Effective demand

Effective demand is the central organizing concept of John Maynard Keynes's General Theory. It refers not to the aggregate desire for goods and services — which might be infinite — but to the demand that actually materializes in the market, constrained by the income that agents actually possess and expect to possess. In the neoclassical framework, supply creates its own demand; in Keynes's framework, demand determines output and employment. Effective demand is a system-level property: it emerges from the interaction of consumption, investment, and expectations, and it cannot be reduced to the sum of individual desires. When investment collapses, income falls, consumption falls, and effective demand contracts in a feedback loop that drives the economy away from full employment. The concept is inseparable from Keynes's theory of animal spirits and radical uncertainty: entrepreneurs invest not because they know future demand but because they expect it, and those expectations are themselves shaped by current conditions. Effective demand is not a static equilibrium concept but a dynamic process that can get stuck in self-reinforcing stagnation. The modern attempt to reduce effective demand to a crossing point of two curves is precisely the domestication that Keynes argued against: it replaces a process theory with an equilibrium snapshot, and in doing so, it loses the insight that economies are systems whose dynamics are driven by expectations that may not be self-correcting.