Proponents of Say`s Law believe that during the production process, the necessary purchasing power is generated – which absorbs the additional supply. As this chart shows, households provide factor services to businesses and earn income from them. Households spend part and save part of this income. Businesses derive their income from sales to households – they also receive money from households for investment. (Image: adapted from economicsdiscussion.net) In his excellent book on Say`s Law, Hutt states: “All power of demand comes from production and supply. The delivery process – that is, the production and appropriate pricing of services or assets to be replaced or expanded – keeps the flow of demand in constant circulation or expansion. [3] Later, Hutt will be a little more precise in his definition: “The demand for each commodity is a function of the supply of non-competing goods. [4] The addition of the “non-competitive” modifier is important. If I sell my services as a computer technician, it is presumed that my resulting claims apply to goods and services that are not those of a computer technician (or similar). Goods or services that compete with those I sell can always be obtained through the direct use of my work, so I am unlikely to demand them. The demand for my services as a computer technician is the result of the procurement activity of everyone except computer technicians. According to Keynes, the implication of Say`s law is that a free market economy is always what Keynesian economists call full employment (see also Walras` law). Therefore, Say`s Law is part of the general worldview of laissez-faire economics – that is, free markets can automatically solve the problems of the economy.

(These problems are recessions, stagnation, depression, and involuntary unemployment.) Say was heavily influenced by Adam Smith (1723-1790), the Scottish economist, philosopher and author now known as the father of modern economics. Some scholars now suspect that Say was not the first person to formulate what we now call Say`s Law. In classical economics, however, there was no reason for such a collapse. From this point of view, prolonged depressions such as those of the 1930s are impossible in a free market organized according to laissez-faire principles. Laissez-faire market flexibility allows prices, wages and interest rates to be adjusted to eliminate excess supply and demand; However, since all economies are a mix of regulation and free market elements, laissez-faire principles (which require a free market environment) cannot effectively accommodate excess supply and demand. Before the Keynesian revolution, denying the validity of Say`s law put an economist among the crackpots, people who had no idea how an economy worked. That the vast majority of economists today were classified as crazy in the 1930s and before is simply the way it is. [22] According to the Merriam-Webster dictionary, Say`s law reads: “A statement in economics: production creates not only the supply of goods, but also the demand for them.

Such misunderstandings are often more than just mistakes; They can have profound implications for our theories of the social world, our interpretations of history, and our policy proposals. There are many examples of this phenomenon in economics. My job here is to examine one of them: how Say`s law of markets (named after the great classical economist Jean-Baptiste Say) has been fundamentally misunderstood by economic theorists and laymen, and to examine some of the consequences of this misunderstanding. While economists have abandoned Say`s Law as a true law that must still apply, most still view Say`s Law as a useful rule of thumb that economics will tend to follow in the long run, as long as it is allowed to adapt to shocks such as financial crises without being exposed to other such shocks. [28] The applicability of Say`s law to long-run theoretical conditions is a motivation behind the study of general equilibrium theory in economics, which studies economies in the context in which Say`s law applies. However, he pointed out that the shortage of some goods and the flooding of others may continue if the collapse in production continues due to ongoing natural disasters or (more frequent) government interventions. Say`s Law therefore supports the idea that governments should not interfere in the free market and adopt a laissez-faire economy. In this John Locke Foundation video, Dr.

Paul Cwik, associate professor of economics at Mount Olive College, explains what the arguments behind Keynesian economics and Say`s Law are. Say`s Law also has a significant impact on what governments should do in the area of economic policy. Instead of adhering to mercantilist policies based on the belief that money is the basis of wealth, Say`s Law argues more strongly in favor of laissez-faire economics. John Maynard Keynes (1883-1946) – creator of the influential Keynesian school of economics – disagreed with Say`s law. He experienced the Great Depression, which showed that there can be more production than demand for goods. Keynes argued that governments must actively promote demand (using tactics such as money printing and fiscal policy aimed at expansion). Otherwise, some resources are destined to sit idle (e.g., hoarding money in times of economic hardship). If firms produce more goods than is required in certain sectors, suppliers in those sectors lose revenue. This loss of income, which in turn would have been used to purchase other goods from other firms, reduces the demand for products of firms in other sectors, resulting in a general decline in production and thus a reduction in the demand for labour. This leads to what contemporary macroeconomics calls structural unemployment, the presumed mismatch between aggregate demand for labour in the jobs offered and individual professional qualifications and the location of work. This differs from the Keynesian concept of cyclical unemployment, which is thought to result from insufficient aggregate demand. Say`s law, also known as Say`s law of markets in classical economics, states that supply itself creates its own demand.

According to Say`s law, aggregate output necessarily generates an equal amount of aggregate demand. It is an economic rule that production is the source of demand, says Say`s law. If you look at what governments in North America, Europe and other parts of the world have done to get their economies back on track after the global recession of 2007-08, Keynesian economics is clearly the preferred option. The concept of Say`s law is part of classical economics and was created by the pro-laissez-faire economist Jean-Baptiste Say (1767-1832) at the turn of the 19th century. In classical economics, Say`s law or the law of markets is the assertion that the production of one product creates demand for another product by providing something of value that can be exchanged for that other product. Production is therefore the source of demand. In his magnum opus Traité d`économie politique (1803), Jean-Baptiste Say wrote: “As soon as a product is created, it offers from that moment on a market other products to the full measure of its own value.” [1] And also: “Since each of us can only buy the productions of others with our own productions – since the value we can buy is equal to the value we can produce, the more people can produce, the more they will buy.” [2] Say`s law was used throughout the 19th century. It has been modified to incorporate the idea of a boom-bust cycle. During the Great Depression of the 1930s, Keynesian economic theories challenged Say`s conclusions.

Keynesian economics argues for policy recipes that directly contradict the implications of Say`s Law.