History
Classical economist David Ricardo embraced Say's Law, suggesting, in Keynes's formulation, that "supply creates its own demand." According to Say's Law, for every excess supply (glut) of goods in one market, there is a corresponding excess demand (shortage) in another. This theory suggests that a general glut can never be accompanied by inadequate demand for products on a macroeconomic level. In challenge of Say's Law, Thomas Malthus, Jean Charles Leonard de Sismondi, and other 19th Century economists argued that "effective demand" is the foundation of a stable economy. Responding to the Great Depression of the 20th Century, John Maynard Keynes concurred with the latter theory, suggesting that "demand creates its own supply."
According to Keynesian economics, weak demand results in unplanned accumulation of inventories, leading to diminished production and income, and increased unemployment. This triggers a multiplier effect which draws the economy toward underemployment equilibrium. By the same token, strong demand results in unplanned reduction of inventories, which tends to increase production, employment, and incomes. If entrepreneurs consider such trends sustainable, investments typically increase, thereby improving potential levels of production.
Michał Kalecki developed theories of effective demand similar to Keynes', based on Marxism rather than the neoclassical framework. But, published mainly in Polish, the language difference is said to have limited the spread of Kalecki's ideas, compared to Keynes'.
Read more about this topic: Effective Demand
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