Economics Dictionary of ArgumentsHome
| |||
|
| |||
| Consumption function: The consumption function describes the relationship between a household's income and its consumer spending. The more income a household has, the more it generally spends. However, it does not spend its entire income, but saves a portion of it. The consumption function is an important component of overall economic demand and is often used in models to explain economic fluctuations. See also Business cycles, Demand._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
| Author | Concept | Summary/Quotes | Sources |
|---|---|---|---|
|
Keynesianism on Consumption Function - Dictionary of Arguments
Rothbard III 861 Consumption function/Keynesianism/Rothbard: The stability of the passive consumption function, as contrasted withthe volatility of active investment, is a keystone of the Keynesian system. This assumption is replete withso many grave errors that it is necessary to take them up one at a time. Consumption function/RothbardVsKeynesianism/VsConsumption function: (a) How do the Keynesians justify the assumption of a stable consumption function (…)? One route was through "budget studies" - cross-sectional studies of the relation between family income and expenditure by income groups in a given year. This is supposed to intimate that those doing the "dissaving," i.e., the dishoarding, are poor people below the subsistence level who incur deficits by borrowing. But how long is this supposed to go on? >Hoarding/Keynesianism. RothbardVsKeynesianism: How can there be a continuous deficit? Who would continue to lend these people the money? It is more reasonable to suppose that the dishoarders are decumulating their previously accumulated capital, i.e., that they are wealthy people whose businesses suffered losses during that year. (b) Aside from the fact that budget studies are misinterpreted, there are graver fallacies involved. For the curve given by the budget study has no relation whatever to the Keynesian consumption function! The former, at best, gives a cross section of the relation between classes of family expenditure and income for one year; the Keynesian consumption function attempts to establish a relation between total social income and total social consumption for any given year, holding true over a hypothetical range of social incomes. At best, one entire budget curve can be summed up to yield only one point on the Keynesian consumption function. Budget studies, therefore, can in no way confirm the Keynesian assumptions. Rothbard III 862 (c) Another very popular device to confirm the consumption function reached the peak of its popularity during World War II. This was historical-statistical correlation of national income and consumption for a definite period of time, usually the 1930's. This correlation equation was then assumed to be the "stable" consumption function. Errors in this procedure were numerous. RothbardVs: In the first place, even assuming such a stable relation, it would only be an historical conclusion, not a theoretical law. In physics, an experimentally determined law may be assumed to be constant for other identical situations; in human action, historical situations are never the same, and therefore there are no quantitative constants! Conditions and valuations could change at any time, and the "stable" relationship altered. There is here no proof of a stable consumption function. RothbardVs: Moreover, a stable relation was not even established. Income was correlated with consumption and with investment. Since consumption is a much larger magnitude than (net) investment, no wonder that its percentage deviations around the regression equation were smaller! >Consumption/Keynesianism, >Investment/Keynes, >Interest/Keynesianism. Time/ex ante/ex post/RothbardVsKeynesianism: Thirdly, the consumption function is necessarily an ex ante relation; it is supposed to tell how much consumers will decide to spend given a certain total income. Historical statistics, on the other hand, record only ex post data, which give a completely different story. For any given period of time, for example, hoarding and dishoarding cannot be recorded ex post. In fact, ex post, on double-entry accounting records, total social income is always equal to total social expenditures. Yet, in the dynamic, ex ante, sense, it is precisely the divergence between total social income and total social expenditures (hoarding or dishoarding) that Plays the crucial role in the Keynesian theory. (1) Rothbard III 863 (d) Actually, the whole idea of stable consumption functions has now been discredited, although many Keynesians do not fully realize this In fact, Keynesians themselves have admitted that, in the long run, the consumption function is not stable, since total consumption rises as income rises; and that in the short run it is not stable, since it is affected by all sorts of changing factors. RothbardVs: But if it is not stable in the short run and not stable in the long run, what kind of stability does it have? (e) it is instructive to turn now to the reasons that Keynes himself, in contrast to his followers, gave for assuming his stable consumption function. It is a confused exposition The "propensity to consume" out of given income, according to Keynes, is determined by two sets of factors, "objective" and "subjective." Rothbard: It seems clear, however, that these are purely subjective decisions, so that there can be no separate objective determinants. 1. See Lindahl, "On Keynes' Economic System - Part I," Economic Record (May 1954). p. 169 n. Lindahl shows the diffculties of mixing an ex post income line with ex ante consumption and spending, as the Keynesians do. Lindahl also shows that theexpenditure and income lines coincide ifthe divergence between expected and realized income affects income and not stocks. Yet it cannot affect stocks, for, contrary to Keynesian assertion, there is no such thing as hoarding or any other unexpected event leading to "unintended increase in inventories." An increase in inventories is never unintended, since the seller has the alternative of selling the good at the market price. The fact that his inventory increases means that he has voluntarily invested in larger inventory, hoping for a future price rise. 2. Summing up disillusionment withthe consumption function are two significant articles: Murray E. Polakoff, "Some Critical Observations on the Major Keynesian Building Blocks," Southern Economic Journal, October, 1954, pp. 141-51; and Leo Fishman, "Consumer Expectations and the Consumption Function," ibid., January, 1954, pp. 243-51._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Keynesianism Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
||
> Counter arguments against Keynesianism
> Counter arguments in relation to Consumption Function
Authors A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Concepts A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
