Effective Demand Failures

Abstract

Part I argues that the central issue in macroeconomic theory today again concerns, as it did in the 1930's, the self-regulatory capabilities of market systems. Our failure to make better progress towards a generally acknowledged resolution of long ongoing controversies seems in large measure due to the relatively underdeveloped state of our knowledge pertaining to this question. The theory of effective demand does not deal with all aspects of it, but it deals with hardly anything else. Part II sketches three exploratory ventures in effective demand theory. In turn, it discusses (A) The Theory of Markets and Money, (B) Theories of the Consumption Function, and (C) Quantity Theories of Money Income Determination. Effective demand failures impair the economy's ability to restore itself to a state in which economic activities are reasonably well coordinated. The three avenues of approach explored in Part II all point to the relation between the magnitude of the shock or shocks to which the system is exposed and the size of the bufferstocks-particularly of liquid assets, and most particularly of money-that transactors maintain as critical to whether effective demand failures of major consequence will emerge or not. The theory suggests that the system may be much less able to cope automati. cally with large than with moderate displacements from its equilibrium time-path. Policy prescriptions for large and for moderate displacements will differ, beingvery roughly speaking, indeed-fiscalist for the former, monetarist for the latter case.

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