The Keynesian Cross: Graphical Interpretations of Effective Demand

Abstract

The General Theory of Employment, Interest and Money by John Maynard Keynes led up to three cross-shaped graphical interpretations: the IS-LM model, the 45o model and the Z-D model. The first one was originated from Hicks (1937) well-known paper, despite the differences between his original version and the textbook versions. The second one has become familiar through Alvin Hansen's 1953 book, to which Paul Samuelson also contributed. These two models are considered to be neoclassical - the meaning of which in this particular context will be discussed in our paper. The third model has became popular through Dudley Dillard's 1948 book and is embraced - with few qualifications - by Post Keynesians, who consider it to be more faithful to Keynes's original 1936 book. The three models are graphical (and algebraical) formalizations of Keynes's theory, but the last two are more specific in that they are focused on the explanation of the Principle of Effective Demand (PED). This paper compares the two graphical representations of the PED in the light of the definitions of aggregate demand, aggregate supply and effective demand, as they were presented by Keynes in the General Theory. The purpose of the paper is to identify which original arguments by Keynes support each of both models.