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The American economist Milton Friedman developed the permanent income hypothesis in his 1957 book A Theory of the Consumption Function. [7] In his book, Friedman posits a theory that explained how and why future expectations change consumption. [8] Friedman's 1957 book A Theory of the Consumption Function created the basis for consumption ...
Milton Friedman (/ ˈ f r iː d m ən / ⓘ; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the complexity of stabilization policy. [4]
Graphical representation of the consumption function, where a is autonomous consumption (affected by interest rates, consumer expectations, etc.), b is the marginal propensity to consume and Yd is disposable income. In economics, the consumption function describes a relationship between consumption and disposable income.
Friedman was also known for his work on the consumption function, the Permanent Income Hypothesis (1957), which Friedman referred to as his best scientific work. [127] This work contended that rational consumers would spend a proportional amount of what they perceived to be their permanent income. Windfall gains would mostly be saved.
The Keynesian consumption function is also known as the absolute income hypothesis, as it only bases consumption on current income and ignores potential future income (or lack of). Criticism of this assumption led to the development of Milton Friedman's permanent income hypothesis and Franco Modigliani's life cycle hypothesis.
The absolute income hypothesis argues that income and demand generate consumption, and that the rise in GDP gives life to a rise in consumption. It was popularized by Keynes. Milton Friedman argues for a permanent income hypothesis, that consumption spending is a function of how rich you are. [6]
A new Friedman biography ably explores the economist's ideas but sidesteps the libertarian movement he was central to.
[1] p. 493 Within mainstream economics, the rise of monetarism started with Milton Friedman's 1956 restatement of the quantity theory of money. Friedman argued that the demand for money could be described as depending on a small number of economic variables.