Fallacy of the Multiplier Effect: Correcting the Income Analysis

Yoshiyasu Ono

ISER Discussion Paper from Institute of Social and Economic Research, The University of Osaka

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.

Date: 2006-10
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