지은이: Jochen Hartwig (University of St. Gallen, Swiss Institute for Business Cycle Research, Zürich)
* * *
Most of the scholarly reinterpretations of the Principle of Effective Demand are not in line with Keynes's original presentation of it in Chapter 3 of the General Theory. To substantiate this claim, Keynes's definition is here first reproduced and then compared with different reinterpretations of the principle by textbook authors, and Neo-Ricardians, Kaleckian, and Post Keynesian economists. A new interpretation of the Principe of Effective Demand is suggested which links the Post Keynesian D/Z-model to a reproduction scheme thatㅡbroadly in the tradition of Marxㅡdistinguishes between the consumption- and investment-goods "departments".
1. The Principle of Effective Demand in the literature
1.1 Keynes's original presentation of the Principe of Effective Demand
In the first section of this paper it is argued that most of the scholarly interpretations of the Principle of Effective Demand are not in line with Keynes's own description thereof. Since this is a strong claim a full quote from the General Theory is called for:
“Let Z be the aggregate supply price of the output from employing N men, the relationship between Z and N being written Z=Φ(N), which can be called the ^aggregate supply function^. Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men, the relationship between D and N being written D=f(N), which can be called the ^aggregate demand function^. Now if for a given value of N the expected proceeds are greater than the supply price, i.e. if D is greater than Z, there will be an incentive to entrepreneurs to increase employment beyond N and, if necessary, to raise costs by competing with one another for the factors of production, up to the value of N for which Z has become equal to D. Thus the volume of employment is given by the intersection between the aggregate demand function and the aggregate supply function; for it is at this point that entrepreneurs's expectation of profits will be maximised. The value of D at the point of the aggregate demand function where it intersected by the aggregate supply function, will be called ^the effective demand^”(KEYNES 1973A, p. 25).In the next sentence Keynes declares Effective Demand "the substance of the General Theory of Employment". In view of his statement: "The object of our analysis is to discover that determines the volume of employment"(KEYNES 1973A, p.89), it is beyond doubt that the Principle of Effective Demand is the centerpiece of the economics of Keynes.
 Keynes uses the expression "Principle of Effective Demand" in the title of Chapter 3 of the General Theory, but not in the given quotation and hardly ever again. A recent discussion has focussed the question whether the given quotation expresses a ^principle^(cf. Pasinetti 1996, Davidson 2001). Here, the ^Principle of Effective Demand^ is taken to state that the quantity of employment is fixed at the ^Point& of Effective Demand.Keynes defines Effective Demand as a ^point^ of intersection of two curves.
- Are those curves identical with the aggregate demand curve and the 45˚-line in the famous "Keynesian Cross"? They are not.
- Even if we were prepared to ignore the facts that the two functions D and Z as defined by Keynes are specified in nominal terms while those of the Income-Expenditure-model are in real terms, and that Keynes's functions depend on expectations while Keynesian Cross-functions do not, it would still impossible to mix up Keynes's aggregate supply function Z with the 45˚-line. (1) Z depends on employment, the 45˚-line does not; (2) Z incorporates profit maximization (see below), the 45˚-line does not; (3) Z has a distinguishable price- and quantity-component (see below), 45˚-line does not.
- In short, unlike Z, the 45˚-line is no autonomous supply function, it is a "helping line" (SAMUELSON 1948, p. 257)ㅡit is just there to find out which level of income is consistent with the aggregate demand it supports, given the assumptions made about the aggregate demand schedule.
1.2 The Principle of Effective Demand in textbook-economics
What do students of economics learn about Effective Demand from their textbooks? The answer of this question is important because "(s)tandard textbooks are deliberate attempts to represent the consensus concerning accepted facts(and theories) in a given area of study. ... Any would-be textbook whose contents deviates (sic!) from this will fail as a textbook since it will not be generally used" (BOLAND 1991, p. 14). We should be on the safe side in assuming that what has fought its way into those textbook is regarded as "conventional wisdon" by the discipline's mainstream.
Perhaps the most influential textbook ever written is Paul A. Samuelson's ECONOMICS. But although the macroeconomic framework of ECONOMICS evolves from a simple Income-Expenditure model(SAMUELSON 1948, Chapter 12) via the same model supplemented by an IS-LM-analysis (SAMUELSON 1973, Chapter 12 plus appendix to Chapter 18) into a combination of the Keynesian Cross with AS/AD-analysis(SAMUELSON/NORDHAUS 1995, Chapter 24), neither in the first nor in the later editions of the book is the term "Effective Demand" ever mentioned. And this holds for many other best-selling textbooks too.
 Of course, I cannot provide a complete overview. I examined the following textbooksㅡwhich had been indicated to me by colleagues as most often assigned in undergraduate intermediate macro courses and/or used in first-year graduate courses since the 60sㅡwithout finding any reference to the Principe of Effective Demand: ACKLEY 1969, HALL/TAYLOR 1991, GORDON 1993, FROYEN 1996, BARRO 1997, DORNBUSCH/FISCHER/STARTZ 1998, and MANKIW 2000. I also checked earlier editions of these books (in most cases back to the first edition) to see if a reference to the Principle of Effective Demand might have disappeared in the course of time, but this is not the case. The same holds for advanced-level textbooks such as BLANCHARD/FISCHER 1989, and ROMER 1996.
Textbooks tend to neglect Effective Demand. But there is a revealing exception in a textbook most prominent in the German-speaking countries: FELDERER/HOMBURG 1999. The 32nd section of this book is called "Effective Demand". There the authors write: “The crux of the argumentation lies in the fact that Keynes points attention to effective demand, defined as aggregate demand backed by purchasing power in an economy”(FELDERER/HOMBURG 1999, p. 102, my translation). Felderer/Homburg treat Effective Demand as equivalent to aggregate demand. Their additional remark that effective demand is backed by purchasing power while aggregate demand could be just notional (cf. p. 102) seems odd: in all Anglo-Saxon textbooks mentioned above it is presupposed that aggregate demand is not just notional. So it is no surprise that on page 112f. of their book Ferderer/Homburg define Effective Demand as the sum of consumption- and investment-demand (what the others call aggregate demand), equate that with output and end up with the familiar Keynesian Cross.
To sum up, mainstream textbooks either neglect Effective Demand or confuse it with aggregate demand. The implications of this practice are severe, since the substitution of aggregate demand for Effective Demand seems to be mainly responsible for some influential misinterpretations of Keynes's theory still defending their place in those textbooks:
- the conclusion drawn from the income-expenditure(45˚-) model that Keynes simply shifted the equilibrium role (between supply and demand) from prices to quantitiesㅡthe notion of "fast quantities" but "slow prices" in Keynes's theory (originating Leijonhufvud); or
- the notion that Keynes has simply turned Say's Law upside downㅡnot every supply creates its own demand but every demand creates its own supply(cf. FELDERER/HOMBURG 1999, p. 102f.).
 Another example for this confusion by a renowned economist would be: "The General Theory emphasised ^effective demand^ㅡwhat we now call ^aggregated demand^", BLANCHARD 2000, p. 538.
 “In the Keynesian macrosystem the Marshallian ranking of price- and quantity-adjustment speeds is reversed: in the shortest period flow quantities are freely variable, but one or more prices are given, and the admissible range of variation for the rest of the prices is thereby limited. The ‘revolutionary’ element of the General Theory can perhaps not be stated in simpler terms”(LEIJONHUFVUD 1968, p. 52). Leijonhufvud later stepped back from this interpretation(cf. LEIJONHUFVUD 1974), but it is still alive in the Neo-Keynesian school.
1.3 The Principle of Effective Demand in Neo-Ricardian economics: (... ...)
1.4 The Principle of Effective Demand in Kaleckian economics
This section is concerned with the interpretation of the Principle of Effective Demand within a group of economist who are united by their conviction that it is important distinguish different sectors of an economy as well as different income groups (in other words: paying attention to distributive aspects). Some of them are sometimes referred to as Post-Keynesians. I prefer to call their approach Kaleckianㅡon the one hand because they themselves declare their indebtedness to Kalecki and on the other hand to distinguish them from the authors to be dealt with in the next section.
Chapter three of the second book of ROBINSON/EATWELL 1973 is called "Effective Demand". After having stated that they intend to follow Kalecki rather than Keynes the authors present a reproduction scheme with two departments (sectors), one of which produces wheat, the other machines. If a certain rate of profit and propensity to save (or different propensity to save for different income groups) are assumed, a specific proportion of the two departments in value terms (what BHADURI 1986, p. 40, calls "macroeconomic balance equation") can be calculated. If the two departments are in proportion (given by the "balance equation"), their whole output can be sold for its value (or price of production). Since profit is incorporated in the value [?of] product, "macroeconomic balance" is equivalent to maximization of of the ^realized^ profit or to realization of the maximum profit respectively. (Since all of this plays an important role in my own reinterpretation of the Principle of Effective Demand I relegate an in-depth discussion of these topics on the third section of this paper.) If, on the other hand, the two department are out of balance, demand does not equal supply. The authors of the Kaleckian school assume that in such a situation a quantity reaction of real income closes the gap. To recapitulate: There is only one proportion of departments in which demand equals supply, and this equilibrium proportion is brought about by quantity reactions. This is seen to be the Principle of Effective Demand (cf., eg., ROBINSON/EATWELL 1973, book 2, Chapter 3; BHADURI 1986, Chapter 2; NELL 1998, Chapter 11).
As will be argued in more detail below the "macroeconomic balance equation" is identical to Keynes's "logical" multiplier relation while the alleged quantity reaction which brings about the correct proportion of departments is his dynamic multiplier process (cf. KEYNES 1973A, p. 122f.). If we consider this, the Kaleckian interpretation of the Principle of Effective Demand bears a striking resemblance to the Neo-Ricardian and (if at all) the textbook-view of the Principle of Effective Demand: Its essence is claimed to be a quantity reaction of real income which brings about "equilibrium", and which could be labeled "multiplier process". None of these camps mention the two functions D and Z that Keynes uses to illustrate the Principle of Effective Demand.
1.5 The Principle of Effective Demand in Post Keynesian economics
In this paper, I reserve the term "Post Keynesian" for authors who follow Keynes in his presentation of the Principle of Effective Demand in terms of the two functions D and Z.
[.] Weintraub called the point of intersection of these two curves "the income-employment equilibrium". It was Paul Davidson who got back to Keynes's coining "point of effective demand" (cf. DAVIDSON/SMOLENSKY 1964, p. 4-6; DAVIDSON 1978, pp. 22, 44-49) and who has been the perhaps most audible advocate of the D/Z-model ever since (cf. also DAVIDSON 1994, Chapter 2).
How do these two authors define the D- and Z-curves? DAVIDSON 1994, p. 19, writes about Z:
“Keynes's aggregate supply function represents the relationship between entrepreneurs' expected sales revenues tomorrow and the amount of today's labour hiring that the entrepreneurs require to produce sufficient output to meet tomorrow's expected demand.”Herein he follows WEINTRAUB 1958, p. 25. If we compare this with the quotation given above in section 1.1 we recognize that Weintraub and Davidson call "Z" what Keynes called "D". What, then, do Davidson and Weintraub call "D"?
“The aggregate demand function (D) represents the desired expenditures of all buyers at any level of aggregate employment”, DAVIDSON (1994), p. 19, cf. WEINTRAUB 1958, p. 31.Whereas for Keynes D represents "the proceeds which entrepreneurs expect to receive from the employment of N men", that is, a magnitude the suppliers are concerned about, for Weibtraub and Davidson D represents something which is contemplated by the other side of the marketㅡthe buyers. There interpretation of the Principle of Effective Demand cannot claim to be in line with Keynes's expositions in Chapter 3 of the General Theory.
 (a long remark follows...)
Other (mostly Post Keynesian) authors follow Keynes's model more closely in that they recognize that D refers to aggregate demand as expected by the suppliers. (Let me postpone a discussion of Z until the next section.) The question then arising is what shape the D-curve has. In Weintraub and Davidson's presentation the D-curve is strictly concave. But while it is uncontroversial that the aggregate demand curve ^as realized ex post^ must be strictly concave as long as the marginal propensity to consume is smaller that 1 (Keynes's "fundamental psychological law") and as long as there are decreasing returns to labor,, it is less clear why the same should hold for the D-curve in expectation terms. As PARINELLO 1980, p. 69-70, notes, the individual producer's expected demand curve is a horizontal line in a diagram with her own offers of employment as abscissa and her own expected proceeds as ordinate(cf. also WELLS 1987, p. 512). No single producer expects her own proceeds to be negatively influenced if she cuts back employment, but if all of them did so, aggregate proceeds would certainly be smaller. But how does this aggregate result come about? Certainly there should be some kind of connection between the individual behavior of the producers and the aggregate result. I offer an explanation in the next section in the context of my own reinterpretation of the Principle of Effective Demand.
2. Proposal for a thoroughgoing interpretation of the Principle of Effective Demand