Thursday, October 27, 2011

Russ Roberts on the Multiplier

Russ Roberts is blogging about the multiplier again, and I encourage people to go look at it and comment. There is little of the "you guys are just doing it for ideology" or "you guys are brimming with hubris and scientism" that you often get, so he seems to be in a mood to really talk about the stuff. I already have several comments, and I think readers should jump in too, particularly with points I didn't speak to - like the mechanism involved.

I know I've addressed all of these points several times before on his blog, and God knows the big-shot Keynesian bloggers have addressed all of them. But the more you discuss this stuff the more it gets understood and worked out.

UPDATE: More thoughts from Russ here. This one is a little more head-smack-invoking than his last post, but he does pose a specific question to Krugman, DeLong, Yglesias, and me, which I'm going to try to answer tomorrow morning before getting my study on.


  1. So far, the only counter that I can offer to one Cafe Hayek commentator's remark that "Keynesianism is not based upon reason, it is based upon ideology" is that the economics of Keynes AND Keynesianism ARE based on reason.

    See these two well-written working papers for more information.

    The Austrian School of Economics ALSO uses the tool of reason.

    The main difference between Austrian School of economics with the Economics of Keynes and Keynesianism is the KIND of reason.

    The economics of Keynes and some parts of Keynesianism are based off *inductive* logic, whilst the Austrians tend to use *deductive* logic. Keynes preferred induction to deduction, and explained why in his renowned mathematical/philosophical book, "A Treatise on Probability". If you consider economics to be a science, then one should know that there are limits to the use of deductive logic.

    Speaking of corresponding with Austrian School economists, I've e-mailed Robert P. Murphy and pointed out the connection between Benoit Mandelbrot and econophysicists like Joseph L. McCauley, Victor Yakovenko, H. Eugene Stanley, Rosario N. Mantegna, Jean-Phillippe Bouchaud. I've yet to respond to Robert Murphy's e-mail thanks to a technical problem and schoolwork, but I'm also going to e-mail Russ Roberts about the econophysics project.

    Daniel, how do you think Russ Roberts will react to Jean-Phillippe Bouchaud's article on Nature, or Joseph L. McCauley's proclamations that the findings of econophysics will overtake what is now taught by the economics profession?

  2. Is it really true that multiplier of .5 means that the private sector reduces economic activity by 50%?

    Like, if you have a tax cut of $100mil and people put $50mil of that under under mattresses that's not a reduction in private economic activity by $50 million dollars.

  3. There appear to be some good reasons to be agnostic on the notion (of the multiplier that is).

  4. Daniel,

    I have made a reasonable attempt to understand Keynesian economics but I have never really grasped the multiplier concept.

    I can see how an increase in government spending can "crowd out" private investment (giving the .5 multiplier that Roberts references), and I can see that in some situations there may be no crowding out and every dollar the govt spends will increase total spending by the same amount (giving a multiplier of 1?)

    But I don't get how it could ever "multiply up" without double-counting.

    I know its supposed to work like this: The govt hires someone to dig a ditch at $100 a week, that person saves $20 and spends $80 at a store, and the store owner then spends some and saves some of the $80 , and so on until we end up with increased net spending of 4 or 5 times greater than the original $100.

    But surely in reality what has happened is that this new money (assuming a very simple case where the govt has simply printed it up) will simply add to the money supply and (assuming it is spent and/or saved in roughly the same proportions as the existing money supply will add to AD proportionally. In other words a fiscal stimulus that increases the money supply by 10% will (assuming velocity does not change as a result of the stimulus) increase AD by 10% and the multiplier is really not telling us anything useful beyond how money circulates in the economy and is split between consumption and saving.

    Am I missing something obvious here ?

  5. Perhaps what I am missing is that the aim of fiscal policy is not actually to increase the money supply directly but for the govt to divert money that is currently being saved into direct spending and therefore the whole purpose is to increase velocity of money ?

    If that is the case then perhaps the multiplier is describing the effect a changed velocity of money will have on the economy ?

  6. Don't forget Austrians are NOT SINCERE. They are paid by the rich and powerful to spread propaganda.

    Invisible Backhand

  7. Invisible Backhand -
    I'm not sure your conclusion follows from that premise, much as I like a lot of your comments at Cafe Hayek. I'd be thrilled to have money from the rich and powerful (in fact my research has been paid for by the rich and powerful before), and I don't consider myself compromised by it. You can't just presume how people are going to respond to financial support like that. Many of the rich and power are likely interested in funding dependably objective researchers and would be less interested in insincere people.

  8. Daniel Kuehn,

    More to the point, it is pretty rare for an individual to think, hey, I'm going to become an economist of the Austrian school because you know, there is a guaranteed pot of gold at the end of that rainbow. In the 1950s and 1960s there was a school amongst Sovietologists that said the Bolsheviks became Bolsheviks merely because they wanted power; that claim is as equally moronic as the sort of claim that Invisible Idiot is making.


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