After posting my question, I found out an interesting paper. It is Chapter 2 of Luigi Pasinetti's book Growth and Income Distribution (1974). I have read this book not much long after the publication, but I have completely forgotten what was written in this regard. An Osamu Ishida's paper (written in Japanese) reminded me of this paper.

Pasinetti's paper is principally a theory one. It mainly explains "Economics of Effective Demand" (this is the title of Chapter 2), but three sections are devoted to the history of economics. In Section 1, Pasinetti talk about Ricardo and Malthus. Section 3 treats the history of under-consumption theories. Section 7 is devoted to "Anti-Keynesian features of some 'Keynesian' literature." In this section, Pasinetti repeats the right allegation that Hicks started to interpret General Theory in the neoclassical framework.

Pasinetti's remark on liquidity preference is interesting. Pasinetti wrote: "However important a role liquidity preference may play in Keynes' monetary theory, it is entirely immaterial to his theory of effective demand."(p.47) In other place (in Section 5), he explains why the principle of effective demand was destined to fade away. According to Pasinetti, it is necessary to distinguish the principle of effective demand and from other analytical tools Keynes used. While the basic enrichment that Keynes brought to economics was the principle of effective demand, what gave Keynes' theory success were his analytical tools. Maybe we can compare Kalecki and Keynes. They both analyzed depressions and lack of effective demand. But Keynes was much more successful than Kalecki. Pasinetti suspects that this easy success may induce an easy fail.

Beware of the fact that Pasinetti suspected this before the arrival of New Classical Macro. We must say he was really farsighted.

As for the liquidity preference, I am planning to discuss it in another question box: How might one reconstruct the theory of effective demand, and on what basis?

There is a great need, as I see it, in academia to try and put macroeconomics on 'sound' microeconomic foundations. The most well-defined model of micro is the Arrow-Debreu-Hahn GET in which goods are defined by both time period and state of the world. As Arrow notes, this allowed time and uncertainty to be handled in a static model. Now my belief is the GET was about the possibility of the existence of a competitive equilibrium in which no agent can be made better off without someone else being made worse off (Pareto Optimal). However, there is no setting of prices. They are given to us by the Walrasian auctioneer. We might have a tatonnement process but no trades are allowed until the market clearing price vector is found. There is no concept of effective demand here because there are no ineffective demands. However, it also seems to me that this model has little bearing on the messy reality of the economy. When we get to uncertainty, dynamic processes, trading at non-market clearing prices, oligopoly, government interventions and everything else, we inevitably fall back on messy models (especially those of us in the economic forecasting business).

I am not sure, however, that the claim that effective demand has disappeared is correct. Most macroforecasters have some kind of model with a Keynesian style consumption function. Indeed, many forecasters and commentators seem to be too oriented towards boosting consumption (like current Fed policy). What has fallen out of favor in many places is activist Keynesian fiscal policy. Debt-to-GDP ratios have become very high (Keynes analyzed the short period in which he thought stocks could be ignored--as illustrated by investment spending leaving the capital stock unchanged). There is tremendous uncertainty about the size of the multiplier (including the possibility that it is 0). As far as I can see, we have placed too much emphasis on demand and not enough on incentives and the supply side of the economy. For example, the level of job openings in the US is very high relative to unemployment. Why is this persisting? Is it, Janet Yellen has argued, just a sign that demand is too weak and will correct over time? Or is it a sign that the labor that is available in the US does not match the types of jobs that are available? Is it a skills gap? Etc.

Anyway, I thought the question deserved an answer to get the ball rolling and I am interested if others also agree with the premise that effective demand has disappeared from the literature.

John Ryding,

Thank you for your detailed explanations.  I have to apologize that  my  response to your post has been so late in time. I was preoccupied with various complications and could not post my response  earlier.

It was already a few years ago. I checked several macroeconomics books written in English and in Japanese. What was shock to me was there was no "effective demand " in the index pages in some of books. And I found that the concept of "effective demand " has disappeared from the New Keynesian textbooks (and .presumably from  New Keynesian Economics too). I also checked if they say anything in main text of those books but I could not found any definition of effective demand. There were no words as "effective demand". They kept the concepts like aggregate  demand and others. This is the reason why I claim that the concept of "effective demand" had disappeared  in New Keynesian textbooks.  

It seems that, for New Keynesians,  the concept  of "effective demand " was for them superfluous and confusing and the concept of "aggregate demand" was sufficient.

In my understanding, however, the concept of "effective demand" is the core of Keynes's economics. I admit that the definition Keynes gave in his General Theory  was disastrous.  This is the reason why I insist that we should reconstruct concept effective demand in a more suitable way. It is to give a micro foundation to Keynes's economics. 

Flemming Bjerke,

thank you for your post on September 4. I was obliged to be away from ResearchGate for several months.

I agree with you that economics should not be founded on a psychology. Psychology may influence economy but the economics should put more emphasis on social facts and not on individuals' subjective impression. For example, present day macroeconomics consensus is focused on expected future rate of interest. I do not think this is a firmly based economics.

As for your opinion that  macroeconomics should be theorized on a macro level only,   I have a bit different opinion. I admit that the past micro foundation research program failed. This occurred with reasons. Those who sought micro foundation of Keynesian economics try to do it on the basis of neoclassical  economics framework. It is based on psychology as you mentioned it correctly. Its basic framework is maximization and equilibrium. Maximization includes consumer's maximization of utility. We should adopt a different research program. And for this, we have already another economics. I mean the classical economics.

The classical economics I have in mind is, of course, different  what Keynes called "classical economics" in his General Theory.  He disseminated a superfluous confusion in the naming of most important distinction among various strands of economics thinking.

What I call classical economics here is the economics which started around the time of Quesnay and Adam Smith and  took a more concrete form in Ricardo. After Ricardo's death, the tradition of classical economics started to decline  with John S. Mill and conceded the place of the mainstream to the neoclassical economics  which emerged around 1870's. Please read my paper presented at the Ricardo conference this summer for the details. It is uploaded in my  ResearchGate page.  The tile is "On Ricardo's Two Rectification Problems".  See the Link below. 

Of course, the classical economics as it was is not  sufficient. We should discard many superfluous parts and develop its rational core. In a word, we should upgrade classical economics to a stage of the 21st century economics. This classical economics is based not on psychology but on a more objective  variables such as actual sales volumes and tendencies of commodities known to each firm.

I am thinking that the principle of effective demand can and should be reformulated  in this firm's level.

Conference Paper On Ricardo's Two Rectification Problems

your discussions are very  exciting 

Flemming Bjerke,

I mentioned on your opinion in an answer of mine (Feb 6, 2015) in the question box

Why are we all so forgetful? Is the crisis of economics over?

 If you have time, please read it. (Crick the link below)

https://www.researchgate.net/post/Why_are_we_all_so_forgetful_Is_the_crisis_of_economics_over

Flemming Bjerke,

thank you for your comments. I also thank that you will read my papers on classical value theory.

As for consumption function, it is clear that neoclassical demand function  based on preference function has serious theoretical troubles at different layers. There are at least three layers:

(1) Possibility of maximization

Neoclassical economics assumes that a person can maximize his/her utility function under the budget constraint. It is not known that this simple maximization problem  contains computing time explosion problem. If the number of articles exceeds 100 order, it is impossible to get an exact solution even for a computer except for some instances.

See for this point my paper 

Economics and accounting: A comparison between philosophical backgrounds of the two disciplines in view of complexity theory.  (Crick the link below. Two sections under the heading The necessity of theory reform in economics pp.21-23)

(2) Aggregation

It is well known that demand function can take any shape if it satisfies Walras equation.  This is the result of Sonnenschein-Mantel-Debreu theorem  which was established in the first half of  1970's. This means that to a well behaved demand function as it is supposed in standard analysis requires some supplemental assumptions on the distribution of incomes and others.

(3) Statistical question

Granger cites rather approvingly an interesting observation of Robert Hall (1978):

〉〉 No information available in period t, apart from the level of consumption, ct, helps predict future consumption, ct+1, in the sense of affecting the expected value of marginal utility. In particular, income or wealth in period t or earlier are irrelevant, once ct is known. 

Cited in Granger (1999) Empirical Modeling In Economics. CUP, p.43. See 2.3 Testing Hall's theory of consumption pp.42-48 for the logic of this induction.

The above observation is  based on two famous hypotheses, i.e.  life cycle and permanent income hypotheses. If these two hypotheses are correct, the future consumption can be predicted only by  the present consumption and no other factors like income and wealth are irrelevant for it.

(I have an intention to open a new question box on this last point. I want to know how this "observation" is accepted and interpreted by different strands of economics. )

These thee layers of troubles proves that neoclassical theory of consumption is seriously ill and demands a major  reformulation. However, the problem does not stop here. We have to reconstruct a  new theory of consumption demand. This must be a very difficult challenging task.  I have no good idea for this challenge.  

Do you have any idea?

Article Economics and accounting: A comparison between philosophical...

Flemming Bjerke,

your post is full of information. I want to continue this kind of discussions. Some other researchers may also intervene to our discussion.

I think your "simplest theory of all" is very important. Some (even major) parts of our consumption are regulated by this constancy and decay law. When I teach my students, I used to say this: Think of your tooth brush. You don't care of buying another one before your brush bristle become weak and bent. At that time alone, you remind of buying a new brush.

Buying moment of most of everyday items are determined in this way. Sometimes I called this behavior "calculation by things."  Even if we are behaving in this way, and if its total purchase per month does not exceed the monthly budget, it OK. There is no necessity to calculate in advance.   

I was also interested in Rodgers' diffusion theory. I taught some part of it to my students in my Evolutionary Economics class. What I taught  was more mechanical diffusion process which can be described by a logistics equation. It seems that Rodgers confused normal density curves and the first order derivatives of logistic curves. But this is not an important question.

I totally agree with you that we should build a new theory which does not rely on equilibrium. Nobody buys his/her necessaries at one time. Each time we buy something, our needs change as we do not need to buy the same thing for a while. 

At any rate, it is clear that people do not buy things after having calculated a maximal solution of the utility maximization type. It must be the time to move one step further. 

Calculation by things

I mentioned "calculation by things" in my previous posting. It is a peculiar term which does not appear everywhere. I checked this term in the Google and I found only two examples: one for my own expression in this ResearchGate and another in a discussion on Game Mechanics.

Closely related concept must be affordance. James J. Gibson introduced this term in 1977. A thing or an object affords us to do something. For example, a certain type of doors affords us to turn the knob, whereas another type of doors hints us to push the bar in front of them. There are always close interactions between surroundings and a person and Gibson called this interactive analysis ecological approach. See his book Ecological Approach to Visual Perception. This approach became a powerful and active field of cognitive science. Flemming Bjerke surely knows this but I am writing this post for a wider group of researchers.

Calculation by things is a similar function of an objective item that tells us to react in a certain predictable manner. When the bristle of your toothbrush becomes bent and weak, you think of buying another. This must be a special type of affordance. A toothbrush teaches us to buy another.

The case of tooth brush is quite simple. How about the case of more complicated machines? When your washing machine or dish washer stops working, you starts to think of repairing it. You may call on a telephone an electric appliance shop keeper and ask how much it costs you if you repair it. If it cost you too much, you may start to consider if it is the time to buy a new one. This pondering is quite stylized but you can not imagine when you start to ponder this question before your washing machine comes to a breakdown. If you are asked to predict and plan in advance, your load of thinking and calculation becomes too heavy. As there are so many items in a house, this calculation by things makes your load much lighter and practical.

I may also cite Arnold Gehlen. He distinguished three kinds of techniques: techniques which substitute organs, strengthening techniques which reinforce natural abilities, and facilitation techniques which relieve the burden on our organs. The burden to survive in a complex environment is extreme and burden relieving is an omnipresent mechanism in our living. Habits, customs  and institutions have functions in relieving our burdens. Calculation by things is a method or a practical solution in relieving our burden in preparing and calculating everything.

The neoclassical consumer behavior formulation is the maximization of prospective utilities. It simply ignores the human inability in calculating everything in that way. It exceeds our intellectual capacity and is in this sense an irrational construction.

Neoclassical economists are misusing the concept of rationality. Our rational reasoning works in proper circumstances where calculating burden is not excessive. When we make an important decision, we may consume our time and pour our efforts in gathering information, in comparing alternatives, and so on. In other occasions, when we buy everyday items like toothbrush, ball pens, or post-it, we prefer and are obliged to relieve our burden as far as possible.

I believe Gibson and Gehlen are giving us important suggestions in the making of a new consumption theory.

Dear Bjerke,

13 days ago, I actually wrote as you cited above:

At any rate, it is clear that people buy after calculating maximal solution of utility maximization problem. It must be the time to move one step further.

It was a pure mistake of  mine. I should have written

At any rate, it is clear that people do not buy after calculating maximal solution of utility maximization problem. It must be the time to move one step further.

 I am sorry that my mistake confused you very much. I have edited above sentences so that other readers of this page will not be confused again. 

As for the ideas you have exposed, please give me 10 days or so. I will participate to a conference in Sendai and am now preparing  my paper.

Here is a criticism of the utility  concept:

    The Utility of Utility (about the methodology of economics)

This is written (it seems) by Peter Dorman of the Evergreen State College (Olympia, Washington State). This is similar to Flemming Bjerke's critique, but contains some different points of information.

http://econospeak.blogspot.jp/2015/02/the-utility-of-utility-about.html

Flemming Bjerke, 

I recently came to know Andre’ Lorentz and others paper 

The Effect of Demand-Driven Structural Transformations on Growth and Technological Change

Available at ResearchGate: See the link below.

 Because it is based mainly on a simulation, we may not say anything definitely, but the base idea is quite interesting. How do you evaluate it?

Article The Effect of Demand-Driven Structural Transformations on Gr...

Effective demand, if conceived at the micro-level of consumers is very much about choices. I must admit that as such, the phrase "effective demand" ceases to "register on the radar" of the layman. Thus "effective demand" as a notion is supplanted by other ideas that are the currency of marketers and the business community as a whole, such as "choice"/"preference" (even though economically-speaking these may refer to "latent demand"). That is where aggregate demand continues to carry on the heritage of "effective demand" and its ties to economic reality and microeconomics seems to have abandoned it completely and drifted into more and more abstract realms. Behavioral economics is held up as a way to make things more realistic as I argue below.

Returning to the idea of choices there are two variants- constrained choices (rooted in prices, typified by utility-budget constraints) and "unconstrained" choices (Lancasterian characteristic-based demand, with subjective constraints). This brings up an analogous situation with equity price-based risks and characteristics-based risks assessments of stocks. Given this setup, effective demand may not just be limited to spillovers or constraints in other markets. Aside from a pure market perspective (macroeconomic) on "materialized demand" there is also a psychological perspective (behavioral economic?) on "materialized demand" and this is constrained by our rationality and the predominance of human psychology. What some would call the Chinese menu problem, what Barry Schwartz calls the Paradox of Choice. The micro-agent is no longer constrained with choices, he or she is inundated by choices. This effect is discounted at the macro-level since the process of aggregation filters out much of it.  "Effective demand" can be invoked in microeconomics by referring to utility-maximizing choice under "effective choice sets". Where the "effective choice set" is the one the majority would go for to slice through the complexities of characteristics. Not just necessarily to operate within budgets. This has given birth to the idea of "created demand"  where companies such as Apple have "created demand" or created unanticipated/iconic consumption categories, often with a Zen-like simplification, that drives "effective demand". The irony of less decision-making leading to higher "effective demand"

Back to the jargon of economics, this may be viewed as a new twist on Say's law: "Simple/iconic supply (in a sea of variants) creates its own effective demand" In this sense "effective demand" that seems to have vanished from microeconomic landscape may be salvaged by the New Say's Law that links effective demand to a simpler subjective/characteristic-based demand, given a simpler objective supply.   

Shian-Loong Bernard Lew

thank for your post.  I also think "demand creation" is a key to the economic growth for a matured economy. I am also wondering how a left-over savings stay in a financial world without being invested in real economy. this must be the problem of hoarding, although the term "hoarding" may not be a good name. That is why I am  asking following  questions:

Is saving necessarily invested or not? How can this contradiction in Keynes be solved?

https://www.researchgate.net/post/Is_saving_necessarily_invested_or_not_How_can_this_contradiction_in_Keynes_be_solved

Are there any papers or books which examined historical change of the concept "hoarding"?

https://www.researchgate.net/post/Are_there_any_papers_or_books_which_examined_historical_change_of_the_concept_hoarding

This question page ends by my answer of 3 years ago. I wonder why this important topic does not attract more readers and contributors.