Gottfried Haberler, The Trade Cycle: An Essay (1937)

Gottfried Haberler’s review of R. F. Harrod’s 1936 book assesses a substantial synthesis of trade-cycle theory while challenging its terminology, explanation of turning points, and policy implications. Its governing distinction is between cumulative processes that different theories largely share and the potentially diverse disturbances that initiate them. Moving from the interaction of investment and consumption to saving, monetary circulation, and public works, Haberler argues that conceptual innovation must be distinguished from verbal reformulation.

Harrod explains cumulative expansion and contraction through the interaction of the “Relation,” or acceleration principle, and the “Multiplier”: investment stimulates consumption, whose growth in turn stimulates investment. Haberler praises the force of this account but locates it within an existing tradition encompassing Wicksell, Clark, and Slichter.

The invention of the word "Multiplier" has not added to what we knew before.

The objection concerns intellectual continuity as well as analytical clarity. Presenting familiar mechanisms as discoveries exaggerates divisions between economic schools. Haberler also questions Harrod’s aversion to time lags: a sequence in which investment generates consumption and consumption induces further investment appears to require precisely the temporal distinctions Harrod seeks to avoid.

The review next considers Harrod’s three “dynamic determinants”: the propensity to save, the shift toward profits, and capital requirements per unit of output. During expansion, diminishing returns and declining demand elasticity allegedly favor profits and raise aggregate saving. Haberler treats the elasticity argument as a distinctive contribution, but doubts that these determinants establish the necessity of a downturn.

I find it extremely difficult to understand how the working of the three dynamic determinants “decrees” a slowing down and reduction of activity.

This difficulty opens onto the review’s central methodological criticism: definitions must not be mistaken for propositions about economic behavior. Haberler attacks the neo-Cambridge identification of saving and investment through Harrod’s example of workers temporarily retaining newly received wages. Calling those balances “saving” makes the recipients of investment expenditure appear to finance it, obscuring the role of banks or previously accumulated cash. The identity may hold by convention, but cannot itself explain financing or refute theories formulated with different definitions.

Then the words "receiving income" and "spending" it are replaced by the words "saving" and "dissaving." But it would still be necessary to have a term for saving proper.

Haberler nevertheless endorses a more concrete version of Harrod’s turning-point argument. Recovery can initially draw upon unemployed labor faster than depleted capital equipment can accommodate. Consumption therefore grows at a temporarily exceptional rate; when reemployment advances and that growth slows, demand for additional capital goods falls, setting cumulative contraction in motion. The agreement is substantial but qualified: this is a plausible maladjustment at the end of an upswing, not an exhaustive account of every crisis.

The monetary discussion extends the same effort to translate competing vocabularies into common mechanisms. Falling prices alongside falling output imply that money disappears or ceases to circulate against goods. Purchasing existing assets does not remove the problem: their sellers must retain the proceeds, repay loans, or spend them. Haberler consequently interprets Harrod’s account through hoarding and changes in velocity, terms whose rejection he regards as obscuring rather than resolving the issue.

The concluding appraisal combines genuine admiration with resistance to a uniform prescription. Harrod recommends public works during the brief “breathing space” immediately after the peak. Haberler recognizes the book’s analytical importance and sense of economic responsibility, but argues that its remedy follows from an unduly exclusive diagnosis.

The process of contraction may be in the main features always the same, but the cause by which it is initiated need not be and probably is not always the same.

This distinction gives the review its enduring significance. Shared propagation mechanisms do not establish a single cause of recession, and neither accounting identities nor terminological innovations can substitute for causal analysis. Policy at the turning point must therefore attend to the particular maladjustments generated by the boom, rather than assume that every contraction warrants an identical response.