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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. Paul Davidson, 1994. "Post Keynesian Macroeconomic Theory," Books, Edward Elgar Publishing, number 124.
    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. David L. Roberts, 1978. "Patinkin, Keynes, and aggregate supply and demand analysis," History of Political Economy, Duke University Press, vol. 10(4), pages 549-576, Winter.
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    5. 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.
    6. John King, 1993. "Aggregate Supply and Demand Analysis Since Keynes: A Partial History," Working Papers 1993.16, School of Economics, La Trobe University.
    7. 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.
    8. Edward J. Amadeo, 1989. "Keynes’s Principle of Effective Demand," Books, Edward Elgar Publishing, number 11.
    9. Godley, Wynne, 1999. "Money and Credit in a Keynesian Model of Income Determination," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 23(4), pages 393-411, July.
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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. 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, 2007. "Monetary circulation, the paradox of profits, and the velocity of money," Post-Print halshs-00196485, HAL.
    7. 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.
    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. 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).
    11. Jochen Hartwig, 2009. "D and Z in ROPE," KOF Working papers 09-243, KOF Swiss Economic Institute, ETH Zurich.
    12. Rotta, Tomas, 2020. "Effective Demand and Prices of Production: An Evolutionary Approach," MPRA Paper 97910, University Library of Munich, Germany.

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    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; Modern Monetary Theory

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