Keynes’ Unscientific Theory of Consumption Function and Its False Policy Implication for the Multiplier Effect: A Review of Disaggregated Evidence

Abstract

The assumption that the Marginal Propensity to Consume (MPC) and the resulting multiplier are fairly stable at the aggregate level irrespective of the time frame, commonly articulated in some post-Keynesian literature and introductory macroeconomic texts and universally used as the building block of fiscal policy decisions, are false concepts. In this enquiry, we examine the robustness of this proposition using disaggregated disposable income to demonstrate that neo-Keynesians’ generalization that consumers in different income brackets would react similarly to a change in income is refuted by the weight of historical evidence. We derive estimates of the MPC in the short-run and the long-run using recent data from the US Bureau of Economic Analysis (BEA). We show that the whole is not the sum of its parts when it comes to the MPC. This insight should give teachers a more accurate description of short-run consumption behavior. Our objective is to extend students’ understanding of the complexity of the economy and reveal that there are many intricate mysteries that are yet to be expounded (Note 1).