A Theory of the Consumption Function is a seminal work of economic theory by Nobel laureate Milton Friedman. In this book, Friedman presents his theory of how individuals and households make decisions about consumption, and how these decisions affect the overall economy. Friedman argues that consumption is determined primarily by individuals' permanent income, rather than their current income. Permanent income is the income that individuals expect to earn over their lifetime, and it is influenced by a variety of factors including education, skills, and family background. Friedman also introduces the concept of the marginal propensity to consume (MPC), which measures the proportion of additional income that is spent on consumption. He argues that the MPC is higher for individuals with lower permanent income, as they are more likely to spend any additional income they receive. Throughout the book, Friedman provides empirical evidence to support his theory, drawing on data from a range of sources including surveys and national income accounts. He also discusses the implications of his theory for government policy, arguing that policies aimed at stimulating consumption are less effective than policies aimed at increasing permanent income. Overall, A Theory of the Consumption Function is a highly influential work that has had a significant impact on economic theory and policy. It remains an important reference for economists and policymakers interested in understanding the determinants of consumption and their implications for the broader economy.This scarce antiquarian book is a facsimile reprint of the old original and may contain some imperfections such as library marks and notations. Because we believe this work is culturally important, we have made it available as part of our commitment for protecting, preserving, and promoting the world's literature in affordable, high quality, modern editions, that are true to their original work.

Review

Friedman argued that the best way to make sense of saving and spending was not, as Keynes had done, to resort to loose psychological theorizing, but rather to think of individuals as making rational plans about how to spend their wealth over their lifetimes. This wasn't necessarily an anti-Keynesian idea--in fact, the great Keynesian economist Franco Modi-gliani simultaneously and independently made a similar case, with even more care in thinking about rational behavior, in work with Albert Ando. But it did mark a return to classical ways of thinking--and it worked. The details are a bit technical, but Friedman's 'permanent income hypothesis' and the Ando-Modigliani 'life cycle model' resolved several apparent paradoxes about the relationship between income and spending, and remain the foundations of how economists think about spending and saving to this day. -- Paul Krugman, New York Times

Friedman described Keynes's theory of a declining propensity to consume as 'very imaginative and thoughtful.' But in "A Theory of the Consumption Function" (1957), he demonstrated that while the hypothesis seemed to make psychological sense, it was empirically false. In relating income to propensity to consume, Keynes had erred in not distinguishing between 'transitory' and 'permanent' income. In fact, consumption does not decline as incomes generally rise. Economists across the political spectrum agreed with Friedman's refutation of Keynes.... -- James A. Nuechterlein, Commentary

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