Effective Demand: Securing the Foundations

Abstract

This paper is one of three contributions to a symposium commenting on papers previously published by the other authors. Allain (Allain, O. (2009) Effective demand and short-term adjustments in the General Theory, Review of Political Economy, 21, pp. 1–22) argues that Keynes elides a distinction between aggregate demand and global expenditure that is necessary to explain the formation of price expectations by individual entrepreneurs. Allain's conclusions depend upon redefinitions of aggregate and effective demand and the consumption function. Hartwig (Hartwig, J. (2007) Keynes vs. the Post Keynesians on the principle of effective demand, European Journal of the History of Economic Thought, 14, pp. 725–739) argues that entrepreneurs must take into account the state of the economy as a whole, in order to form price expectations independently and not as a market equilibrium determined by aggregate supply and demand. This leaves demand price expectations to be determined outside the principle of effective demand. Neither author does full justice to Keynes's own treatment. We still need to agree by what mechanism individual entrepreneurs form a collective and mutually consistent state of expectation in The General Theory.

Acknowledgments

I am most grateful to Olivier Allain and Jochen Hartwig for our cordial exchanges in correspondence and in a seminar at Roskilde in May 2011.