The Principle of Effective Demand - reconsidered: 'Anything we can actually do, we can afford'

Effective demand is one of the distinctive, analytical concepts that Keynes developed in The General Theory. Demand and demand management have thereby come to represent one of the ‘trademarks’ of Keynes’s (and post-Keynesian) macroeconomic theory and policy. So, it is not without reason that this concept has left the impression that Keynes’s macroeconomic theory in The General Theory predominantly consists of arguments related to aggregate demand, while the supply side is, in this interpretation, nearly neglected. From this position, there is only a short step to claim that Keynes’s and post-Keynesians’ macroeconomics are as lop-sided as neoclassical macroeconomics by only emphasizing one part of the market process – aggregate demand – and neglecting the supply side. An important point in this chapter is to demonstrate that this interpretation of The General Theory can be challenged, with the interplay of supply conditions, market structures, institutions and demand expectations, which together form the microeconomic basis for the macroeconomic dynamic relationship within the private business sector as a whole.