The Keynesian Consumption Function Is Fundamentally Flawed and the Expenditure Multiplier Is Closer to 1 Than the Textbook Version of 4 or 5

Friedman demonstrated that the Keynesian consumption function did not fit the historical evidence. Crucial to the Keynesian case for increased government spending to bring about full employment is the consumption function--the notion that there is a stable short-term relationship between household consumption spending and household current income. According to the Keynesian model, government spending would increase household incomes through a leveraged multiplier effect. However, using a massive study of consumption data in the United States, Friedman showed that households adjust their expenditures only according to long-term or permanent income changes, and pay little attention to transitory patterns. Therefore, the Keynesian consumption function was fundamentally flawed and any leveraging of government expenditures through the multiplier would be much smaller than expected. Friedman's diligent and comprehensive work set a new high standard of empirical scholarship, and later research by Franco Modigliani, James Tobin, and other Keynesians confirmed this "life-cycle" or "permanent income" hypothesis of consumption. Further studies over the years validated Friedman's conclusion that the expenditure multiplier is closer to 1 than the textbook version of 4 or 5.

--Mark Skousen, Vienna and Chicago: Friends or Foes? A Tale of Two Schools of Free-Market Economics (Washington, DC: Regnery Publishing, 2016), Kobo e-book.