Solution to “the Kuznets Riddle”

Abstract

S. Kuznets's study that average propensity to consume is a constant value were nexpected because they denied one of basic provisions of Keynesian theory. This fact was called the riddle of F. Modigliani and M. Friedman, using hypothesis of life cycle and concept of constant income, proposed two options that explain its solution. But models should not explain, but give a method of solution. The most controversial is indicator of autonomous consumption. In first model, it grows, and in second it goes to zero. Creation of a method of simulation of consumption functions based on common methodological principles for consideration of micro and macroeconomic systems. Having constructed a model that objectively describes activity of a separate enterprise, primary and primary links of macroeconomic system, we can explore whole system. At exit of economic system we consider two functions of offer - cost and cost-price, and one demand. These functions form two types of Keynesian cross, which define two points: break-even and economic power (equilibrium In a three-dimensional space a chain of transformations is considered: profit, investments, fixed assets, growth of depreciation (constant costs) and output. The condition for formation of a proportional development economy - average propensity to consume should remain unchanged, which is achieved when marginal values of multipliers of fixed costs and return on assets are constant. Such periods were explored by S. Kuznets.