Introduction.pdf - Introduction ^AXXa iir]v ngdurr ^e xal fie^icrrri TCJU XQ^ elvat re xal C,riv ^evexa Asvriga V'^V^ Tgo(pf Tragaaxevf rov 6f

Introduction.pdf - Introduction ^AXXa iir]v ngdurr ^e xal...

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Introduction ^AXXa iir]v ngdurr] ^e xal fie^icrrri TCJU XQ^^^^ V '^V^ Tgo(pf)(; Tragaaxevf] rov elvat re xal C,riv ^evexa. Asvriga 6f) olxTjascuc;^ rgtrr] 6e ea'drjroc; xaX rCbu TOiOVTUJV. Now the first and greatest need is the provision of food for existence and life. The second is housing^ and the third is clothing and related things. (Plato, Politeia, 11. 369d) In a market economy, the individual needs and desires determine which goods are developed and finally produced. A priori^ the value of a product does not hinge on the costs incurred to produce it; the value only depends on the consumer's willingness to pay. The chain from needs to desires, from desires to demand, and finally to consumption determines all economic activity. The founder of economics as a discipline states this in the following way: " Consumption is the sole end of all production" (Smith, 1776). He continues, "the maxim is so perfectly self-evident, that it would be absurd to attempt to prove it." In fact, macroeconomics has analyzed extensively the determinants of the size of aggregate consumption. To take an example, one of the main modern develop- ments in macroeconomics, the microfoundation of macroeconomic theories, starts with the "Theory of the Consumption Function" by Milton Friedman (1957). The purpose of microfoundations is to explain macroeconomic phenomena by individual decisions which are in turn governed by the individuals' preferences and restrictions. If we think about consumption it would therefore be natural to
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2 1. Introduction start with a specification of the agents' preferences over different goods. However, (macroeconomic) consumption theory only tries to explain total consumption of a consumer (if this is possible without referring to an agents' preferences over single goods). Thus, it seems that consumption theory has stopped at half way in the microfoundation of consumption behavior. In particular, the theory has been almost silent about the question of how the consumption structure looks, i.e. which goods are consumed. When different goods are taken into account, it is normally assumed - following Dixit and Stiglitz (1977) - that there exists a non- changing " composite commodity", a consumption basket where the ingredients do not change.^ Therefore, the previous theory is unable to judge how macroeconomic consumption structure changes over time or how it is affected by the distribution of wealth across consumers. One reason for these assumptions is their analytical simplicity. For issues where the time dimension or the inequality of agents plays no role, this seems innocuous. However, as soon as we are interested in the long run behavior of an economy or in questions dealing with inequality, the validity of analysis will be - possibly strongly - affected.^ The modest purpose of the present book is the analysis of these questions when we take the changing consumption structure into account. Further, we discuss in what sense one should rethink many important macroeconomic problems.
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