A "Business" Multiplier?

When I started writing the recent post about Henry Ford, I wasn't even thinking in terms of the connections between innovation and economic gain which could lead to more aggregate demand. However, in my attempt to explain why Henry Ford was in a better position to reimburse his employees than Walmart is today, the positive shock which could be associated with growing auto use became apparent. That is, in terms of AD growth - providing nominal targeting is utilized. At any rate, it was just fun to "go there" and muse over the possibilities, such as Nick Rowe did in a post responding to Scott Sumner's reaction to a twitter conversation between Yglesias and Mandel.

Today, one might think of innovation gain with less confidence, because a substantial part of technological innovation has migrated to the digital realm. What's more, most innovation outside this area is captured by specific institutions rather than populations in general. Indeed that could be why innovation wouldn't be considered a true growth multiplier. Nick Rowe's post was somewhat indicative of this stance, in that the latest "nifty" product may simply take market share of another product - a pattern which doesn't change overall growth trajectories of AD.

Thinking about this, it's not hard to see why business wouldn't necessarily wish to promote private interests as a growth multiplier, even if they are disinclined to believe in government growth multipliers. After all, was there really any need to stress additional wealth creation, if it was mostly occurring within institutional walls? Hence, the easiest rationale might be to deny that a multiplier existed for either public or private concerns: in spite of what many economists believe to be possible on the part of governments.

In other words, private interests likely wouldn't have adequate reason to stress a growth multiplier in business based terms and governments certainly didn't have reason to. And yet, when governments created something that actually contributed to overall wealth gains, there would also be an unidentified business component as a result.  Probably the closest thing to an argument for business multipliers was thought of in fiscal terms for supply side measures. Even in the sixties, early versions of supply side economics suggested that tax cuts freed up growth which was otherwise held back by government. And yet...this was expressed in terms of a market supposedly free to do its thing, rather than the added benefit of consumer demand to make a recognizable whole, of the actual assertion.

Just the same, there is a random element for any investment, whether by government infrastructure support or business plans. All too often, a steady focus on aggregate demand gets lost in the mix of fiscal and business concerns. And yet, that focus could serve to smooth the rough patches where investments or infrastructure goals don't go as planned - as is so often the case. Certainly there are no guarantees as to potential multipliers on the part of government, especially in a timeframe when few can agree on what would actually help a sizable portion of any population.

Aggregate demand has not always been well accounted for in the monetary equation, unless of course it appeared beneficial to the outcome. All too often, monetary policy might be allowed to "step up to the plate", so long as other economic factors were functioning well. For instance, governments in the sixties handed over the punch bowl to finance as a sort of extra bonus. Monetary policy was somewhat in the background, seen as a lesser contender to fiscal and credit based options. The fact that finance was given too much power even then, makes it all the more difficult to reduce its power in the present.

While there are other pressing issues as well, three structural factors make it difficult for many to realize the central role nominal targeting needs to play for monetary stability: government fiscal policies, the ever present role of finance in the economy, and the uncertainties of technological change for employment in the future. The main problem is that these three elements overwhelm one another, so that it's difficult to know where to begin.

And yet it is necessary to begin with monetary stability through a nominal targeting rule. This is why some Market Monetarists don't have the luxury of discussing supply side and structural elements very often, even though they are often quite sympathetic to those concerns. It can't be said enough that even though a lot of things may be done right: if monetary policy is not sufficient, everything will still turn out wrong. For instance, tremendous innovation took place in the years of the Great Depression, which was not backed by adequate monetary policy for aggregate demand.

When nominal targeting is taken into account, staying true to income and consumption potential has the capacity to act as a shock absorber for multiple scenarios, whether positive or negative. That's true whether those scenarios are resource based or a result of political decisions. Sometimes innovation has the potential - for instance - to be a positive supply shock. But even here, one does not have to calculate potential growth or multipliers, because those possibilities are already factored into changes in nominal income, which in turn become total spending. In other words, nominal targeting greatly simplifies the process.