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Whether individual consumers are literally rational in this sense is not important. The overall question of interest to the macroeconomist is whether the assumptions of consumer rationality, however tentative in view of the empirical evidence to the contrary, provide an adequate mechanism for predicting behavior in the large.

Elasticity of demand In economics, the consumer enters the market through his demand schedule, the schedule of quantities of a commodity he will buy at various prices. The summation of these quantities for all consumers gives the market demand schedule. For many-applications, it must be assumed that the market demand schedule has a negative slope, that the quantity demanded decreases as price increases. For other purposes, it may be necessary to know the elasticity of demand, that is, how sensitively the quantity demanded depends on price. The tendency, even in these matters, is to deal in generalities; only occasionally is the economist concerned with the numerical measurement of the elasticities of demand for specific commodities. Many attempts have been made to derive certain characteristics of the demand schedule by deductive reasoning from the theory of consumer choice. However, where it is necessary to measure the elasticity of demand numerically, the usual procedure is to infer the elasticity from direct measurements of quantities purchased in the market at various prices. Hence, the empirical study of demand has rested much more on the direct accumulation and analysis of data than on inferences from underlying psychological principles (Schultz, 1938).

Saving and spending In the modern, post-Keynesian theory of the business cycle, the consumer's decision as to what proportion of his income he will spend and what proportion he will save is of very great importance. The number of cents he will spend out of each dollar of income at the "marginal" decision is the "marginal propensity to consume" of Keynes. In certain

versions of Keynesian theory, an additional crucial assumption is made: that spending increases less than proportionately as income increases. Considerable effort has been devoted, over the past two decades, to testing this assumption (Katona, 1951, Chapters 7 and 8). On the one hand, there have been attempts to measure spending and saving behavior by obtaining empirical data from consumers or analyzing secondary data from the economy. On the other hand, there have been attempts to deduce the spending and saving behavior of the consumer from the theory of rational consumer choice. The first course involves no particular framework of theory and, while it may yield data of interest to psychologists, it has borrowed little or nothing from psychology. The second course, the deduction of the theory of saving from the theory of consumer choice, has also evolved almost independently of work in psychology. It illustrates the characteristic approach of the economist to individual behavior and the reason why he can formulate his assumptions with so little dependence on empirical observation (even though he may use aggregative data to test the consequences derived from his assumptions). Modigliani and Brumberg (1954) assumed that the only motive for saving is retirement income and that the consumer adjusts his saving to give him a level annual

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expenditure over his lifetime. During periods of high income, he saves; during periods of low or no income, he dissaves. These are plausible assumptions, at least as approximations, and it is their introspective plausibility that the economist takes as his justification for adopting them. From these assumptions, together with assumptions as to how income expectations are formed and data on length of life and length of adult earning period, numerical estimates can be made of the fraction of total income that will be saved; that is to say, the saving-consumption function can be deduced from these assumptions. Up to the present time, the model has held up fairly well in explaining the actually observed data on consumer expenditure and savings. Similar approaches have been used by economists to explain the fact (or supposed fact) that some individuals both gamble in lotteries and buy insurance (Luce and Suppes, 1965, p. 393). The explanation, like that outlined above, consists in showing that circumstances exist (that is, can be postulated) under which the behavior in question would be rational behavior for a consumer bent on maximizing his utility. It is quite uncharacteristic of the economic theorist to test his explanation further by studying the consumer's attitudes or subjecting him to experimental situations. On the other hand, the psychological assumptions that underlie theories of this kind are not difficult to identify, and there are many possibilities here for direct testing by psychologists of the economic models.

Expectations The third aspect of the consumer's behavior in which the macroeconomist has substantial interest is the formation of expectations. (Expectations really belong to the cognitive rather than the motivational sphere, but it is convenient to discuss them here to round out our picture of contemporary research. For a panorama of recent approaches to the theory of expectations, see Bowman, 1958.) In a world of uncertainty, a theory cannot make a consumer's expenditure depend on future income, but only on expectations of future income. Hence, the predictions of the theory will depend on assumptions about the formation of expectations.

Studies have been made of how both consumers and businessmen form expectations. We will have more to say in the next section about businessmen's expectations, but a comment is relevant here before we turn, again, to consumers' income. Modigliani and Sauerlender (1955) have shown that expectations involving the statements of businessmen, their intentions, and other factors presumed to be relevant to actual decisions were poorer predictors of the actual behavior than were "naive" models which simply assumed that "next year" and "this year" would be the same or that "next year" could be approximated by adding this year's figures with the difference between this year's and last year's data. This does not, of course, preclude the possibility of basing forecasts on business expectations; it merely serves as an indication that such expectations must be tempered by some form of correction to compensate for the errors usually found in such forecasts. Returning to the area of consumer motivation, a similar skepticism may be presumed. Though, over the past decade, considerable data have been accumulated on consumers' plans and expectations from the Survey of Consumer Finances conducted for the Board of Governors of the Federal Reserve System by the Survey Research Center of the University of Michigan (Bowman, 1958; Katona, 1951, Chapter 5), these statements are subject to the same qualifications as those observed in Modig-