HIRE PURCHASE AND THE STABILITY OF CONSUMPTION

Abstract

SummaryThe argument of this paper may be summarised:Consumption expenditure depends upon the sum of households' income after tax plus the rise in outstanding hire purchase liabilities. Hence when hire purchase outstandings rise, say from zero, consumption rises. This higher level of consumption expenditure will only be maintained so long as hire purchase outstandings continue to rise by the same annual amount. But outstandings will not continue to rise if personal disposable income is fixed, because a rise in outstandings necessitates a rise in hire purchase repayments and there is a limit to the ratio of repayments to income which people are prepared to undertake. Hence at some point consumption falls.In essence this argument is that the average propensity to consume rises when hire purchase is introduced and falls subsequently. This proposition remains substantially true if personal disposable income is not fixed but is rising. Thus if national income is rising at a constant rate because of a rise in the work force, hire purchase outstandings will initially grow at a more rapid rate than national income in order to reach the acceptable repayments/income ratio for the existing population. Subsequently hire purchase outstandings must grow less rapidly at a rate equal to national income. This fall m the rate of growth of outstandings involves a lower average propensity to consume.Finally, if national income falls in a recession it seems likely that hire purchase outstandings not merely do not rise but may fall sharply as the disemployed and people on short time seek to pay off their hire purchase contracts without entering into new contracts. This will cause the average propensity to consume to fall further. In the subsequent boom this process may be reversed.The first two paragraphs of this summary suggest a once‐for‐all fluctuation in the average propensity to consume. The third paragraph suggests that the fluctuation may be perpetuated in a steady (or unsteady) cycle.