We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Economy

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is the Keynesian Multiplier?

By Tim Zurick
Updated: May 17, 2024
Views: 18,713
Share

The Keynesian multiplier is an economic theory that states that spending generates more spending, ultimately to the benefit of the economy as a whole. The theory was proposed by economist Richard Kahn in the 1930s, as an integral component of John Maynard Keynes' more sweeping work, The General Theory of Employment, Interest and Money. Modern economists are far from united on the validity of either Kahn's or Keynes' work. The Keynesian multiplier and Keynes' entire approach are widely discounted as remnants of discredited central economic planning by governments. Their influence persists, however, among some economists and economic schools of thought.

An example of how the Keynesian multiplier is supposed to work might consist of a manufacturer that moves into a new community and injects $100,000 US Dollars into the local economy by purchasing goods from local merchants. If this new company spends $40,000 USD with company A, $35,000 USD with company B and $25,000 USD with company C, the multiplier effect predicts that companies A, B and C will in turn spend a certain percentage of their new income with three more companies, which also will spend part of their new income. If each company spends half of their new income, aggregate economic activity would increase by the total spent. In this example, the increased activity is the original $100,000 USD, plus $20,000 USD by company A, plus $17,500 USD by company B plus $12,500 USD by company C. The point of the Keynesian multiplier is that economic activity is not increased merely by the original $100,000 USD but by an ever-increasing total, which is $150,000 USD-plus in this example.

Economic critics disagree on several grounds. The gist of their criticism is that the Keynesian multiplier makes presumptions about economic behavior that are demonstrably untrue. If, for example, spending actually multiplied economic activity, then a spending injection of only a limited amount could generate an unlimited increase in activity — like an economic perpetual motion machine. Instead, empirical studies have yielded multiplier effects of less than 1, suggesting that rather than multiply spending or even increasing it, centralized injections of spending crowd out other economic activity.

As a perhaps exaggerated example of his belief in the effect of the multiplier, Keynes suggested that governments could simply bury currency in the ground and lease out the right to dig it up. The result would be full employment and capital appreciation. His detractors consider any such nonproductive activity completely in error.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
By anon298073 — On Oct 18, 2012

Keynes's multiplier is a mathematical identity consisting of a consumption function series equaling the reciprocal of the savings function, and is utterly useless in spite of sounding very learned.

Share
https://www.wisegeek.net/what-is-the-keynesian-multiplier.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.