Steve Bain

Autonomous Consumption Explained

Autonomous consumption refers to the portion of an individual's spending that is not influenced by changes in income. It is a key determinant of economic output because it directly affects consumer spending, the largest component of a country's GDP.

Macroeconomic models tend to skip over any explanation of what determines autonomous consumption, but by delving deeper into the factors that underlie it we can gain valuable insights into how individual spending habits shape the overall economic landscape.

The standard treatment of autonomous consumption is to regard it as the minimum level of spending that individuals engage in regardless of their income levels i.e., it represents the basic necessities and essential goods and services that individuals require to maintain a certain standard of living.

These expenses are typically non-discretionary and include items such as food, housing, utilities, and healthcare. Autonomous consumption is influenced by factors such as cultural norms, personal preferences, and the cost of living.

That being the case, autonomous consumption is not static, and it can vary significantly between individuals and across different regions or countries. Factors such as income inequality, cultural differences, and government policies can all influence the level of autonomous consumption within a society.

Autonomous Consumption vs. Induced Consumption

To fully understand the concept of autonomous consumption, it is important to distinguish it from induced consumption. While autonomous consumption refers to the minimum level of spending that individuals engage in regardless of income changes, induced consumption is the portion of spending that varies with changes in income.

Induced consumption is influenced by changes in income levels and represents the additional spending individuals engage in when their income increases. For example, if an individual receives a salary increase, they may choose to spend a portion of that additional income on discretionary items such as vacations, luxury goods, or entertainment. This additional spending contributes to increased consumer demand and stimulates economic output.

My article about the consumption function explains the Keynesian ideas that bring autonomous and induced consumption together into a unified theory of consumption, and its impact on economic output. However, as already indicated, that Keynesian model skips over any real discussion of the factors that drive autonomous consumption.

Factors influencing individual spending habits

Individual spending habits are influenced by a multitude of factors, ranging from psychological factors to external economic conditions. One of the key psychological factors that influence spending habits is consumer confidence.

When individuals feel optimistic about the future and have a positive outlook on their personal finances, they are more likely to engage in higher levels of spending. On the other hand, during periods of economic uncertainty or financial instability, individuals tend to reduce their spending and focus on essential items.

Cultural factors also influence individual spending habits. Cultural norms, values, and traditions can shape the way individuals prioritize their spending. For example, in some cultures, saving for the future may be highly valued, leading individuals to allocate a significant portion of their income towards savings and investments. In contrast, in cultures that emphasize immediate gratification, individuals may prioritize spending on immediate desires rather than saving for the future.

The point here is that countries with thrifty citizens are better equipped to maintain their spending habits in times of unemployment and low/no income. This helps to avoid any serious recession by smoothing out spending so that the economic boom bust cycle is reduced in magnitude. In other words, countries with thrifty citizens tend to enjoy greater economic stability. This would imply that the consumption function should be less steep in thrifty countries i.e., that the marginal propensity to save is high and, conversely, that the marginal propensity to consume is lower.

Via a similar line of reasoning, the level of autonomous consumption within a society might also indicate the overall economic well-being of its citizens. This is because higher levels of autonomous spending might indicate that there have probably been higher rates of saving in previous periods, and that that must have come from high levels of national income.

Interestingly, this association has been shown to be weak, and there is a lack of evidence that saving rates increase substantially as a country gets richer from one period to the next. It is true, however, that in any given period individual people do tend to save more of their disposable income as they get richer. This is consistent with the permanent income hypothesis.

The role of government in influencing autonomous consumption

The government plays a crucial role in influencing autonomous consumption through various policies and regulations. One way to achieve this is through social safety net programs to support individuals with limited (or zero) financial resources. Programs such as unemployment benefits, welfare assistance, and healthcare subsidies can provide individuals with a basic level of support, ensuring that they can meet their essential needs even during periods of financial instability.

By providing a safety net, the government can help maintain a certain level of autonomous consumption that contributes to economic stability. However, the right balance needs to be found because social safety nets that are too generous are known to discourage work i.e., the so-called benefits trap.

A special case arises in times of national emergencies, such as a major war or the Covid 19 lockdowns. In such cases income may be reduced drastically, and the government will likely take action to provide stimulus checks in order to maintain autonomous consumption of basic necessities. The danger here is that this kind of spending quickly leads to sky-high national debt, and it creates inflationary pressure in the economy due to too many monetary units chasing too few consumer goods & services.

Conclusion

Autonomous consumption plays a crucial role in supporting economic output in times of recession, and it helps to smooth out the severity of the boom bust business cycle. The government can also help to smooth out this cycle via providing the right balance of social safety net provisions.

Policies that aim to encourage saving a greater proportion of disposable income, rather than encouraging more and more spending on current consumption, can also help to build provisions for autonomous spending in times of reduced income. Unfortunately, this is not standard practice among western government policymakers. Current consumption seems always to be prioritized, and while that may increase living standards in the short-term, it leaves our economies vulnerable to economic downturns.

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