Understanding Economics and Politics

Consumption Theory and Keynes' Simple Principle

Keynes-Clower-Wu Income Growth Theory

Keynes-Clower-Wu Income Growth Theory provides a working consumption theory, combining theory and empirical evidence. In contrast, neoclassical economists cannot easily explain overconsumption and consequently dissaving. Or why one country has households saving much more than others can just a few years later start saving less, and vice versa. This inability to explain personal saving in data reflects poorly on existing consumption theories. With the analysis of employment and labor income growth, I will show that changes in savings are the direct consequence of forecasting error of future income and therefore its optimal consumption.

The following chart will show some of the issues we will discuss:

The relating saving to income and consumption is given by,

Saving = Income - Consumption

The questions are,

  • what variables affect income?

  • what is the relationship between income and consumption?

Theories behind consumption theory

In each section, we will analyze Hall's random walk, Wu's new consumption result, Keynes' simple principle and then Clower's Dual-Decision Hypothesis. We finish by showing the effect of trade on saving and the main determining factor driving U.S. presidential elections.

What is the relationship between consumption and income?