J.-B. Say (Born January 5, 1767,: Lyon Economist Markets Postulates Supply

J.-B.
Say (born January 5, 1767, Lyon, France—died November 15, 1832, Paris)
French economist, best known for his law of markets,
which postulates that supply creates its own demand.
After completing his education, Say worked briefly for an insurance company and
then as a journalist. In 1794 he became an editor of a new magazine dedicated to the
ideas of the French Revolution; he later became editor in chief of the magazine. He
was appointed to the Tribunate under the consulate in 1799 but was later dismissed
by Napoleon. In 1807 he started a cotton-spinning mill, which he sold in 1813. Next
he held a chair in industrial economy at the Conservatory of Arts and Crafts from
1817 to 1830, and he was a professor of political economy at the Collège de
France from 1830 until his death. His major publication was Traité d’économie
politique (1803; A Treatise on Political Economy).
Say attributed economic depression not to a general weakness in demand but to

temporary overproduction in some markets and underproduction in others. Any
imbalance would adjust automatically, he believed, because overproducers must
either redirect their production to meet their customers’ preferences or be forced out
of business.
There are two versions of Say’s law—one proved to be true, the other false. The true
version states that a glut of goods cannot persist over a long term because the
production of goods will motivate producers to buy other goods. In Say’s words,
“Products are always exchanged for products.” This represented a significant new
understanding of markets because economists before Say had worried about the
possibility of a long-term glut. There is, however, the false version of Say’s law, which
Say appears to have also believed; it states that there cannot be an overproduction of
goods in the short term. British economist Thomas Malthus, with whom Say was
acquainted, attacked this version in the 19th century, as did John Maynard Keynes in
the 20th century.
(Read Thomas Malthus’s 1824 Britannica essay on population.)
Say was the best-known expositor of Adam Smith’s views in both Europe and
the United States. But he disagreed with Smith’s labour theory of value. Say was one
of the first economists to realize that the value of a good derives from its utility to its
user—not from the labour used to produce it. This insight was not systematized until
the early 1870s, when Carl Menger, William Stanley Jevons, and Friedrich von
Wieser gave it further attention.
Say’s Law of Markets states that the supply of a good or service creates
demand for that good or service. Jean Baptiste Say, a classical French
economist, studied the nature of markets in his 1803 book “Treatise on
Political Economy” and put forth the view that supply creates its own
demand and that economic agents must first engage in production
before they can demand goods and services in the market.
Summary
 Say’s Law of Markets states that the supply of a good or service

creates demand for that good or service, i.e., supply creates its
own demand.
 According to Say’s Law, any economic agent must first produce
goods and services that before they can consume, i.e., a person’s
ability to demand goods and services is a direct result of the
production activities they’ve undertaken.
 Since production comes first and demand follows the wealth
created from production, Say’s Law infers that it is important to
look at the supply side if there is a fall in consumption.
Understanding Say’s Law of Markets
According to the Law of Markets, a person’s ability to demand goods

and services is a direct result of production activities that they’ve
undertaken. They earn an income either through the production and
sale of physical assets or by supplying labor to capital owners. The
productivity of the economic agent will influence the level of income
they receive, which will, in turn, influence what goods and services they
demand and how much of each good or service they demand.
By choosing to produce a certain good, they are indirectly creating the

demand for those goods and services that they intend to buy with their
earned income. Conversely, if one did not demand anything, they
would not want to work. Thus, Say’s Law describes the unfolding
market process, stating that “all purchasers must first be producers, as
only production can generate the power to purchase.”
Since the production level drives the ability to demand, the most
extensive demand will be found in areas where the maximum value is
created. Thus, production comes first, and demand follows the wealth
created from production. On this note, Say’s Law infers that it is
important to look at the supply side if there is a fall in consumption.
There is no point in encouraging demand if there is nothing to supply.
Keynesian Criticism of Say’s Law
The colloquial expression for Say’s Law is that “supply creates its own
demand.” It translates as Say saying that simply producing a good is
enough to create a demand for it. Further, aggregate supply will always
be equal to the aggregate demand of goods and services, and that we
cannot deviate from full employment. John Keynes is one of the most
important critics of Say’s Law.
Keynesians claim what Say meant was that if things are produced, the
income generated from production is automatically spent to fulfill
people’s demand. If it were true, then Say would’ve been wrong as
some income is often saved for future consumption. However, Keynes
focused on only a part of the complex idea behind Say’s Law and
presented it as the whole concept.
In reality, while the law maintains that there cannot be a general

absence of the ability to purchase what’s been produced (i.e., lack of
demand for current supply) in the long run, it does not dismiss the
existence of general gluts or recession.
In fact, given the existence of money, Say’s Law considers the possibility
of aggregate demand being different from the aggregate supply. If
the banking system is allowed to function freely, then the income that
some people choose to save will be transferred to those who wish to
borrow; thus, reallocating the demand, keeping the aggregate demand
unchanged. Say’s Law essentially puts down the circular flow in
markets.
Therefore, as opposed to the critique put forward by the Keynesians,
the presence of deficient aggregate demand is not the result of market
failure, and the occurrence of recessions does not contradict the Law of
Markets. Looking at Say’s Law in its entirety provides insights into the
market operations.
Assumptions of Say’s Law of Markets  There is free Market Economy.  No Government

intervention.  Automatic adjustment of economic system due to flexibility of wages, interest and
prices.  Extent of Market is limitless.  Closed Economy, no trade links with any other country. 
Money is only a medium of exchange.  Validity of long run.  Optimum allocation of resources.
Important facts of Say’s Law  PRODUCTION CREATES DEMAND FOR GOODS  With the use of
inputs in production process, income is generated. This income is distributed to the owner of inputs
which they ultimately spend on purchasing goods for their use. This causes demand for produced
goods. This is how supply creates its own demand.  BARTER AND MONETISED ECONOMY  Say’s
Law holds good in barter economy. It is because, goods are produced for self consumption or to get
other goods in exchange for the produce. When people offer their produce in barter for other goods,
they create demand for the goods. This law is also valid in monetised economy. In this economy
money is used to buy or sale goods and services. The inputs used in production generate money
incomes in the form of wages, interest, rent and profits. The incomes are spent on purchasing the
goods produced. It creates demand. It implies that if there is demand for goods whose production
creates income. Thus, supply creates its own demand for goods whose production creates income..
Thus, supply creates its own demand. Contd……  NO GENERAL OVERPRODUCTION  Say’s law
states that there is no general overproduction. When there is an increase in production, there is also
increase in income of related factors. Consequently new demand is created and there is no general
over production. General overproduction may exist in the short run but it is automatically adjusted
by the market forces of demand and supply in the long run.  SAVING AND INVESTMENT EQUALITY
 Generally income is spent on consumption. When some amount of income remains unspent on
consumption or saved, overproduction may exists. But it is rate of interest which plays important role
to make a decision for both the consumers and producers about saving and investment. How much
to save and how much to invest, depend on rate of interest. The interaction for demand for and
supply of saving as a capital determines equilibrium rate of interest in market at which the equality
between saving and investment is restored and there is no over production. Contd…. LABOUR
MARKET Labour always seek higher wage rate but it causes a fall in demand for labour and rise in
unemployment. In a free market economy flexible rate of wages automatically restores full
employment through the interaction of demand for and supply of labour. Implication of Say’s Law
The implications of the law are as follows: SELF ADJUSTMENT MECHANISM According Say’s law the
self adjustment mechanism brings up equilibrium in different markets. So equilibrium is a temporary
situation. In a capital market equality between saving and investment is restored by the flexible
interest rate while in labour market equality between demand for and supply of labour is maintained
by the wage rate. WAGE CUT CREATES FULL EMPLOYMENT This law assumes that wage cut helps to
restore full employment by reducing production cost and price level and increasing demand for
goods. It denies the wage rigidity policy in the economy. NEUTRAL ROLE OF MONEY This law is based
on barter system where goods are exchanged for goods. There is also assumed that money is just a
medium of exchange; it does not affect the production process. So the role of money is neutral.
Contd…  FULL EMPLOYMENT IN THE ECONOMY  According to Say’s law there is full employment
in the economy. It is because increase in production means increase in employment and production
continues until the full employment is reached. In such a condition production will be maximum. 
PROPER UTILISATION OF RESOURCES  This law is based on full employment in the economy.
According to which the proper utilisation of idle resources are ensured which will further help to
produce more and also generate more income.  NO GENERAL OVERPRODUCTION  There is no
general overproduction and no unemployment. Increase in production generates income for inputs
and further demand is created for the produce

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J.-B.

Say attributed economic depression not to a general weakness in demand but to

(Read Thomas Malthus’s 1824 Britannica essay on population.)

 Say’s Law of Markets states that the supply of a good or service

Understanding Say’s Law of Markets

According to the Law of Markets, a person’s ability to demand goods

By choosing to produce a certain good, they are indirectly creating the

Keynesian Criticism of Say’s Law

In reality, while the law maintains that there cannot be a general

Assumptions of Say’s Law of Markets  There is free Market Economy.  No Government

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