Clarifying Keynes’s Theory Of Consumption And Psychological Law

Abstract

This paper presents a careful, comprehensive examination of Keynes’s theory of consumption or ‘propensity to consume’, a theory as important to the General Theory as its other foundations. The theory, however, is often badly misunderstood and misrepresented by orthodox and some heterodox writers. Based on all his relevant writings from 1933 to 1939, several important conclusions are reached. First, far from being a simple or straightforward theory, it is a rich and moderately complicated one. Second, it does not postulate constant or invariant behaviour. Third, the ‘psychological law’ on which it is grounded it is not universal, but limited and conditional. Fourth, it embraces many determinants of consumption. Fifth, it is significantly different from standard consumption functions. Sixth, it has an inbuilt temporal structure consistent with dynamic and static analysis. And finally, it is adaptable to new economic circumstances.

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