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The Multiplier Effect

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EmbraceLiberty Posted: Mon, Jun 4 2012 8:04 PM

So, let me get this straight. Take the scenario that the government injects 100 billions dollars into the economy in the form of bonuses to all their employees. Do you believe that the employees will spend it and the recipients of that money will spend it and the recipients of their money will spend it and so forth, or do you believe that it is spent once and freezes? I'm confused of the rejection of the money multiplier.

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Where did the government get this money?

 

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thank you. sorry if I am being repetitive i'm just trying to grasp everything before i confront a keynesian.

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borrowed

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EmbraceLiberty:
thank you. sorry if I am being repetitive i'm just trying to grasp everything before i confront a keynesian.

No not a problem at all.  This is important to understand.

 

I think an important issue is in understanding the difference between dollars and stuff.  Give at least the first two posts of this thread a good read through (definitely watch the videos).  I think it may help.  Come back with questions:

Three questions from a clueless high school student

 

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So the government is taking water from the deep end of the pool and pouring it in the shallow end in order to rise the water level overall, so to speak?

If I had a cake and ate it, it can be concluded that I do not have it anymore. HHH

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Jargon replied on Mon, Jun 4 2012 8:57 PM

Why does it immediately follow that they will spend the new money? If they're not spending their own cash currently, they expect to make a greater yield doing that than using it to buy things. So who says this new money will be put into consumer spending rather than savings or "putting it under the mattress"?

Land & Liberty

The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger

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The government giving it's employees bonuses does not raise GDP by a dollar, so it doesn't make sense to talk about the multiplier effect.

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how does it not raise GDP? 

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It's possible there's some caveat about government employee payouts such that they won't get counted in the GDP and that's what he's talking about, but I can't be sure. 

Either way, it doesn't really matter.  GDP is essentially meaningless.

 

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John, I read the thread. I am still confused however about the Austrian view of currency circulation.

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Wheylous replied on Tue, Jun 5 2012 11:40 AM

The government giving it's employees bonuses does not raise GDP by a dollar, so it doesn't make sense to talk about the multiplier effect.

Government spending is part of GDP.

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Wheylous replied on Tue, Jun 5 2012 11:41 AM

It's likely true that when the government spends money the velocity of money will increase, but I'm not sure that it actually matters. Sure, you boost GDP, but so what? We might as well make a $1 trillion coin and store it in the Treasury in that case.

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EmbraceLiberty:
John, I read the thread. I am still confused however about the Austrian view of currency circulation.

well what's your question?  I thought you'd have questions.

 

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Does the Austrian Theory totally discard the money multiplier or do they accept the notion that a dollar spent in the economy is used continuously?

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EmbraceLiberty:
Does the Austrian Theory totally discard the money multiplier or do they accept the notion that a dollar spent in the economy is used continuously?

I don't understand what you mean by this.  The "money multiplier" is simply a "ratio of commercial bank money to central bank money under a fractional-reserve banking system."  Austrians do not deny that a fractional reserve banking system leads to an increase in the supply of money...in fact that's essentially the main problem they have with it.

In Keynesian economics "the multiplier" is typically what Keynes referred to as an "investment multiplier".  This is a completely different concept than the "money multiplier".  Did you happen to look into any of the resources that were suggested to you in the other thread?

I have no idea what "a dollar spent in the economy is used continuously" means, or what relevance it has to the issue at hand.  Could you explain?

 

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Yes. Okay, Keynes said that every dollar the government injects into the economy it multiplies from the money multiplier. So, for example, if we pass a stimulus of $700 billion the people who get that money spend it at the grocery store and the grocery store pays their employees and their employees spend it at Best Buy and then best buy gives it to their employees and so on and so forth. This process would have that initial $700 billion become a couple trillion depending on the marginal propensity to consume. Does the Austiran perspective believe that money circulates in that manner?

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That is not the money multiplier.  You're thinking of the fiscal multiplier.  Of course that happens.  No one denies that.  But to say that the process results in a continuous transfer of payments ignores the fact that people the next $500 you spend is not the same as the last $500 you received.  It's also not self-evident that nominal increases in spending signify increases in real wealth.

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EmbraceLiberty:
Yes. Okay, Keynes said that every dollar the government injects into the economy it multiplies from the money multiplier.

No.  He didn't.  I'm getting the feeling you're not looking at virtually any of the resources that are being provided to you.  I literally just linked you to the wikipedia page explaining what the "money multiplier" is, and told you that Keynes talked about the "investment multiplier", and that these are two completely different things.  Yet you persist in your fallacious terms.

I do not have a problem helping people understand things, and being patient with the progression, but I lose patience rather quickly when it becomes evident one is not willing to help himself.  When simple resources are provided to you, I expect that you will at least look at them.  We're not just handing you a bunch of links to incomprehensible tomes and saying "good luck"...these are specific references that will help you.  Indeed, you were given specific page numbers in the last thread.  I know you said you went through the thread I suggested for you here, but I figured you would come back with specific questions. 

I don't know how any progress is supposed to take place from "I am still confused however about the Austrian view of currency circulation."  This doesn't tell me anything about what you learned, what changed in your mind, what specifically you're having trouble with, which parts you do understand, etc. etc.

As Rorschach stated, simple nominal increases in spending are not necessarily increases in real wealth.  This is precisely the point Friedman was making in the video I said you should watch from that thread you say you went through.  Again, have you looked at all into the resources that were suggested to you in the first thread?

 

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I'm sorry. In my macroeconomics class we were told that Keynes came up with the money multiplier and the marginal propensity to consume equation. I read the excerpts from Money, Bank Credit, and Economic Cycles and it only talked about the investment multiplier not the "fiscal multiplier" that I was referring to. What I learned is that the investment multiplier is false; however, I was asking about the idea that money goes from one person to the next. I did watch the Friedman video and already understand that concept, but what I have trouble understanding, that Rorschach clarified, was if Austrians believe that money goes from one person to the next. Now, if I may ask, from reading some comments on this forum what are the flaws of the marginal propensity to consume?

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EmbraceLiberty:
I'm sorry. In my macroeconomics class we were told that Keynes came up with the money multiplier and the marginal propensity to consume equation.

Either your economics class is more full of shit that usual and didn't even get it's own Keynesian nonsense right, or you misunderstood.  Again, read the definition of "money multiplier" (which was already provided to you twice before.)

 

I read the excerpts from Money, Bank Credit, and Economic Cycles and it only talked about the investment multiplier not the "fiscal multiplier" that I was referring to.

Did I not just tell you (twice) that the "investment multiplier" is what Keynes talked about?  It's literally on the first page of "The Multiplier" chapter of the first resource recommended to you in the last thread.

 

What I learned is that the investment multiplier is false;

Good.  That's the point.  That's the answer to your question.

 

I was asking about the idea that money goes from one person to the next.

I've never heard of anyone who denies this.  I don't know where anyone would get the idea that anyone believed that money doesn't get exchanged.  That has to be the most asinine thing I've ever heard.  If you have an example of anyone suggesting such a thing, please point me in their direction.

 

I did watch the Friedman video and already understand that concept, but what I have trouble understanding, that Rorschach clarified, was if Austrians believe that money goes from one person to the next.

See above.  What the heck did you think Austrians (or anyone else) would believe?  I can't even fathom what else is essentially possible, let alone plausible.  Honestly, what did you have in mind?

 

Now, if I may ask, from reading some comments on this forum what are the flaws of the marginal propensity to consume?

Serously?  One more time.  Have you looked at all into the resources that were suggested to you in the first thread?  In particular, the first one in the first response of that thread?  The first three recommended pages?  Or that whole chapter, really.  (Not to mention the entire two chapters prior to it, titled "the propensity to consume".)

If you understand what's wrong with the multiplier, I don't quite see how you cannot understand what's wrong with the "marginal propensity to consume".

There is never any fixed, predictable “multiplier”; there is never any precise, predeterminable, or mechanical relationship between social income, consumption, investment, and extent of employment.

Please look into the resources that have been suggested to you.

 

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Either your economics class is more full of shit that usual and didn't even get it's own Keynesian nonsense right, or you misunderstood.  Again, read the definition of "money multiplier" (which was already provided to you twice before.)

I understand the money multiplier now. I was merely stating what I was taught not what I now know. Thank you.

Did I not just tell you (twice) that the "investment multiplier" is what Keynes talked about?  It's literally on the first page of "The Multiplier" chapter of the first resource recommended to you in the last thread.

Yes, I understand and understood it when I wrote my previous post . I was simply restating that I had thought earlier that the money multiplier was the fiscal multiplier. Thank you. 

I've never heard of anyone who denies this.  I don't know where anyone would get the idea that anyone believed that moneydoesn't get exchanged.  That has to be the most asinine thing I've ever heard.  If you have an example of anyone suggesting such a thing, please point me in their direction.

I misunderstood what someone said. Again, I thought (at the time of starting this thread) that the money multiplier was the exchange of currency (which I must repeat is something I know longer believe) and when an Austrian rejected it I thought they were rejecting the exchange of currency.

See above.  What the heck did you think Austrians (or anyone else) would believe?  I can't even fathom what else is essentially possible, let alone plausible.  Honestly, what did you have in mind?

I had nothing in mind that is why I asked the question. 

 

I read the pages of the book The Failure of the New Economics. I'm going to type a response later.

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