The Constrained Sectors: I: Households—Basic Preferences

Households are the final consumers and the final wealth holders in the community—‘All production is for the purpose of ultimately satisfying a consumer’.1 In some senses, all economic activity may be regarded as the production of consumption over the long run (even if the consumers’ desires are contrived). That is, the purpose of economic activity is the satisfaction of the long-term demands of the household sector. This alone is enough to make decisions of this sector paramount. In simple statistical terms, the household sector is also of major importance for financial analysis. Households are large direct holders of financial assets; for example, they account for approximately 60 per cent of total money holdings in both the United Kingdom and the United States,2 and for other financial assets their proportion is even larger, for example, for quasi-money and claims on life insurance companies (in the latter case, they usually account for almost 100 per cent of the total). Therefore, the basic theory of financial asset choice should place considerable emphasis on the explanation of the holdings of the household sector.