KEYNES‘ ECONOMIC THOUGHT AND THE THEORY OF CONSUMER BEHAVIOUR
| Author | S. A. Drakopoulos |
| DOI | http://doi.org/10.1111/j.1467-9485.1992.tb00624.x |
| Published date | 01 August 1992 |
| Date | 01 August 1992 |
KEYNES’ ECONOMIC THOUGHT AND THE
THEORY
OF
CONSUMER BEHAVIOUR
S.
A.
DRAKOPOULOS’
University
of
Aberdeen
I
INTRODUCTION
Although there is a large literature on the subject of the microeconomic foun-
dations
of
Keynes’s macroeconomics,
it
seems that the subject
of
Keynes’ views
on the theory of consumer behaviour has been taken for granted. In particular,
there is considerable controversy over other aspects of microeconomic founda-
tions (wage theory, monetary theory, investment theory); somehow however,
there is almost universal agreement among economists about consumer behav-
iour theory. Generally, an implicit (or sometimes explicit) idea prevails that the
utility maximizing model is perfectly compatible with Keynesian economics,
and this naturally implies a belief that Keynes accepted that model. This can
be seen in various theoretical discussions like the consumption function, the
controversy over Keynes’ and Walras’ law, the asset choice model and gener-
ally in attempts to combine Keynesian macroeconomics with Neoclassical
General Equilibrium theory. The work of such theorists
as
Klein (1949),
Patinkin (1965), Clower (1965), Leijonhufvud (1967), Barro and Grossman
(1971),
Malinvaud (1977) and Hahn (1980), is indicative. (Even Post-Keynesian
theorists have not paid the proper attention to this issue.)
The purpose of this paper is
to
demonstrate that although Keynes was not
particularly interested in consumer behaviour, there are strong signs that he
actually rejected the standard theory
of
consumer behaviour and especially the
expected utility model. This can also help
to
explain a number
of
problems
about the microeconomic foundation of his macroeconomic ideas. Further-
more, one can discern ideas in Keynes which might be taken as an outline
of
an alternative model
of
consumer choice, and
if
one is willing
to
connect these
ideas with modern alternative formulations of consumer behaviour, they might
be seen as an additional explanation for issues like sticky prices and Keynesian
unemployment.
The paper starts with a discussion of the attempt
to
connect Neoclassical
*Special thanks are due to Dr Sheila Dow, Professor
P.
J.
Sloane and to
two
anonymous
referees
of
this journal. The usual disclaimer applies.
Date
of
receipt
of
final manuscript:
27th
January
1992.
318
KEYNES ON CONSUMER BEHAVIOUR
319
microfoundations with Keynes’ economic thought. The next section is con-
cerned with Keynes’ rejection
of
the standard theory as is found in his ‘General
Theory’ but also other writings. A discussion
of
signs for alternative formu-
lations
in
the work
of
Keynes, and possible alternative models which can be
connected
with
these, is the subject matter
of
the two subsequent sections.
Finally, the implications
of
the above
for
Keynesian macroeconomics are
assessed.
I1
MICROECONOMIC
FOUNDATIONS
Some years after the publication
of
Keynes’ ‘General Theory’, a number
of
economists attempted
to
integrate Keynes’ ideas within the standard Neo-
classical framework. More specifically, many Neoclassical theorists saw the
apparent lack
of
microfoundations
in
Keynes as a deficiency
in
the sense that
aggregative analysis had not been connected with the individual economic
agent’s behaviour (Dow, 1985, p. 89). According
to
the prevailing method-
ological Neoclassical framework it was necessary that macroeconomics should
have a
firm
basis on microeconomic principles. These microeconomic principles
were basically the marginalist microeconomics, the most important
components
of
which are utility maximizing consumers and profit maximizing
firms. These attempts were made easier mainly because
of
the apparent lack
of
specific microeconomic principles in Keynes’ work. Leaving aside the attempts
to incorporate other aspects
of
the standard microeconomics, we will
concentrate
on
the theory
of
consumer behaviour.
One
of
the first attempts were made by Klein
in
1949. His purpose was to
derive the Keynesian macroeconomics by using the standard microeconomic
assumptions. The idea that a ‘household maximizes its satisfaction subject to
the constraint
of
its budget’ is central in Klein’s work (Klein, 1949, p. 58).
In
the same climate Patinkin,
in
his ‘Money, Prices and Interest’ also accepted the
idea
of
the utility maximizing agent (Patinkin, 1965). This can also be seen
in
more specialized works like that
of
Tobin’s liquidity preference theory where
utility
maximizing agents are introduced in a Keynesian framework (Tobin,
1958).
Some authors like Clower and Leijohnufvud require more attention since
they were the first to explicitly address the issue
of
the appropriateness
of
inte-
gration between Keynesian macroeconomics and Neoclassical microeconomics
(see Dow, 1985, p. 92). Clower for instance in his discussions
of
microfounda-
tions was never thought to challenge the standard utility maximizing model
assumed by other theorists.
In
particular, although he realizes the possibility
of
Keynes’ rejection of the standard theory, he seems to regard
it
as somewhat
unthinkable (Clower, 1965, pp. 277-78). Clower asserts that Keynes’ rejection
of the Walras’ law does not refer
to
the one he thought he was attacking,
because
if
it
did he would have to reject the theory
of
household behaviour
(Clower, 1965, p. 278). Clower goes
on
to suggest a conservative interpretation,
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