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. I basically agree with Allain's (2009) reconstruction of Keynes's model of effective demand from Chapter 3 of The General Theory, except that I think that entrepreneurs take the overall economic situation into account when forming expectations as to how much demand will be forthcoming to them. I also agree with Hayes (2007a) on the most important—and most controversial—issues surrounding the principle of effective demand. Some disagreement remains on the merits of the ‘Swedish’ method of comparing ex ante expectations with ex post results and on the ‘nature’ of the equilibrium represented by the point of effective demand: for Hayes, it is a market equilibrium, while I regard it to be an expectational equilibrium in the minds of entrepreneurs.

Notes

¹Elsewhere it has been the heterogeneity of output and the alleged inadmissibility of measures of aggregate output in Keynes: see Hayes (2007b), the comment by Hartwig & Brady (2008) and Hayes's reply (Hayes, 2008).

²It complicates things only when demand price expectations are volatile. I see no compelling reason why they should be in the short run.

³Maybe, this reinterpretation of Keynes in an Arrow-Hahn framework is a remnant of the earliest stage of the paper, which—as Hayes told me in 2005—started out as a mathematical comparison between Keynes's General Theory equilibrium and Walrasian general equilibrium.