Challenges to J. M. Keynes Assumed Stability of Marginal Propensity to Consume (MPC)

John M. Keynes’ hypothesis “that the marginal propensity to consume (MPC) is a fairly stable function” (Keynes, 1936, P. 96) is one of the most enduring foundations for exploring and analyzing economic performance. The... [ view full abstract ]

John M. Keynes’ hypothesis “that the marginal propensity to consume (MPC) is a fairly stable function” (Keynes, 1936, P. 96) is one of the most enduring foundations for exploring and analyzing economic performance. The proposition, that a predictable causal relationship exists between income and consumption, allows researchers to create and test parsimonious models (both theoretical and empirical), making it an attractive and robust assumption to rely upon. Furthermore, a fixed MPC allows for the identification of a constant “multiplier effect” for the application of fiscal policy. Since the idea is both simple and intuitive, it has become a component of introductory economic analysis taught in most undergraduate macroeconomics courses. In this article, we review the robustness of this proposition. Notwithstanding, his exceptional insight that adding stimulus to aggregate demand will help to shorten the duration of a recession, Keyes generalizations that all consumers react similarly to a change in income is refuted by the weight of historical evidence.



Key Words: MPC, Multiplier, Keynes, General Theory
JEL Codes: E21 E27, E60