People are paid to create goods and/or services, and can then spend that money on other goods/services. And there’s no point in holding onto money for long periods without spending it because then its value is likely to decrease with inflation. So: anytime goods are manufactured or services are rendered, people are paid money, which leads to greater demand. Thus, aggregate production level leads to equal aggregate demand.
Who Developed Say’s Law?
The concept of Say’s Law is part of classical economics and was created by pro-laissez-faire economist Jean-Baptiste Say (1767–1832) near the turn of the 19th century.
Say’s Law of Markets is most poetically summarized by Say himself: “It is worthwhile to remark that 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. Thus the mere circumstance of creation of one product immediately opens a vent for other products.” Other classical economists expanded on Say’s work, including well-known figures like James Mill (1773–1836) and David Ricardo (1772–1823).
Implications of Say’s Law
According to Say’s Law, increasing production will naturally result in proportionate increases in demand. The clear implication of this assumption is that, if you’re aiming to facilitate economic growth, it’s much more effective to focus on increasing production than increasing demand. After all, production is much easier to control and spontaneously generate than demand, and increasing production will itself increase demand (resulting in higher rates of economic growth, and on a national scale, a higher Gross Domestic Product).
Say’s Law also has strong implications for what governments ought to do in the sphere of economic policy. Rather than adhering to mercantilist policies, which are based on the belief that money is the foundation of wealth, Say’s Law makes a stronger case for laissez-faire economics.
Criticisms of Say’s Law
John Maynard Keynes (1883–1946)—creator of the influential Keynesian school of economics—disagreed with Say’s Law. He lived through the Great Depression, which demonstrated that there can be more production than there is a demand for goods. Keynes asserted that governments must actively encourage demand (using tactics like printing money and fiscal policies oriented toward the expansionary). Otherwise, some resources are destined to go unused (e.g. as a result of hoarding money during economically challenging periods).
Other, related criticisms of Say’s Law:
- Wages, and also prices, are not flexibly consequence-free—workers will undermine efforts to lower their wages.
- High levels of savings (when people and businesses hoard money) mean lower consumption. They may do so due to low economic confidence in the prospect of spending.
- Liquidity traps involve spending demand being outweighed by the demand to hold onto cash. The result: bank reserves go up along with the savings rate so that total demand throughout an economy declines.