Chapter three of

*The General Theory*is The Principle of Effective Demand. Keynes opens the chapter with some definitions. I want to skip a few of them and get to the ones where he defines the term "effective demand".

We begin with supply and demand. We begin with the "aggregate supply function" Z and the "aggregate demand function" D:

Let Z be the aggregate supply price of the output from employing N men ....

Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men ....

Now ... if D is greater than Z, there will be an incentive to entrepreneurs to increase employment ... up to the value of N for which Z has become equal to D. Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs’ expectation of profits will be maximised. The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called

Similarly, let D be the proceeds which entrepreneurs expect to receive from the employment of N men ....

Now ... if D is greater than Z, there will be an incentive to entrepreneurs to increase employment ... up to the value of N for which Z has become equal to D. Thus the volume of employment is given by the point of intersection between the aggregate demand function and the aggregate supply function; for it is at this point that the entrepreneurs’ expectation of profits will be maximised. The value of D at the point of the aggregate demand function, where it is intersected by the aggregate supply function, will be called

*the effective demand*.So effective demand occurs at the equilibrium point where the supply curve and the demand curve intersect -- where they intersect

*in the expectations of entrepreneurs*. That's according to Keynes. And I think he's the one who invented the term, so his is the definition I want to use.

To my simple mind, thinking like a consumer, thinking of demand as a quantity demanded --

*gasp!!*-- the term makes perfect sense. "Effective" demand is given by actual purchases: by how much we spent. I can't think of a better fit for the word "effective". This goes back to Adam Smith:

The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market.

But as we all know, now, "quantity demanded" is not the same as demand. So, "how much we spent" to buy that quantity can't be demand, either. And that means that "actual purchases" cannot be demand. (Clearly, "actual purchases" are the same as "quantity demanded"!)

Yeah, I have trouble with that. As a demand-side entity, I think I express demand by buying things. I don't think I express demand by woulda-buying more at a lower price and woulda-buying less at a higher price. If your price is too high and I buy little, well, that's the demand I express then. If you think you can get me to buy more by lowering the price, go for it.

Effective demand occurs at the intersection of supply and demand, where supply is

the expectation of proceeds which will just make it worth the while of the entrepreneurs to give that employment

and demand is

the proceeds which entrepreneurs expect to receive from the employment of N men

according to Keynes. Demand in this view is the demand

*for labor*. Supply is not supply at all, but is the minimum acceptable return that brings supply to market. This is altogether supply-side machinery.

So why do I care about effective demand? I guess I don't.

Come to think of it, why do I care about the grand distinction between "demand" and "quantity demanded"? Because economists tell me this distinction exists?? That ain't gonna happen.

I'm easily convinced of things, by good argument. The argument that economists make a distinction, that's not good argument. Seems like an appeal to authority.

Or maybe it's just ego.