The word “macro” is often used to attach gravitas to drivel. I...

The word “macro” is often used to attach gravitas to drivel. I have often read politicians drop the concept of the “multiplier” to imply that some profligate government spending is going to ripple advantageously through the economy, increase the Gross National Product (GNP), and thus effect great national good.

The multiplier is the increase in spending that occurs as each recipient of money spends a percentage of what they get, and hence somebody else gets that spend and spends a percentage, and so on. The other side of the propensity to spend is the propensity to save. Because both “save” and “spend”start with “s”, the propensity to spend is usually called the propensity to consume “c”, and the propensity to save is conventionally represented by “s”. The two sum to 1.

If an initial cash injection into the economy were A, then the multiplier effect would be A + A*c + A*c^2 + +A*c^3 . . . + A*c^n, which can be written as A*c^0 + A*c^1 +A*c^2 +A*c^3 . . . +A*c^n. This can be simplified to A/(1-c), which is A/(1/s.), because by definition c+s = 1. The multiplier is 1/s, or the reciprocal of the propensity to save – an impressive bon mot to drop in your next macroeconomics discussion. The foregoing is a simplistic explanation, and does not cover, for instance, leakages caused by spending on imported goods.

If the propensity to save were 5%, the multiplier in a closed economy would be 1/5%, which is 20. If the propensity to save were near zero, the multiplier effect would be near infinity, and hence the GNP would be massive, and the poor would be rich. Politicians have been spinning the latter multiplier story for decades to justify public spending. The inconvenient truth of its inflationary effect is generally ignored.

I wrote the above because it night interest a few (very few), and I know from reading about the economy for sixty years that underlying facts about the multiplier are rarely reported, and probably not understood.

I saw a Friederich Hayek interview on TV years ago. He was a contemporary of John Maynard Keynes, the founding father of macroeconomics. They knew each other well, and Hayek said that he visited Keynes in hospital, and he told Keynes that his 'General theory of income and employment' would give politicians intellectual ammunition to do stupid things. Keynes, who is famous for changing his mind, assured Hayek that he would change the thrust of his advice when the time was right, and persuade politicians to follow suit. Keynes died soon afterwards on 21/04/1947.

As a student I went to a few talks that Hayek gave in 1964, and I and a small group of economics students had tea with him and his wife. Hayek was unpopular at the time, so his books were not prescribed reading, so although I know the gist of his views, I do not recall reading any of his books. The bits that I did read made sense, and were well argued. In contrast, 'General theory of income and employment' was prescribed reading, and I found it difficult to digest. I was later to learn that this is a generally held view – Keynes's writing skills were poor.

On CCP, I'll venture that the reaction of different demographics to things macroeconomic differ, and the demographic likely to be interested in CCP as an investment err if they ascribe their thinking patterns related to macro issues to CCP's customer demographic, or even to CCP's collection teams' demographic. This is a topic that could be fleshed out with advantage.