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Summary: The paper explores the principle of effective demand in the context of modern financialization. The traditional "two-sector" model is extended to include banking and finance sectors to examine the implications of the interaction between real and financial sector for effective demand in a closed economy. The analytical framework developed in the paper provides an intuitive understanding of the problem of effective demand in the investment led and consumption led regimes under financialization. It also brings out the underlying dynamics in terms of transfer of profit between the sectors that renders macroeconomic vulnerability in these regimes.
Key words: Effective demand, Profit realization, Securitization, Finance sector, Fictitious capital, Investment led regime, Consumption led regime, Underlying assets.
JEL: E11, E12, E20, E22, E24, E40, E44.
(ProQuest: ... denotes formulae omitted.)
The principle of effective demand was discovered almost simultaneously but independently by the Polish economist Michal Kalecki (1966, 1971) and the British economist John M. Keynes (1936, 1937). Given their vastly different intellectual background Kalecki's theory had close resemblance to Marx's two department scheme and the profit realization problem with capitalists and workers; whereas Keynes stayed closer to the Marshallian distinction between households and firms, the former making the savings plan out of their presumed income and the firms making their investment plans on the basis of expected demand in the market. With a hindsight of eighty years we now recognize that the problem of profit realization, and that of investment saving equality are essentially the same (Joan Robinson 1964; Amit Bhaduri 1986) as one of the fundamental insights developed in the twentieth century into the analysis of the capitalist economy.
Neither Keynes nor Kalecki accepted the notion of neutrality of money developed originally by the Scottish philosopher Hume and embellished in various ways with the aid of various formulations of rational expectations by the Monetarist school. In their counter-offensive against Keynesian economics, they claimed that the effect of money is essentially transient and in the long run leaves the real economy unaffected. In that long run at least Say's law holds and effective demand has no role to play. Since the frictionless long run equilibrium is a mythical theoretical state used as a benchmark for theory, it is a convenient point to start by recapitulating...