The Principle of Effective Demand is the title of chapter 3 of John Maynard Keynes's book ''

The General Theory of Employment, Interest and Money ''The General Theory of Employment, Interest and Money'' is a book by English economist John Maynard Keynes published in February 1936. It caused a profound shift in economic thought, giving macroeconomics a central place in economic theory and ...

.'' The principle presented in that chapter is that the aggregate demand function and the

aggregate supply In economics, aggregate supply (AS) or domestic final supply (DFS) is the total supply of goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms ...

function intersect each other at the point of

effective demand In economics, effective demand (ED) in a market is the demand for a product or service which occurs when purchasers are constrained in a different market. It contrasts with notional demand, which is the demand that occurs when purchasers are not ...

and that this point can be consistent with a state of under-employment and under-capacity utilization. Another way of expressing this, in pre-Keynesian terminology, is to say that " demand creates its own supply" which gives primacy to a shifting demand function that can be insufficient to give an economy full employment in the long term, in contrast to the

Say's law In classical economics, Say's law, or the law of markets, is the claim that the production of a product creates demand for another product by providing something of value which can be exchanged for that other product. So, production is the source ...

which insists "supply creates its own demand" and doesn't allow the possibility of long term unemployment as the supply figure is always, by definition, a fixed amount that demand will match. According to Keynes it is the principle of effective demand that determines the level of output and employment in a country. In chapter 3, in which Keynes uses the term 'effective demand' 15 times in expounding his principle of effective demand, he defines the concepts of an ''aggregate'' demand and an ''aggregate'' supply, and then defines the concept of

as the point of intersection of these two ''aggregate'' functions - at this point of intersection, the aggregate demand becomes "effective". The importance of the term 'effective demand' to Keynesian Economics in general is shown in the fourth paragraph of the chapter, where he states that this concept of effective demand, referring to the intersection of the supply and demand functions, is the "substance of the General Theory" and says that "the succeeding chapters will be largely occupied with examining the various factors upon which these two functions depend." Colin Rogers claimed that "the principle of effective demand is the key to understanding both the theoretical claims presented in the General Theory and Keynes’s post-war policy proposals." However, the interpretation of chapter 3 The Principle of Effective Demand of

remains confused. Despite of its importance, chapter 3 of

is known to be hard to interpret it coherently.Hartwig, Jochen (2007) Keynes vs. the Post Keynesians on the principle of effective demand. ''European Journal of the History of Economic Thought'' 14(4): 725-739.Hartwig, Jochen (2022) The evolution of Patinkin’s interpretation of Keynes’ principle of effective demand. European Journal of the History of Economic Thought 29(3): 1-18. Many different interpretations were presented, but pointed to have some incoherence. Colin Rogers claimed that "What is missing is an appreciation of the principle of effective demand" as a theory of monetary economy> More recently, a symposium on the notion and interpretations of "Effective Demand: Securing the Foundations – A Symposium" was held as 5th "Dijon" Post-Keynesian Conference at Roskilde University on 13th and 14 May 2011, in which Mark Hayes, Jochen Hartwig, and Olivier Allain participated, and was published in ''Review of Political Economy'' Volume 25,Issue 4, in 2013. Although the symposium was animated, the three participants could not arrive to an unified interpretation. Olivier Allain pointed out that "GT faces a closure difficulty between the macroeconomic outcomes and the microeconomic behaviour of firms." Mark Hayes claimed that "We still need to agree by what mechanism individual entrepreneurs form a collective and mutually consistent state of expectation in The General Theory."Mark G. Hayes (2013) Effective Demand: Securing the Foundations. ''Review of Political Economy'' 25(4): 661-671. Yoshinori Shiozawa proposed a new interpretation, from a different angle based on his new theory of value, to reformulate the principle as a behavioral principle of firms, thus rending the principle to a microeconomic law.Shiozawa, Yoshinori (2021) The principle of effective demand: a new formulation. Review of Keynesian Studies 3: 67-95. He claimed that the concepts of aggregate demand and supply function was the very origin of all confusions including J. M. Keynes himself.

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* {{DEFAULTSORT:Principle of Effective Demand Demand Keynesian economics Macroeconomic aggregates

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