Rod Hay asks for details of the Pigovian multiplier:

Several economists, including Pigou, developed (at the level of theory and policy) the idea of employment creation having multiple repercussions; although most failed to make it central to their analysis or to link it up, as Keynes did, to aggregate demand management.  Pigou's multiplier may (or may not) have been analytically or descriptively inferior to Kahn's; but it certainly existed and appears to be both sophisticated and realistic.

Discussing (approvingly) Bowley's calculations of the required magnitude of counter-cyclical public expenditure to stabilise unemployment at five per cent, Pigou (1927, 294, 116) wrote that "It will be noticed that Dr. Bowley takes no account of the secondary effects ... the expansion of activity brought about in bad times by 'artificial' creations of demand is likely to be financed in part by the creation of new credit by the banks ... In this way secondary influences are set to work that further enlarge the aggregate real demand for labour.  This is a very important matter".  There was, however, "no way of determining conclusively" the magnitude of secondary repercussions that depended on relative price changes.  

If the "volume of floating capital used in purchase of labour" was below normal, this deficiency was made up of a primary part, x million bushels of wheat, and a "secondary part, the outcome of reactions set up through the monetary mechanisms, of (10 - x) millions.  But our artificially stimulated demand will also carry with it secondary effects of the same character as those carried by the primary part of the contraction".  The size of the multiplier would depend on whether the government financed the expansion through monetary policy or through an increase in taxation.  Taxation would reduce, but not eliminate, the multiplier.  Pigou then worked out the algebra of the multiplier generated by "public spirited producers" expanding their output; concluding that this "cannot accomplish much towards general stabilisation unless [the] product is one for which the demand is very elastic".  Pigou neglected to expand on the relationship between x and the desired counter-cyclical target, simply saying that "unfortunately, we do not know at all how large x is".  But he concluded that "the presumption in favour of some creation or transfer [of demand] beyond what comes about 'naturally' is very strong" [emphasis in text] (1927, 294-6, 298-9).  In his supposedly "Classical" Theory of Unemployment, Pigou continued: "a small injection of money into the income-expenditure circuit might lead to a progressive and far reaching improvement in the employment situation ...The process I have been describing is cumulative and progressive in character ... a spiral upwards movement ... Plainly, this cumulative process is of great importance" [emphasis in text] (1933, 242-3).

One difference is that Keynes (1936, 32, 129, 127) argued that "there need be no more unemployment" if the Treasury were to bury old bottles stuffed with bank notes, then offer, for tender, the rights to dig up the bottles: "Thus public works even of doubtful utility may pay for themselves over and over again at a time of severe unemployment".  Pigou (1927, 320), in contrast, supported public works on social cost benefit grounds: with "obviously futile work, such as the digging of trenches to be afterwards filled up again, the economic waste involved is bound to be very great".       

In May 1929, Keynes and Henderson published (in the Nation) part of their election pamphlet, Can Lloyd George Do It?, which two eventful years later, was reprinted in Essays in Persuasion.  In the version of Can Lloyd George Do It? that appeared in Essays in Persuasion, Keynes deleted the two paragraphs that follow the words, "We are left with a broad, simple, and surely incontestable proposition.  Whatever real difficulties there may be in the way of absorbing our unemployed labour in productive work, an inevitable diversion of resources from other forms of employment is not one of them".  Those two paragraphs read: "This conclusion is not peculiar to ourselves or to Lloyd George and his advisers.  The theoretical question involved is not a new one.  The general problem whether capital developments financed by the government are capable of increasing employment has been carefully debated by economists in recent years.  The result has been to establish the conclusion of this chapter as sound and orthodox and the Treasury's dogma as fallacious.  For example ... our preceding argument has closely followed Professor Pigou's reasoning in his recent volume Industrial Fluctuations (part II, chapter X), where he quotes a statement of the Treasury dogma and expressly declares it to be fallacious ... Indeed we have not been able to discover any recent pronouncements to the contrary, outside the ranks of the Treasury, by an economist of weight or reputation.  It is an error to believe that Mr Baldwin and Mr Churchill and Sir Lamington-Evans are talking impeccable economic orthodoxy when they maintain that government borrowing necessarily attracts to itself resources which would otherwise have been employed in private enterprise, and that Mr Lloyd George is offering no better than a specious dodge when he maintains the contrary.  Precisely the opposite is true.  The theory underlying the Liberal Party's policy is the theory which is supported by the weight of expert opinion" (JMK IX, 120-1; Dimand 1988).  


Robert Leeson