The Propensity to Consume and the Multiplier

Abstract

From the time of Smith and Ricardo the classical school tends to view consumption in a negative light, even though it is by far the largest aggregate in total economic activity. From the classical perspective consumption spending is unproductive, acting as a fetter on the amount a community saves and invests, thereby retarding long-term economic growth. Having rejected Say’s law Keynes is able to properly appreciate the central role of aggregate consumption expenditure in determining aggregate effective demand and employment. Keynes is the first mainstream economist to treat consumption spending as an ultimate independent variable. For Keynes this represents a pivotal break with the classical frame of reference.