A Theory of the Consumption Function

National Bureau of Economic Research. General Series #63

by Milton Friedman

What is the exact nature of the consumption function? Can this term be defined so that it will be consistent with empirical evidence and a valid instrument in the hands of future economic researchers and policy makers? In this volume a distinguished American economist presents a new theory of the consumption function, tests it against extensive statistical J material and suggests some of its significant implications.


Central to the new theory is its sharp distinction between two concepts of income, measured income, or that which is recorded for a particular period, and permanent income, a longer-period concept in terms of which consumers decide how much to spend and how much to save. Milton Friedman suggests that the total amount spent on consumption is on the average the same fraction of permanent income, regardless of the size of permanent income. The magnitude of the fraction depends on variables such as interest rate, degree of uncertainty relating to occupation, ratio of wealth to income, family size, and so on.


The hypothesis is shown to be consistent with budget studies and time series data, and some of its far-reaching implications are explored in the final chapter.

Genres: Economics, Westerns, Business, Philosophy, Fiction, Politics

Hardcover

First published January 1, 1922

About the author

Milton Friedman was an American economist who became one of the most influential and controversial figures of the twentieth century, widely recognized for his profound contributions to monetary economics, consumption theory, and the defense of classical liberalism. A leading figure of the Chicago School of Economics, Friedman challenged the prevailing Keynesian consensus that dominated mid-century policy and instead placed monetary policy at the center of economic stability, arguing that changes in the money supply were the primary drivers of inflation and fluctuations in output. His groundbreaking permanent income hypothesis reshaped the study of consumer behavior by suggesting that individuals make spending decisions based on long-term expected income rather than current earnings, a theory that profoundly influenced both academic research and practical policymaking. Alongside Anna Schwartz, Friedman coauthored A Monetary History of the United States, 1867–1960, a monumental work that emphasized the role of Federal Reserve mismanagement in deepening the Great Depression, a thesis that redefined historical understanding of the period and helped establish monetarism as a major school of thought. His broader philosophy was articulated in works such as Capitalism and Freedom, where he argued that political and economic liberty are interdependent and advanced ideas like educational vouchers, voluntary military service, deregulation, floating exchange rates, and the negative income tax, each reflecting his conviction that society functions best when individuals are free to choose. Together with his wife Rose Friedman, he later brought these ideas to a global audience through the bestselling book and television series Free to Choose, which made complex economic principles accessible to millions and expanded his influence beyond academia. Awarded the Nobel Prize in Economic Sciences in 1976 for his achievements in consumption analysis, monetary history, and stabilization policy, Friedman became a prominent public intellectual, sought after by policymakers and leaders around the world. His ideas strongly influenced U.S. policy in the late twentieth century, particularly during the administration of Ronald Reagan, and found resonance in the economic reforms of Margaret Thatcher in the United Kingdom, both of whom embraced aspects of his prescriptions for free markets and limited government intervention. Friedman’s policy recommendations consistently opposed measures he regarded as distortions of market efficiency, including rent control, agricultural subsidies, and occupational licensing, while he proposed alternatives such as direct cash transfers through a negative income tax to replace complex welfare bureaucracies. His teaching career at the University of Chicago shaped generations of economists, many of whom extended his research and helped institutionalize the Chicago School as a major force in global economic thought, while his later role at the Hoover Institution at Stanford University provided him with a platform to continue his scholarship and public advocacy. Beyond technical economics, Friedman’s clarity of expression and ability to frame debates in terms of individual freedom versus state control made him one of the most recognizable intellectuals of his era, admired by supporters for his defense of personal liberty and market efficiency, and criticized by detractors who accused him of underestimating inequality, social costs, and the complexities of government responsibility. Despite the controversies, his impact on the development of modern economics was immense, reshaping debates about inflation, unemployment, fiscal policy, and the role of the central bank. His writings, lectures, and media appearances consistently reinforced his belief that competitive markets, voluntary exchange, and limited government intervention offer the most effective means of promoting prosperit

Reviews

[elise rose · Rating 4 out of 5]

This was a very fun and interesting read.

[Frederick Hammill · Rating 1 out of 5]

The author clearly isn’t qualified to write on this topic. Also, I’d advise Christians to NOT real this book. A dark spiritual aura for sure..

[Bobby · Rating 3 out of 5]

"Wild Freedom" (1922) is an exciting survival adventure about a young boy fending for himself in the wilderness, reminiscent of Jack London, "The Jungle Book", and "The Revenant".

"The Long, Long Trail" (1922) is an engrossing and romantic story of family feuds and outlaws seeking redemption. Much like Zane Grey, but Brand is better at characterization and a little less creaky for modern readers.

Both novels are excellent (4 stars) for their genre until their (1 or 2-star) endings, where they suffer from Brand's inability to create satisfying or well-timed endings to serve the stories. But don't let it stop you from reading these.

[Scott Schmidt · Rating 3 out of 5]

Really enjoyed this one. Wasn't the generic "town" Western the blurb made it sound like it. The first quarter of the book, Tom Parks' "origin" had strong "Hatchet" vibes, wouldn't be surprised if Gary Paulsen had read this in his youth. Ending was a bit weird if there was never a follow-up, almost like the villain prevailed.

[JJ Tee · Rating 3 out of 5]

Easy read- love the authors ability to describe animal behaviors as well as the detailed work it took to build shelter find food and survive in the wild. I enjoyed reading the book though the end did feel a bit rushed.

[Jessica DeWitt · Rating 2 out of 5]

If I could, I would probably give this a 2.5, but a 2 will suffice. Wild Freedom has all of the stereotypical themes of any mass-produced Western novel: rugged individualism, savage Indian stereotypes, lawlessness, wilderness, etc. The story as a whole is just too predictable and the characters too one-dimensional. It had elements that could have made it good, but they fell short. I enjoyed the beginning of the book, when it is just Tom and the animals, much more than the second-half. I spent most the second-half of the book just being annoyed. I found many scenes uncomfortable because I knew something bad was about to happen. I couldn't stand that Brand insisted on Tom referring to his animal pals as "dumb animals," something that an animal lover such as Tom would most certainly not do. The ending pissed me off as well, boo to Tom leaving Jerry behind to go to the East in hopes of one day landing Gloria. Maybe I disliked this book more than I thought...scratch that 2.5 comment, this is a solid two.

My favorite racist quote: "What he turned out to be was white all the way through. No growling or snarling. He talked man and he acted man all the way." Because Native Americans aren't men...palm to face.

[Barbara Lee Wood · Rating 5 out of 5]

BEAR AND ME

Father and son traveling to find a better life. Father disappeared, possibly slipped and drown in the Turnbull River. Rescues a mother bear from a cave in, feeds and gives her and her cubs. Took care of himself while living a cave. You need to read this about the life he led in the woods. Interesting action you can sense the enjoyment he felt while accepting his fate...