Say’s Law of Markets: What Is It?
The Treatise on Political Economy, Or, The Production, Distribution, and Consumption of Wealth by French economist Jean-Baptiste Say, published in 1803 contains chapter XV, “Of the Demand or Market for Products,” which contains Say’s Law of Markets. According to a traditional economic theory, the income produced by the previous production and sales of things is the source of spending that fuels demand for the current production of goods. Say’s Law has seen various revisions and iterations among modern economists.
Knowledge of Say’s Law of Markets
Jean-Baptiste Say, a French journalist and classical economist, created Say’s Law of Markets in 1803. Say’s thoughts on the nature of economic activity and how a community generates wealth made him influential. Say reasoned that in order to have the money to buy, a buyer must first have sold something. Therefore, rather than money itself, the source of demand occurs before products are produced and sold for money. To put it another way, a person’s capacity to demand products or services from others depends on the revenue generated by their own prior acts of production.
The mercantilist idea that money is the source of wealth was challenged by Say’s Law. According to Say’s Law, money only serves as a means of exchange for the value of previously produced goods as new ones are created and brought to market. As these new goods are sold, money income is generated, which in turn fuels demand for future purchases of other goods in an ongoing process of production and indirect exchange. To say, money was just a tool for moving actual economic products, not a goal in and of itself.
Say’s Law states that rather than a lack of money, a lack of demand for a commodity in the present can result from the failure of the manufacture of other commodities that would have otherwise sold for enough money to buy the new good. Say continued by stating that under normal conditions, such shortages in the manufacture of some items would be quickly remedied by the promise of profits from the production of those goods.
He did, however, point out that when the production breakdown is sustained by a continuing natural disaster or (more frequently) government meddling, some items can remain scarce and others can remain abundant. Say’s Law thus supports the idea that governments should practice laissez-faire economics and refrain from interfering with the free market.
Say’s Law and later economists
Say’s Law is still present in contemporary neoclassical economic theories, and supply-side economists have been inspired by it. According to the implications of Say’s Law, supply-side economists in particular think that tax incentives for firms and other measures designed to boost production without distorting economic processes are the optimal course of action for economic policy.
Furthermore, Austrian economics adhere to Say’s Law. Say’s recognition of production and exchange as processes taking place over time, emphasis on various goods rather than aggregates, emphasis on the entrepreneur’s role in coordinating markets, and conclusion that persistent declines in economic activity are typically caused by government intervention are all particularly consistent with Austrian theory.
To create his macroeconomic ideas, Keynes rewrote Say’s Law and then fought against his own revised version.
Despite Say’s explicit and continuous emphasis on the production and exchange of distinct specific items against one another, Keynes misinterpreted Say’s Law as a statement about macroeconomic aggregate production and spending. Keynes came to the conclusion that Say’s Law appeared to be broken by the Great Depression. Say’s Law was modified by Keynes, who said that there had been an overall surplus of production and a shortage of demand, and that economies may encounter crises that market mechanisms could not resolve.
Say’s Law’s consequences are directly in opposition to the recommendations of Keynesian economics. Governments should act to promote demand, according to Keynesians, because people tend to hoard money in difficult economic times and during liquidity traps.