Read this article to learn about the ten limitations of Multiplier Keynesian in economics.
1. Availability of Consumer Goods:
The process of income generation is subject to the availability of consumer goods. If, with a rise in income, consumer goods are available in sufficient quantity, the process of income generation would be strengthened and multiplier will have a high value.
If, however, there is a shortage on consumption goods, income recipients will not be able to spend more on consumption resulting in a decline in the MPC and hence the multiplier. The value of the multiplier is thus, limited by the availability of consumption goods.
2. Maintenance of Investment:
In order to achieve a high value of multiplier, it is necessary that the increments in investment are repeated in regular time intervals, then and only then, can the national income be raised to multiplier level and kept or maintained there. One injection of new investment will raise the income to the multiplier level, but as soon as the multiplier effect has worked itself out, other things remaining the same, the income will fall back to its original level. Thus, steady injection of investment will raise the national income to the multiplier level and having raised it will keep it there. Maintenance of investment, therefore, is essential for higher values of multiplier.
3. No Considerations of Profit Maximisation:
Multiplier includes any type of investment (public or private) but it specially applies to loan-financed public investment because, by nature, it is autonomous i.e., it is free from the motive of profit maximisation (as is usually not the case in private investment). Since a steady injection is necessary for the multiplier to have positive effects on income and employment during depression periods, considerations other than profit maximisation are essential to attain the unhampered operation of the multiplier.
4. Multiplier Period:
Multiplier period presents another important qualification to the working of the multiplier. Lapse of time between successive expenditures on consumption may be called the multiplier period. In other words, it is the period during which the receipt of new income includes secondary expenditures on consumption. It has been seen that there is a time lag (interval) between the receipt of income and the spending of it, and also between the spending and its reappearance as income.
Consumers receive additional income but do not re-spend it immediately. The lag, however, is fairly short. If we want to know the effect of an increase in investment on the national income, we have to turn to the multiplier period. The greater the length of this period, the fewer are the secondary expenditures on consumption and smaller the value of multiplier and vice-versa.
5. Direction of Net Investment:
It is clear that whenever we speak of the multiplier effects on income as a result of changes in investment, we always mean net investment. It, therefore, follows that we must be sure that any act of investment in one sector of the economy is not offset by a decline in investment in some other sector of the economy. If this happens, the multiplier effects would be impaired because a decline in investment in some other sector may result in greater decline of national income. Therefore, the direction of net investment becomes very important in determining the value of multiplier.
6. Full Employment Ceiling:
The value of the multiplier is further restricted by the limitation provided by the full employment ceiling. The output, income and employment will expend as a result of multiplier, as long as there are unemployed resources in the economy and full employment level is not reached. But once the full employment level has been attained, output and employment will stop expanding, however high the MPC may be.
7. Effects of Induced Consumption on Investment (Acceleration Effects):
Multiplier is concerned with the effects of original investment on consumption and hence on income. It does not deal with the effects of increased or induced consumption on investment. The value of the multiplier would be greater and achieved earlier if both the effects were to be taken into account [i.e., of investment on consumption (Multiplier) and of consumption on investment (Acceleration)]. But multiplier is concerned with the effects of investment on consumption alone and to that extent its value is restricted.
8. Closed Economy:
Working or value of multiplier depends upon the fact whether economy is closed or open. A closed economy implies absence of international trade. More imports over exports act as a leakage on the process of income propagation through multiplier.
9. Availability of Resources:
Smooth and better working of multiplier also depends upon the availability of other factors and resources of production, besides labour, for example, raw materials, capital equipment, etc. In its absence the value of the multiplier is bound to be low and its working impaired.
10. Constant Prices:
It assumes that there is no change in prices of commodities and raw materials, etc. If the prices go up, consumption will go down and value of multiplier will be affected. These limitations and qualifications of Keynes’ investment (income) multiplier show how imperfect and simplified the treatment of the process of income-generation was at the hands of Keynes.
The simplicity of Keynes’s treatment of the multiplier raised certain doubts in the minds of some writers. H. George J. Stigler has remarked, “The multiplier is the fuzziest part of his (Keynes’) General Theory.” Since then, the multiplier has been the main concept with the improvement of which economists have been pre-occupied. As a result, it is now used as a tool for short-run and long-run analysis of income changes in the economy.