Chapter 8: Effective Demand: A Macroeconomic Causal Relationship
As I now think, the volume of employment is fixed by the entrepreneur under the motive of seeking to maximise his present and prospective profits; whilst the volume of employment which will maximise his profit depends on the aggregate demand function given by his expectations of the sum of the proceeds. (Keynes, 1936: 77) PROLOGUE ‘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 distinct trademarks of Keynesian macroeconomic theory and policy. It is not without reason that the central position of this concept has left the impression that Keynes’s macroeconomic model predominantly consists of theories for determining demand, while the supply side is neglected. From here it is a short step within a superficial interpretation to conclude that Keynes (and postKeynesians) have ended up at a theoretical dead end, where macroeconomic development is exclusively determined by demand factors. To avoid this dead end, this prologue is intended as an encouragement to the reader to abandon this mistaken understanding. In this chapter it will be demonstrated that behind the somewhat ill-chosen expression ‘effective demand’, there lies a rather refined analysis of how supply factors, market conditions and demand expectations in the business sector as a whole interact and together form the arguments behind the macroeconomic causal relationship that is known as ‘effective demand’. It is this mix of supply, demand and institutional considerations that determines how much the business sector as...
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