Say's Law Of Markets

In classical economics, Say's law, or the law of markets, states that "Supply creates its
own demand” or that production necessarily increases aggregate demand by an equal
amount. Say's Law is sometimes incorrectly said to state that production inherently
creates consumption.[1] In his principal work, A Treatise on Political Economy (Traité
d'économie politique, 1803), Jean-Baptiste Say wrote: "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."[2] And also, "As each of us can only purchase the productions of others with his
own productions – as the value we can buy is equal to the value we can produce, the
more men can produce, the more they will purchase."[3]
Say further argued that this law of markets implies that a general glut (a widespread
excess of supply over demand) cannot occur. If there is a surplus of one good, there
must be unmet demand for another: "If certain goods remain unsold, it is because other
goods are not produced."[3] Say's law has been one of the principal doctrines used to
support the laissez-faire belief that a capitalist economy will naturally tend toward full
employment and prosperity without government intervention. [4][5]
Over the years, at least two objections to Say's law have been raised:

 General gluts do occur, particularly during recessions and depressions.

 Economic agents may collectively choose to increase the amount of money they
hold, thereby reducing demand but not supply.
Say's law was generally accepted throughout the 19th century, though modified to
incorporate the idea of a "boom-and-bust" cycle. During the worldwide Great
Depression of the 1930s, the theories of Keynesian economics disputed Say's
conclusions.
Scholars disagree on the question of whether it was Say who first stated the
principle,[6][7] but by convention, Say's law has been another name for the law of
markets ever since John Maynard Keynes used the term in the 1930s.
Say's Law Of Markets
Say’s law of markets, developed in 1803 by French classical economist and
journalist, Jean-Baptiste Say, was influential because it deals with how a society creates
wealth and the nature of economic activity. To have the means to buy, you first have to
have something to sell, Say reasoned. So, the source of demand is production, not
money. In other words, a person's ability to demand goods or services from other is
predicated on the income produced by that person's own acts of production

The law of markets ran counter to the mercantilist view that money is the source of
wealth. It supports the view that governments should not interfere with the free market
and should adopt laissez-faire economics. Say's law still lives on in modern neoclassical
economic models which assume that all markets clear.

Say’s law has also influenced supply-side economists, who believe in tax breaks for
business and other policies intended to spur production, and Austrian economists who
believe Say’s law would hold if interfering governments and monetary policy did not
distort the economy, create booms and busts, and cause misallocation of capital.

Implications of Say’s Law of Markets

One of the burning issues of Say’s day was the question whether a free economy could
experience a depression as a result of overproduction, or excess demand. Say’s law
says that a supply glut cannot be the cause of such downturns,
because macroeconomic activity tends towards stability and the economy should
always be close to full employment. Because the supply of one type of good constitutes
the demand for other, different goods, aggregate demand is not only equal to, but
identical to, aggregate supply. To boost the economy, the focus should be on increasing
production rather than demand.

The Keynesian Challenge to Classical Economics

The Great Depression appeared to prove that economies could experience crises that
market forces could not correct – as there was an abundance of manufacturing
capacity, but not enough demand. British economist John Maynard Keynes challenged
Say’s law in his seminal book, "General Theory of Employment, Interest and Money."

Keynesian economics argues that governments do need to intervene to stimulate

demand – through expansionary fiscal policy and money printing — because structural
rigidities in the economy can lead to unemployed resources. Banks businesses and
consumers hoard cash in hard times and during liquidity traps, as we witnessed during
the global financial crisis.

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