Circular Flow and The Multiplier

[Harry Veeder <eo200@xxxxxxxxxxxxxxxxxxx>]

From the thread  Re: WWW -- Harrod home-page (fwd)
Gunnar Tomasson wrote:

> James:
>
> Re. the following:
>
> >  it seems a rather barren quest to determine who
> >  was "first."
> >  Much more important is our current understanding of the concept and
> >  its practical role in policy.
>
> The 10th (1976) edition of Samuelson's 'Economics' explains and defines the
> multiplier concept as follows:
>
> "Modern income analysis shows that an increase in investment will increase
> national income by a multiplied amount - by an amount greater than itself!
> Investment spending - like any independent shifts in governmental, foreign,
> or family spending - is high-powered, double-duty spending, so to speak.
>
> "This amplifed effect of investment on income is called the "multiplier"
> doctrine; the word "multiplier" itself is used for the numerical coefficient
> showing how much above unity is the increase in income resulting from each
> increase in investment."
>
> "The multiplier is the number by which the change in investment must be
> multiplied in order to present us with the resulting change in income." (p.
> 226)
>
> And what does all this mean?
>
> It means that analysis of an economy's income and expenditure accounts -
> "modern income analysis" - reveals a greater than one-to-one ratio between
> entries labeled "income" and "investment".
>
> Yet, "investment" in factor inputs to the economy's production process is
> another label for "income" received by suppliers of factor services - as in
> the Circular-Flow view of the economic process.

I  don't know enough economics to be able judge the correctness of
the "multiplier",
but if the "circular flow" model makes no distinction between the
nature of investment and
the nature of income then there is something wrong with the circular
flow model.

It is one thing to identify  investment and consumption as equivalent instances
of "spending", but it is another thing to identify income and investment
as equivalent instances of a circular "flow".

The circular flow model does not seem to respect the individual's freedom
to save OR invest out of his income if income and investment boil down
to the same thing.


> Thus, it would seem to follow that the concept of a multiplier greater than
> one is rooted in the definitions used by national accountants WITHOUT regard
> to the underlying - elementary - economics involved.

I would say the multiplier and the circular flow model seem to clash.

Harry Veeder