Murray Rothbard’s Critique of the Keynesian Multiplier

From all accounts of those who knew Murray Rothbard, he was quite a personable and jovial individual. He was always laughing and making jokes about anything that came across his mind. His writing does not always reveal this part of his personality, however. In some sections of his writing, you can see this element of him peaking through into his economic or philosophical analysis. The best example of this part of his him peaking through is his critique of the Keynesian Multiplier found in his seminal work, Man, Economy, and State.

Rothbard’s treatment of the Multiplier comes at the end of Chpater 11, towards the end of the book. First, however, we must understand what the Kenyesian Multiplier is and how it is used. Keynesians posit that all income everywhere in the economy is the result of consumption or investment, like so:

Social Income = Consumption + Investment

If this is the case, let us posit that consumption is always a percentage of income. For out example, we will say that consumption is 50% of income spent in our hypothetical economy. This gives us the following:

Social Income = .5 (Social Income)+ Investment

This may not look to prove much at first, but we can move this equation around to get an interesting result.

Social Income - .5 (Social Income) = Investment

.5 (Social Income) = Investment

Income = 2 (Investment)

Using algebra, we can see that in our case, 2 is the investment multiplier. Keynesians argue that an increase of $1 in Investment will then lead to an increase of $2 in Social Income. If we wanted to raise Income by $10,000, we would increase Investment by $5,000.

This is the basic view of the Kenyesian Multiplier. As in all things related to economics, there are nuances to the particulars of how it would be used, but this is the fundamental picture of how it operates.

In response to this, Rothbard offered another multiplier of his own. However, this multiplier was thousands of times more potent than any multiplier the Keynesians could create! He did this like so:

Social Income = Income of the Reader+ Income of Everyone Else.

Given that this is true, we can conclude that the income of everyone else in society would dwarf that of the reader alone:

Social Income = .000001 (Income of the Reader) + .999999 (Income of Everyone Else)

This equation is also equal to:

Social Income = Income of the Reader + .999999 (Social Income)

.000001 (Social Income) = Income of the Reader

From this equation, Rothbard derived a multiplier effect of his own:

Social Income = 1,000,000 (Income of the Reader)

Therefore, an increase of $1 in the Reader’s income would result in an increase of $1,000,000 in Social Income! If this incredible discovery is true, all that is needed to exponentially increase GDP is to give a few thousand dollars to the reader! Imagine the leaps and bounds to be made in economic prosperity!

With this reductio ad absurdum, Rothbard shows the intellectual cracks in the Kenyesian Multiplier concept. Just because a certain sector of the economy or a particular person is given a sum of money means nothing at all for the prospects of increasing social income. The only reason this was ever posited by Kenyesians was because they were misled with a bit of fancy algebra and did not think beyond the numbers. This same algebra, and by extension the same argument, can be used to “prove” ridiculous results, as Rothbard showed.

Rothbard’s humor does not always show in his writing, but in select sections, you can almost hear the laughing behind the typewriter.

Alleviating uneasiness one end at a time.