Editing Effective demand (section)

==History==
Classical [[economist]] [[David Ricardo]] embraced [[Say's law]], suggesting, in [[John Maynard Keynes|Keynes's]] formulation, that "[[supply creates its own demand]]". According to Say's law, for every excess supply (glut) of goods in one market, there is a corresponding excess demand (shortage) in another. This theory suggests that a [[general glut]] can never be accompanied by inadequate demand for products on a [[macroeconomic]] level.<ref>[http://www.hetwebsite.org/het/essays/classic/glut.htm The General Glut Controversy] {{webarchive|url=https://web.archive.org/web/20130517124202/http://www.hetwebsite.org/het/essays/classic/glut.htm |date=2013-05-17 }}</ref> In challenging Say's law, [[Thomas Malthus]], [[Jean Charles Leonard de Sismondi]] and other 19th century economists argued that "effective demand" is the foundation of a stable economy.<ref>[http://www.hetwebsite.org/het/profiles/sismondi.htm J.C.L. Simonde de Sismondi<!-- Bot generated title -->] {{webarchive|url=https://web.archive.org/web/20130516143220/http://www.hetwebsite.org/het/profiles/sismondi.htm |date=2013-05-16 }}</ref> Responding to the [[Great Depression]] of the 20th century, in the 1930s [[Michał Kalecki]] and [[John Maynard Keynes]] concurred with the latter theory, suggesting that "demand creates its own supply" and developing a comprehensive theory of effective demand.

According to [[Keynesian economics]], weak demand results in unplanned accumulation of inventories, leading to diminished production and [[income]], and increased [[unemployment]]. This triggers a [[Multiplier (economics)|multiplier effect]] which draws the economy toward [[underemployment equilibrium]]. By the same token, strong demand results in unplanned reduction of inventories, which tends to increase production, employment, and incomes. If [[entrepreneur]]s consider such trends sustainable, [[investment]]s typically increase, thereby improving potential levels of production.

In the 1960s, [[Robert Clower]] and [[Axel Leijonhufvud]] did further work on effective demand, and in the 1970s [[Robert Barro]] and [[Herschel Grossman]] published a well-known model of spillover effects upon effective demand.<ref name=Barro/>