Overturning Say's law
Classical economists relied on Say's law—supply creates its own demand—so slumps should fix themselves. Watching the Great Depression, Keynes argued that when people save part of their income, spending can fall short, leaving firms producing less and the economy stuck with involuntary unemployment. Polish economist Michał Kalecki reached similar conclusions independently.
The multiplier and paradox of thrift
When the government spends $100, that money becomes someone's income and gets spent again, so GDP rises by more than $100—the multiplier, equal to 1/(1 − MPC). And if everyone tries to save more at once, falling demand can shrink incomes and total savings: the paradox of thrift. This became the case for deficit spending in downturns.
FAQ
- How is effective demand different from demand?
- It's demand backed by actual ability to pay, not just desire.
- What are the main criticisms?
- Monetarists and new classical economists stress long-run supply, inflation, and crowding out.
Sources reviewed: 2026-10-26
References
- Keynes, J. M. (1936). The General Theory of Employment, Interest and Money. London: Macmillan.
- Kalecki, M. (1971). Selected Essays on the Dynamics of the Capitalist Economy 1933–1970. Cambridge University Press.
- Blanchard, O. (2021). Macroeconomics (8th ed.). Pearson.