35. The Multiplier
The Multiplier is one
of the major components of Keynesian analysis and policy. The multiplier effect can be defined as
the greater resulting income generated from an initial increase in
spending. (For example, an
increase in spending of $100 will generate a total increase in income received
of $500 as the initial income is respent by each succeeding recipient--these
figures are based on an assumption that each income receiver spends 80% of his
additional income and saves 20%, the formula being Multiplier = 1 / % Change in
Saving.)
Fundamentally, the
multiplier is theory run amok, as Henry Hazlitt has explained in The Failure
of the New Economics:
If
a community's income, by definition, is equal to what it consumes plus what it
invests, and if that community spends nine-tenths of its income on consumption
and invests one-tenth, then its income must be ten times as great as its
investment. If it spends
nineteen-twentieths on consumption and invests one-twentieth, then its income
must be twenty times as great as its investment....And so ad infinitum.
These things are true simply because they are different ways of saying
the same thing. The ordinary man
in the street would understand this.
But suppose you have a subtle man, trained in mathematics. He will then see that, given the
fraction of the community's income that goes into investment, the income itself
can mathematically be called a "function" of that fraction. If investment is one-tenth of income,
income will be ten times investment, etc.
Then, by some wild leap, this "functional" and purely formal
or terminological relationship is confused with a causal relationship. Next the causal relationship is stood
on its head and the amazing conclusion emerges that the greater the proportion
of income spent, and the smaller the fraction that represents investment, the
more this investment must "multiply" itself to create the total
income! p. 139
A bizarre but
necessary implication of this theory is that a community which spends 100% of
its income (and thus saves 0%) will have an infinite increase in its
income--sure beats working!
A further reductio
ad absurdum is provided by
Hazlitt:
Let Y equal the income of the whole
community. Let R equal your (the reader's) income. Let V equal the income of everybody else. Then we find that V is a completely
stable function of Y; whereas your income is the active, volatile, uncertain
element in social income. Let us
say the income arrived at is:
V = .99999 Y
Then, Y = .99999 Y + R
.00001 Y = R
Y = 100,000 R
Thus we see that your own personal multiplier is
far more powerful than the investment multiplier, it is only necessary for the
government to print a certain number of dollars and give them to you.
Your spending will prime the pump for an increase in the national income
100,000 times as great as the amount of your spending itself. pp. 150 -151
The multiplier is
based on a faulty theory of causation and is therefore in actuality
nonexistent. Keynesians today will
often admit to this but cling to their multiplier by citing the fact that it
has a regional effect. Without
them saying so explicitly, what this means is that if income is taken from
citizens of Georgia and spent in Massachusetts it will benefit the
Massachusetts economy(!).
The multiplier is an
elaborate attempt to obfuscate the issues to excuse government spending. It and Keynesian theory are nothing
more than an elaborate version of any monetary crank's call for inflation;
Keynes managed to dredge up the fallacies of the 17th century's mercantilist
views only to relabel them as the "new economics"!
-
Hazlitt, Henry
The Failure of the New Economics ,
(New Rochelle, New York: Arlington House, 1959)
pp. 139, 151, 337 - 373.
-
Rothbard, Murray N.
Man, Economy, and State,
(Los Angeles: Nash Publishing, 1970)
pp. 757 - 759.
-
Skousen, Mark
Economics on Trial ,
(Homewood, Illinois: Business One Irwin, 1991)
pp. 63 - 71.
-
Mises, Ludwig von
"Stones into Bread, the Keynesian Miracle," in The Critics of Keynesian Economics edited by Henry Hazlitt ,
(New Rochelle, New York: Arlington House, 1977)
pp. 304 - 314.
-
Keynes, John Maynard
The General Theory of Employment, Interest, and Money,
(New York: Harcourt, Brace, Javanovich , 1936)
chapter 23.
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