A theory of the consumption function friedman pdf

In this book Friedman developed the permanent income hypothesis PIH. As classical Keynesian consumption theory was unable to explain the constancy of savings rate in the face of rising real incomes in the United States, a number of new theories of consumer behavior emerged. In his book, Friedman posits a theory that encompasses many of the competing hypotheses at the time as special cases and presents statistical evidence in support of his theory.

In relating income to propensity to consume, Keynes had erred in not distinguishing between 'transitory' and 'permanent' income. In fact, consumption does not decline as incomes generally rise. Economists across the political spectrum agreed with Friedman's refutation of Keynes Central to the new theory is its sharp distinction between two concepts of… Expand. View via Publisher.

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Citation Type. Has PDF. Publication Type. More Filters. A study of the consumption function in Canada. In particular, this is so in the field of the theory of the consumption … Expand. Distribution Effects and the Aggregate Consumption Function. Journal of Political Economy. Download Download PDF. Translate PDF. Keynes took it for granted that current consumption expenditure is a highly dependable and stable function of current income—. Numerical con- sumption functions were estimated from two kinds of data: first, time series on consumption, savings, income, prices, and similar variables available mostly for the period after World War!

Current consumption expenditure was highly correlated with income, the marginal propensity to consume was less than unity, and the marginal propensity was less than the average propensity to consume, so the percentage of income saved increased with income. Estimates of savings in the United States made by Kuznets for the period since revealed no rise in the percentage 1 M. Williams and Cane C. According to his estimates, the percentage of income saved was much the same over the whole of the period.

The corresponding ratio of consumption expenditure to income— the constancy of which means that it can be regarded as both the average and the marginal propensity to consume—is decidedly higher than the marginal propensities that had been computed from either time series, or budget data. The average propensity to consume is roughly the same for widely separated dates, despite substantial differences in average real income.

Yet each set of budget studies separately yields a marginal propensity decidedly lower than the average propensity. Finally, the savings ratio in the period after World War IL was sharply lower than the ratio that would have been consistent with findings on the relation between income and savings in the interwar period. This experience dramatically underlined the inadequacy of a con- sumption function relating consumption or savings solely to current income.

The conflict of evidence stimulated a number of more complex hypotheses. Brady and Friedman suggested that a consumer unit's consumption depends not on its absolute income but on its position in the distribution of income among consumer units in i.

They presented a good deal of evidence, mostly from budget data, in support of this relative income hypothesis. In addition, he that the relative income hypothesis could be used to- interpret aggregate data by expressing the ratio of consumption to income as a function of the ratio of current income to the highest level previously reached.