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# The (Keyenesian) multiplier effect. Easily debunked?

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31 Posts
Points 695
DerpStatis posted on Sun, Nov 4 2012 7:06 PM

I have a really basic question and I don't have time to go to the economics textbooks to check details. So I'm hoping someone can please shed some light on this.

Basically the story goes...

If the government spends X , then there will be m*X increase in GDP. (Fiscal multiplier effect)

I assume the number "m>1" is the multiplier that is estimated empirically and takes into account crowding out, etc. (Multiplier is because of money changing hands more than once)
When I learned this multiplier it was generally assumed that this somehow made government spending more preferable.

Isn't it the case that if an individual spends X the same thing will happen? Or is there some magic that happens when you collect taxes? Why does it matter that the government spend the money? I don't see what the trick is, is it so easy to debunk this? Please let me know if you have a reference to a discussion of this.

And most of all, what happened to assessing things based on opportunity cost, rather than some gdp accounting?! (rhetorical question)

My name is Derp and I will be your statist.
• | Post Points: 65

#### Verified Answer

2,439 Posts
Points 44,650
Neodoxy replied on Mon, Nov 5 2012 1:32 AM
Verified by DerpStatis

All that matters within the Keynesian model is that money is spent, not who spends it. So you're perfectly right that individuals spending money should have the same effect. C+I+G+(E-M)=Y.  It doesn't matter where the spending comes from, it just has to come from somewhere. This is why (contra many conservative and more than one libertarian strawman) oftentimes Keynesians propose a variety of tax-breaks. Indeed that was a large part of the 09 stimulus package.

The reason why government spending is supposed to be especially effective is that the government has an incentive to have no propensity to save and therefore it can activate the multiplier. This is why Keynes advocated the "treasure chest" idea of the government saving a huge amount of money during the boom period and then when the depression hits it uses this money in order to boost back up aggregate demand.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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51 Posts
Points 825
Tugwit replied on Wed, Nov 14 2012 2:32 PM
Verified by DerpStatis

Neodoxy,

Keynesians say that since the tax cut multiplier b/(1-b), is one less than the government spending "multiplier" 1/(1-b)

(1/(1-b)) - (b/(1-b)) = (1-b)/(1-b) = 1

that "proves" that government spending is better for the economy than tax cuts.

That comes from disguising the "saved" fraction of disposable income (1-b)Yd as a+I+NX, and disguising tax T, as G.

It's another kind of Keynesian math fraud. I have more about it in Pt 2, Fiscal Multiplier Debunked.

Scroll down about 2/3 of the way to The Bogus Tax Cut “Multiplier” (TCM)

Tugwit

• | Post Points: 40

#### All Replies

452 Posts
Points 7,620
shackleford replied on Sat, Nov 17 2012 7:52 PM

Jon Irenicus:

The math used in the physical sciences is still descriptive. Equations simply describe hypothesied relationships.

Yes, ultimately they are descriptive in the sense that they seek to, as accurately as possible, descripe physical phenomena. However, the key diffierence is that they can be used to accurately predict the behavior of physical phenomena. That's what I mean when I say prescriptive. You can predict the behavior of the particle/system to whatever level of approximation that you want. This in turn lends credence to the veracity of the underlying theories, etc. Implicit in this are the physical laws that govern the behavior of physical reality. They are immutable constraints. This is not the case in economics. As far as I know, there are no immutable laws in economics because it's ultimately based on human (ir)rationality and behavior.

http://thephoenixsaga.com/
• | Post Points: 20
452 Posts
Points 7,620
shackleford replied on Sat, Nov 17 2012 7:54 PM

Jargon:

Physical sciences are not prescriptive.

Tell that to a civil engineer.

http://thephoenixsaga.com/
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2,679 Posts
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gotlucky replied on Sat, Nov 17 2012 7:58 PM

Prescriptive has nothing to do with prediction. The dichotomy is descriptive vs prescriptive, or positive vs normative.

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452 Posts
Points 7,620
shackleford replied on Sat, Nov 17 2012 8:06 PM

gotlucky:

Prescriptive has nothing to do with prediction. The dichotomy is descriptive vs prescriptive, or positive vs normative.

Are we really arguing over semantics?

prescribe: to lay down, in writing or otherwise, as a rule or a course of action to be followed; appoint, ordain, or enjoin.

Physical theories use mathematical models to predict or lay down the course of action that the system/particle will follow. That's all I mean.
http://thephoenixsaga.com/
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2,679 Posts
Points 45,110
gotlucky replied on Sat, Nov 17 2012 8:09 PM

Are we really arguing over semantics?

If you are going to tell people that science is normative, then yes.

Physical theories use mathematical models to predict or lay down the course of action that the system/particle will follow. That's all I mean.

Let's go with an actual standard definition of prescribe:

1. pre·scribe
 verb /priˈskrīb/  prescribed, past participle; prescribed, past tense; prescribes, 3rd person singular present; prescribing, present participle (of a medical practitioner) Advise and authorize the use of (a medicine or treatment) for someone, esp. in writing - Dr. Greene prescribed magnesium sulfate - the doctor prescribed her a drug called amantadine Recommend (a substance or action) as something beneficial - marriage is often prescribed as a universal remedy State authoritatively or as a rule that (an action or procedure) should be carried out - rules prescribing five acts for a play are purely arbitrary - doing things in the prescribed manner

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452 Posts
Points 7,620
shackleford replied on Sat, Nov 17 2012 8:19 PM

gotlucky:

Are we really arguing over semantics?

If you are going to tell people that science is normative, then yes.

Physical theories use mathematical models to predict or lay down the course of action that the system/particle will follow. That's all I mean.

Let's go with an actual standard definition of prescribe:

1. pre·scribe
 verb /priˈskrīb/  prescribed, past participle; prescribed, past tense; prescribes, 3rd person singular present; prescribing, present participle (of a medical practitioner) Advise and authorize the use of (a medicine or treatment) for someone, esp. in writing - Dr. Greene prescribed magnesium sulfate - the doctor prescribed her a drug called amantadine Recommend (a substance or action) as something beneficial - marriage is often prescribed as a universal remedy State authoritatively or as a rule that (an action or procedure) should be carried out - rules prescribing five acts for a play are purely arbitrary - doing things in the prescribed manner

Science is normative? I don't follow.

State authoritatively or as a rule that (an action or procedure) should be carried out

Looking at that definition, are you telling me I'm not using the correct word in characterizing the mathematics used in physical science?

http://thephoenixsaga.com/
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2,679 Posts
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gotlucky replied on Sat, Nov 17 2012 8:23 PM

Science is normative? I don't follow.

Do you understand that is what the other posters in this thread thought you were saying? That is why they said you were wrong. You don't understand that you were using the word "prescriptive", which people understand to mean "normative"?

Looking at that definition, are you telling me I'm not using the correct word in characterizing the mathematics used in physical science?

Yes, I am. Notice the word "should" in the definition. Science has to do with "is", not "ought".

• | Post Points: 20
452 Posts
Points 7,620
shackleford replied on Sat, Nov 17 2012 8:31 PM

gotlucky:

Science is normative? I don't follow.

Do you understand that is what the other posters in this thread thought you were saying? That is why they said you were wrong. You don't understand that you were using the word "prescriptive", which people understand to mean "normative"?

Looking at that definition, are you telling me I'm not using the correct word in characterizing the mathematics used in physical science?

Yes, I am. Notice the word "should" in the definition. Science has to do with "is", not "ought".

I never thought people would equate normative with prescription.

I disagree to an extent. Science is about confirming that the should is the "is" and "ought." How do you think quantum mechanics and special relativity arose? The historical classical "ought" failed to explain a new "is." Consider blackbody radiation, angular momentum of the electron, etc. according to classical theory.  The lack of correct predictability prompted new theories that then were able to correctly predict behavior and identify the failures of the previous theories. In the scientific method, you develop the should and after experimentation, you get the "ought" or you have to revise your "should."

http://thephoenixsaga.com/
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gotlucky replied on Sat, Nov 17 2012 9:09 PM

I never thought people would equate normative with prescription.

Yeah, it's the standard.

I disagree to an extent. Science is about confirming that the should is the "is" and "ought." How do you think quantum mechanics and special relativity arose? The historical classical "ought" failed to explain a new "is." Consider blackbody radiation, angular momentum of the electron, etc. according to classical theory.  The lack of correct predictability prompted new theories that then were able to correctly predict behavior and identify the failures of the previous theories. In the scientific method, you develop the should and after experimentation, you get the "ought" or you have to revise your "should."

The purpose of science is descriptive. Scientists use various methods to try to understand the world and describe it. Your example of civil engineer was a good example of a prescriptive use of scientific knowledge. Engineers use descriptive knowledge in order to tell people what they should do:

"This is the safest method of keeping this building up. Oh, you want me to keep it up for a lower cost X. Okay, then for X cost, this is the safest way to keep this building up. Oh, the architect wants to use certain materials? Then for cost X and materials Y, etc."

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Jon Irenicus replied on Sun, Nov 18 2012 1:51 PM

Well to be honest economics is also prescriptive in that sense, given that it's a science of means and their relation to given ends rather than a science of means. But yeah, prescriptive implies an element of normativity in modern day parlance, yet I can see why Shackleford used the term.

Freedom of markets is positively correlated with the degree of evolution in any society...

• | Post Points: 35
2,679 Posts
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gotlucky replied on Sun, Nov 18 2012 2:14 PM

Murray Rothbard explains it in more depth here, for anyone who is interested. His introduction:

Economics, as a science, attempts and claims to be purely value-free; that is, separate from the personal, valuational, or political proclivities of the economist. And yet economics and economists are continually making political pronouncements; economics per se is shot through with value-loaded assumptions, usually implicit, which then emerge as political conclusions and recommendations. It is my contention that this procedure is illegitimate and unscientific, and that it is incumbent on economic theory to purge itself of all vestiges of the unsupported value judgment. As a science, economics can and should stand apart from such value judgments. But since all political policy recommendations necessarily involve value judgments, does this mean that the economist must never make any policy recommendations or indeed, never use any terminology that is value-loaded? Not necessarily.

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Jargon replied on Mon, Nov 19 2012 1:02 AM

Absolutely not. Neither the science employed by civil engineers or that employed by economists is prescriptive. Science is not prescriptive! You are referring to a situation where this science tells said specialist what happens/what will happen should they do X. Using their judgment, they then select a course which is deemed to produce the desireable outcome.

But it is absolutely untrue to say that when an engineer is designing a bridge, his calculations will come out to: "This design is good!" No, his calculations will come out to something like X=Y+B, and the engineer will use his judgment as an engineer to determine that that is in fact the design he wants to employ.

Prescriptive is how it sounds: a prescription.  A doctor prescribes you medication because he thinks it will help. Economics describes what happens and the economist uses his judgment from there to prescribe a course of action which does not produce unemployment/waste/whatever.

Land & Liberty

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

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88 Posts
Points 1,455
idol replied on Mon, Nov 19 2012 11:38 AM

If "you don't need Tax to show up in the GDP equation because it's not production" then what is it that government spends?

The government spends what would otherwise be C+I. When government spending increases by, say, \$10, C+I falls by \$10.

• | Post Points: 20
51 Posts
Points 825
Tugwit replied on Mon, Nov 19 2012 1:20 PM
Idol In another mises forum topic, the question was whether I had actually debunked the math of the Keynesian fiscal multiplier (Which I have. You can see that on Tugwit.blogspot.com if you like.). Wheylous and a couple of others believe in Keynes' bogus "mulitplier", and Wheylous suggested that I contact an economist named Caplan about it. In this current forum topic, Wheylous asked me if I got a reply from Caplan. I said I never got a reply from Caplan, but I did get a reply from a Keynesian professor. I had asked the Keynesian prof, in Yt = C + I + NX + G, where is tax? I mean it's the GDP equation and there's no mention of tax? Why doesn't the Keynesian equation show tax? The Keynesian prof gave me a long-winded run-around and didn't answer. So I asked him again. He then said that there was no tax in Yt = C + I + NX + G. And then he said that tax is in C ... which is in the equation. Wheylous then said "As for Tugwit - you don't need Tax to show up in GDP because it's not production, obviously." So I said "then what is it that government spends?" G is in the GDP equation Yt = C + I + NX + G. I keep having to pay tax, so that meathead politicians can spend it as G, and waste a good portion of it. So if they're not spending tax as G, and all this stuff I see in the news about how they spend tax, and need to increase tax so they can have more tax to spend ... is false ... then I'd like to have my money back so I can spend it on C and I and NX. But Wheylous hasn't got back to me on that. So do you know where tax is in Yt = C + I + NX + G?
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idol replied on Mon, Nov 19 2012 7:46 PM

Well you're correct, tax lowers C+I and increases G by an equal amount. It is implicit in the equation.

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