"Life Cycle" Hypothesis of Saving: Aggregate ... - Arabictrader.com

Utility Analysis and the Consumption Function 7
Saving and dissaving can then usefully be defined as the positive, or negative,
change in the net worth of an individual during a specified time period. Correspondingly,
consumption will be defined as the expenditure on nondurable goods
and services—adjusted for changes in consumers’ inventories—plus current
depreciations of direct-service-yielding durable goods. 8
As we shall see, the fact that assets are capable of satisfying more than
one motive simultaneously provides the foundation for our earlier statement
that it should be possible to neglect the phenomenon of uncertainty without too
serious consequences. But a fuller development of this point will have to wait
until later.
I.2 Some Further Assumptions and Their Implications
The currently accepted theory of the household, even in the very general formulation
used so far, has begun to broaden our view of saving behavior. It is,
however, too general to be really useful in empirical research. If we are to derive
from it some propositions specific enough to be amenable to at least indirect
empirical tests, it will be necessary to narrow it down by introducing some further
assumptions about the nature of the utility function (see Assumption II below).
For convenience of exposition, however, we shall also find it useful to introduce
several additional assumptions whose only purpose is to simplify the problem by
reducing it to its essentials. These assumptions will enable us to derive some very
simple relations between saving, income, and other relevant variables, and it will
appear that the implications of these relations are consistent with much of the
available empirical evidence. While some of the simplifying assumptions we are
about to introduce are obviously unrealistic, the reader should not be unduly disturbed
by them. In the first place we have shown elsewhere 9 that most of these
assumptions (except Assumption II) can be greatly relaxed or eliminated altogether,
complicating the algebra but without significantly affecting the conclusions.
In the second place, the question of just which aspects of reality are
essential to the construction of a theory is primarily a pragmatic one. If the theory
proves useful in explaining the essential features of the phenomena under consideration
in spite of the simplifications assumed, then these simplifications are
thereby justified.
It may be well to recall, first, that one simplifying assumption has already been
made use of in developing our basic model of equation (I.1) to (I.3); this is the
assumption that (on the average) the price level of consumables is not expected
to change appreciably over time. The first of our remaining assumptions will
consist in disregarding altogether what we have called the “estate motive.”
Specifically, we shall assume that the typical household, whose behavior is
described by equations (I.1) to (I.3), does not inherit assets to any significant