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The Point of Effective Demand

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  • Mark Hayes

Abstract

Keynes's principle of effective demand conceives competitive equilibrium in terms of the choices of entrepreneurs, investors and consumers, rather than of the optimal allocation of factors of production. In The General Theory, effective demand is distinguished from aggregate demand and from income, expected or realised, and there is no suggestion that equilibrium means the convergence of expectations. Reconsideration of Keynes's use of time and equilibrium periods leads to the conclusion that he treats employment as in continuous equilibrium, at the point of effective demand, determined by the state of expectation, the correctness of which is strictly irrelevant. The nature of the equilibrium represented by the point of effective demand is here described, not in terms of the multiplier, but in terms of the continuous equilibrium of supply and demand in short-term forward markets. This reading is faithful to Keynes's conception of aggregate demand as dependent upon the expectations of entrepreneurs, and it resolves the meaning of his 'long-period employment.' Formal appendices identify the differences between Keynes and Walras and the nature of the multiplier. The paper concludes that the Keynesian cross and 'Swedish' analysis should be abandoned, and the Walrasian conception recognised as only the limiting case of general competitive equilibrium in a monetary economy.

Suggested Citation

  • Mark Hayes, 2007. "The Point of Effective Demand," Review of Political Economy, Taylor & Francis Journals, vol. 19(1), pages 55-80.
    • Handle: RePEc:taf:revpoe:v:19:y:2007:i:1:p:55-80
    DOI: 10.1080/09538250601080743
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    References listed on IDEAS

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    1. Paul Davidson, 1978. "Money and the Real World," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-1-349-15865-2.
    2. Edward J. Amadeo, 1989. "Keynes’s Principle of Effective Demand," Books, Edward Elgar Publishing, number 11.
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    Cited by:

    1. M.G. Hayes, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 661-671, October.
    2. Hayes, M.G., 2008. ""Fighting the Tide: Alternative Trade Organizations in the Era of Global Free Trade"--A Comment," World Development, Elsevier, vol. 36(12), pages 2953-2961, December.
    3. Jochen Hartwig, 2017. "The Comparative Statics of Effective Demand," Review of Political Economy, Taylor & Francis Journals, vol. 29(3), pages 360-375, July.
    4. Rotta, Tomás N., 2021. "Effective Demand and Prices of Production: An Evolutionary Approach," Structural Change and Economic Dynamics, Elsevier, vol. 58(C), pages 90-105.
    5. Olivier Allain, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 653-660, October.
    6. Olivier Allain & Jochen Hartwig & M.G. Hayes, 2013. "Introduction to the Symposium," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 650-652, October.
    7. M. G. Hayes, 2013. "The State of Short-term Expectation," Review of Political Economy, Taylor & Francis Journals, vol. 25(2), pages 205-224, April.
    8. repec:pke:wpaper:pkwp1211 is not listed on IDEAS
    9. Mark Hayes, 2006. "The Economics of Keynes: A New Guide to The General Theory," Books, Post Keynesian Economics Society (PKES), number nggt.
    10. Jochen Hartwig, 2018. "Wachstumsfolgen von Einkommensungleichheit – Theorie, empirische Evidenz und Politikempfehlungen," Chemnitz Economic Papers 020, Department of Economics, Chemnitz University of Technology.
    11. Hein, Eckhard, 2015. "The principle of effective demand: Marx, Kalecki, Keynes and beyond," IPE Working Papers 60/2015, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    12. Strati, Francesco, 2012. "On Keynes's Z-function," MPRA Paper 42918, University Library of Munich, Germany.
    13. Rotta, Tomas, 2020. "Effective Demand and Prices of Production: An Evolutionary Approach," MPRA Paper 97910, University Library of Munich, Germany.

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