CRITICISM OF MULTIPLIER

Keynes concept of the multiplier has been severely criticized on the various grounds.

1. Constancy of MPC

Keynes concept of the multiplier concentrates exclusively on the consumption. It varies directly with MPC. Again, MPC is assumed to be constant. However, the value of MPC fluctuates in the different phases of a business cycles. The value of MPC falls during the depression and rises during the boom. Further, MPC may fall as the level of income rises. Even the empirical evidence does not support to the idea of a linear consumption function having constant MPC. The extent to which a community desires to save out of the income received, the magnitude of the investment multiplier will get reduced.

2. Time Lags

Keynes theory of the multiplier fails to mention the process by which an increase in the autonomous investment will lead to a rise in the income. Actually, there is a time lag between the receipt of the income and the consumption expenditure. This time lag may be known as the multiplier period, i.e., the period during which the receipt of the new income induces the secondary expenditure on the consumption. Keynes analysis has ignored these time lags. Thus, he could not analyse the process of income propagation dynamically. The increase in the length of the lags may reduce the value of the multiplier by decreasing the number of the secondary consumption expenditures.

3. Effects of Induced Consumption on Investment

The multiplier theory merely explains the aggregate increase in the income and the output in response to an increase in the autonomous investment. However, the increased expenditure on the consumption (induced consumption) may also induce further investment, which in turn will raise the levels of income, output and employment. This can be explained under the accelerator theory, which is beyond the scope of this book.