General Theory Seminar--the Multiplier

["William B. Ryan" <william_b_ryan@xxxxxxxxx>]

The seminar has languished without ever getting to some of its most
salient points.  Chief among these, perhaps, is the concept of the
"multiplier."  We are fortunate to have forwarded to us some comments
from Keynes himself:

"There follows from this extremely obvious principle an important, yet
unfamiliar, conclusion. Incomes are created partly by entrepreneurs
producing for investment and partly by their producing for
consumption. The amount that is consumed depends on the amount of
income thus made up. Hence the amount of consumption goods which it
will pay entrepreneurs to produce depends on the amount of investment
goods which they are producing. If, for example, the public are in the
habit of spending nine-tenths of their income on consumption goods, it
follows that if entrepreneurs were to produce consumption goods at a
cost more than nine times the cost of the investment goods they are
producing, some part of their output could not be sold at a price
which would cover its cost of production. For the consumption goods on
the market would have cost more than nine-tenths of the aggregate
income of the public and would therefore be in excess of the demand
for consumption goods, which by hypothesis is only the nine-tenths.
Thus entrepreneurs will make a loss until they contract their output
of consumption goods down to an amount at which it no longer exceeds
nine times their current output of investment goods.

"The formula is not, of course, quite so simple as in this
illustration. The proportion of their incomes which the public will
choose to consume will not be a constant one, and in the most general
case other factors are also relevant. But there is always a formula,
more or less of this kind, relating the output of consumption goods
which it pays to produce to the output of investment goods; and I have
given attention to it in my book under the name of the multiplier. The
fact that an increase in consumption is apt in itself to stimulate
this further investment merely fortifies the argument.

"That the level of output of consumption goods, which is profitable to
the entrepreneur, should be related by a formula of this kind to the
output of investment goods depends on assumptions of a simple and
obvious character. The conclusion appears to me to be quite beyond
dispute. Yet the consequences which follow from it are at the same
time unfamiliar and of the greatest possible importance.

"The theory can be summed up by saying that, given the psychology of
the public, the level of output and employment as a whole depends on
the amount of investment. I put it in this way, not because this is
the only factor on which aggregate output depends, but because it is
usual in a complex system to regard as the causa causans that factor
which is most prone to sudden and wide fluctuation. More
comprehensively, aggregate output depends on the propensity to hoard,
on the policy of the monetary authority as it affects the quantity of
money, on the state of confidence concerning the prospective yield of
capital assets, on the propensity to spend and on the social factors
which influence the level of the money wage. But of these several
factors it is those which determine the rate of investment which are
most unreliable, since it is they which are influenced by our views of
the future about which we know so little.

"This that I offer is, therefore, a theory of why output and
employment are so liable to fluctuation..."

http://csf.colorado.edu/pkt/pktauthors/Berglund.Per/Laissez/QJE.htm

Discussion from list members relating their understanding of Keynes'
concept would be most helpful.

william_b_ryan@xxxxxxxxxxx



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