Prosperity and Depression.pdf

Chap. 8Recent Discussions on the Trade Cyclefor the use of the two terms " marginal propensity to consume "and " multiplier" and nothing more,The practical problem to the solution of whichThe practical the theory of the multiplier and the attempts at aproblems statistical measurement ofits magnitude are directedbehind the is the determination, if possible in advance, of themultipljer. indirect effects of Government expenditure onpublic works and the like. The underlying ideais that, if the Government spends several hundred million dollarson public investment and thereby creates additional employment,the first recipients of the money will spend at least a part of theirincome on consumption; the consumption industries will bestimulated; the money will be spent again and again; and a wholeseries of successive income- and employment-creating expenditurewill emanate from the first investment. The question is, howbig will be the secondary, tertiary, etc., effects flowing from theprimary investment of a given magnitude?l For the reasonsgiven below, the pure theory of the multiplier cannot provide afinal answer to that question.(I) The multiplier refers to the effect pf anThe problem increment ofnet investment. Hence, ~s Mr. KEYNESof determining states, "if we wish to apply [the theory of the" net inve.rt- multiplier] without qualification to the effect ofment ". (for example) increased public works, we have toassume that there is no off-set through decreasedinvestment in other directions" (page I 19). In other words, aconcrete amount of public works cannot, without examination,be accepted as net new investment; the public works policy mayhave unfavourable repercussions on private investment (a) byraising prices of material and labour; (b) by raising the interestrate, because of the method of financing employed; (c) owing torepercussions "through psychology", if a Government deficit1 The idea that investment stimulates consumption is almost as .oldas business-cycle theory. That it is inherent in the Wicksellian theory ofthe cumulative process of expansion has already been said (see Chapter 3,pages 33 et seq., above). Mr. Kahn, among others, has analysed theproblem in his article U The Relation of Home Investment to Unemployment" (Economic Journal, June 1931), and has contributed the word" multiplier ".