Consumption Function Theory

In this volume, a distinguished American economist presents a new theory of the consumption function, testing it against extensive statistical material and discussing its implications. The exact nature of the consumption function is examined, with the question raised of whether it can be consistently defined to align with empirical evidence and be a useful tool for future economic researchers and policy makers.

Central to the new theory is the sharp distinction between two concepts of income: measured income, recorded for a specific period, and permanent income, a longer-term concept that influences consumer spending and saving decisions. Milton Friedman proposes that the total amount spent on consumption is typically a fixed fraction of permanent income, regardless of the overall size of permanent income. The specific fraction is influenced by variables such as interest rates, occupational uncertainty, wealth-to-income ratio, family size, and other factors.

The hypothesis put forth by Friedman is supported by budget studies and time series data, indicating its validity. The implications of this theory are far-reaching and are explored further in the final chapter of the book. Overall, the new theory offers a fresh perspective on the consumption function and its relationship to income levels, providing valuable insights for economic researchers and policymakers.

product information: