Keynes’s General Theory, chapter ten

The velocity of money can vary, aggregate demand matters, and the multiplier is real.  Let's get those preliminaries out of the way.  That all said, this is one of the least accurate chapters in Keynes's General Theory.  To pull out one key quotation (pp.116-117, in section II):

It follows, therefore, that, if the consumption psychology of the community is such that they will choose to consume e.g., nine-tenths of an increment of income, then the multiplier is 10; and the total employment caused by (e.g.) increased public works will be ten times the primary employment provided by the public works themselves…


Empirically a typical estimate of a multiplier might be 1.3 or 1.4, not 10, not even in a deep slump.  (Valerie Ramey points out that the key issue in estimating a multiplier is to determine when the fiscal innovation actually occurred; this is not easy.)  One theoretical problem in generating a high multiplier is this.  Say you have a debt-financed increase in government spending.  You can get some dollars out of low-velocity pools into high-velocity pools on the first round of redistributing the spending flow.  Do not expect complete crowding out and so nominal aggregate demand can increase, thus boosting output and employment.  But the second and third round effects of the redistributed money are usually a wash and the boost to velocity dwindles.  Why should it stay in a high-velocity sector of the economy?

It is common in the GT that Keynes confuses marginal and average effects and, for all of his explicit talk about average and marginal in this chapter, he is making one version of that error again.  Rothbard and Hazlitt are not in general reliable critics of Keynes, but
they do have a good reductio (see chapter XI) on crude interpretations of the multiplier and that is what Keynes is serving up here.  You can't just take a partial derivative of an accounting identity and call the result a causal relationship.

In addition to velocity/spending effects, there are also multiplier effects through real production.  The most insightful analysis of supply-side multipliers comes from the work of W.H. Hutt. 

The multiplier is a legitimate concept but often it is overestimated in its import.  This chapter in Keynes is a step backwards from Richard Kahn, the father of the multiplier concept.

Here is one critique of Keynes on the multiplier.

Don't forget Alex's comments on fiscal policy and velocity.


Prof.Ahiakpor's criticism, I think, is due to some personal disliking towards Keynes and his GT, sometimes very harsh and baseless too.His numerous articles reveal this.

"the multiplier is real"

Is the multiplier real over time? I.e., does not inflation or increased taxation eventually use up any gains from the multiplier? (Needless to say, I'm not an economist.)

Barkley -- Thanks very much for the response. I guess that what my overly literal mind is having trouble grasping is how a dollar spent can become more than a dollar. Can you recommend a "For Dummies" explanation?

Keynes gives a footnote here which says "Our quantities are measured throughout in terms of wage-units." Many sites explain the multiplier in dollars. Is Keynes incorrect even if this footnote is taken into consideration?

If you look at the monetary equation M x V = GDPn = P x GDPr, the FED nowadays controls the growth of M to produce a smooth growing P and GDPr (I would argue that GDPn would be a better target). What we have here is a feedback loop. What happens on the right side equation is what the FED uses to determine the growth of M. This effectively overrides any fiscal stimulus.

Raivo Pommer


Bei der Conti brennt die Hütte. Der einst erfolgsverwöhnte Autozulieferer ist in die roten Zahlen gerutscht, Großaktionär Schaeffler bittet um Milliarden-Staatshilfen, die Zukunft ist höchst ungewiss.

Nun hat die Continental-Spitze auch noch Gewerkschaften, Betriebsräte und die Politik verprellt. Die Pläne, Reifenwerke am Stammsitz Hannover und in Nordfrankreich dicht zu machen, sorgen für einen Proteststurm. Conti habe ein "intaktes Wohnhaus" in Brand gesetzt, wetterte der kommissarische Aufsichtsratschef Werner Bischoff von der Gewerkschaft IG BCE am Dienstag in Hannover bei einer Protestkundgebung vor mehr als 1000 Beschäftigten - sie soll erst der Anfang im Kampf um die Jobs sein.

Die Conti-Arbeiter sind wütend. Auf einem Plakat steht: "Heuschrecken sind nichts gegen den Conti-Vorstand". Bischoff schimpft, Conti sei das erste Unternehmen in der Chemie-Industrie, das Massenentlassungen durchziehen wolle - statt die Kurzarbeit auszudehnen. Die Gewerkschaft habe Politik und Banken aufgefordert, dem Unternehmen zu helfen, sagt Bischoff mit Blick auf die Lage bei der Schaeffler-Gruppe, die sich mit der Conti-Übernahme verhoben hat. Um so "unverantwortlicher" seien nun die geplanten Werksschließungen. Auch Hannovers Oberbürgermeister Stephan Weil (SPD) nennt das Vorgehen "inakzeptabel".

Tyler is not in general a reliable critic of bailout plans. He said Paulson's plan was "better than nothing". It reminds me of the Y2K nuts who thought that a spreadsheet error on a PC in Detroit would cause all of our cars to stop running.

Do people really believe that crops would not grow and gas wells would not pump if AIG didn't pay off its fraudulent "insurance"/bets on mortagage defaults declining by 3%. You really think Goldman getting that AIG money is THAT critical to civilization? IF so shouldn't we have mariens standing outside the Goldman Sachs and JP Morgan buildings 24/7?

Barkley -- Thanks.

Which specific "typically Austrian fallacies" do you mean? Btw, prof. Ahiakpor definitily isn´t an Austrian economist.


No. Net National Product is just Gross minus depreciation. Not a big
deal for this analysis.

In terms of "leakages," the key ones are those I mentioned that are in
the textbooks but that Keynes did not mention, namely income taxes and
imports. Again, the back of envelope calculation taking them into
account says the multiplier is about 2, with some empirical estimates
coming in higher, but most coming in somewhat lower, although still
above 1.

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