A key component of Keynes’ General Theory was R.F. Kahn’s development of the multiplier first published in the Economic Journal in June, 1931 ‘The Relation of Home Investment to Unemployment.’ Kahn was not the only economist to develop this concept. There were others including L.F.Giblin,at The University of Melbourne, Ralph Hawtrey a key figure in the British treasury who had provided an earlier version of the multiplier in his commentary on The Treatise ,Colin Clark, an Australian statistician educated at Oxford later lectured at Cambridge and worked with Kahn, the Danish statistician Jens Warming and James Meade who made important contributions to the theory of the multiplier. (See the work of Peter Clarke, Keynes:the Rise, Fall and Return of the 20th Century’s Most Influential Economist; as well as Donald Moggridge, Maynard Keynes: An Economist’s Biography and Robert Dimand, The Origins of the Keynesian Revolution and Robert Skidelsky, John Maynard Keynes:the Economist as Saviour, 1920-1937 )
The size of the multiplier has become a key part of the debate that has taken place over the effectiveness of the Obama stimulus. Anti-Keynesian economists like Robert Barro argue that the multiplier is less than 1 while The Congressional Budget Office believe it to be somewhere between 1 and 2.5 , depending upon where and how the stimulus is spent.Keynes believed along with Kahn that the employment multiplier after accounting for leakages typical of an open economy where foreign trade accounts for 20 % of the GDP approached 2 -3.(GT, p.121-122.) I think the evidence is strong for a multiplier that ranges between 1.5 and 2. (for the Congressional Budget office study see
by Benjamin Page and Felix Reichling of the Congressional Budget Office.)
( A more recent study (Nov. 26, 2012) of infrastructure spending at the state level on roads and highways finds that the multiplier has the value of at least two. The study is by Sylvain Leduc and Daniel Wilson. < a href= ”http://www.economistsview.typepad.com/…/11/the-multiplier-is-at-least-two.html> )
Clearly there are leakages in domestic round one spending to imported goods, debt repayment and precautionary cash hoarding. Keynes discussed these in his chapter 10 on the multiplier and the marginal propensity to consume (see pp.115ff, G.T.) But these leakages may return later to the income stream as people and companies transfer their quasi hoards to real spending and investment and ones trading partners use their accumulations from their export earnings to import goods and services from the original stimulating economy. There will be a lag , of course, but it should happen to a degree nonetheless .If and as this happens the real impact of the stimulus and the multiplier will be greater.
A.Asimakopulos in his work Keynes’s general theory and accumulation argues that Keynes in The General Theory presents too static a view of the multiplier where the time lag between the increment of consumption and the increment of income is too short in the Marshallian sense to appreciate the ways in which there can be leakages of spending from a stimulus that results in a smaller multiplier. But Keynes was in fact aware of these possibilities but because of the nature of his Marshallian roots he presented the multiplier in a way that appears more immediate than would in fact be the case. The multiplier, as Keynes himself states in the GT would not reach its full potential and investment not increase to the level of full employment unless the public would increase their savings in terms of wage units sufficient to finance new investment.For this to happen their aggregate income in terms of wage units must increase so that a given propensity to consume will permit additional savings to take place out of an enlarged economy. But they could not achieve this if in response to appropriate stimulus, austerity was implemented because of deficit hysteria. ”The multiplier tells us by how much their employment has to increase to yield an increase in real income sufficient to induce them to do the extra saving and is a function of their psychological propensities ” (GT, 117) Its also a function of the conditions of production in the investment and consumption industries. As Keynes puts it to get more of the pill of savings one needs sufficient extra jam of consumption.
See also my earlier post on Feb. 8, 2011 in my older blog on blogspot ,Harold Chorney political economist, ”Estimating the size of the multiplier”