Extending the “principle of effective demand” – did Keynes produce an ad hoc tautology?

Sheetal K. Chand

Journal of Post Keynesian Economics, 2024, vol. 47, issue 4, 685-706

Abstract: Keynes extended his Principle of Effective Demand (PED), which explains how effective demand determines employment, to cover changes in effective demand and, inter alia, their price and output effects. However, owing to Keynes’s poor presentation and Friedman’s critique, the latter extension failed to gain traction, thwarting a fuller realization of the PED’s potential as a fundamental macroeconomic principle. According to Friedman, Keynes’s equation is a tautology, and ad hoc in its application. The paper demonstrates that Keynes obtained his equation in the form he did not because he was manipulating identities, but because his theory drew on the PED which requires that employment and output be substantively determined as functions of effective demand in wage units. His equation is therefore neither tautology nor ad hoc. It represents a genuine extension of the applicability of Keynes’s Principle of Effective Demand, and opens a potentially useful line of enquiry in macroeconomics.

Date: 2024
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DOI: 10.1080/01603477.2024.2374573

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