Sunday, April 29, 2012

Arnold Kling, probably unintentionally, does an excellent job of highlighting the similarities between private investment multipliers and government spending multipliers in a recession

Posted by dkuehn at 11:55 AM
Here. We shouldn't fault entrepreneurs for not following this advice, though, because they have to keep prospective demand in mind when making these decisions. Government doesn't because government isn't profit maximizing.

But a multiplier is a multiplier, and crowding out is crowding out. Governments and entrepreneurs want to avoid crowding out for the same reasons: crowding out works against the ultimate goal of both of them.

2 comments:

  1. Daniel KuehnApril 29, 2012 at 11:57 AM

    And I agree with Arnold - Garett Jones is always a thoughtful thinker, and he's had some good posts at McArdle's blg.

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  2. RaoulApril 29, 2012 at 3:29 PM

    Hello,

    I think entrepreneurs’ benefit in doing so would be to employ “underpriced” factors of production, and then to maximize their profits by taking advantages of discrepancies in the price structure; so, if government is really not seeking for profit, there’s no reason why he should follow Kling’s advice.

    Of course, if these factors are unused, there is a reason, namely a lack of demand for the consumers goods they help to produce. As a consequence, the unused factors of production aren’t really “underpriced” – except, and maybe it’s Kling’s point, if entrepreneurs may use the workers for new schemes with a lot of prospective demand.

    At any rate, I find the “private investors multiplier” expression is inappropriate. As Keynes put it, the multiplier was supposed to be “a definite ratio… between income and investment” found by the way of a mathematical and apriositic reasoning. In the real economy, it’s impossible to have such an aprioristic “definite ratio”: some entrepreneurs obtain a profit, some else a loss.

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