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Effective demand and short-term adjustments in the General Theory

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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File URL: ftp://mse.univ-paris1.fr/pub/mse/cahiers2006/R06018.pdf
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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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  1. repec:ltr:wpaper:1993.16 is not listed on IDEAS
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. John King, 1993. "Aggregate Supply and Demand Analysis Since Keynes: A Partial History," Working Papers 1993.16, School of Economics, La Trobe University.
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