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Uncertainty and Consumption in Keynes's Theory of Effective Demand

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  • Sven Larson

Abstract

Keynesian uncertainty normally exercises influence over effective demand via private investment. This paper expands the scope of influence of uncertainty to comprise private consumption as well. When private spending is explicitly made subject to uncertainty the individual consumer is forced to take active steps to make the future predictable. Contracted, sticky money prices are key tools in the consumer's efforts to keep uncertainty at a minimum and match earnings with consumption costs. However, even if prices are successfully contracted there is still need for preparedness against contingencies. Consumers therefore regulate their propensity to consume with reference to their confidence in the future: the propensity to consume is high when confidence is strong and low when confidence is weak. Because of its effect on the propensity to consume, consumer confidence exercises a significant influence on macroeconomic activity in general.

Suggested Citation

  • Sven Larson, 2002. "Uncertainty and Consumption in Keynes's Theory of Effective Demand," Review of Political Economy, Taylor & Francis Journals, vol. 14(2), pages 241-258.
    • Handle: RePEc:taf:revpoe:v:14:y:2002:i:2:p:241-258
    DOI: 10.1080/09538250220126546
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    References listed on IDEAS

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    1. Petar Sorić, 2022. "Ability to consume versus willingness to consume: the role of nonlinearities," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(3), pages 663-689, August.

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