Background
The multiplier–accelerator model is an economic framework used to explain how business cycles — periods of economic expansions and contractions — can emerge from the interaction between the so-called multiplier effect and accelerator principle. Effectively, the model demonstrates how an initial change in economic activity can lead to larger and persistent fluctuations over time.
Historical Context
Introduced in the early 20th century, the multiplier–accelerator model gained traction after the 1930s as part of efforts to understand and predict the business cycles. It formed a cornerstone of mid-20th-century studies of economic stability and growth.
Definitions and Concepts
- Multiplier Effect: This economic concept shows how initial spending (like investment) results in increased overall economic activity, generating further income and spending.
- Accelerator Principle: This idea posits that investment levels are driven by changes in consumer demand and output. As income and demand increase, businesses invest more to keep up with future anticipated demands.
Major Analytical Frameworks
Classical Economics
Classical economists also observed cycles, but they didn’t explicitly invoke the multiplier or accelerator due to the model’s development history post-dates their primary contributions.
Neoclassical Economics
Neoclassical frameworks handle business cycles but often focus on market equilibria and factors like technological shocks rather than cumulative mechanisms like the multiplier-accelerator interaction.
Keynesian Economics
Keynesian models often emphasize the multiplier effect, looking at how fiscal policy and changes in investment spur changes in output and employment levels, closely linking to the multiplier-accelerator model.
Marxian Economics
In Marxian economics, business cycles derive from capitalistic contradictions about overproduction and under-consumption rather than the multiplier-accelerator mechanism.
Institutional Economics
This perspective considers how historical and social institutions affect economic fluctuations. The multiplier and accelerator effect can, therefore, be viewed within institutional responses and norms.
Behavioral Economics
Understanding the psychological aspects of consumption and investment lends weight to broadening the idea that multiplier and accelerator effects depend on more than just assumption of rational behavior.
Post-Keynesian Economics
Post-Keynesians extend Keynesian doctrines to incorporate complex, endogenous cycle mechanisms, often supporting the feasibility of the multiplier-accelerator framework.
Austrian Economics
Australians focus on interest rates, capital structure, and saving-investment equilibria. While not dismissed, multiplier-accelerator models do not define the core framework here.
Development Economics
The role of external shocks, investment flows, and underdeveloped financial markets are vital here but can incorporate multiplier and accelerator concepts as catalytic factors in developing nations.
Monetarism
With its emphasis on the roles of money supply, monetarism typically de-emphasizes spending-induced income accelerants, focusing on financial indicators over multiplier effects.
Comparative Analysis
Different schools vary significantly in leveraging the multiplier-accelerator model to explain economic fluctuations. Potential variance among approaches highlights the importance of context in economic thought:
- Keynesian models and multi-factor Post-Keynesian updates robustly utilize this model.
- Institutional and Behavioral, though tertiary, alignments consider broader systems and human actions respectively.
- Classical, Monetarist, and Austrian instead tend to either predate or focus outside this explanatory scope.
Case Studies
Case studies include 20th-century economic booms and slumps, which are ideal scenarios showcasing accelerator-driven expansions and contractions via multiplier mechanisms out of various macroeconomic paths traced within regional analyses.
Suggested Books for Further Studies
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process” by Joseph Schumpeter
- “Stabilizing an Unstable Economy” by Hyman Minsky
Related Terms with Definitions
- Business Cycle: Periodic fluctuations in economic activity marked by phases of economic expansion and contraction.
- Aggregate Demand: Total demand for goods and services within an economy.
- Fiscal Policy: Government spending and taxation policies used to influence economic activity.
- Investment: Spending on capital goods by businesses to increase their capacity to produce future goods and services.
