17.7 Conclusion


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

Consumption = f(Current Income).

Recent 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 relative 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 saw in the previous chapter, the debate over the effects of government debt is partly 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 behaviour for many years to come.