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Effective Demand and Short-term Adjustments in the General Theory

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  • Olivier Allain

Abstract

Keynes's principle of effective demand constitutes a pillar for Post Keynesian theories. But Keynes's 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 generate the effective demand (which partially results from the consumers' and investors' behaviour). Previous studies by authors such as Weintraub and Davidson highlight the trial-and-error procedure here involved. But since their analyses are not built on a precise accounting of monetary flows, they fail to demonstrate formally the coherence of the whole adjustment process. The aim of this article is to provide such a formal demonstration. We thus concentrate on verifying how the General Theory constitutes a coherent framework to analyse temporary equilibriums (at the end of every elementary period) and short-term dynamics (towards the stationary equilibrium) which bring entrepreneurs towards the stationary equilibrium. Our analysis rests on a distinction between the aggregate demand and the global expenditure functions. We also distinguish between two modes of price setting—ex ante price setting by entrepreneurs, and ex post price setting by the market.

Suggested Citation

  • Olivier Allain, 2009. "Effective Demand and Short-term Adjustments in the General Theory," Review of Political Economy, Taylor & Francis Journals, vol. 21(1), pages 1-22.
  • Handle: RePEc:taf:revpoe:v:21:y:2009:i:1:p:1-22
    DOI: 10.1080/09538250802516917
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    References listed on IDEAS

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    1. John King, 1993. "Aggregate Supply and Demand Analysis Since Keynes: A Partial History," Working Papers 1993.16, School of Economics, La Trobe University.
    2. J. E. King, 1994. "Aggregate Supply and Demand Analysis Since Keynes: A Partial History," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 17(1), pages 3-31, September.
    3. 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 209-225, June.
    4. Edward J. Amadeo, 1989. "Keynes’s Principle of Effective Demand," Books, Edward Elgar Publishing, number 11, April.
    5. H. Vandenborre, 1958. "An Integration Of Employment Economics Within The Keynesian Theory Of Money Flows," Oxford Economic Papers, Oxford University Press, vol. 10(2), pages 205-219.
    6. 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.
    7. Casarosa, Carlo, 1981. "The Microfoundations of Keynes's Aggregate Supply and Expected Demand Analysis," Economic Journal, Royal Economic Society, vol. 91(361), pages 188-194, March.
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    Cited by:

    1. Narciso Túñez, 2014. "The Demand for Labour: A Post Keynesian Appraisal," Iberian Journal of the History of Economic Thought, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Dpto. Historia e Instituciones Económicas I., vol. 1(2), pages 38-50, January 2.
    2. M.G. Hayes, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 661-671, October.
    3. 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).
    4. repec:taf:revpoe:v:29:y:2017:i:3:p:360-375 is not listed on IDEAS
    5. Jochen Hartwig, 2017. "The Comparative Statics of Effective Demand," Review of Political Economy, Taylor & Francis Journals, vol. 29(3), pages 360-375, July.
    6. M. G. Hayes, 2013. "The State of Short-term Expectation," Review of Political Economy, Taylor & Francis Journals, vol. 25(2), pages 205-224, April.
    7. Olivier Allain, 2013. "Effective Demand: Securing the Foundations," Review of Political Economy, Taylor & Francis Journals, vol. 25(4), pages 653-660, October.
    8. repec:pke:wpaper:pkwp1211 is not listed on IDEAS
    9. Jochen Hartwig, 2009. "D and Z in ROPE," KOF Working papers 09-243, KOF Swiss Economic Institute, ETH Zurich.

    More about this item

    JEL classification:

    • B20 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - General
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian

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