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, Say's law is a totally supply-driven view of the market.

The implication is that in order to raise economic demand people must be willing and able to supply more. That is, supply must be created before demand can come into being. To put it another way: economic or effective demand (as opposed to mere hypothetical desire) is manifested and expressed as a 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. Some 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 External links

Modern Interpretations

Another way of saying this is that Say's Law says that there can never be a general glut.[1] Instead of there being an excess supply (glut) of goods in general, there may be an excess supply of one or more goods, balanced by an excess demand (shortage) of yet other goods. Thus, there may be a glut of labor (unemployment), but that is balanced by an excess demand for goods. Advocates of Say's Law see market forces as working quickly -- via price adjustment -- to abolish both gluts and shortages.

In essence, Say's law is stating that supply and demand are in fact the same thing. It is only when we take the view of a single market participant that we can describe of supplying potatoes so we might demand pumpkins. From a macro economic view point the difference between supply and demand is subject to dispute.

Keynes and many others have paraphrased Say's Law as "supply creates its own demand". Using this definition it might be asserted that once a producer has created a supply of a product, consumers will inevitably start to demand it. Keynes was a critic of Say's law and his interpretation more easily allowed for him to introduce his counter notion that instead "demand creates its own supply".

The implication of this "law" is that the 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 (where here the problem are recessions, stagnation, and 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. Increased government purchases of goods merely "crowds out" the private sector's purchase of goods, while increasing the money supply to stimulate the economy merely causes inflation.

Keynes vs. Say

By way of contrast, Keynesian economics placed 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, there will be an insufficient availability of jobs; 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.)

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, in turn, would 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.

Modern Adherents of Say's Law

See supply-side economics and Austrian school.

External links

• Foundation for Economic Education: "Say's Law Is Back"
• The Proceedings of the Friesian School: "Say's Law and Supply Side Economics"
• Supply-Side University Economics Lesson #4
• Say's Law and Economic Growth