What are the implication of the Multiplier effect? What is the Austrian response to the Multiplier Effect?
The multiplier isn’t necessarily untrue. The problem is that Keynes’ General Theory really wasn’t a general theory at all but a theory of certain particular aspects of an economy in depression. If, during a deflation, factor prices are pushed above their market clearing wage (particularly labour) this causes unemployment . As a result of Say’s Law, other producers in non competing industries will see the demand for their products fall, with this effect “spreading”, so to speak, around the economy. Hutt puts in the following way, he says that Keynes theory of depression is that sellers are “unable” to sell because buyers are “unwilling” to buy. But, this doesn’t make any sense, because any valuable asset can be sold on the market for some price. Rather, what is happening is that becauses sellers are “unwilling” to sell (at the market clearing price), buyers are “unable” to buy due to lack of purchasing power.
Now, in terms of the multiplier what this means is that essentially the government can stimulate production by means of inflation if the economy is in a slump, Austrians have conceded this. However, this sort of “remedy” is only really a form of “crude coordination” whilst indeed it may lead to the release of withheld capacity by reducing real wages below their market clearing rate. It will also lead to the raising of some prices and distort the relative structure of prices that coordinates production. Now, Keynes missed this because of aggregation, and for him merely assuming a “wage rate” and levels of “consumption” and “investment”, using inflation was unproblematic. However, from the Austrian perspective the key is merely to remove those impediments to wage and price adjustments (such as coercive power on behalf of unions).
A quick point- the Rothbardian/ Hulsmannian position is that factor prices in a deflation are not pushed above the market clearing rate since price changes area everywhere and always instantaneous. Thus the government can never stimulate the economy by means of simple inflation. This is of course is the case if there aren’t price controls otherwise prices can’t adjust.
The position of the Hayekian branch- Selgin, White etc would agree with the above analysis.
However both agree the key is to remove coercive power of any bodies.
Without addressing the points here (which I disagree with) I think I may have communicated my point poorly. My original post was talking about deflation in the context of coercive wage controls (either by government decree or union power). Given this, surely the Rothbard/ Huelsmann position would be the same. Except, perhaps, we’d disagree on whether or not the government can stimulate the economy through inflation (I say it can acheive a sort of crude coordination, not that acheiving such “coordination” is worth it).
Ah, fair enough. I read it and assumed it was a general reference to price stickiness. So if it was in reference to coercive measures then of course we’d be in agreement.
I’m just mindful of of distinguishing between the Rothbardian paradigm and the Hayekian one; I don’t here much from the Lachmannites these days though. I’m re-reading the Mises and Hayek dehomogonised and Mises as Social Rationalist to brush up on my distinctions.
Well, I do agree with the idea of price stickiness, even in an entirely unhampered market, I also think it’s a more “Austrian” position. However, my original post was meant to be something that one would be in agreement with whichever branch of Austrianism one aligns themselves most closely with (and for what it’s worth, Hutt didn’t agree with the idea of price stickiness in a free market either, at least, not from my reading).
I was actually planning on reading the latter of those today or tomorrow! I’ve read the former a while ago, so I could probably reread it. That said, I don’t agree with Salerno’s thesis (and I think Horwitz, Yeager and Kirzner do a good job of rebutting it).
Robert Barro suggests there’s no such thing as a Multiplier Effect.
The implication of the multiplier effect is that the government can spend money it doesn’t have and grow the economy infinitely. Part of the multiplier effect - the marginal propensity to consume - implies that a consumption and/or government spending rate of 100% would grow the economy at an infinitely quick pace.
This, of course, is absurd. The size of an economy depends on how much it can produce, not consume. You need technology, natural resources, and capital goods in order to produce. Consumption simply consumes natural resources and capital goods - in other words, it uses these products up. That shrinks the amount the economy can produce, thus reducing the purchasing power and real wages of consumers.
The way an economy grows is through saving and investment. Consumers save, financial institutions take that saved money and lend it out, and entrepreneurs borrow those funds and invest in capital goods and technology. The result is an expanding base of resources (due to expanded production) that the consumer is able to consume. This raises purchasing power, thus increasing real wages.