Autonomous consumption

Autonomous consumption represents the level of consumer spending that occurs independently of income. John Maynard Keynes introduced this concept in his 1936 work "The General Theory of Employment, Interest and Money"^[1]. Even when disposable income falls to zero, households must still purchase necessities for survival. They finance these expenditures through savings, borrowing, or asset liquidation.

The consumption function

Keynes formulated the relationship between consumption and income as:

C = a + bY_d

where C represents total consumption, a denotes autonomous consumption, b is the marginal propensity to consume (MPC), and Y_d stands for disposable income.

The marginal propensity to consume takes a value between zero and one. An MPC of 0.6 means that a €100 increase in income generates €60 of additional consumption^[2]. The remaining €40 goes to savings. Keynes based this on what he called the "fundamental psychological law" - people spend more when income rises, but not by the full amount.

Factors affecting autonomous consumption

Several variables influence the baseline level of spending. Asset holdings play a major role. Homeowners can access equity withdrawal through remortgaging. Stock portfolios and savings accounts provide buffers during income disruptions.

Expectations about future earnings shape current behavior. Confidence in job security encourages borrowing against anticipated income. Pessimistic outlooks lead households to reduce autonomous consumption and increase precautionary savings.

Credit availability matters significantly. Easy access to consumer loans, credit cards, and payday lending allows households to maintain spending despite income shortfalls. Payday loan usage is particularly common among low-income individuals seeking to cover essential expenses^[3].

Autonomous versus induced consumption

Total consumption divides into two components. Autonomous consumption remains constant regardless of income changes. It covers basic necessities - food, shelter, utilities, and essential transportation. Induced consumption varies directly with disposable income. Discretionary purchases like entertainment, dining out, and luxury goods fall into this category.

The distinction has practical implications. During recessions, induced consumption drops sharply as incomes fall. Autonomous consumption proves more resilient. People cut back on restaurants before they stop buying groceries. They cancel vacations before missing rent payments.

Applications in fiscal policy

Government policymakers use consumption function analysis when designing fiscal interventions. Tax cuts directly affect disposable income. The MPC determines how much of a tax reduction translates into increased spending.

A tax cut of $1,000 generates different effects depending on the MPC. If MPC equals 0.8, consumption rises by $800. The spending multiplier amplifies this initial stimulus through subsequent rounds of income and spending. Higher autonomous consumption during downturns supports aggregate demand and moderates recessions.

Understanding consumption patterns helps forecast the impact of transfer payments, stimulus checks, and unemployment benefits. The 2008 and 2020 stimulus programs were designed with these principles in mind^[4].

Short-term versus long-term adjustments

Time horizon affects consumption behavior substantially. In the short term, households have fixed commitments. Rent or mortgage payments continue. Phone contracts remain binding. Utility bills arrive monthly. Autonomous consumption stays high.

Extended income loss forces adaptation. Families downsize to cheaper housing. They terminate service contracts. Some attempt to grow their own food. The longer deprivation persists, the more autonomous consumption can be reduced - though it never reaches zero.

Franco Modigliani's life-cycle hypothesis and Milton Friedman's permanent income hypothesis extended Keynesian analysis. These theories suggested that consumption depends on lifetime expected income rather than current income alone. Yet autonomous consumption remains a useful concept for short-run analysis.

References

• Keynes, J.M. (1936). The General Theory of Employment, Interest and Money. Macmillan.
• Modigliani, F. and Brumberg, R. (1954). Utility Analysis and the Consumption Function. Post-Keynesian Economics.
• Friedman, M. (1957). A Theory of the Consumption Function. Princeton University Press.
• Blanchard, O. (2021). Macroeconomics. 8th Edition. Pearson.

Footnotes

1. Keynes, J.M. (1936). The General Theory of Employment, Interest and Money, Chapters 8-10.
2. Economics Online. Consumption Function.
3. Economics Help. Autonomous Consumption Definition.
4. Congressional Research Service. Economic Impact Payments: Overview and Issues.