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Effective demand and short-term adjustments in the General Theory

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Abstract

Keynes' principle of effective demand constitutes a pillar for Post Keynesians theories. But Keynes' presentation remains difficult to interpret, mainly because the aggregate demand function is based on entrepreneurs' expectations. The problem is then to demonstrate how these entrepreneurs (whose only concern is making profits) are led to produce the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors like Weintraub or Davidson highlight the trial and error procedure here at stake. However, since their analyses are not built on a precise accounting of monetary flows, they fail to formally demonstrate the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on the General Theory to verify how it constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics which bring the economy towards the stationary equilibrium.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number bla06018.

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Length: 20 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:mse:wpsorb:bla06018

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Keywords: Keynesian economics; General Theory; macroeconomics; effective demand; short-term expectations.;

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  1. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Oxford University Press, vol. 23(4), pages 393-411, July.
  2. Casarosa, Carlo, 1981. "The Microfoundations of Keynes's Aggregate Supply and Expected Demand Analysis," Economic Journal, Royal Economic Society, vol. 91(361), pages 188-94, March.
  3. John King, 1993. "Aggregate Supply and Demand Analysis Since Keynes: A Partial History," Working Papers 1993.16, School of Economics, La Trobe University.
  4. J. E. King, 1994. "Aggregate Supply and Demand Analysis since Keynes: A Partial History," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 17(1), pages 3-31, October.
  5. Kregel, J A, 1976. "Economic Methodology in the Face of Uncertainty: The Modelling Methods of Keynes and the Post-Keynesians," Economic Journal, Royal Economic Society, vol. 86(342), pages 209-25, June.
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Cited by:
  1. Jochen Hartwig, 2011. "Effective Demand: Securing the Foundations," Working Papers PKWP1211, Post Keynesian Economics Study Group (PKSG).
  2. Mark Hayes, 2011. "The State of Short-Term Expectation," Working Papers PKWP1107, Post Keynesian Economics Study Group (PKSG).
  3. Mark Hayes, 2011. "Effective Demand: Securing the Foundations," Working Papers PKWP1212, Post Keynesian Economics Study Group (PKSG).
  4. repec:hal:journl:halshs-00196485 is not listed on IDEAS
  5. Jochen Hartwig, 2009. "D and Z in ROPE – Will the Real Keynes Please Stand Up?," KOF Working papers 09-243, KOF Swiss Economic Institute, ETH Zurich.
  6. Olivier Allain, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 653-660, October.

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