Towards a Greater Understanding of Say’s Law

Published Wed, Mar 4 2009 5:36 AM | laminustacitus

            The most renown theory of the French economist, Jean Baptiste Say (1767-1832), the eponymous Say’s Law has been one of the most important contributions of Classical economics even though it was but a minor facet of Say’s own economics. He introduced it in Chapter XV of Book I of his A Treatise on Political Economy, and has been summarized by later economists under the catchphrase: “supply creates its own demand”. Ever since the integration of the doctrine into Classical economics by Ricardo, and J.S. Mill, Say’s Law has been the victim of intellectuals who have only understood its role in Classical economics without understanding its role in Say’s own economics. But, a firm understanding of what Say’s Law truly entails is not only a great facet to one’s education in economics, but also in understanding the very process by which the markets function.


            Above all, Say’s Law is meant to communicate the most basic principle of economics: that man lives in a world of limited means, despite his unlimited desires. There are very few goods that are given to man without cost, and hence he must utilize his labor to transform nature-given resources into the goods he demands. From this, Say realizes that not only are men consumers, but they are also producers: man cannot procure the goods he desires for free; rather he must, in isolation, independently create everything he consumers, and, in a market economy, create goods that others demand to sell for money to be able to buy the goods he demands. Forgetting the former, individuals do not acquire money as a good for consumption per se, but because it is a medium of exchange that enables them to supply themselves with the commodities that they wish for. By this reasoning, money serves as only an intermediary role in the economy; commodities are not truly paid for in money, but, other commodities. Therefore, every good produced serves as a price for others produced.


            Without a doubt, the key to Say’s Law is that what is produced must be desirable to other individuals; otherwise, the product simply will not sell and the producer will be at a loss. The entrepreneurs who successfully anticipate market demand will be the ones whose enterprises expand, and this will lead to the majority of the products sold upon market being produced by them. Surely, there can be a short-term glut in the markets when there is the quantity of commodities produced has far outstripped the demand for them. Nevertheless, the profit and loss mechanism of the market will dissuade further production in that industry, and capital there will be driven to industries that promise greater return. In fact, the only barriers in the way of a change in production is, in the short-run, natural disasters, and, in both the short-run and the long-run, government policies preventing liquidization and further reinvestment in the economy.


            In the end, Say’s Law describes basic fundamental aspects by which the markets work: that money plays a mere intermediary role in the procurement of goods, and how the market works to equalize the supply of a good to the demand for it. Without a doubt, “supply creates its own demand” does not capture the true integrity of Say’s Law, and as so it is utilized as an item to display how “primitive” the Classical economists were by many modern day professors. Later, I shall write about how they have misinterpreted this law, and why their critiques of it fail.


# RayLopez said on April 14, 2009 11:21 AM:

Thread on Say's Law