The US consumption function: a new perspective

Abstract

In the United States, the ratio of consumption to GDP has risen steadily over the past half century. In trying to understand why this ratio has increased so much, it is argued that standard models of the consumption function, built up from the neoclassical theory of constrained optimization, cannot offer a satisfactory answer. An alternative perspective is offered whereby aggregate consumption expenditure is seen as primarily the outcome of the population adopting widely upheld rules (‘meso-rules’) in a complex economic system. Aggregate consumption is viewed as the outcome of two contrasting historical processes: one mainly involving pre-committed, rule-bound choices and the other involving open-ended choices, made knowingly in the face of uncertainty, to adopt new meso-rules concerning the consumption of novel kinds of goods and services. The former process provides the degree of order that must be present in any complex system and the latter facilitates evolutionary change to occur. Using over half a century of data, the US consumption function is modelled successfully on the presumption that the economy is a complex system. The evidence supports the hypothesis that the ratio of consumption to GDP has risen because of the diffusion of a ‘culture of consumerism’ in the post-war era and that the limit of this process is now being approached, with important macroeconomic and social implications.