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Fallacy of the Multiplier Effect: Correcting the Income Analysis

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  • Yoshiyasu Ono

Abstract

Although the Keynesian multiplier effect of public works is criticized for lack of a microeconomic foundation, it is still taught in most undergraduate courses and believed to be useful for policy makers. However, it has a serious fallacy even if we accept the consumption function. This note shows that useless public works is equivalent to unemployment relief expenditure in the presence of unemployment and that the argument on the multiplier effect seriously misleads the present national accounting and thereby distorts evaluation of public works. A correction of the textbook explanation on the income analysis is also provided.

Suggested Citation

  • Yoshiyasu Ono, 2006. "Fallacy of the Multiplier Effect: Correcting the Income Analysis," ISER Discussion Paper 0673, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:0673
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    File URL: https://www.iser.osaka-u.ac.jp/library/dp/2006/DP0673.pdf
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    1. Karl Ove Moene & Asbjorn Rodseth, 1991. "Nobel Laureate: Trygve Haavelmo," Journal of Economic Perspectives, American Economic Association, vol. 5(3), pages 175-192, Summer.
    2. Ono, Yoshiyasu, 2001. "A Reinterpretation of Chapter 17 of Keynes's General Theory: Effective Demand Shortage under Dynamic Optimization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(1), pages 207-236, February.
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    Cited by:

    1. IIDA Yasuyuki & MATSUMAE Tatsuyoshi, 2009. "The Dynamic Effects of Japanese Macroeconomic Policies: Were There Any Changes in the 1990s?," ESRI Discussion paper series 209, Economic and Social Research Institute (ESRI).

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