In the work of six prominent economists, we have seen a progression of views on consumer behavior. Keynes proposed that consumption depends largely on current income. He suggested a consumption function of the form

Consumption = f(Current Income).

More recently, economists have argued that consumers understand that they face an intertemporal decision. Consumers look ahead to their future resources and needs, implying a more complex consumption function than the one Keynes proposed. This work suggests instead that

Consumption = f(Current Income, Wealth, Expected Future Income, Interest Rates).

In other words, current income is only one determinant of aggregate consumption.

Economists continue to debate the importance of these determinants of consumption. There remains disagreement about, for example, the influence of interest rates on consumer spending, the prevalence of borrowing constraints, and the importance of psychological effects. Economists sometimes disagree about economic policy because they assume different consumption functions. For instance, as we will see in Chapter 19, the debate over the effects of government debt is in part a debate over the determinants of consumer spending. The key role of consumption in policy evaluation is sure to maintain economists’ interest in studying consumer behavior for many years to come.

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