Page 30 - Ekonomija i Biznis_noemvri 2015.indd

ECONOMY

Deaton reviewed the postulates and the Poor people are not poor because of their low
conclusions of the then prevailing theo-
ries about the consumption function: productivity level (so for this reason they earn low
these were Friedman’s theory of perma-
nent income and Modigliani’s theory of income), but rather poor people are not productive
life-cycle of saving (and consumption).
The key idea of these theories is that because they are poor (because of the low income they
consumers determine the level of con-
sumption within a specific time period are undernourished and for this reason they have low
not only on the basis of the income that
they dispose of in that period (the cur- productivity)
rent income), but also on the basis of
the expected changes of the income in less than current income. This leads to
future, whereby the expected future in- Deaton’s paradox: it seems that in the
come is discounted and thus reduced to real world, consumption shows greater
its present day value whereby the size stability that the theory actually im-
of the so called permanent income is plies. This encouraged many further re-
obtained. The main implication of these searches which sought the explanation
theories is that consumption changes of the paradox in the inclusion of new
more slowly i.e. it fluctuates less over factors which would eventually explain
time compared to income. This is re- this excessiveness of the stability of
lated to the phenomenon of consump- consumption – for example, the fear of
tion smoothing over time: in an event a possible financial crisis which would
of positive shock on income, consumers dry up the credit sources for financing
save part of the increased income for of consumption.
situations of negative shock on income
in order to avoid significant reduction of The third dimension of the consump-
consumption. tion refers to the developing countries
where the problem of low income of
Deaton’s contribution in this regard is households is directly related to the
rather subtle: he points to a paradox in problem of low standard of living and
the theory of permanent income: Name- existence of poverty. In this field of de-
ly, according to Deaton, unexpected velopment economics, Deaton also pro-
changes in current income do not have vides quite a remarkable contribution.
only temporary and short term effects, He participates in a large international
but also have lasting, permanent effects, project under the auspices of the World
which means that shocks on current in- Bank, which comprises of surveys of
come change the permanent income as
well. Hence, permanent income should
fluctuate more than current income,
and not less, as the very concept of per-
manent income assumes, understood as
a trend, i.e. a time average in the move-
ment of the current income. This means
that according to Deaton and the associ-
ates, the true implication of the theory
of permanent income is that consump-
tion should fluctuate more, rather than
less than current income – this was
quite contrary to the generally accepted
interpretation of this theory hitherto.
However, on the other hand, the empir-
ical data confirmed the original inter-
pretation that consumption fluctuates

30 November 2015