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Effective demand and short-term adjustments in the General Theory

Author

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  • Olivier Allain

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UPD5 - Université Paris Descartes - Paris 5)

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," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00345891, HAL.
    • Handle: RePEc:hal:cesptp:halshs-00345891
    DOI: 10.1080/09538250802516917
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    Citations

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    Cited by:

    1. Jochen Hartwig, 2011. "Aggregate Demand and Aggregate Supply: Will the Real Keynes Please Stand Up?," Review of Political Economy, Taylor & Francis Journals, vol. 23(4), pages 613-618, October.
    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. Jochen Hartwig, 2017. "The Comparative Statics of Effective Demand," Review of Political Economy, Taylor & Francis Journals, vol. 29(3), pages 360-375, July.
    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. 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.
    8. M. G. Hayes, 2013. "The State of Short-term Expectation," Review of Political Economy, Taylor & Francis Journals, vol. 25(2), pages 205-224, April.
    9. repec:pke:wpaper:pkwp1211 is not listed on IDEAS
    10. Jochen Hartwig, 2009. "D and Z in ROPE," KOF Working papers 09-243, KOF Swiss Economic Institute, ETH Zurich.
    11. Rotta, Tomas, 2020. "Effective Demand and Prices of Production: An Evolutionary Approach," MPRA Paper 97910, University Library of Munich, Germany.

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