Say's Law

Last Updated :

21 Aug, 2024

Blog Author :

Edited by :

Reviewed by :

Table Of Contents

What Is Say's Law?

Say's Law of Markets states that supply creates demand, and each supply of goods or items creates an equivalent amount of demand for the goods. It works on the idea one good can increase demand for another. The law thus denies a possible scarcity of aggregate demand.

The law signifies an automatic economic system where governmental intervention is absent. It visualizes an economy where excess production is impossible, and full employment exists. It implies using idle resources to boost production, where they eventually become profitable, and an infinite possibility of economic development.

What is Say's law?

Say's law, also known as the law of markets, is the idea that by producing something of value that can be traded for another good, one product stimulates demand for another.
The Law of Markets states that the economy automatically adjusts as long as there is a consumption of what is produced.
It is assumed that another purchases everything sold by one person. Say opines that it is because individuals can buy the supplied goods, and he implies that this ability to buy must have resulted from a prior transaction or a previous sale.

Say's Law Of Market Explained

Say's law, often known as the law of markets, is the idea that by producing something of value that someone can trade for another sound, one product, in turn, stimulates demand for another. Therefore, demand comes from production or supply. Jean-Baptiste Say stated in his most famous work, "Traité d'économie politiqu," that a commodity is no sooner produced, than it, from that moment, creates a market for other things to the full amount of its value. Furthermore, since the value one can buy is equal to the value one can generate, the more individuals can produce, the more they will buy.

One can interpret the "supply creates its own demand "sentence in various ways. One interpretation is that simply putting a good on the market would generate demand. This is because the total supply and total demand for goods and services will always be equal, and they will also be equal at full employment. So it means that full employment must constantly exist. This is another interpretation of the expression, and it is the one that Keynes seemed to think the classical economists accepted.

The assumption is that another purchases everything sold by one person. Say opines that it is because individuals can buy the supplied goods, and he implies that this ability to buy must have resulted from a prior transaction or a previous sale. Since only production can provide the ability to purchase, all buyers must first be producers. This logic implies, among other things, that there will be more buyers when there are more sellers. Where there are many manufacturers, there is a higher demand for other goods.

Assumptions

Say's law of the market is based on certain assumptions:

First, there is a free exchange economy, where consumers possess freedom of choice. Consumers can purchase commodities at their will, and the sellers have the freedom to sell those commodities.
Money has free mobility and is spent as soon as it is earned. Savings are invested and paid to collect production factors used in the manufacturing process.
Savings and investments are equal, and adjustable interest rates accomplish this equality.
A laissez faire policy exists. It is one in which the government does not impede the activities of the market.
The volume of output determines the size of the market.

Example

One prominent Say's law example is the case of cash hoarding.

During an economic recession, people may hoard their Money for fear of losing their jobs and livelihood, resulting in a severe demand shortage. As not all money saved is invested in any way, increasing savings can lead to people earning more than they spend. As people choose to remove money from the system, spending would not match the income in this case.

This primarily causes recessions. Instead of spending their Money, people hoard it, which makes it difficult for firms to sell their products. Companies will then let go of employees, decreasing consumer demand for goods even if supply is normal. This debunks the assumption that individuals spend all their Money, and at the same time, mere supply does not increase demand.

Implications

Say's law states that the economy automatically adjusts as long as there is a consumption of what is produced. In other words, every output carries with it the necessary amount of available purchasing power that will result in its sale, preventing overproduction.

Price, wage, interest rate, and the amount to be manufactured are changed according to the economy's needs. Due to this, there is an automatic adjustment, and there is no need for the government to intervene. Supply generates its demand; therefore, overproduction and universal unemployment are impossible.

Again, by the law, as long as there are resources in the market, people can find employment because they are self-sufficient and can pay independently. In addition, the resources can increase production levels to the point where they can pay for themselves.

The law equalizes savings and investments. It views savings as another form of spending. Therefore, people will invest everything that they have saved. As a result, there is no possibility that aggregate demand will be insufficient, and the interest rate serves as the mechanism for keeping it that way. Money only serves as a means of exchange too to make transactions easier.

The wage rate is a mechanism that aids in automatic adjustment. Lowered wage rates will lead to full employment under perfect competition. The government should therefore ensure a free market with no wage regulations.

Criticism

Say's law would have served a purpose in a barter economy where production was primarily for consumption. But, then, people produced and traded everything for the same purpose. In these changing times, however, the production of goods and services depends upon preferences, predictions, and future expectations apart from consumption. Therefore, it has little relevance because there will inevitably be some overproduction, which will cause a surplus in the market. And the price reduction may not always increase demand for a product as human beings are more emotional than rational.

Similarly, wages and price levels are not very flexible and sometimes need government intervention. Apart from this, one cannot solve the saving investment by a change in the rate of interest. Another factor that receives criticism is wage reduction. Reduced wages can make people have less money to afford many commodities. As a result, their purchasing power falls, going against the proposed statements. However, despite all these, Say's law ought to be true, according to Austrian economists, in the absence of disruptive government actions.

Say's Law vs Keynes's Law

Keynes' law asserts that demand produces its supply, whereas Say's law states that supply creates demand.

Keynes challenged Say's law and noted that not all income must be used up in the same time frame it was generated. Indeed, there is always saving of some income, and people do not spend it for contingency. In normal circumstances, firms borrow against such savings to finance the purchase of capital goods, increasing the economy's overall consumption. However, if prospects become bad, businesses will cut back on investment spending, and a large portion of those savings will go to waste.

The overall spending will be insufficient as a result. In addition, unsold goods will build up in producers' warehouses, and producers will respond by lowering their output and laying off workers. As a result, there will be widespread cyclical unemployment and a recession or depression. Furthermore, Keynes asserted that recessions and depressions are unlikely to end independently. Keynes suggested that in these circumstances, the government should actively participate in stabilizing the economy, in contrast to the more laissez-faire perspective of classical economists.

Frequently Asked Questions (FAQs)

1. What is Say's law, and why is it important?

Say's law, also known as Say's law of markets in economics, states that supply inevitably generates demand. As a result, the total output must invariably result in total demand. The law suggests increasing production is the key to economic growth rather than boosting demand.

2. Is Say's law true?

Say's law holds without exception in a barter system. The law, however, is only sometimes valid in a sophisticated economy dependent on money. According to it, money is just a medium of transaction. Moreover, the law has faced criticism for various other reasons.

3. What does the law of the market state say?

Say's law in economics is a theory of classical economics contending that the existence of demand is a result of the creation of goods. By this notion, the supply of a separate good supports the ability to demand something.

4. Who made Say's Law?

Say's law in economics argues that supply creates demand. French economist, J. B. Say is one of the first to suggest this theory.