On the Monetary Nature of the Principle of Effective Demand

Abstract

Since the publication of The General Theory the relationship between money and the principle of effective demand has been a matter of never-ending studies by the Keynesian economists. There are at least three different ways to explain this relationship. The first explanation lies in the liquidity preference theory. The second, points out that the decisions to accumulate a kind of money differing from a commodity obtained by labor may cause a level of aggregate demand insufficient to absorb the level of income corresponding to full employment. Finally, the third explanation is associated with the endogenous money theory. The first aim of this paper is to highlight the limits of these analyses. The second aim is to present a different explanation of the monetary nature of the principle of effective demand based on Schumpeter’s analytical approach which underlines the role of bank money in a capitalist economy.