Milton friedmans masterpiece of economic theory reinterpreted that keynesian concept of the consumption function by relating it to lifetime instead of current income. The implications of the pure theory of consumer behavior. The sum of transitory consumption for a group of people just like transitory income is equal to zero. One influential theory of consumption and saving is the lifecycle hypothesis, which asserts that a persons consumption at any age is proportional to his or her lifetime resources. First edition a theory of the consumption function by. But in a theory of the consumption function 1957, he demonstrated that while the hypothesis seemed to make psychological sense, it was empirically false.
Central to the new theory is its sharp distinction between two concepts of income, measured income, or that which is recorded for a particular. Brady and friedman suggested that a consumer units consumption depends not on its absolute income but on its position in the distribution of income among consumer units in i. The magnitude of the fraction depends on variables such as interest rate, degree of uncertainty relating to occupation, ratio of wealth to income, family size, and so on. Friedman states, that this permanent income hypothesis is indeed just a hypothesis and empirical evidence is much needed. Indeed, prior to writing this book, i had done none since 193537, when i was connected with. A theory of the consumption function, with and without. Reliable information about the coronavirus covid19 is available from the world health organization current situation, international travel. Pdf a theory of the consumption function shuree suhee. In fact, consumption does not decline as incomes generally rise.
Further theories on the shape of the consumption function include james duesenberrys 1949 relative consumption expenditure, franco modigliani and richard brumbergs 1954 lifecycle hypothesis, and milton friedmans 1957 permanent income hypothesis. In relating income to propensity to consume, keynes had erred in not distinguishing between transitory and permanent income. Thinking about a consumption function where taxes are also a function of income which is more realistic than constant taxes. A theory of consumption function, milton friedman, 1st ed.
Published in 1957 by princeton university press, bound in a navy cloth covered boards with gilt lettering, and retaining its original first issue dust jacket. This pdf is a selection from an outofprint volume from the national bureau of economic research volume title. Theory of the consumption function by friedman, milton ebook. Permanent consumption is a function of permanent income while transitory consumption is a function of transitory income.
Pdf the estimation of friedmans consumption function. If this assumption is to be used, it would result in a nonlinear consumption function with a diminishing slope. If this is true, measuring consumption is not only useful in its own right but also provides an indication of lifetime resources. Keynes in his general theory postulated that aggregate consumption is a function of aggregate current disposable income. The consumption function the consumption function is an equation describing how a households level of consumption varies with its disposable income. Consumption function with income dependent taxes video. The conflict of evidence stimulated a number of more complex hypotheses. Contributions to economic theory of his earliest, described in a theory of the consumption function 1957, was the articulation of the permanent income hypothesis, the idea that a households consumption and savings decisions are more affected by changes in its permanent income than by income changes that household members perceive as temporary or transitory.
Oclcs webjunction has pulled together information and resources to assist library staff as they consider how to handle coronavirus. Friedmans quantity theory of money can be explained diagrammatically in the following figure fig. Milton friedman, theory of the consumption function. Carroll f ifteen years ago, milton friedmans 1957 treatise a theory of the consumption function seemed badly dated.
Become engaged in a community that shares an interest in the mission of the hoover institution to advance policy ideas that promote economic opportunity and prosperity, while securing and safeguarding peace for america and all mankind. In order to fully understand the consumption function, we need to understand a few ideas about household income and how they choose to use that income. Consistency of the permanent income hypothesis with existing evidence on the relation between consumption and. Digital rights management drm the publisher has supplied this book in encrypted form, which means that you need to install free software in order to unlock and read it. In the figure while the xaxis shows the demand and supply of money, yaxis measures the income level. Friedmans theory of income and consumption, then and now. Keynes took it for granted that current consumption expenditure is a highly dependable and stable function of current income. The theory of the consumption function proposed in this book evolved over a number of years. Theory of the consumption function princeton university. In relating income to propensity to consume, keynes had erred in not distinguishing between transitory and permanent.
This paper describes a mse comparison of ten estimators of a linear consumption function implied by friedmans. Keynes took it for granted that current consumption expenditure is a highly dependable and stable function of current incomethat. Md is the demand curve for money which changes along with income. View citations in econpapers 1208 track citations by rss feed there are no downloads for this item, see the econpapers faq for hints about obtaining it. A theory of the consumption function work by friedman.
Friedman described keyness theory of a declining propensity to consume as very imaginative and thoughtful. The discussion then turns to tests of the theory, beginning. The relation between consumption and income is based on his fundamental psychological law of consumption which states that when income increases consumption expenditure also increases but by a smaller amount. This rational optimization assumption is untestable, however, without additional assumptions about why and. A theory of the consumption function volume authoreditor. In their studies of consumption, economists generally draw upon a common theoretical framework by assuming that consumers base their expenditures on a rational and informed assessment of their current and future economic circumstances. Quantity theory of money by friedman economics discussion. The principal development in consumption theory in the last 15 years or so, startingwithzeldes1984. A theory of the consumption function, milton friedman, golden springs publishing. A theory of the consumption function, with and without liquidity constraints christopher d. A first printing, first edition copy of economist milton friedmans a theory of the consumptive function, considered his magnum opus. A theory of consumption function milton friedman first edition. The final theory is the life cycle income hypothesis.
The relation between aggregate consumption or aggregate savings and aggregate income, generally termed the consumption function, has occupied a major role in economic thinking ever since keynes made it a keystone of his theoretical structure inthe general theory. This chapter discusses friedmans theory of the consumption function and its companion permanent income hypothesis, which together are the basis for all modern formulations of the household choice problem. In this volume a distinguished american economist presents a new theory of the consumption function, tests it against extensive statistical j material and suggests some of its significant implications. Given the aggregate supply, the level of income or employment is determined by the level of aggregate demand. Theory of the consumption function by milton friedman.
A theory of the consumption function, pages 16, national bureau of economic research, inc. Friedman reliedat crucial points on intuition andverbal descriptions of behavior. The discussion first explains the theory, starting with a simple case and working up to a more complete and realistic version. A theory of the consumption function by milton friedman.
A theory of the consumption function, with and without liquidity constraints christopherd. Signed by milton friedman on the front free endpaper. This economists masterpiece of economic theory reinterpreted that keynesian concept of the consumption function by relating it to lifetime instead of current. Nber final draft a theory of the consumption function, with and without liquidity constraints expanded version christopherd. The theory of the consumption function your article library. This theory was advanced by modiglani, ando and brumberg. During most of this period, i was not engaged in empirical work on consumption. Introduction to a theory of the consumption function. A reexamination of friedmans consumption puzzle james h. Introduction to a theory of the consumption function, pp 16 milton friedman the implications of the pure theory of consumer behavior, pp 719 milton friedman the permanent income hypothesis, pp 2037 milton friedman consistency of the permanent income hypothesis with existing evidence on the relation between consumption and income. A theory of the consumption function milton friedman. Introduction to a theory of the consumption function, nber chapters, in. Milton friedman suggests that the total amount spent on consumption is on the average the same fraction of permanent income, regardless of the size of permanent income.
Here friedman develops keynesian consumption function, which was not able to explain the constancy of savings rate during rising real incomes in the united states. Our mission is to provide a free, worldclass education to anyone, anywhere. Consumption function it is a functional relationship between two aggregates i. Numerous and frequentlyupdated resource results are available from this search. For its ingenious manipulation of data and its reconciliation of apparently conflicting evidence, this book must rank as one of the masterpiece of modern econometrics blaug, 63.
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