Say's law

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Say's law is an economic principle, formulated by Jean-Baptiste Say, that asserts that there can
be no demand without supply. In the economic sense, demand refers to a desire materially
expressed in an exchange. Say's Law states that there can be no exchange unless the market
participants have something to supply. Simply, this "law" represents a totally supply-driven view
of the market.

The implication is that in order to raise market demand people must be willing and able to supply
more: supply must be created before demand can come into being. To put it another way:
effective demand (as opposed to mere hypothetical desire) is manifested and expressed in the
form of supply. This can perhaps be seen most clearly in a barter economy where the means of
demand is implicitly some form of supply: in a farmers' market, for example, the act of supplying
potatoes is intimately tied up with the demand for pumpkins and other commodities. Some,
however, regard Say's Law as also applying to monetary economies.

Contents
1 Modern Interpretations
2 Keynes vs. Say
3 Modern Adherents of Say's Law
4 See also
5 External links
6 Further reading

Modern Interpretations
A modern way of expressing Say's Law is that there can never be a general glut.[1] 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.

The implication of Say's "law" is that a free-market economy is always at what the Keynesian
economists call full employment. 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, and involuntary unemployment). There is no need for any
intervention by the government or the central bank (such as the U.S. Federal Reserve) to help
the economy attain full employment. In fact, 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: Say's Law means that the total level of
output is constant, so that any increase in government purchases implies that there are fewer
goods available for private consumption and investment. Increasing the money supply merely
causes inflation, since the level of real output cannot be increased.
From a modern macroeconomic viewpoint Say's law is subject to dispute. John Maynard Keynes
and many other critics of Say's law have paraphrased it as saying that "supply creates its own
demand". Under this definition, once a producer has created a supply of a product, consumers
will inevitably start to demand it. This interpretation allowed for Keynes to introduce his
alternative perspective that "demand creates its own supply" (up to, but not beyond, full
employment). Some call this "Keynes' law".

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

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. (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 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.

Most modern advocates of laissez-faire economics have rejected Say's Law, except perhaps in
the long run. Instead, the emphasis is on the automatic adjustment of the labor market to get to
full employment: if wages are allowed to fall, this increases the availability of jobs and allows full
employment. Many advocates of laissez-faire economics (for example, economists at the
International Monetary Fund) are quite activist in their approach, advocating the use of state
power to destroy unions, minimum wage laws, and the like in order to make labor markets more
"flexible" so that this idealized vision of labor markets can be attained.

Say’s law
In economics, Say’s Law or Say’s Law of Markets is a principle attributed to French businessman and
economist Jean-Baptiste Say (1767-1832) stating that there can be no demand without supply. A central
element of Say's Law is that recession does not occur because of failure in demand or lack of money.

The more goods (for which there is demand) that are produced, the more those goods (supply) can
constitute a demand for other goods. For this reason, prosperity should be increased by stimulating
production, not consumption. In Say's view, creation of more money simply results in inflation; more
money demanding the same quantity of goods does not represent an increase in real demand.

What Say said

Recession and unemployment
Role of money
Modern interpretations
Keynes vs. Say
Modern Adherents of Say's Law
See also

What Say said

James Mill was to restate Say's Law as "production of commodities creates, and is the one and universal
cause which creates a market for the commodities produced". 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)

He also wrote:

It is not the abundance of money but the abundance of other products in general that facilitates sales...
Money performs no more than the role of a conduit in this double exchange. When the exchanges have
been completed, it will be found that one has paid for products with products.

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 only be increased by more
production. James Mill used Say's Law against those who sought to give economy a boost via
unproductive consumption. Consumption destroys wealth, in contrast to production which is the source
of economic growth. Production must be guided by demand, however, to prevent the creation of goods
for which there is little demand. Thus, supply and demand interact in self-correcting feedback.

It is important to note that 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 into what is
sometimes called "law of markets" which was the framework of macroeconomics from mid 1800's until
the 1930's.

Recession and unemployment

Keynes claimed that according to Say's Law, involuntary unemployment cannot exist due to inadequate
aggregate demand. However, involuntary unemployment could be explained in a different way by the
19th century economists, and the neoclassical economists actually used Say's Law to understand and
explain even long-term unemployment and recession.

Recession was explained as arising from production not meeting demand in quality. 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" would lead to a producer not being
able to sell the products in cost-covering prices. Hence he will be lacking in the capability to buy and this
will cause contraction in other parts of industry, too.
Such economic losses and unemployment were seen as an intrinsic property of the capitalistic system.
Division of labour leads to a situation where one always has to anticipate what others will be willing to
buy, and this will lead to miscalculations.

The kind of unemployment that results is what modern macroeconomics calls "structural
unemployment". It differs from Keynesian "cyclical unemployment" that arises due to aggregate
demand failure.

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. One can read the second long quotation above by Say
quotation (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.

To understand the role of this notion, restate Say's Law. 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. 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.

The only reason to have money, in Say's view, is to buy products. It would not be a mistake, in his view,
to treat the economy as if it were a barter economy.

An alternative view 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.

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 to 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, were impossible according to laissez-faire principles. The
flexibility of markets under laissez faire would allow prices, wages, and interest rates to adjust to abolish
all excess supplies and demands.

Modern interpretations

A modern way of expressing Say's Law is that there can never be a general glut. 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. 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). There is no need for
any intervention by the government or the central bank (such as the U.S. Federal Reserve) to help the
economy attain full employment. All that the central bank needs to be concerned with is the prevention
of inflation.

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. To
contradict this, Arthur Cecil Pigou, who, according to himself, followed Say's Law, wrote 1932 a letter
signed by five other economists (among them Keynes) calling for more public spending to alleviate high
levels of unemployment.

From a modern macroeconomic viewpoint Say's Law is subject to dispute. John Maynard Keynes and
many other critics of Say's Law have paraphrased it as saying that "supply creates its own demand".
Under this definition, once a producer has created a supply of a product, consumers will inevitably start
to demand it. This interpretation allowed for Keynes to introduce his alternative perspective that
"demand creates its own supply" (up to, but not beyond, full employment). Some call this "Keynes' law".

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. 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). 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. But
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. (More generally, this is seen in terms of the equality of saving (abstention from purchase of
goods) and investment in goods.)

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. (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 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.

Many modern advocates of laissez-faire economics have rejected Say's Law, except perhaps in the long
run. Instead, the emphasis is on the automatic adjustment of the labor market to get to full
employment: if wages are allowed to fall, this increases the availability of jobs and allows full
employment. More interventionist economists (for example, those at the International Monetary Fund)
are quite activist in their approach, advocating the use of state power to destroy unions, minimum wage
laws, and the like in order to make labor markets more "flexible" so that this idealized vision of labor
markets can be attained.

Modern Adherents of Say's Law

Economists such as Thomas Sowell of the Chicago school of economics have advocated Say's Law. Sowell
also wrote his doctoral dissertation on the idea too. Arthur Laffer, who is now associated with the theory
supply-side economics, also adhered to the law, as well as members of the Austrian school.