Understanding Economics and Politics

Consumption Theory and Keynes' Simple Principle

In contrast to all the advances in science and technology, until Keynes-Clower-Wu Income Growth Theory, economics lacked a clear understanding of consumption theory, i.e., the relationship between income, consumption and saving. For instance, economists cannot explain overconsumption and consequently dissaving. Or why one country has households saving much more and then after a few years saving less, and vice versa.

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

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?

Which Consumption Theory?

Firstly, we examine Keynes and Hall approaches to consumption

In the buttons above, 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.