The Keynesian Multiplier Story Is More of a Myth Than an Accurate Description of the Economic Process

Keynes (1933, 1936), by his elaboration of Richard Kahn’s earlier (1931) argument, thus exalts consumption spending to a magical significance in macroeconomic analysis, contrary to the classical emphasis on production and saving for investment in order to promote the growth of output and employment (Ahiakpor 1995). Such popular claims as “the current U.S. economic expansion is being driven by consumer spending” also reflects the Keynesian multiplier view.

The Keynesian multiplier analysis has become a staple in macroeconomic education at the introductory and higher levels, without students being warned of the concept’s fundamental misrepresentation of how an economy works. . . .

Some previous analysts have cast doubts on the validity or meaningfulness of Keynes’s argument, such as Pigou (1933, 1941), Robertson (1936), Hawtrey (1950, 1952), Hazlitt (1959), Haberler (1960), Rothbard (1962), and Hutt (1974), but with hardly any success in limiting its widespread acceptance and teaching in macroeconomics. . . .

In this article, I argue that the earlier criticisms have not been effective mainly because they miss pointing out the real illusion of the Keynesian multiplier story. If one asked some fundamental questions, such as “From where does the initial spender get the income to spend?” or “What is saving other than the purchase of financial assets and not the hoarding of cash?” (the classical definition of saving) we find that the Keynesian multiplier story is more of a myth than an accurate description of the economic process.

—James C. W. Ahiakpor, “On the Mythology of the Keynesian Multiplier: Unmasking the Myth and the Inadequacies of Some Earlier Criticisms,” American Journal of Economics and Sociology 60, no. 4 (October 2001): 746-747.