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MultiplierFallacies

Looking at only part of a system, it's easy to mistake a fragment as representative of the whole. If one is mathematically inclined and knows how to sum a geometric series, real trouble is close at hand!

Suppose I only save five cents of every dollar I get. Give me a dollar and I'll spend 95 cents. If that ratio is typical, then when I spend $0.95 the recipient will save 5% and spend $0.95*0.95 = $0.9025, of which the person who stands next in line will spend 0.95 cubed (about $0.86), etc., etc. The sum of the series is $20 (counting the initial dollar I got to start with). Apparently there's a 20:1 multiplier effect. If the average savings rate is lower, the multiplier is (reciprocally) higher.

So a silly person who only thought about one side of the equation might deduce that a little "pump-priming" would "ripple through the economy" and "create jobs". And if only people would stop saving entirely, the magic multiplier would go to infinity and we'd all be infinitely rich without further effort. Forget about hard work, capital investment, human creativity, or anything else!

But of course, all those factors and more are critical. The flaw is not in the math but in the initial step: focusing on only one factor and treating it in isolation. A real system has feedback loops, internal delays, counterbalancing forces, and more. Good analysis is the art of seeing the whole system.

Tuesday, March 21, 2000 at 06:48:51 (EST) = Datetag20000321

TopicScience - TopicThinking


(correlates: UnknownFriend, SecretOrigins, KnowHowAndFearNot, ...)