The independence of consumption and current income

John Maynard Keynes argues that an individual's economic decisions are dependent on their current disposable income. Traditional macroeconomic theory claims that consumer spending is predictable, and can be calculated. The marginal propensity to consume, or MPC, is the increase in consumer spending when disposable income rises by $1.

MPC = (change in consumer spending / change in disposable income)

The MPC is a convenient tool for macroeconomists in predicting consumer spending and economic trends in the future.

However, Akerlof's research suggests that an individual's rationale is more complex, and includes other factors. These factors could persuade the individual to consume more than their disposable income allows. According to Akerlof's research, consumption and current income are disconnected because:

1. Sociology argues that consumption is determined by what people believe they should consume, whether these are qualified as entitlements or as obligations, and current income can be an entitlement or an obligation.

2. Sociologists also say that consumption is largely dictated by social expectations, and what people believe they are expected to do, and what they aspire to be.

3. Entitlements are when people believe they have earned something special, after working for a while. Obligations are when people feel pressured to spend, according to the standards in their social circle.

Next --> The independence of investment and finance decisions