Say’s Law of Market
Say's law of markets is the core of the classical theory of employment. An early
19th century French Economist, J.B. Say, enunciated the proposition that
"supply creates its own demand." Therefore, there cannot be general
overproduction and the problem of unemployment in the economy. On the other
hand, if there is general overproduction in the economy, then some labourers
may be asked to leave their jobs. There may be the problem of unemployment
in the economy for sometime. In the long-run, the economy will automatically
tend toward full employment. In Say's words, "It is production which creates
markets for goods. 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. Nothing is
more favourable to the demand of one product, than the supply of another."This
definition explains the following important facts about the law.
Production Creates Market (Demand) for Goods:When producers obtain the
various inputs to be used in the production process, they generate the necessay
income. For example, producers give wages to labourers for producing goods.
The labourers will purchase the goods from the market for their own use. This,
in turn, causes the demand for goods produced. In this way, supply creates its
own demand.
Barter System as its Basis: In its original form, the law is applicable to a barter
economy where goods are ultimately sold for goods. Therefore, whatever is
produced is ultimately consumed in the economy. In other words, people
produce goods for their own use to sustain their consumption levels. Say's law,
in a very broad way, is, as Prof. Hansen has said, "a description of a free-
exchange economy. So conceived, it illuminates the truth that the main source
of demand is the flow of factor income generated from the process of
production itself. Thus, the existence of money does not alter the basic law.
General Overproduction Impossible: If the production process is continued
under normal conditions, then there will be no difficulty for the producers to sell
their products in the market. According to Say, work being unpleasant, no
person will work to make a product unless he wants to exchange it for some
other product which he desires. Therefore, the very act of supplying goods
implies a demand for them. In such a situation, there cannot be general
overproduction because supply of goods will not exceed demand as a whole.
But a particular good may be over produced because the producer incorrectly
estimates the quantity of the product which others want. But this is a temporary
phenomenon, for the excess production of a particular product can be corrected
in time by reducing its production. J.S. Mill supported Say's views regarding the
, impossibility of general overproduction and general unemployment. According
to him, Say's law of markets does not consider the possibility of general
overproduction and also rejects the possibility of decrease in the demand of
goods produced in the economy. By employing more factors of production,
there is an increase in the level of employment and therefore profits are
maximised.
Saving-Investment Equality:Income accruing to the factor owners in the form
of rent, wages and interest is not spent on consumption but some proportion out
of it is saved which is automatically invested for further production. Therefore,
investment in production is a saving which helps to create demand for goods in
the market. Further, saving-investment equality is maintained to avoid general
overproduction.
Rate of Interest as a Determinant Factor : Say's law of markets regards the
rate of interest as a determinant factor in maintaining the equality between
saving and investment. If there is any divergence between the two, the equality
is maintained through the mechanism of the rate of interest. If at any given time
investment exceeds saving, the rate of interest will rise. To maintain the
equality, saving will increase and investment will decline. This is due to the fact
that saving is regarded as an increasing function of the interest rate, and
investment as a decreasing function of the rate of interest. On the contrary,
when saving is more than investment, the rate of interest falls, investment
increases and saving declines till the two are equal at the new interest rate.
Labour Market: Prof. Pigou formulated Say's law in terms of labour market.
By giving minimum wages to labourers, according to Pigou, more labourers can
be employed. In this way, there will be more demand for labour. As pointed out
by Pigou, "with perfectly free competition...there will always be at work a
strong tendency for wage rates to be so related to demand that everybody is
employed." Unemployment results from rigidity in the wage structure and
interferences in the working of the free market economy. Direct interference
comes in the form of minimum wage laws passed by the state. The trade unions
may be demanding higher wages, more facilities and reduction in working
hours. In short, it is only under free competition that the tendency of the
economic system is to provide automatically full employment in the labour
market.
Say's law of markets is the core of the classical theory of employment. An early
19th century French Economist, J.B. Say, enunciated the proposition that
"supply creates its own demand." Therefore, there cannot be general
overproduction and the problem of unemployment in the economy. On the other
hand, if there is general overproduction in the economy, then some labourers
may be asked to leave their jobs. There may be the problem of unemployment
in the economy for sometime. In the long-run, the economy will automatically
tend toward full employment. In Say's words, "It is production which creates
markets for goods. 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. Nothing is
more favourable to the demand of one product, than the supply of another."This
definition explains the following important facts about the law.
Production Creates Market (Demand) for Goods:When producers obtain the
various inputs to be used in the production process, they generate the necessay
income. For example, producers give wages to labourers for producing goods.
The labourers will purchase the goods from the market for their own use. This,
in turn, causes the demand for goods produced. In this way, supply creates its
own demand.
Barter System as its Basis: In its original form, the law is applicable to a barter
economy where goods are ultimately sold for goods. Therefore, whatever is
produced is ultimately consumed in the economy. In other words, people
produce goods for their own use to sustain their consumption levels. Say's law,
in a very broad way, is, as Prof. Hansen has said, "a description of a free-
exchange economy. So conceived, it illuminates the truth that the main source
of demand is the flow of factor income generated from the process of
production itself. Thus, the existence of money does not alter the basic law.
General Overproduction Impossible: If the production process is continued
under normal conditions, then there will be no difficulty for the producers to sell
their products in the market. According to Say, work being unpleasant, no
person will work to make a product unless he wants to exchange it for some
other product which he desires. Therefore, the very act of supplying goods
implies a demand for them. In such a situation, there cannot be general
overproduction because supply of goods will not exceed demand as a whole.
But a particular good may be over produced because the producer incorrectly
estimates the quantity of the product which others want. But this is a temporary
phenomenon, for the excess production of a particular product can be corrected
in time by reducing its production. J.S. Mill supported Say's views regarding the
, impossibility of general overproduction and general unemployment. According
to him, Say's law of markets does not consider the possibility of general
overproduction and also rejects the possibility of decrease in the demand of
goods produced in the economy. By employing more factors of production,
there is an increase in the level of employment and therefore profits are
maximised.
Saving-Investment Equality:Income accruing to the factor owners in the form
of rent, wages and interest is not spent on consumption but some proportion out
of it is saved which is automatically invested for further production. Therefore,
investment in production is a saving which helps to create demand for goods in
the market. Further, saving-investment equality is maintained to avoid general
overproduction.
Rate of Interest as a Determinant Factor : Say's law of markets regards the
rate of interest as a determinant factor in maintaining the equality between
saving and investment. If there is any divergence between the two, the equality
is maintained through the mechanism of the rate of interest. If at any given time
investment exceeds saving, the rate of interest will rise. To maintain the
equality, saving will increase and investment will decline. This is due to the fact
that saving is regarded as an increasing function of the interest rate, and
investment as a decreasing function of the rate of interest. On the contrary,
when saving is more than investment, the rate of interest falls, investment
increases and saving declines till the two are equal at the new interest rate.
Labour Market: Prof. Pigou formulated Say's law in terms of labour market.
By giving minimum wages to labourers, according to Pigou, more labourers can
be employed. In this way, there will be more demand for labour. As pointed out
by Pigou, "with perfectly free competition...there will always be at work a
strong tendency for wage rates to be so related to demand that everybody is
employed." Unemployment results from rigidity in the wage structure and
interferences in the working of the free market economy. Direct interference
comes in the form of minimum wage laws passed by the state. The trade unions
may be demanding higher wages, more facilities and reduction in working
hours. In short, it is only under free competition that the tendency of the
economic system is to provide automatically full employment in the labour
market.
