The classical consumption models (Modigliani’s Life-Cycle hypothesis and Friedman’s Permanent Income hypothesis) tell us that consumption is dependent on life-time income. This is based on the assumptions of credit market access (so we don’t have liquidity constrained individuals) and certainty. In short this means that consumption will only change if income changes, and a temporary income change will cause consumption to rise by less (i.e. MPC is low) than a permanent income change (i.e. MPC is close to 1).
Due to the theory of consumption smoothing – whereby individuals prefer to have similar incomes over two periods (or a lifetime) than extremities in either period – we would expect change in consumption to be low over a lifetime. [...]
The advent of the neoclassical approach to establish economics as a science, led to the disappearance of many psychological insights already made by economists, for example Smith says “we suffer more… when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” And Edgeworth points out that one agent’s utility can be affected by another agent’s payoff. One development of neoclassical economics was the formulation of the expected utility framework which makes precise assumptions that can be falsified, it assumes stable and consistent preferences, the ability to perform complex computations, and an ability to memorise a large amount of information. [...]
Comparisons of Britain’s labour productivity in manufacturing with that of other industrialised countries, such as the USA and Germany, from 1850-1914 suggest no dramatic decline in this sector during the period. However, labour productivity performance at the whole economy level was poor in comparison to other countries. (a) How can this be explained (b) Does it suggest a failure occurring in the UK economy?
Over the period 1850-1914 there was a decline in Britain’s overall labour productivity comparative to its competitors – against the US Britain was more productive in 1870 but was overtaken during the 1890s – in 1870 US/UK labour productivity in the aggregate economy was 89.8 [...]
The debate about living standards in the Industrial Revolution has recently focused on anthropometric measures, such as height and mortality, and linked these to the ability to work more intensively. Describe how these factors may be related. Discuss what the anthropometric evidence reveals about living standards in this period.
Anthropometric measures add a new light on the debate and show whether people were healthier as a result of the industrial revolution. If they were then they would have been able to work more intensively because they would need fewer days off work due to fatigue or illness. Schultz believes that there is a positive relationship between height and productivity because height is a measure of nutritional status and better fed, healthier people could work harder. [...]