2021 Volume 3 Pages 67-95
This paper provides a new formulation for the principle of effective demand. this new formulation, the principle boils down to a specific behavior of producer firms (and sellers). After giving new definitions in Section 2, the main part of this paper (Section 3), based on the study by Shiozawa, Morioka, and Taniguchi (2019) Microfoundations of Evolutionary Economics, Springer, Tokyo, proves that the behavior of individual firms generates the macroeconomic result that is typically interpreted as the principle of effective demand. Sections 4 and 5 provide the price theory that explains the irrelevance of price rigidity arguments. While the paper provides a new scheme of microfoundations, Section 6 presents a new framework for methodology arguments between micro and macro. Many Post Keynesians claim that microfoundations are impossible and unnecessary. The paper demonstrates why they are wrong. Finally, Section 7 shows that many fields of economics may find unexplored paths of development in the new scheme which sees micro and macro coherently linked.