Economics as a science, the laws of its functioning and regulation, the principles of development are the subject of scientific research of many generations of scientists. To understand the economy, experiments were conducted, colossal work was organized, on the basis of which theories were born and died, and people argued, disputed each other's ideas. Over a long period of time, all possible factors affecting the development of society and the economy were considered. The stereotypes of behavior, habits and patterns of consumption, production, income and savings were considered.
J. M. Keynes
One of these theories was Keynesianism, which was based on the works of a multidisciplinary scientist and outstanding public figure, J. M. Keynes. Keynes called into question the entire economic thought of the beginning of the 20th century, saying that the economy does not regulate itself, it does not strive for balance and overcoming crises. According to the scientist, to get out of the crisis, government intervention is necessary with the help of monetary and credit policies.
The wording of the law
This statement was based on the principles of work and development of economic processes, namely income, consumption, employment. These concepts were connected using Keynes's basic psychological law, which reflected the relationship between income and consumption. These two terms were the basis for the development of all other economic factors.
According to Keynes's basic psychological law, with rising incomes, consumption also rises, but at a slower pace. The author analyzed many events in a generalized form and received a clearly formed trend, which he later expressed in his writings. Keynes's basic psychological law, thus, also covered the concept of saving, since the funds received and unspent by the population go in this direction.
Economics and Employment
The success of the economy, according to the scientist, was achieved only if full-time employment was organized. An effective economy is a system that brings the maximum amount of profit. According to Keynes's basic psychological law, maximum profit is achieved with full employment if people are free to part with money. Full employment, in turn, is available at maximum profit. It turns out here is such a vicious circle in which everyone depends on everyone.
The psychological aspect of consumption
Keynes's basic psychological law described the effect of psychological behavior on macroeconomics. The factors under consideration represent the reaction of individual individuals to changes in the economy. Such reactions were surprisingly typical of people, which allowed us to describe the direction of movement of society and the economy when certain events occurred.
The equilibrium of the economy is considered by scientists through supply and demand, which should balance each other. Demand is formed by consumer spending, which, in turn, is based on consumer psychology. A decent level of demand that can give the economy an impetus for development can only be formed if consumers spend all their income, again and again starting the cycle of financial flows in the economy.
Psychology and Savings
Keynes's basic psychological law of consumption affirms the less active dynamics of changes in consumer spending with rising incomes. Accordingly, a certain balance is formed that is not allowed by society back into the economy. This balance generates savings.
The amount of savings, as well as consumption, depends on the amount of income. This is the first and main factor determining the size of all financial transactions.
Share distribution
The propensity to consume and save, according to the basic psychological law of J. Keynes, is determined by shared indicators. The share of consumer income spent on satisfying a person’s daily needs and ensuring his livelihoods indicates his propensity to consume. By analogy, the basic psychological law of J. M. Keynes defines the propensity to save as a share of consumer income, which is not spent on needs, but remains in the balance.
The scientist examined in detail the psychology of expenses and incomes, therefore, for the best argumentation of his law, he introduced the concepts of marginal propensities to consume and save. These concepts do not consider the full income, consumption and savings, but the amount by which they were changed. The rest of the principle remains the same: we consider the share ratios of changes in expenditures and savings relative to the magnitude of changes in income.
The distribution of expenses and savings, in addition to income, also depends on many factors that influence the behavior of the population. The first of them will be price ones (changes in the cost of certain necessary products directly affect the amount of money spent, even if they remain the same), then the expectation factors (people psychologically prepare themselves for growth or depression in the economic environment, adjust the style of expenses). Credit factors are also important (the ability to easily take out a loan if necessary will increase expenses, since a person will not put off "just in case"). Already existing loan obligations accumulated in the company will not contribute to an increase in expenses. Most likely, the population will more actively cover obligations if the income level is stable and shows a positive trend, allowing to satisfy daily needs and leaving a balance.
The basic psychological law of D. M. Keynes received public attention and recognition in the 30-60s of the twentieth century. During the Great Depression in the United States, it was a huge discovery that allowed a deeper understanding of the principles of economic movement, the behavior of an individual and the entire population. On the basis of the scientist’s works, a whole scientific field was created, recommendations were developed for regulating the economy and managing financial flows on the basis of psychological factors.