Consumption Expenditures

In the General Theory, J. M. Keynes suggested that the marginal propensity to consume is a positive fraction, and that it is smaller in the  short term than in the long term. In addition, he suggested that the average propensity to consume diminishes over time as aggregate income grows

Modern theories of the consumption function accept the first two propositions; however, they see no compelling reason why the average propensity to consume should decline over time as income grows. This is important because a diminishing average propensity to consume complicates the problem of maintaining a full-employment aggregate demand as full-employment output and real income grow over time. In Duesenberry's formulation, the average propensity to consume remains constant over time if the distribution of income remains constant. The Ando-Modigliani-Brumberg theory and the Friedman theory require a constant ratio of property net worth to income and a trendless interest rate in order for the average propensity to consume to remain constant over time.

The modern view on the average propensity to consume is consistent with the time series result that the average propensity to consume has not diminished appreciably over widely separated points in time, even though aggregate income has multiplied by several times. However, theories of the consumption function which incorporate a constant long-term average propensity to consume must reconcile it with the budget study result which shows that the average propensity to consume is lower for high than for low income groups at a given point in time.

Keynes and Duesenberry attribute the smaller short-term marginal propensity to consume to the influence of past income levels in establishing habits in spending patterns which resist change. Ando-Modigliani-Brumberg and Friedman approach it from the standpoint that consumption depends not just on current income but on life cycle resources or permanent income, which people perceive as changing by less than current income in the short term.