Income Inequality by Matthew P. Drennan

Author:Matthew P. Drennan
Language: eng
Format: epub
Publisher: Yale University Press
Published: 2014-12-31T16:00:00+00:00

Keynes’s Theory of Consumption

Keynes developed his theory of consumption in that book. Mostly expressed in words, it has been translated into algebra in generations of macroeconomics texts, a clarifying improvement made possible by the development of systems of national income accounts in developed nations after 1936. However, something was lost in the translation into algebra—namely, the importance of psychological factors in determining consumption. His key idea was that the marginal propensity to consume is positive and less than one, while the average propensity to consume falls as income rises. His controversial idea, in light of his classical economics predecessors and contemporaries, is that the rate of interest is relatively unimportant in determining consumption, whereas income is of central importance. His consumption function is:

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