Hawtrey on the Keynesian Multiplier: A Question of Cognitive Dissonance?

Robert Dimand (1997, 554) claims that Ralph Hawtrey was a “multiplier pioneer [who] overlooked his own contribution,” as were L. F. Giblin and J. B. Clark. Earlier, Dimand (1988, 101–21) pointed out the similarities between Richard Kahn’s and John Maynard Keynes’s multiplier argument and the general equilibrium analyses of Hawtrey and others. William Darity Jr. and Warren Young (1997, 557) agree with Dimand’s assessment and suggest that Hawtrey’s failure to recognize that he had “discovered” the multiplier analysis before Kahn (1931) resulted from “a cognitive dissonance between the Hawtrey of ‘crowding out’—as in the ‘Treasury View’—and the Hawtrey of the multiplier.” This essay intends to correct the view that Hawtrey’s employment of a general equilibrium analysis—which Hugo Hegeland ([1954] 1966, chap. 1) and A. Llewellyn Wright (1956), among others, have called “the multiplying principle”¹—is a precursor of the same multiplier argument that Kahn, implicitly, and Keynes, explicitly, founded on the principle of the marginal propensity to consume and that considers savings a negative but necessary evil in the investment and income-creation process.

Thus, although Hawtrey was familiar with the geometric series formula and employed it to illustrate his general equilibrium analysis, and also used the multiplier label to describe one such analysis (Hawtrey 1950, 441–43), his criticisms of the Keynesian multiplier argument (Hawtrey 1950, 1952) must not be seen as a puzzling inconsistency on his part. Neither should Hawtrey’s own reference to Kahn’s 1931 article as the original source of the Keynesian multiplier argument (Hawtrey 1950, 76 n) be regarded as an example of his own cognitive dissonance. Arguments by Wright (1956), G. L. S. Shackle (1967, 186–202), and Patrick Deutscher (1990, 134) come close to making my point in claiming that Kahn originated the Keynesian multiplier argument (see also King 1998, 63; and Patinkin 1982, 26 n). Hawtrey, Kahn, and Keynes employed the same mathematical formula that underlies a multiplier or cumulative-process analysis, but their conceptions of the economic process, especially the role of savings, differed significantly. Indeed, Hawtrey’s distinction between his analysis and the Keynesian argument, as well as his criticism of the latter, grew sharper with subsequent editions of his work, not less sharp.

The Kahn-Keynes Multiplier Argument

The multiplier argument formalized in Richard Kahn’s (1931) geometric series summation of dampened proportions of income consumed, and incorporated in Keynes’s General Theory (1936), emphasizes the role of consumption spending in promoting income and employment growth. Kahn concentrated particularly on public works expenditures, arguing that, rather than diverting “capital” (funds) from productive, private investment and thus retarding employment and output growth, spending on public works increases employment and output growth by a factor of more than unity through a multiplier process (Kahn 1931, 174; 1984, 91–95). Thus, investment in public works increases employment and income, and “to meet the increased expenditure of wages and profits that is associated with the primary employment, the production of consumption-goods is increased. Here again wages and profits are increased, and the effect will be passed on, though with diminished intensity. And so on ad infinitum” (Kahn 1931, 173). Although Kahn’s article focuses on public works, it is the “expenditure on home-produced consumption goods” (see Kahn 1931, 182–86) that provides the positive income summation in the series—one person’s consumption spending becomes another’s income—while savings and expenditure on imports constitute a leakage.

Keynes seized upon Kahn’s mathematical formulation of the argument to focus on the need for increased consumption spending rather than savings, as the classics argued, to promote output and employment growth. Thus, Keynes ([1936] 1976, 118) argues:

Unless the psychological propensities of the public are different from what we are supposing, we have here established the law that increased employment for investment must necessarily stimulate the industries producing for...