Re: Circular Flow and The Multiplier

["eperez" <eperez@xxxxxxxxx>]

According to Patinkin (Essays in and on the Chicago Tradition)
it was Frank Knight that came up with the circular flow model
in its modern form (of course it has precursors in Quesnay...). In that book, if
I recall correctly, he reproduces some of the drawings by Knight.
The multiplier analysis belongs (I think) to another tradition.
Keynes made use of it in 1933 (Means to Prosperity). Equal to 2 according
to JMK (CW vol IX p.343). JMK stated that applying the reasoning of the
Mult. to loan-expenditure projects there was no dilemma betwen "increasing
employment and schemes for balancing the budget (p.347)."There is no
possibility of balancing the budget except by increasing national income,
which is much the same thing as increasing employment".(Ibid),





Date sent:      	Fri, 25 May 2001 11:58:06 +0100
To:             	pkt@xxxxxxxxxxxxxxxx
From:           	Harry Veeder <eo200@xxxxxxxxxxxxxxxxxxx>
Subject:        	Circular Flow and The Multiplier
Send reply to:  	pkt@xxxxxxxxxxxxxxxx

 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
--------------------------------------------------------------------------------------------------------------------
Esteban Pérez
Economic Affairs Officer
Economic Commission for Latin America and the Caribbean
United Nations
Av. Presidente Masaryk 29 12o Piso
Col. Chapultepec Morales 11570 Mexico D.F.
Phone   : 263-9681
Fax     : 531-1151
E-mail address: eperez@xxxxxxxxx
Mexico ECLAC WEBPAGE:
http://www.un.org.mx/cepal
This message does not constitute official ECLAC
correspondence; the organization is not responsible
for the contents or the consequences of its use,
not for inaccurate transmission or misdirection
---------------------------------------------------------------------------------------------------------------------------------------