Prosperity and Depression.pdf

CHAPTER 13THE MULTIPLIER, INSTITUTIONAL RIGIDITIESAND PUBLIC SPENDING§ 1. FURTHER OBSERVATIONS ON THE THEORY OF THEMULTIPLIERIn Chapter 8, § 4, the basic ideas of the multiplier have been discussed.. Since that was written the theoretical discussion about theusefulness of the approach has been continued and numerous attemptshave been made to determine statistically the magnitude of the multiplier.1 As is always the case, the application· of a theory to concretefigures tends to clarify the issues and to bring· to light difficulties andambiguities which before had escaped proper attention.A problem which must be faced squarely in any concrete investigationconcerns the nature of the units in which the magnitudes, related bythe multiplier, are to be expressed. The main choice is between realand monetary units. The theoretical analysis usually runs in realterms-employment (wage units, labour days, etc.) or units of physicaloutput. Mr. COLIN CLARK, on the other hand, measures all relevantmagnitudes in money units. HIt is proposed that the multiplier to beused should be a money-income multiplier, and should relate moneyexpenditure on investment goods to changes in the money level of grossnational income as a whole." 2 The main reason seems to be that in1 See especially the various writings of Colin Clark. A brief review of thestatistical work done will be found in his book,· The Conditions of EconomicProgress, London, 1940, Chapter XV. Several important new works have appearedrecently, too late to be considered in the text: J. W. Angell, InvestmentIlnd the Business Cycle, New York, 1941, A. H. Hansen, Fiscal Policy andBusiness Cycles, New York, 1941, H. H. Villard, Deficit Spending and NationalIncome, New York, 1941, and B. Higgins and R. A. Musgrave, "Deficit Finance­The Case Examined", in Public Poli~y, Vol. II, Cambridge, Mass., 1941.2 "Determination of the Multiplier", Economic JOllrnal, September 1938.