The Consumption Function
Keynes’s 1936 General Theory sought to explain the occurrence and persistence
of large scale unemployment, and it did so in a way that proved readily
amenable to a degree of simplification that, by the 1950s, was making it the stuff
of intermediate and even elementary textbooks. The overall level of
45
unemployment, so it was said, varied with the economy’s real output (Y), which,
when resources were unemployed, was able to respond more or less passively to
satisfy the demand for goods and services. This demand, in turn, came from
three sectors of the economy: households (consumption, C), firms (investment,
I) and the government (government expenditure, G).