The Supermultiplier. A Cornerstone of the New Macroeconomics

Eladio Febrero (E.F.)  Universidad de Castilla-La Mancha, Spain) interviews Óscar Dejuán (O.D.) about The Supermultiplier

E.F. On the book’s cover, we find these statements: “The Supermultiplier is a wonderful and much-needed book” (E. Nell); “It offers a new perspective on macroeconomics based on the surplus approach” (J.M. Bricall); “The book arrives at a time when the topic is gaining prominence across all heterodox approaches” (L.P. Rochon). Could you summarize the meaning and working of the supermultiplier?

O.D. The supermultiplier mixes two old, straightforward ideas: multiplier and accelerator. The third element is the vector of autonomous demand. It encompasses the expectations of persistent demand for exports, public expenditure, residential investment, and modernisation investment.

The SM model takes for granted the dominant technology and one distributive variable. Then, it computes the induced demand corresponding to the expected evolution of persistent autonomous demand. The traverse to a faster expansion conveys a structural change led by the supermultiplier. The income share of capacity-creating investment and business savings are supposed to increase. 

The SM ensures the validity of the Keynesian principle of effective demand both in the short term (equilibrium level of income) and in the medium term (fully adjusted growth paths acting as a gravity centre).

E.F.  You have raised an issue that has always worried me. If the multiplier-accelerator model is so old, why was it not accepted and popularised earlier?

O.D. Harrod’s warning about the extreme instability of the multiplier-accelerator model frightened most economists. Yet, such a hypothesis clashes with the ordinary working of capitalist economies and lacks a convincing rationale. In our view, Harrodian instability stems from an inappropriate correlation between capacity utilisation and demand expectations, a correlation that does not respect the autonomy of “autonomous demand”. Notice that our position does not imply a perfect foresight of entrepreneurs. We only require “prudence”, the key virtue that Adam Smith attributed to entrepreneurs. They will only invest if demand expectations prove to be persistent. Short term capacity adjustments do not affect the expected growth of persistent demand.

The supermultiplier is not only a stable mechanism but also a stabilising one. This can be seen in the “traverse” between two growth paths. The supermultiplier drives a change in the structure of the economy until the shares of induced consumption, induced investment, and autonomous demand ensure a new, fully adjusted path of growth. Even the “warranted” rate, derived from the supply side, is bound to adjust to the autonomous trend. To be efficient and competitive, firms are supposed to use the best technology in the most efficient way (i.e., at full capacity utilisation).

E.F. The Keynesian multiplier has been criticised for ignoring monetary and financial factors. Does the same criticism apply to the SM?

O.D. Your question involves a misconception. Money and finance are essential in both the multiplier and the supermultiplier. Post-Keynesian economists support the money endogeneity hypothesis summed up in Moore’s statement: “Money is credit driven and demand determined”. Graziani distinguishes between initial and final finance. In his examples, initial finance refers to the short term loans that finance variable capital, particularly wages. The eflux phase introduces the means of payment to purchase final goods. After selling them, firms can pay back the loans. This is the reflux phase that he calls “final finance”. In the supermultiplier model, we should consider the part of autonomous demand financed by long term loans and debt. Banks are supposed to reabsorb the liquidity injected in these ways.

The supermultiplier can be computed from three different perspectives. (1) The geometric progression that captures the induced demand for consumption and investment (c+h). (2) The inverse of the share of uncommitted income (s=1-(c+h)); it coincides with the value of autonomous demand as a share of income (z). (3) The inverse of the income share of the money collected to pay for autonomous demand (d). The last variable varies according to the autonomous expenditure under consideration. Regarding residential investment, it would be the inverse of the unit financial commitments. An increase in the indebtedness ratio and interest rates reduces the value of the supermultiplier and may lead to a massive default of households. The explanation of the financial crises is more appealing when explained by the supermultiplier model. In the book, we inspect the global financial crisis of 2008.

E.F. You are trying to build macroeconomics from “the surplus approach.” Can you explain the pillars of such a synthesis?

O.D. The theoretical building blocks are three. (1) The Keynesian-Kaleckian principle of effective demand and money. (2) The classical political economy of value and distribution, conveniently restated by Sraffa. (3) The Schumpeterian emphasis on innovative entrepreneurs and the institutions that channel economic decisions.

E.F. To the best of my knowledge, economists usually refer to the “Sraffian supermultiplier”  while Schumpeter is never mentioned.

O.D. In my opinion,  the adjective conveys an is an overstatement. Sraffa talks little about demand and nothing about the multiplier. It is true, however, that the term surplus approach was coined by Sraffa’s disciples (Pasinetti, Garegnani, Eatwell, Nell), and the supermultiplier mechanism was introduced by Sraffians like Serrano in Brasil, Bortis in Sweetzeland,  Cesaratto in Italy …  

To your second observation, I must clarify that my book is not intended to describe the current state of the SM studies. It transmits my own perceptions, hoping to contribute to a future synthesis when the issue is mature enough. In my opinion, some Schumpeterian observations should be part of the final synthesis. (1) Capitalist economies tend to stagnate. (2) Innovative entrepreneurs dynamize demand by introducing new goods, new forms to produce traditional goods and new markets. (3) Modernization investment (that transforms capacity instead of increasing it) is the key element of autonomous demand and the ordinary vehicle of technological change. (4) The second task of innovative entrepreneurs is to convince banks to finance the project. (5) Major innovations usually lead to long waves of prosperity.

E.F. What adds the SM model to Keynes’ economics?

O.D. The most important contribution is the validation of the Keynesian principle of effective demand both in the short run (the equilibrium level of output in a given period) and in the long run (fully adjusted path of growth).

It provides Keynes’s macroeconomics with a coherent theory of value that marks the gravity centers forged by competition.

It offers the necessary equilibrium between the objective and subjective forces that influence economic decisions and the formation of expectations. The SM gathers the objective elements: technological parameters and propensities determining induce demand (usually more than 80% of aggregate demand). The “multiplicand” collects the expected levels and growth rates of the autonomous elements driving the economy. Such expectations, however, are not extremely volatile and arbitrary. They also depend on objective factors like the potential market of the elements of autonomous demand driving the system.

The SM model enhances the structure of the economy, usually hidden in Keynes aggregation. The SM connects with the Kaldorian models that emphasise the competitive advantages associated to particular structures of production; with Latin American structuralism and developmentalism; and with Leontief’s input-output analysis. In the last chapter, we build a disaggregated SM to study the decarbonisation process.

The SM model corrects some misconceptions about fiscal policies based on the traditional income multiplier. It provides a better foundation for export-led growth and balance of payment constraints (Thirlwall and McCombie).

E.F.  A last question. Who is the target audience of the book?

O.D.  First of all, postgraduate students of macroeconomics who search for an alternative to mainstream textbooks. Our didactical priority shows in the attempt to present my ideas as much as possible and to accompany the theoretical presentation with a collection of simulation exercises. The second target audience would be heterodox researchers on dynamic macroeconomics. Hopefully, the interest in the supermultiplier model will expand and eventually conceive a new macroeconomics that integrates the theories of value, distribution, demand, and money into a coherent “surplus approach”.

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