Say\'s Law Is an Economic

Say's Law is an economic principle of classical economics, which was named after economist Jean-Baptiste Say, though the idea predated Say's time and was supported by economists including Smith, Say, Ricardo, James Mill, and J.S. Mill. Say's Law is also referred to as the law of the market. Therefore, Say's Law suggests that the government should stimulate production rather than consumption. Another factor of Say's Law is that aggregate supply is determined by supply-side factors such as changes in raw materials, changes in wages, and changes in the direct tax on industry (Coursework Info).

Say's Law is an idea that is frequently found in classical economics. It rejects the idea of a glut in supply, because of the idea that supply creates its own demand. Therefore, it rejects Mathus' theory of gluts. The first part of Say's Law is that there cannot be too much saving. Saving is actually an expenditure, even though it is an investment expenditure. Real estate adjustments are able to bring savings and investment expenditure into equality. Say's Law also discusses the demand for money. Under the classical view, the demand for money was seen as something wholly related to the desire to undertake transactions; therefore the demand for money would be based on the transactions planned and the expected price of the transactions. Money itself is not held as an asset, because it pays no interest. Therefore, people either consume or invest their money. Say's Law suggests that there is no hoarding or dishoarding of money, all income not consumed is saved, all saving is invested, all income is spent, and that there cannot be overproduction or underconsumption. In fact, Say's Law is sometimes simplified as a demand is a supply, and a supply is a demand; which applies in a barter economy. The principle does not necessarily apply in a monetary economy. Instead, it applies in a monetary economy only if a monetary economy behaves like a barter economy. In fact, "Say's Law, at least as Say himself described it, is about an unfolding market discovery process, not an equilibrium condition, as it is often presented" (Horwitz 2003, p83).

There is a suggestion that classical economists did not wholeheartedly agree with Say's Law in all scenarios. Classical economics relied on two basic assumptions: there is rigorous market competition that prevents sellers from controlling prices and people are rational (Chapter 3). Classical writers acknowledged that various disturbances could cause temporary excesses in supply. Furthermore, they acknowledged that people might want to run up a money balance. As a result, Say's Law may be referred to as an equilibrium condition, which is referred to as Say's Equality. Therefore, money is neutral only between equilibrium states; it can also be a disturbing cause.

Keynes disagreed with some of the basics of Say's Law, though he thought that Say's Law provided the underpinnings for much of classical economic thought (Kent YEAR, p62). Keynes disagreed with the idea that supply can create its own demand. Instead, Keynesian economics emphasizes the role of demand. In fact, Keynesian economics rests on the principle that aggregate demand creates supply. Moreover, Keynesian economics seems to take into account boom and bust cycles and recessionary periods in a way that Say's Law does not. According to Keynesian principles, when aggregate demand is low, the number of jobs will be low, which means that people will not have enough income to create demand for other products. This results in an aggregate demand failure and can cycle into recessionary periods. Moreover, Keynesian economics examines the interaction between multiple markets, showing how supply and demand in a single market can literally impact the entire economy.

Another significant difference between Keynesian economics and Say's Law is the role that money and a monetary economy play in an economy. Say's Law basically ignores the idea that some people will engage in hoarding behaviors, and suggests that savings are essentially spending and result in interest. However, people do engage in hoarding behavior, and Keynesian economics allow for this behavior in a way that Say's Law does not. Hoarding creates an increase in the demand for money while also creating decreases in the demand for goods and services, which leads to a recession. In classical though, hoarding (beyond the short-term) would always be balanced by dishoarding, in which people were accumulating inventory. However, Keynesian economics acknowledges that there are different decision makers in the hoarding and dishoarding process, so that it is unlikely that hoarding and dishoarding will always remain in equilibrium. Classical theorists suggest that financial markets and interest rates can help balance hoarding and dishoarding, but this is generally seen to occur with a recession, not in a manner that can prevent a recession. The Keynesian approach to this is to stimulate demand for products. The theory is that the increase for demand in a single product leads to increased (or maintained) production, which leads to increased (or maintained) employment, which increases the demand for other products. Obviously, demand is the driving factor in Keynesian economics rather while supply is the driving factor in Say's Law.

Many people may wonder if Say's Law is even important for an understanding of modern economic theory, given the prevalence of Keynesian economics in the field. While Say's Law may be part of classical economic theory, it is important to understand it as more than a historic relic. "Say's law is not just an obsolete theory. It has been refashioned and is currently an important foundation of microeconomic theory among some U.S. economists (such as the New Classical economists, and supply-side economists)" (Sherman & Kolk 1996, p4). Say's Law is, in many ways, a laissez-faire approach to economics; though government can certainly play a role in helping maintain the desired equilibrium of the economy.

Say's Law becomes much more difficult to understand in a global economy. Supply may indeed increase demand, but that might not have an impact on a local economy when that supply is created in another location. This can make it very difficult to apply Say's Law to the current monetary and fiscal policies; because of the economy is a global one. However, Say's law suggests that consumption, alone is not enough to stimulate an economy. The idea that consumption can do so is one that has been proven false, at least locally. The fiscal policies of the last two administrations has pushed the idea that stimulating the economy through consumption would be enough for forestall a recession. That did not occur. However, it may have helped establish equilibrium across global populations, which is something that was not considered in discussions of classical economics, because there was no global economy, but that does not mean improvements for the local economy.