Munich Personal RePEc Archive The Consumption Function: A New Perspective Foster, John School of Economics, University of Queensland 6 February 2018 Online at https://mpra.ub.uni-muenchen.de/84383/ MPRA Paper No. 84383, posted 06 Feb 2018 12:38 UTC The Consumption Function: A New Perspective John Foster1 The School of Economics The University of Queensland Brisbane Queensland 4072 Australia
[email protected] Abstract The behaviour of aggregate consumption is conventionally understood from the perspective of the permanent income and life cycle hypotheses. Both of these hypotheses are deduced from the theory of constrained optimization as applied to a ‘representative agent’ that consumes and saves. An alternative way of understanding aggregate consumption expenditure is to see it as primarily a systemic outcome of the adoption of widely upheld rules (‘meso-rules’) that enable trading and contracting in a complex economic system. Such systems require order to function but they must also adapt and evolve. Correspondingly, aggregate consumption can be viewed as being determined by two contrasting historical processes: one involves an aggregation of pre-committed, rule-bound choices and the other open-ended aspirational choices of novel products. Both of these processes are influenced by economic incentives. This is the domain of neoclassical economic theory and it is found that such theorising can tell us a great deal once it is set in its proper historical context. Although a modern complex system perspective derived from the natural sciences is adopted, it is embedded in economic thinking. For example, connections are made to the insights and intuitions of Alfred Marshall, Joseph Schumpeter, Simon Kuznets, Friedrich Hayek and John Maynard Keynes.