The principle of effective demand

Marx, Kalecki, Keynes, and beyond

Authored by: Eckhard Hein

The Routledge Handbook of Heterodox Economics

Print publication date:  July  2017
Online publication date:  July  2017

Print ISBN: 9781138899940
eBook ISBN: 9781315707587
Adobe ISBN:

10.4324/9781315707587.ch6

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Abstract

The rejection of Say’s law, and the associated notion that there are no long run limits to output and growth besides those given by productive capacities, unites several strands of heterodox macroeconomic theory. As Keynes (1979) makes clear in the drafts leading to the General Theory (1936), Say’s law can only be assumed to hold in a barter economy where aggregate demand and aggregate supply cannot deviate; in a real-wage or cooperative economy where money is only used as a means of exchange but not as a store of value; or in a neutral economy where there is a market mechanism, such as the real or commodity rate of interest in the neoclassical capital market, which ensures that the part of income saved and hence not spent by households for consumption purposes is spent by firms for investment purposes. However, in a monetary or entrepreneur economy, and hence ‘in the world in which we live,’ there may be leakages from the circuit of income (saving) which are not exactly compensated for by injections (investment) of the same amount, and aggregate demand may systematically deviate from aggregate supply. Therefore, output and growth are determined by aggregate demand, and thus adjust towards the latter, in the short and in the long period.

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