Abstract
‘Effective demand’ is the term used by Keynes in his General Theory (1936a) to represent the forces determining changes in the scale of output and employment as a whole. Keynes attributed the first discussions of the determinants of the supply and demand for output as a whole to the classical economists, in particular the debate between Ricardo and Malthus concerning the possibility of ‘general gluts’ of commodities, or what has come to be known as Say’s Law of Markets. Indeed, Keynes’s theory was intended to replace Say’s Law, although the emergence of effective demand from his Treatise on Money (1930) critique of the quantity theory of money, and his insistence on its application in what he originally called a ‘monetary production economy’, suggests that it should also be seen in antithesis to classical monetary theory. For Adam Smith (1776, p. 285), ‘A man must be perfectly crazy who … does not employ all the stock which he commands, whether it be his own or other peoples’ on consumption or investment. As long as there was what Smith called ‘tolerable security’, economic rationality implied that it was impossible for demand for output as a whole to diverge from aggregate supply.
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Kregel, J.A. (2008). Effective Demand. In: Durlauf, S.N., Blume, L.E. (eds) The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-58802-2_449
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DOI: https://doi.org/10.1007/978-1-349-58802-2_449
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