Importance of Multiplier

The concept of the multiplier is a significant contribution of J.M. Keynes to the theory of income, output, and employment. As Richard Goodwin aptly observed, "Lord Keynes did not discover the multiplier." The credit goes to Mr R.F. Kahn, who first presented it as an employment multiplier in his 1931 article "The Relation of Home Investment to Unemployment." However, Keynes gave it the role it plays today by transforming it from an instrument for the analysis of road building into one for the analysis of income building.

Goodwin remarked that the multiplier concept "sets a fresh wind blowing through the structure of economic thought." It has both theoretical and practical significance in the theory of employment.

1. Income Generation
   Under the multiplier, the process of income generation is automatic. When investment increases, income, output, and employment increase manifold through successive rounds of spending — one person's expenditure becomes another's income, and this chain continues.
2. Full Employment
   The multiplier helps in framing policy for full employment. The government only needs to inject a calculated amount of net investment, and the multiplier amplifies it many times over to bridge the income gap needed for full employment.
3. Public Investment
   The multiplier has given added importance to public investment. Government spending on roads, schools, hospitals etc. leads to many times increase in income, output, and employment — making it a powerful tool for economic growth.
4. Trade Cycles
   The multiplier explains the ups and downs (booms and depressions) in the economy. Greater investment leads to a multiplied rise in income (boom), while a fall in investment leads to a multiplied decline (depression). It helps in controlling both.
5. Equilibrium Between Savings and Investment
   The multiplier helps in achieving equilibrium between savings and investment through changes in income. When investment rises, income rises via the multiplier, and savings increase until they equal the new level of investment.
6. Inflation and Deflation
   The multiplier helps estimate how much change in investment is needed to control price levels. To reduce inflation, investment is reduced (reverse multiplier). To control deflation, investment is raised (forward multiplier).
7. State Intervention
   The multiplier justifies government intervention in the economy. Even a small increase in government investment leads to many times increase in income, proving that state action is necessary during economic downturns — a departure from the classical laissez-faire approach.
8. Deficit Financing
   The multiplier adds significance to deficit financing. During severe depression, when cheap money policy fails, deficit financing increases investment which has a multiplier effect on income — raising aggregate demand and helping to control deflation.