Michael Dawson -PSU wrote:
I can see the point and realism of Doug's usage, but I still think the above is erroneous. Productive (leading to increased goods/services output) capitalist investments are made based on the existence or non-existence of promising pools of effective demand, not on the basis of some general profit-rate calculation:
This is rather fanciful. Of course there needs to be "effective demand", that is to say potential customers who would be willing to and have the means to purchase the product. However that isn't enough.
By the way, this use of "effective demand" isn't excatly what Keynes meant by the term. Here's his def from the General Theory:
>Effective demand is simply the aggregate income (or proceeds) which
>the entrepreneurs expect to receive, inclusive of the incomes which
>they will hand on to the other factors of production, from the
>amount of current employment which they decide to give. The
>aggregate demand function relates various hypothetical quantities of
>employment to the proceeds which their outputs are expected to
>yield; and the effective demand is the point on the aggregate demand
>function which becomes effective because, taken in conjunction with
>the conditions of supply, it correspodns to the level of employment
>which maximises the entrepreneur's expectation of profit.
In other words, effective demand is determined by what "entrepreneurs" (the word Keynes used rather than "capitalists") make possible through their investment and hiring decisions - and it's based on their expectations of profit. So it actually has more in common with Marx's POV than you might think.
Or, as Victoria Chick put it in Macroeconomics After Keynes:
>[Effective demand] is not a schedule - it is the point on the
>schedule of firms' anticipation of aggregate demand which is 'made
>effective' by firms' production decisions. It is the volume of
>output they decide to produce, valued at their asking price; it is
>the value of anticpated sales. ED is an unfortunate term, for it
>really refers to the output that will be supplied; in general, there
>is no assurance that it will also be demanded.
Doug