Edited by Robert W. Dimand and Harald Hagemann
Chapter 33: The multiplier
Ever since Pericles (as reported by Plutarch), it has been recognized that public works induce secondary rounds of spending and employment, but how to calculate the amount of secondary employment, and why it was not infinite, remained a puzzle. The derivation of a finite-valued spending multiplier, showing how much a given increase in autonomous spending (investment, exports or government expenditure) would raise equilibrium income, was a crucial step in the development of Keynes’s theory of aggregate output and employment. L.F. Giblin in Australia and Ralph Hawtrey at the UK Treasury provided numerical examples of a finite multiplier with leakages into imports (so only finite if the income of the rest of the world is held constant), Richard Kahn derived a finite multiplier with leakages into imports, unspent profits and reduced dole, Jens Warming and Ralph Hawtrey introduced a personal saving function, and Keynes summarized the multiplier theory in the US edition of his pamphlet The Means to Prosperity. In addition to the origins of the multiplier, the chapter examines recent discussions of the size of the government spending multiplier, allowing for changes in interest rates and prices and for the possibility of debt neutrality.
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