Keynes defined effective demand to be the income from production where aggregate supply (total expected income required to hire some number of workers) equals aggregate demand (total expected income due to hiring that number of workers).  Keynes says that effective demand could be in equilibrium with large scale involuntary unemployment.  This is where the General Theory comes in (so named to be compared with Einstein’s generally valid relativity as against Newton’s more special case of mechanics.  Keynes was trying to say that Classical economics, which focused on the distribution of given output, was only valid in the special case of full employment.  The General Theory broadened the scope of analysis to the laws of the size of output).  If effective demand is in equilibrium with involuntary unemployment, then the classical view that workers supply labor up until the disutility of labor equals the utility of the wage is only valid in the “special case” of full employment, not in general.  Effective demand is at this point because consumer demand and investment is too low for the employment of all available resources.

Keynes believed that effective demand with involuntary unemployment disproved Say’s Law, which he took to mean that aggregate supply and aggregate demand will be equal and that this would occur with full resource employment.  Say actually says that production leads to the ability to demand.  Something must be created in order to exchange it for something that someone else has created.  This is easy to see in a barter economy, but the issue becomes more complex in a money economy with wage labor.

How did Keynes propose to break out of the trap of effective demand equilibrium with unemployment, an equilibrium which perpetuated a cycle of underemployment and underinvestment?  He focused on the marginal efficiency of capital, or IRR in modern terms.  Capitalists would borrow money to buy capital goods until the point where their marginal efficiency equaled the interest rate.  Keynes argues that the interest rate should be pushed down, approaching zero, in order to induce more capital investment, increasing the price of capital, and the marginal efficiency of capital would approach zero (Keynes, and modern neo-classicals and New Keynesians, interestingly consider capital to be a homogeneous stock of goods.  Therefore capital is spoken of in general and in the aggregate and “its” marginal efficiency can approach zero).

This is where Keynes’ famous “euthanasia of the rentier” comes in.  Since investment has been socialized, the capitalist class which has benefited from the scarcity of capital by renting it out will be done away with.  Investment capital will be made available at zero percent interest, capital goods will be bought, and a new effective demand equilibrium with full employment will be reached.