Expenditure
How could such a model be conceived at all? The basic clue had come to Keynes from Malthus. Malthus, recall, thought that unemployment might occur as a result of insufficient aggregate demand. Demand for labor depends on the demand for goods and services. In turn, the demand for goods and services might be deficient if (for example) consumption expenditure were too low. If the aggregate demand for goods and services should be insufficient, then the demand for labor would also fall short of its supply -- there would be a "general glut," that is, excess supply of all real goods and services and resources at the same time. So Malthus had argued.
In response to Malthus, a French economist named Jean-Baptiste Say had argued that this would be logically impossible, since demands and supplies are simply different ways of looking at the same decision. Add up all the demands, or add up all the supplies, and you would come up with the same number. Keynes argued that this would be true enough in a barter economy, but that in a monetary economy, decisions to demand and decisions to supply were made by different persons -- they are unlinked. Thus they might not be the same. There is a need for coordination of the decisions, and there might be a coordination failure which could result in excess supply.
Keynes saw this possibility as arising from a vicious circle. Demand depends upon income. But income in turn depends upon expenditure. Indeed, income is expenditure: in our market economy, every dollar of income comes from somebody's expenditure. But expenditure in turn depends on demand. Thus we might tentatively "explain" depressions as follows: low income produces low demand produces low expenditure produces low income. This sounds like circular reasoning, but Keynes argued that it is the causation that is circular. Keynes' strategy was to explain unemployment in terms of circular causation from income to expenditure and back to income. Thus, Keynes' model is a model of equilibrium income and expenditure -- an "income-expenditure" model.
Expenditure
