A NOTE ON THE MULTIPLIER The basis of the theory of the Multiplier is that any ‘indepen-

dent’ increase in the national income induces certain consequential increases which depend, individually and also in aggregate, on the community’s marginal propensity to consume, i.e., on the proportion of an increase in national income which the recipients choose to spend on home-produced consumption goods and services. The ;Multiplier is defined as the ratio of the total change in the national income (i.e., the independent change plus such consequential changes as depend on the community’s marginal propensity to consume) to the independent change alone.

Any statistical estimate of the Multiplier therefore necessitates iL search for those components of the national income which change ‘ independently’ ; i.e., whose magnitude is not affected by the reactions of income-receivers t o changes in their incomes. Of the major sources of national income, both exports and private investment expenditure on home-produced goods qualify reasonably satisfactorily as indepen- dent components. Private consumption espenditure on home- produced goods and services is less easy to classify, because though sensitive to changes in the national income it may also change for other reasons, and in particular as the result of a change in the relative prices of home-produced and imported goods. This com- plication was admitted by the inventors of the RiIultiplier and some empirical investigators have attempted to allow for it, though their efforts have not been conspicuously successful.

One such effort has indeed been (I suggest) a serious source of confusion. Some economists, noting that a curtailment of imports, due for example to the imposition of a tariff, acts as a stimulus to the consumption of home-produced goods, have adopted the device of including imports as a negative independent component of the national income or (which amounts t o nearly the same thing) have regarded the balance of current payments, rather than simply exports, as the appropriate item for inclusion in the ‘multiplicand’.’ This procedure is however defensible, if a t all, only iw a statistical pis aller, for in our theory we must surely allow that a change in the balance of current payments can be an effect as well as a cause of a change in national income and employment. (Newly-employed workers can always be expected to buy additional imports and thus to change adversely the balance of current payments). I submit therefore that there is little advantage to the statistician and none to the theorist in departing from the straightforward procedure, adopted by Professor Tarshis in his recent text book,2 of including

1. This, incidentally, involves defining the other components of the national income ar inclusive of expenditure on imported, as well l ~ ~ l on home-produced. goods. See Kslecki. Economic Fluctuations. D. 48.

2. Elements of Ecaomica. reviewed elsewhere in this issue of the Record.

109

110 THE ECONOMIC RECORD JUNE exports, rather than the balance of current payments, in the multi- plicand. For Professor Tarshis’s procedure, though it gives us no touchstone by which to distinguish independent from dependent varia- tions in the consumption of home-produced goods and services, has a t least the great merit of avoiding any confusion of cause and effect.

I turn now to the main purpose of this note, which is to comment on the best way of treating the remaining major source of national income, namely expenditure by public authorities on home-produced goods and services. At first blush it might seem that the best treat- ment would be to split public expenditure into two components, capital expenditure and current expenditure ; the former being regarded by analogy with private investment as an independent component of the national income, and the latter by analogy with private consumption as mainly a dependent component. Keynes in the General Theory did not reject this dichotomy outright, but he considered that government saving ‘is not influenced by the same sort of psychological motives as those which govern private saving’3 and thus by implication challenged the analogy between current expenditure by the public authorities and consumption expenditure by private citizens. Moreover he in effect suggested a rival dichotomy by introducing the term ‘loan expenditure’ which has subsequently been adopted by empirical investigators as describing that part of public expenditure which should be included as an independent component of national i n ~ o m e . ~ Public ‘loan expenditure’ is defined by Keynes as ‘the net borrowings of public authorities on all accounts, whether on capital account o r to meet a budgetary deficit’,3 and under various aliases it has been accorded the status of ‘honorary investment ’.5

I question its right to this status. If we treat the Government’s loan expenditure as an independent component of the national income we are in effect assuming that the Government will as a matter of course adhere to an intended rate of budget deficit (or surplus), despite any change in the national income and therefore in the revenue yielded by a given system of taxation. In other words we are assuming that the Government as a matter of course will stabi- lize its current revenue by constantly varying the rates of taxation or alternatively mill vary its expenditure E f o r E with any variation in its current revenue. The assumption could be relaxed to concede that the Government may from time to time change its intended rate of budget deficit, but only provided its decisions on this matter are never influenced by changes in the national income, and that after such a decision has been taken the actual rate

3. GeMTnl Theow. p. 129. 4. See for example, Clark and Crawford. Nationol Imome of Austrnlia, Chapter XI :

5. So termed by Professor D. H, Robertson. Kalecki. loc. n’t.

1948 THE MULTIPLIER 111

of budget deficit is maintained constantly a t the new intended rate. However even with this concession to reality we at most get a simplified model of Gladstonian finance ; we certainly do not get a n y resemblance to the practice of public finance in the last thirty years.

il much stronger case could be made in favour of an alternative procedure adopted by Professor Tarshis, who treats the total expendi- ture of public authorities, rather than their loan expenditure, as an independent component of the national income.6 For a government nowadays might well react to a change in the national income and therefore in its current revenue mainly by adjusting its rate of borrowing so as to maintain its old programme of total expenditure, perhaps Trarying its programme of expenditure from time to time but never with much regard to changes in the national income.

Even so, the inclusion of total expenditure of public authorities, in place of their loan expenditure, as one of the independent com- ponents of the national income is likely in many cases to be merely an improved, not a wholly correct, procedure. Thus a fall in the national income is quite likely to have some influence on fiscal policy, either by encouraging retrenchment, or, in the interests of high em- ployment, the reverse; and in many cases there will not be adequate grounds fo r dismissing the influence as insignificant. Unfortunately, however, the precise reactions of fiscal policy to variations in the national income must be difficult either to establish ex post or to forecast; for the extent to which a given change in rates of taxation o r in public expenditure can be attributed to changes in the national income is a question which hardly admits of an objective answer, even by those who actually decide fiscal policy.

University of Adelaide. BRIAi i TEW.

INTEGRATION IX T H E AUSTRALIAN VOOL T E X T I L E INDUSTRY

There is considerable scope for specialization in the wool textile industry partly because wool textiles are of two distinct types, woollens and worsteds, and partly because the production of cloth of either type involves several consecutive major processes whieh can be performed in separate mil1s.l I n actual fact some mills specialize in one process, others carry out a number of consecutive processes and some produce both woollen and worsted goods. The

6. O p . cit.. P. 388. 1. The major processes in the production of worsted cloth are wool-scouring, worsted

combing, worsted spinning and weaving ; and of woollen cloth. wool-ecouring. woollen apinning and weaving. Wcol-scouring and weaving are processes common to both woollen and worsted production but theE are still five different pmeesses. any number of which a miil may perfonn.