Say's law: Wikis


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Say's Law, or the Law of Markets, is an economic proposition attributed to French businessman and economist Jean-Baptiste Say (1767–1832), though it actually originated earlier and elsewhere. Say's Law is founded on the notion that commodities are produced as a means to acquire other commodities. It states that in a market economy, goods and services are produced for exchange with other goods and services, and in the process a sufficient level of real income is created in order to purchase the economy's entire output. That is to say, the total supply of goods and services in a market economy will equal the total demand during any given time period – in modern terms, "there will never be a general glut,"[citation needed] though there may be local imbalances, with gluts in one market balanced by shortages in others.

Say was no more the inventor of "Say's law" than Sir Thomas Gresham was of "Gresham's law", Fernand Braudel points out, but the name appears to have stuck to the popularizer of economic theories that were in circulation at the dawn of the Industrial Revolution.[1]




Say's formulation

In Say's language, "products are paid for with products" (1803: p. 153) or "a glut can take place only when there are too many means of production applied to one kind of product and not enough to another" (1803: p. 178-9). Explaining his point at length, he wrote that:

It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9) [2]

He also wrote, that it is not the abundance of money but the abundance of other products in general that facilitates sales:

Money performs but a momentary function in this double exchange; and when the transaction is finally closed, it will always be found, that one kind of commodity has been exchanged for another.[3]


The Scottish economist James Mill restates Say's Law in 1808, writing that "production of commodities creates, and is the one and universal cause which creates a market for the commodities produced."[4]

Say himself never used many of the later short definitions of Say's Law and that Say's Law actually developed due to the work of many of his contemporaries and those who came after him. The work of James Mill, David Ricardo, John Stuart Mill, and others evolved Say's Law into what is sometimes called "law of markets" which was the framework of macroeconomics from mid 1800s until the 1930s.


A number of laissez-faire consequences are drawn from interpretations of Say's law.

However, Say himself advocated public works to remedy unemployment, and criticized Ricardo for neglecting the possibility of hoarding if there was a lack of investment opportunities.[5]

Recession and unemployment

Say argued against claims that business was suffering because people did not have enough money and more money should be printed. Say argued that the power to purchase could be increased only by more production.

James Mill used Say's Law against those who sought to give the economy a boost via unproductive consumption. Consumption destroys wealth, in contrast to production which is the source of economic growth. The demand for the product determines the price of the product.

According to Keynes (see more below), if Say's Law is correct, widespread involuntary unemployment (caused by inadequate demand) cannot occur. Classical economists in the context of Say's Law explain unemployment as arising from insufficient demand for labour. That is, supply had exceeded demand in some segments of the economy.

While in general, more is not produced than there could be demand for, some particular products are produced too much and consequently other products too little. This "disproportionality" in relation to the consumer preferences would lead to a producer not being able to sell the products at cost-covering prices, causing losses and the closing of several firms. Since demand is ultimately determined by supply, the reduction in supply of these isolated sectors of the economy will reduce the demand for products in the other sectors, causing a general reduction in output. Hence decreasing demand for labor. The kind of unemployment that results is what modern macroeconomics calls "structural unemployment." It differs from Keynesian "cyclical unemployment" that arises due to inadequate aggregate demand.

Such economic losses and unemployment were seen by some economists as an intrinsic property of the capitalistic system. Division of labor leads to a situation where one always has to anticipate what others will be willing to buy, and this will lead to miscalculations. However this theory alone does not explain the existence of cyclical phenomena in the economy because these miscalculations would happen with constant frequency, and to such a large scale that thousands of businesses in multiple sectors would simultaneously miscalculate (as during an economic bubble). Economists of the Austrian School have linked these fluctuations in business cycles to the creation of a central banking and its monopolized control of fiat money and prime interest rates. This credit expansion, with central banking / Federal Reserves altering interest rates beyond what the free market would normally bear leads the market into malinvestment. This malinvestment creates the boom and bust bubble cycle, particularly in long-term sectors of the economy, such as in the recent United States housing bubble which has been linked to the Federal Reserve money/credit expansion of the 2001-2004 period (which itself was an emergency response intended to add liquidity into the market after the dot-com bubble collapsed).[6][7] According to laissez-faire economists, massive waves of unemployment, as in economic recessions and depressions can be traced back to State intervention in the market, thereby effectively blocking the natural balance in means of production achieved through Say’s Law.

Assumptions and critiques

In the Keynesian interpretation, the assumptions of Say's law are:

  • A barter model of money – "products are paid for with products;"
  • Flexible prices – all prices can rapidly adjust upwards or downwards;
  • No government intervention.

Under these assumptions, Say's law states that there cannot be a general glut, which, Keynesians conclude, means that there cannot be a persistent state where demand is generally less than productive capacity and high unemployment results.

Since there have been a great many persisting economic crises historically, one may either reject one or more of the assumptions of Say's law, its reasoning, or the conclusion. Taking the assumptions in turn:

  • Circuitists and some post-Keynesians dispute the barter model of money, arguing that money is fundamentally different from commodities, and that credit bubbles can and do cause depressions. Notably, debt owed does not change because the economy has changed.
  • Keynes argued that prices are not flexible – for example, workers may not take pay cuts.
  • Laissez faire economists argue that government intervention is the cause of economic crises, and that left to its devices, the market will adjust efficiently.

The reasoning of the law itself is considered sound, within its assumptions.[citation needed]

Turning to the implication that dislocations cannot cause persistent unemployment, some theories of economic cycles accept Say's law, and seek to explain high unemployment in other ways, considering depressed demand for labor as a form of local dislocation. For example, Real Business Cycle Theory advocates argue that real shocks cause recessions, and that the market responds efficiently to these real economic shocks.

Role of money

It is not easy to say what exactly Say's Law says about the role of money apart from the claim that recession is not caused by lack of money. The phrase "products are paid for with products" is taken to mean that Say has a barter model of money; contrast with Circuitist and Post-Keynesian monetary theory.

One can read the second long quotation by Say (see above) as stating simply that money is completely neutral, although Say did not concern himself about the question. The central notion that Say had concerning money can be seen in the first long quotation above. If one has money, it is irrational to hoard it.

The assumption that hoarding is irrational was attacked by underconsumptionist economists, such as John M. Robertson, in his 1892 The Fallacy of Saving,[8][9] where he called Say's law:

...a tenacious fallacy, consequent on the inveterate

evasion of the plain fact that men want for their goods, not merely some other goods to consume, but further, some credit or abstract claim to future wealth, goods, or services. This all want as a surplus or bonus, and this surplus cannot be represented for all in present goods.

John M. Robertson, The Fallacy of Saving, p. 98

Here Robertson identifies his critique as based on Say's theory of money – that people wish to accumulate a "claim to future wealth," not simply present goods, and thus hoarding of wealth may be rational.

To Say, as with other Classical economists, it is quite possible for there to be a glut (excess supply, market surplus) for one product, and it co-exists with a shortage (excess demand) for others. But there is no "general glut" in Say's view, since the gluts and shortages cancel out for the economy as a whole. But what if the excess demand is for money, because people are hoarding it? This creates an excess supply for all products, a general glut. Say's answer is simple – there is no reason to engage in hoarding money. According to Say, the only reason to have money is to buy products. It would not be a mistake, in his view, to treat the economy as if it were a Barter economy. To quote Say from above:

Nor is [an individual] less anxious to dispose of the money he may get ... But the only way of getting rid of money is in the purchase of some product or other.

An alternative modern view that gives an equivalent result is that all money that is held is done so in financial institutions (markets), so that any increase in the holding of money increases the supply of loanable funds. Then, with full adjustment of interest rates, the increased supply of loanable funds leads to an increase in borrowing and spending. So any negative effects on demand that results from the holding of money is canceled out and Say's Law still applies.

In Keynesian terms, followers of Say's Law would argue that on the aggregate level, there is only a transactions demand for money. That is, there is no precautionary, finance, or speculative demand for money. Money is held for spending and increases in money supplies lead to increased spending.

Some classical economists did see that loss of confidence in business or collapse of credit will increase the demand for money which would cut down the demand for goods. This view was expressed both by Robert Torrens and John Stuart Mill. This would lead demand and supply to move out of phase and lead to an economic downturn in the same way as miscalculation in productions, as described by William H. Beveridge in 1909. However, in classical economics, there was no reason for such a collapse to persist. Persistent depressions, such as that of the 1930s, are impossible in a free market according to laissez-faire principles. The flexibility of markets under laissez faire allow prices, wages, and interest rates to adjust to abolish all excess supplies and demands; however, since all economies are a mixture of regulation and free market elements, laissez-faire principles (which require a free market environment) would not be able to adjust effectively to excess supply and demand.

Modern interpretations

A modern way of expressing Say's Law is that there can never be a general glut.[10] Instead of there being an excess supply (glut or surplus) of goods in general, there may be an excess supply of one or more goods but only when balanced by an excess demand (shortage) of yet other goods. Thus, there may be a glut of labor ("cyclical" unemployment), but that is balanced by an excess demand for produced goods. Modern advocates of Say's Law see market forces as working quickly—via price adjustment—to abolish both gluts and shortages. The exception would be the case where the government or other non-market forces prevent price changes.

According to Keynes, the implication of Say's "law" is that a free-market economy is always at what the Keynesian economists call full employment; see also Walras' law. Thus, Say's Law is part of the general world-view of laissez-faire economics, i.e., that free markets can solve the economy's problems automatically. (Here the problems are recessions, stagnation, depression, and involuntary unemployment.)

In fact, some proponents of Say's Law argue that such intervention is always counterproductive. Consider Keynesian-type policies aimed at stimulating the economy. Increased government purchases of goods (or lowered taxes) merely "crowds out" the private sector's production and purchase of goods. Contradicting this view, Arthur Cecil Pigou—a self-proclaimed follower of Say's Law—wrote a letter in 1932 signed by five other economists (among them Keynes) calling for more public spending to alleviate high levels of unemployment.

Keynes vs. Say

Keynesian economics places central importance on demand, believing that on the macroeconomic level, the amount supplied is primarily determined by effective demand or aggregate demand, and Keynes summarized Say's law as "supply creates its own demand". For example, without sufficient demand for the products of labor, the availability of jobs will be low; without enough jobs, working people will receive inadequate income, implying insufficient demand for products. Thus, an aggregate demand failure involves a vicious circle: if I supply more of my labor-time (in order to buy more goods), I may be frustrated because no-one is hiring — because there is no increase in the demand for their products until after I get a job and earn an income. (Of course, most get paid after working, which occurs after some of the product is sold.) Note also that unlike the Say's law story above, there are interactions between different markets (and their gluts and shortages) that go beyond the simple price mechanism, to limit the quantity of jobs supplied and the quantity of products demanded.

Keynesian economists also stress the role of money in negating Say's Law. (Most would accept Say's Law as applying in a non-monetary or barter economy.) Suppose someone decides to sell a product without immediately buying another good. This would involve hoarding, increases in one's holdings of money (say, in a savings account). At the same time that it causes an increased demand for money, this would cause a fall in the demand for goods and services (an undesired increase in inventories (unsold goods) and thus a fall in production, if prices are rigid). This general glut would in turn cause a fall in the availability of jobs and the ability of working people to buy products. This recessionary process would be cancelled if at the same time there were dishoarding, in which someone uses money in his hoard to buy more products than he or she sells. (This would be a desired accumulation of inventories.)

Some classical economists suggested that hoarding would always be balanced by dishoarding. (More generally, this is seen in terms of the equality of saving (abstention from purchase of goods) and investment in goods.) However, Keynes and others argued that hoarding decisions are made by different people and for different reasons than decisions to dishoard, so that hoarding and dishoarding are unlikely to be equal at all times.

Some have argued that financial markets and especially interest rates could adjust to keep hoarding and dishoarding equal, so that Say's Law could be maintained, or that prices could simply fall, to prevent a decrease in production. (See the discussion of "excess saving" under "Keynesian economics".) But Keynes argued that in order to play this role, interest rates would have to fall rapidly and that there were limits on how quickly and how low they could fall (as in the liquidity trap). To Keynes, in the short run, interest rates were determined more by the supply and demand for money than by saving and investment. Before interest rates could adjust sufficiently, excessive hoarding would cause the vicious circle of falling aggregate production (recession). The recession itself would lower incomes so that hoarding (and saving) and dishoarding (and real investment) could attain balance below full employment.

Worse, a recession would hurt private real investment – by hurting profitability and business confidence – in what is called the accelerator effect. This means that the balance between hoarding and dishoarding would be pushed even further below the full employment level of production.

Keynesians believe that this kind of vicious circle can be broken by stimulating the aggregate demand for products using various macroeconomic policies mentioned in the introduction above. Increases in the demand for products leads to increased supply (production) and an increased availability of jobs, and thus further increases in demand and in production. This cumulative causation is called the multiplier process.

Finally, it is important to note that Keynes identifies the "animal spirits" of sudden collective pessimism as the catalyst for what he calls the "hoarding" of money. But Keynes fails to offer an explanation as to the ultimate causes of such pessimism.

Modern adherents

Economists such as Thomas Sowell (who wrote his doctoral dissertation on the idea) of the Chicago School have advocated Say's law. Arthur Laffer, the supply-sider, also adhered to the law, as does the Austrian School.

According to the Austrian School and some neoclassical economists, recession or depression in a market economy - characterized by a systemic imbalance of supply and demand - can only result from suddenly massive and widespread entrepreneurial miscalculation regarding which commodities are desirable and which production methods are efficient. According to these adherents, such deep and wide entrepreneurial miscalculation is impossible in a purely free market economy. They believe, an important implication of Say's Law is that recessions do not occur because of inadequate demand or lack of money. The production of goods provides the means for the producers to purchase what is produced, and hence, demand will grow as supply grows. For this reason, prosperity can be increased by increasing production, not consumption. Another implication of Say's Law by them is that the creation of more money simply results in inflation; more money demanding the same quantity of goods does not create an increase in real demand.

A number of economists articulate the related Treasury View, which states that fiscal stimulus cannot affect unemployment.

Real Business Cycle Theory is likewise in the tradition of Say's law, considering unemployment as an efficient response to changes in the real economy.

See also



  1. ^ Braudel, The Wheels of Commerce: Civilisation and Capitalism 15th-18th Century, 1979:182.
  2. ^ Information on Jean-Baptiste Say
  3. ^ Jean Baptiste Say: A treatise on political economy; or the production distribution and consumption of wealth. Translated from the fourth edition of the French. Batoche Books Kitchener 2001, page 57
  4. ^ James Mill, Commerce Defended (1808), Chapter VI: Consumption, p. 81
  5. ^ Warren J. Samuels, Jeff Biddle, John Bryan Davis, A companion to the history of economic thought, p. 326.
  6. ^
  7. ^
  8. ^ Robertson, John M. (1892). The Fallacy of Saving. 
  9. ^ Nash, Robert T.; Gramm, William P. (1969). "A Neglected Early Statement the Paradox of Thrift". History of Political Economy 1 (2): 395–400. doi:10.1215/00182702-1-2-395. 
  10. ^ (Fonseca)

External links

Further reading

  • Axel Leijonhufvud, 1968. On Keynesian Economics & the Economics of Keynes: A Study in Monetary Theory. Oxford University Press. ISBN 0-19-500948-7.
  • Kates, Steven (1998). Say's Law and the Keynesian revolution: how macroeconomic theory lost its way. Edward Elgard Publishing Limited. ISBN 1858987482. 
  • Baumol, W. J. (1977). "Say's (at Least) Eight Laws, or What Say and James Mill May Really Have Meant". Economica 44: 145–161. doi:10.2307/2553717.  edit


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