Keynes's principle of effective demand conceives competitive equilibrium in terms of the choices of entrepreneurs, investors and consumers, rather than of the optimal allocation of factors of production. In The General Theory, effective demand is distinguished from aggregate demand and from income, expected or realised, and there is no suggestion that equilibrium means the convergence of expectations. Reconsideration of Keynes's use of time and equilibrium periods leads to the conclusion that he treats employment as in continuous equilibrium, at the point of effective demand, determined by the state of expectation, the correctness of which is strictly irrelevant. The nature of the equilibrium represented by the point of effective demand is here described, not in terms of the multiplier, but in terms of the continuous equilibrium of supply and demand in short-term forward markets. This reading is faithful to Keynes's conception of aggregate demand as dependent upon the expectations of entrepreneur...

The Point of Effective Demand

A study of keynes' theory of effective demand*

Keynes was adamant that the assumption of homogeneous output and capital in macroeconomic theory is inadmissable. His aggregate supply or Z function is a generalisation of Marshall's ordinary supply function to take account of heterogeneous output, and is an essential element of the principle of effective demand. The linear Z curve controversy can be attributed to Keynes's desire to demonstrate how his general monetary theory of value and output encompasses the special case of Classical theory, including the marginal productivity theorem. The infamous second footnote on pages 55-6 of The General Theory can thereby be fully resolved.

Keynes's Z function, heterogeneous output and marginal productivity

A geometric model of an economy with a perfectly competitive goods market based on chapters three and five of Keynes's Genera l Theory is developed. Short-run equilibrium, as well as disequilibri um dynamics, using a market period equilibrium concept, are examined. The model is compared to other Keynesian models; this reveals some p roblems with the fixprice microfoundations approach, and shows how th e diagonal cross and post-Keynesian models, despite some problems, ca n be appropriately reformulated and interpreted. Copyright 1987 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

David L. Roberts

Papers

Patinkin, Keynes, and aggregate supply and demand analysis