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

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.


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

  2. 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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