price stabilization and investment to taxation, trade, labor, and nutritional standards. Harrod defended the Keynes Plan against that of Harry Dexter White and was ultimately disillusioned with the final agreement and the limited scope of the International Monetary Fund (IMF). In the 1950s, Harrod became convinced that the low level of world reserves was the main stumbling block facing developed economies and pushed to increase to price of gold to increase world liquidity in order to meet the growth in global transactions. Harrod also addressed the external sector predicament of developing countries and argued that the insufficiency of technical and entrepreneurial cadres, rather than an insufficiency of capital, was the major constraint on their economic development.