Editing Keynesian economics (section)

===<span id="multorigins">Origins of the multiplier</span>===
The [[Liberal Party (UK)|Liberal Party]] fought the 1929 General Election on a promise to "reduce levels of unemployment to normal within one year by utilising the stagnant labour force in vast schemes of national development".<ref>[http://www.liberalhistory.org.uk/history/the-1929-general-election/The 1929 general election] {{Webarchive|url=https://web.archive.org/web/20220717055645/https://liberalhistory.org.uk/journal-articles/the-1906-landslide-the-legacy/ |date=17 July 2022 }}, Liberal Democrat History Group.</ref> [[David Lloyd George]] launched his campaign in March with a policy document, ''We can cure unemployment,'' which tentatively claimed that, "Public works would lead to a second round of spending as the workers spent their wages."<ref>Dimand, ''op. cit.'', pp102f.</ref> Two months later Keynes, then nearing completion of his ''Treatise on money'',<ref>He had been working on the book since 1923, and finally signed the preface on 14 September 1930. Dimand, ''op. cit.'', p. 119.</ref> and [[Hubert Henderson]] collaborated on a political pamphlet seeking to "provide academically respectable economic arguments" for Lloyd George's policies.<ref>Dimand, ''op. cit.'', pp92f.</ref> It was titled ''Can Lloyd George do it?'' and endorsed the claim that "greater trade activity would make for greater trade activity ... with a cumulative effect".<ref>Kahn, ''The making of the ''General Theory'' '', p92.</ref> This became the mechanism of the "ratio" published by [[Richard Kahn, Baron Kahn|Richard Kahn]] in his 1931 paper "The relation of home investment to unemployment",<ref>Published in ''The Economic Journal''.</ref> described by [[Alvin Hansen]] as "one of the great landmarks of economic analysis".<ref>''Guide to Keynes'' (1953), p. 88.</ref> The "ratio" was soon rechristened the "multiplier" at Keynes's suggestion.<ref>Kahn, ''The making of the ''General Theory, p. 95.</ref>

The [[Fiscal multiplier|multiplier]] of Kahn's paper is based on a respending mechanism familiar nowadays from textbooks. Samuelson puts it as follows:
<blockquote>Let's suppose that I hire unemployed resources to build a $1000 woodshed. My carpenters and lumber producers will get an extra $1000 of income... If they all have a marginal propensity to consume of 2/3, they will now spend $666.67 on new consumption goods. The producers of these goods will now have extra incomes... they in turn will spend $444.44 ... Thus an endless chain of ''secondary consumption respending'' is set in motion by my ''primary'' investment of $1000.<ref>P. A. Samuelson, ''Economics: an introductory analysis'', 1948 and many subsequent editions. 16th edition consulted.</ref></blockquote>
Samuelson's treatment closely follows [[Joan Robinson]]'s account of 1937<ref>''Introduction to the Theory of Employment'', which she described as a "told-to-the-children" account (letter to Keynes included in his Collected Writings vol XXIX, p185), referring to a series of retellings of classic stories.</ref> and is the main channel by which the multiplier has influenced Keynesian theory. It differs significantly from Kahn's paper and even more from Keynes's book.

The designation of the initial spending as "investment" and the employment-creating respending as "consumption" echoes Kahn faithfully, though he gives no reason why initial consumption or subsequent investment respending should not have exactly the same effects. [[Henry Hazlitt]], who considered Keynes as much a culprit as Kahn and Samuelson, wrote that ...
<blockquote>... in connection with the multiplier (and indeed most of the time) what Keynes is referring to as "investment" really means ''any addition to spending for any purpose''... The word "investment" is being used in a Pickwickian, or Keynesian, sense.<ref>''The failure of the new economics'', 1959, pp148f.</ref></blockquote>

Kahn envisaged money as being passed from hand to hand, creating employment at each step, until it came to rest in a ''cul-de-sac'' (Hansen's term was "leakage"); the only ''culs-de-sac'' he acknowledged were imports and hoarding, although he also said that a rise in prices might dilute the multiplier effect. Jens Warming recognised that personal saving had to be considered,<ref>"International difficulties arising out of the financing of public works during depressions," ''Economic Journal'', 1932.</ref> treating it as a "leakage" (p.&nbsp;214) while recognising on p.&nbsp;217 that it might in fact be invested.

The textbook multiplier gives the impression that making society richer is the easiest thing in the world: the government just needs to spend more. In Kahn's paper, it is harder. For him, the initial expenditure must not be a diversion of funds from other uses, but an increase in the total expenditure: something impossible – if understood in real terms – under the classical theory that the level of expenditure is limited by the economy's income/output. On page 174, Kahn rejects the claim that the effect of public works is at the expense of expenditure elsewhere, admitting that this might arise if the revenue is raised by taxation, but says that other available means have no such consequences. As an example, he suggests that the money may be raised by borrowing from banks, since ...
<blockquote>... it is always within the power of the banking system to advance to the Government the cost of the roads without in any way affecting the flow of investment along the normal channels.</blockquote>
This assumes that banks are free to create resources to answer any demand. But Kahn adds that ...
<blockquote>... no such hypothesis is really necessary. For it will be demonstrated later on that, ''pari passu'' with the building of roads, funds are released from various sources at precisely the rate that is required to pay the cost of the roads.</blockquote>

The demonstration relies on "Mr Meade's relation" (due to [[James Meade]]) asserting that the total amount of money that disappears into ''culs-de-sac'' is equal to the original outlay,<ref>See Dimand, ''op. cit.'', p. 114. Kahn's presentation is more complicated owing to the inclusion of dole and other factors.</ref> which in Kahn's words "should bring relief and consolation to those who are worried about the monetary sources" (p.&nbsp;189).

A respending multiplier had been proposed earlier by Hawtrey in a 1928 Treasury memorandum ("with imports as the only leakage"), but the idea was discarded in his own subsequent writings.<ref>Dimand, ''op. cit.'', pp. 107–110.</ref> Soon afterwards the Australian economist [[Lyndhurst Giblin]] published a multiplier analysis in a 1930 lecture (again with imports as the only leakage).<ref>Dimand, ''op. cit.'', pp105-107.</ref> The idea itself was much older. Some Dutch [[mercantilism|mercantilists]] had believed in an infinite multiplier for military expenditure (assuming no import "leakage"), since ...
<blockquote>... a war could support itself for an unlimited period if only money remained in the country ... For if money itself is "consumed", this simply means that it passes into someone else's possession, and this process may continue indefinitely.<ref>Eli Heckscher, ''Mercantilism'' (1931, English tr. 1935), vol II, p. 202.</ref></blockquote> Multiplier doctrines had subsequently been expressed in more theoretical terms by the Dane [[Julius Wulff]] (1896), the Australian [[Alfred de Lissa]] (late 1890s), the German/American [[Nicholas Johannsen]] (same period), and the Dane Fr. Johannsen (1925/1927).<ref>Dimand, ''op. cit.'', pp117f.</ref> Kahn himself said that the idea was given to him as a child by his father.<ref>Kahn, ''The making of the ''General Theory'' '', p. 101.</ref>