THE KEYNES-HARROD CONTROVERSY ON THE CLASSICAL THEORY OF THE RATE OF INTEREST AND THE INTERDEPENDENCE OF MARKETS

Abstract

The aggregation of budget constraints of enterprises and households allows us to throw a new light on the controversy between Keynes and Harrod concerning the classical theory of the rate of interest. It appears that the critique of the classical theory that Keynes formulated does not presuppose the liquidity preference theory; it is based on the multiplier theory. We show that this critique is logically founded and that it is based upon the absence of the labor market in the analysis of the interdependence between the markets for financial assets and for goods. Harrod did not comprehend it completely. This explains one lacuna in the model of the General Theory that Harrod proposed in 1937. We show that it lacks an equation and that the equilibrium (hence the rate of interest) is indeterminate, which is not the case in the 1937 article by Hicks. We conclude that if there is relevance in Keynes’s criticism of the classical theory, then a similar criticism can be directed at Keynes’s own theory.