Multiplying multipliers

The Keynesians got very excited last year when the IMF came out with its October semi-annual report on the world economy and announced that its previous estimate of the fiscal multipliers was too low and the impact of austerity measures applied by various governments in Europe including the UK was much higher that had previously been thought (see IMF World Economic Outlook, October 2012 and my post, The smugness multiplier,

Remember the multiplier is a device invented by Richard Kahn, Keynes’ disciple of the 1930s.  It purports to measure the change in real GDP caused by a change in government spending or taxation – in other words the impact on growth of government fiscal measures.  The IMF report seemed to justify the more radical Keynesian view that austerity was making things worse and what was needed was more fiscal stimulus to get the capitalist economy, rather than less.

But note there are two propositions here: the first is that austerity is making things worse; and the second is that we need more fiscal stimulus.  They are not the same thing.   In my post (cited above), I argued that the claim that the fiscal multiplier was much stronger than previously estimated was subject to doubt, as well as the causation process: namely was it the Great Recession that drove up deficits and forced governments to reduce them; or was it austerity measures that caused the slump?

Now the IMF, in particular its ‘half-Keynesian’ chief economist Oliver Blanchard, has published a paper that explains why they got it wrong (   Apparently, there were ‘growth errors’ in the IMF’s old analysis.   But this new paper only backs up the first proposition above.  It avoids a view on the second.  The new paper concludes “our results should not be construed as arguing for any specific fiscal policy stance in any specific country.  In particular, the results do not imply that fiscal consolidation is undesirable” .  But, of course, that is what every Keynesian leftist does construe.

One radical Keynesian takes the argument for fiscal stimulus a bit further. Noah Smith, in his always readable blog (, reacted to the IMF paper by saying that the fiscal multiplier does not matter.  Or to be exact: “What I mean is: the “pure” or theoretical Keynesian fiscal multiplier doesn’t matter, in the United States, at this time.”   Why not?  “Because right now, the U.S. should be investing in infrastructure whether “pure” Keynesian stimulus works or not.”  The point that Smith is making is that what “Keynesian theory leaves out is public goods. If there are certain kinds of goods that only government can or will provide, then government spending could have huge effects even if the “pure” Keynesian multiplier is zero.”  For him, it is self-evident that “no country in the world has produced a world-class network of roads, bridges, and ports without large amounts of government funding. Infrastructure isn’t the kind of “pure public good” often discussed in the theoretical literature, but it’s clearly something that we need government to do.”

The trouble with both Keynesian multiplier theory and the theory of ‘public goods’ is two-fold.  First, the theories assume that public investment is just a complement to private sector investment, filling in where ‘the angels’ of the private sector fear to tread.  Keynesian guru Paul Krugman presented the first argument that public investment is a complement to, not a replacement for, private investment recently: “OK. Private sector does not want to spend. The government should spend. This is a powerful case for fiscal stimulus to prevent this from causing a persistent slump.  We have not done that.”

But also, as I have explained in many previous posts (see, Keynesians see the capitalist economy in a utopian way.   The Keynesian analysis denies or ignores the class nature of the capitalist economy and the law of value under which it operates by creating profits from the exploitation of labour.  As a result, Keynesian macro identities start from consumption and investment (“effective demand”) and go onto incomes and employment.  So the Keynesian multiplier measures the impact of more or less spending (demand) on income (GDP).   BUT it does not measure the impact on profitability.  And that is crucial to growth under the capitalist mode of production.

That brings me to the second proposition that Keynesians want to draw from the fiscal multiplier: that we need more fiscal stimulus.   Actually some Keynesians are not so sure as Krugman.  John Quiggin put it this way ( “Are we sure that expansionary fiscal policy is the right thing to be doing and that austerity is a terrible, terrible mistake? No. We are absolutely sure of nothing. But the consequences, if that is the truth, and I think the evidence tilts that way, is that what we are doing right now is absolutely disastrous. And that is where we are right now.”. 

Mainstream Keynesian economist Roger Farmer is even more cautious.  “I consider myself to equally entitled to the label ‘Keynesian’ as the leading proponents of fiscal expansion, but I do not share the consensus view of self-proclaimed Keynesians that a large fiscal expansion is the solution to our dilemma.  The slavish devotion to remedies to the Great Depression that were proposed more than 80 years ago smack of religion, not science.  As Keynes himself said on leaving the Bretton Woods convention in 1946, ‘I was the only non-Keynesian in town’.” (see Crooked Timber).

Indeed, as I have shown in previous posts, Keynes changed his views on theory and policy all the time: consistency was not his strong point as he searched for answers to save capitalism from its own flaws.  And in his latter years, he seemed to ditch many of his more radical policy proposals to turn  back to neoclassical theory as the best ‘medicine’ for capitalism over the long run (see the post cited above).  Also Keynesians have reinterpreted Keynes in many ways (like Marxists with Marx).

Farmer makes another pertinent point that relates to my second criticism of Keynesian multipliers: namely, that they do not take profitability into account.  As Farmer puts it in neoclassical terms: “The General Theory does not contain an explanation of unemployment that is consistent with the rational behaviour by profit-maximising firms in the labour market.”  It seems that recessions happen, to quote leftist economist James Tobin, as “a sudden attack of contagious laziness” on the part of economic agents – like households suddenly not spending and companies suddenly not investing.

A Marxist critique of Keynesian stimulus and government investment is not meant to imply opposition to reversing the austerity cuts or boosting government spending, especially investment in infrastructure and other job-creating areas.  On the contrary – there is plenty of evidence for the powerful multiplier impact that infrastructure investment can have (see the FRSB Economic Letter “Highway grants: roads to prosperity, 26 November, 2012 or the NBER working paper, Output spillovers from fiscal policy, November 2012 ( that shows government investment has a multiplier that is twice that of government consumption (i.e. more public services and staff).  Indeed, only government investment would pay for itself through increased revenues.

The Marxist critique of fiscal multipliers is that the Keynesian solution is utopian because bigger government and more spending leads to lower profitability in the capitalist sector and it leads to an enchroachment on the interests of the capitalist sector.  This second argument against government spending as a solution for capitalism was first presented by Michel Kalecki in his  famous 1943 paper, The political aspects of full employment (  But I consider the first argument against the fiscal ‘solution’ is the decisive one.

Guglielmo Carchedi has shown this theoretically with his concept of the ‘Marxist multiplier’ (see his paper, Could Keynesian policies end the slump? An introduction to the Marxist multiplier, at  Marxist theory starts from profit generated from the class struggle and the law of value.  So the causation is from profits to capitalist investment and then from investment to employment, wages and consumption.  Spending and growth in GDP are dependent variables on profitability of investment, not the other way round.  So the Marxist multiplier measures changes in profitability and their impact on investment and growth.  As Carchedi puts it:  “in the Marxist multiplier, profitability is central…. The question is whether n rounds of subsequent investments generate a rate of profit higher than, lower than, or equal to the original average rate of profit”. 

If the Marxist multiplier is the right way to view the modern economy, then what follows is that government spending and tax increases or cuts must be viewed from whether they boost or reduce profitability. If they do not raise profitability or even reduce it, then any short-term boost to GDP from more government spending will only be at the expense of  a lengthier period of low growth and an eventual return to recession.  There is no assurance that more spending means more profits – on the contrary.  Government investment in infrastructure may boost profitability for those capitalist sectors getting the contracts, but if it is paid for by higher taxes on profits, there is no gain overall.  And if it is financed by borrowing, profitability will eventually be constrained by a rising cost of capital.

Carchedi and I have just completed a joint paper (to be published this spring) that details the arguments around the Keynesian and Marxist multipliers.  But in a previous post cited above, I showed that huge fiscal stimulus packages in Japan at various intervals over the last 20 years had not got Japan out of a low growth trajectory.

In his blog post, Krugman on 2013 vs 1958 macro (, John Quiggin pointed out that the US economy slipped back into recession in 1937 and Keynesians have argued that this was caused by Roosevelt turning to austerity from the New Deal.  Yet the fiscal tightening in that year was just 3% of GDP, small beer compared to the austerity imposed on the distressed states of the Eurozone like Ireland, Greece, Portugal and now Spain.  As I have explained in a previous post (, the 1937 recession was more a failure of profitability to recover than misguided austerity policies.

We can keep multiplying the multipliers, but it won’t lead to an end to the depression.

9 thoughts on “Multiplying multipliers

  1. “Government investment in infrastructure may boost profitability for those capitalist sectors getting the contracts, but if it is paid for by higher taxes on profits, there is no gain overall. And if it is financed by borrowing, profitability will eventually be constrained by a rising cost of capital.”

    What if it’s financed by QE. Thus far QE has had minimal effect on prices apart from bond and equity prices to some limited extent so with spare capacity and labour sitting idle what’s to stop a self financing infrastructure blitz from kickstarting growth without runaway inflation.

    Re Japan over last two decades. Isn’t the point about this fiscal stimulus that the Government is making plain that it expects the BOJ to accommodate the Gov position by disregarding its inflation mandate or deliberately targeting somewhat higher inflation.

  2. Your statement quoted by paulc does not mention another way to pay for government investment — higher taxes on wages (or, nearly the same thing, higher sales tax as it is done in the U.S.). Would you argue that shifting demand (from whatever workers forego to what the government buys for roads and whatever) is roughly neutral in its effect on profits?

  3. Dear Michael,
    We are a group of Ukrainian leftists who comprise the editorial board of Spilne (“Commons”) magazine. Our next issue will be dedicated to the “Second World”. Could you write for us some brief analysis of Eastern European economies in the context of the global crisis, euro instability, global trade risks etc.? If you could also add some more general thoughts on the place of the region in today’s world economy and its peculiarities, it would be perfect.
    The deadline is flexible; the main question is whether you would be willing to write such an article at all.
    You can write on my email:

  4. Michael, seeking an economist who can speak on the economic effects of the crisis on women globally to speak at a global women’s conference. Usual ILO/UN contacts but not clear enough on profits issues. Can you suggest contacts?
    thanks .A

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