Editing Keynesian economics (section)

===<span id=aggregatedemand>Aggregate demand</span>===
[[File:Keynescross.svg|class=skin-invert-image|thumb|Keynes–Samuelson cross]]

Keynes' view of saving and investment was his most important departure from the classical outlook. It can be illustrated using the "[[Keynesian cross]]" devised by [[Paul Samuelson]].<ref>P. A. Samuelson, ''Economics: an introductory analysis'' 1948 and many subsequent editions.</ref> The horizontal axis denotes total income and the purple curve shows ''C'' (''Y'' ), the propensity to consume, whose complement ''S'' (''Y'' ) is the propensity to save: the sum of these two functions is equal to total income, which is shown by the broken line at 45°.

The horizontal blue line ''I'' (''r'' ) is the schedule of the marginal efficiency of capital whose value is independent of ''Y''. The schedule of the marginal efficiency of capital is dependent on the interest rate, specifically the interest rate cost of a new investment. If the interest rate charged by the financial sector to the productive sector is below the marginal efficiency of capital at that level of technology and capital intensity then investment is positive and grows the lower the interest rate is, given the diminishing return of capital. If the interest rate is above the marginal efficiency of capital then investment is equal to zero. Keynes interprets this as the demand for investment and denotes the sum of demands for consumption and investment as "[[aggregate demand]]", plotted as a separate curve. Aggregate demand must equal total income, so equilibrium income must be determined by the point where the aggregate demand curve crosses the 45° line.<ref>Chapter 3.</ref> This is the same horizontal position as the intersection of ''I'' (''r'' ) with ''S'' (''Y'' ).

The equation ''I'' (''r'' )&nbsp;=&nbsp;''S'' (''Y'' ) had been accepted by the classics, who had viewed it as the condition of equilibrium between supply and demand for investment funds and as determining the interest rate (see [[interest#classicalinterest|the classical theory of interest]]). But insofar as they had had a concept of aggregate demand, they had seen the demand for investment as being given by ''S'' (''Y'' ), since for them saving was simply the indirect purchase of capital goods, with the result that aggregate demand was equal to total income as an identity rather than as an equilibrium condition. Keynes takes note of this view in Chapter 2, where he finds it present in the early writings of [[Alfred Marshall]] but adds that "the doctrine is never stated to-day in this crude form".

The equation ''I'' (''r'' )&nbsp;=&nbsp;''S'' (''Y'' ) is accepted by Keynes for some or all of the following reasons:
* As a consequence of the ''principle of effective demand'', which asserts that aggregate demand must equal total income (Chapter 3).
* As a consequence of the identity of saving with investment (Chapter 6) together with the equilibrium assumption that these quantities are equal to their demands.
* In agreement with the substance of the classical theory of the investment funds market, whose conclusion he considers the classics to have misinterpreted through circular reasoning (Chapter 14).