Macroeconomics

17-7

Conclusion

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. Since then, economists have argued that consumers under-

stand 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. 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.

C H A P T E R   1 7

Consumption

| 521

7

James J. Choi, David I. Laibson, Brigitte Madrian, and Andrew Metrick, “Defined Contribution

Pensions: Plan Rules, Participant Decisions, and the Path of Least Resistance,” Tax Policy and the

Economy 16 (2002): 67–113; Richard H. Thaler and Shlomo Benartzi, “Save More Tomorrow:

Using Behavioral Economics to Increase Employee Saving,” Journal of Political Economy 112

(2004): S164–S187.

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522

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P A R T   V I

More on the Microeconomics Behind Macroeconomics

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 con-

straints, 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 in part a debate over the determinants of con-

sumer spending. The key role of consumption in policy evaluation is sure to

maintain economists’ interest in studying consumer behavior for many years

to come.