The principle of effective demand (expected), and the role of demand in Keynes’ general theory

Effective demand was defined by Keynes as that which the entrepreneur expects at the time he decides to invest. From that decision, all other essential variables are determined by the model developed in The General Theory, as long as a series of other variables are considered a given. Keynes’ model, therefore, is situated at the ex-ante moment, without considering autonomous changes in variables that are not investments per se. The construction, the presuppositions and the consequences of the effective demand principle seriously affect the results that can be achieved by its application, due in great part to the contradictions inherent to Keynes’ treatment of the consumer market and, especially, to the propensity to consume. In excluding market considerations and variables, the model developed in The General Theory only partially represents that which occurs in the economy even when the investment varies, since this is considered an autonomous outlay that does not depend on production, employment, income or demand variables that might occur, whether or not they arise from prior investments.

KEYWORDS:
Effective demand; Keynesianism; history of economic thought