Say's Law of Market

Say's Law of Market

J. B. Say, a French economist, propounded his law of markets in his book, 'Treatise on Political Economy' (1803). His law can be summarized as 'supply creates its own demand'. This means that production of every good generates sufficient income to ensure that there is enough demand for the goods produced.

Every production which brings goods to market does so only in order to exchange them for other goods. It precisely states that whatever be the level of output, and the income created by that will necessarily lead to an equal amount of spending and hence deficiency of aggregate demand cannot occur. Hence, Say rejected the view that there could be general over-production and mass unemployment. Only full employment prevails in the economy. He made the following assumptions.

1.        All incomes of the households are spent on consumption of goods and services.

2.        There is no government activity (no taxation, public spending, price control etc.).

3.        It is a closed economy i.e. no relationship with other economies.

Whatever is produced represents the demand for another product. Additional supply is additional demand. Thus Say's analysis is carried on in terms of barter. However, introduction of money in no way affects the process. In fact, money-based economy is more efficient than barter economy. It is true that sometimes, misdirected production may result in temporary over-supply of a particular product in a particular industry. Say himself admits this fact. But this disequilibrium disappears by the operation of the self-adjusting market forces. But general over-production or unemployment is impossible according to Say.

The essential aspects of Say's Law can be summarized as:

1.        Economy is self-adjusting

2.        No general over-production or unemployment is possible

3.        All idle resources are fully employed

4.        There is economic interdependence between nations

5.        Flexible wage rate prevails in the economy

6.        Flexible rate of interest prevails in the economy

7.        Money is simply a veil

8.        It helps international trade and

9.        No government interference is essential

Criticism of Say's Law

Keynes has clearly exposed the weakness of Say's law. In 1936, Keynes brought about a revolution in economic theory attacking Say's law. In 1930's, Great Depression and its effects showed that the classical theory of employment was wrong and its foundation, the Say's Law was unacceptable. Keynes launched a vigorous attack on the Say's Law. The main points of criticism of the law are:

1.        Great Depression made Say's law unpopular

2.        All incomes earned are not always spent on consumption

3.        Similarly whatever is saved is not automatically invested

4.        The Law was based on wrong analysis of market

5.        It suffers from the fallacy of aggregation

6.        Aggregate supply and aggregate demand are not always equal

7.        Rate of interest is not the equilibrating factor

8.        Capitalist system is not self-adjusting always

9.        Perfect competition is an unrealistic assumption

10.   Money is a dominant force in the economy

11.   The law is applicable only for long period

12.   Say's law holds goods only in a barter economy

Say's law has no validity and use now, critics point out. However, the classical theory relied on Say's law to assure that there would always be full-employment as a result of equality between aggregate demand and aggregate supply. In short there cannot be deficiency of aggregate demand. Even if there is any unemployment, the market mechanism would restore full employment.