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Say's Law of Markets: Chapter XV, "Of The Demand or Market For Products" Jean-Baptiste Say's

Say's Law of Markets states that production creates income which creates demand, not the other way around. It argues that a person must first produce goods or services and receive income from their sale in order to have the means to demand other goods. The law implies that governments should encourage and not interfere with production to promote economic growth. It had a significant influence on classical economics but has been updated by modern economists.

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Akshay Sarjan
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472 views3 pages

Say's Law of Markets: Chapter XV, "Of The Demand or Market For Products" Jean-Baptiste Say's

Say's Law of Markets states that production creates income which creates demand, not the other way around. It argues that a person must first produce goods or services and receive income from their sale in order to have the means to demand other goods. The law implies that governments should encourage and not interfere with production to promote economic growth. It had a significant influence on classical economics but has been updated by modern economists.

Uploaded by

Akshay Sarjan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Say's Law of Markets

What Is Say's Law of Markets?


Say's Law of Markets comes from chapter XV, "Of the Demand or
Market for Products" of French economist Jean-Baptiste Say's 1803
book, Treatise on Political Economy. It is a classical economic theory
that says that the income generated by past production and sale of
goods is the source of spending that creates demand to purchase
current production. Modern economists have developed varying views
and alternative versions of Say's Law.
KEY TAKEAWAYS

 Say's Law of Markets is theory from classical economics arguing


that the ability to purchase something depends on the ability to
produce and thereby generate income.
 Say reasoned that to have the means to buy, a buyer must first
have produced something to sell. Thus, the source of demand is
production, not money itself.
 Say's Law implies that production is the key to economic growth
and prosperity and the government policy should encourage (but
not control) production rather than promoting consumption.
Understanding Say's Law of Markets
Say's Law of Markets was developed in 1803 by the French classical
economist and journalist, Jean-Baptiste Say. Say was influential
because his theories address how a society creates wealth and the
nature of economic activity. To have the means to buy, a buyer must
first have sold something, Say reasoned. So, the source of demand is
prior to the production and sale of goods for money, not money itself.
In other words, a person's ability to demand goods or services from
others is predicated on the income produced by that person's own
past acts of production.

 
Say's Law says that a buyer's ability to buy is based on the buyer's
successful past production for the marketplace.
Say's Law ran counter to the mercantilist view that money is the
source of wealth. Under Say's Law, money functions solely as a
medium to exchange the value of previously produced goods for new
goods as they are produced and brought to market, which by their
sale then, in turn, produce money income that fuels demand to
subsequently purchase other goods in an ongoing process of
production and indirect exchange. To Say, money was simply a
means to transfer real economic goods, not an end in itself.

According to Say's Law, a deficiency of demand for a good in the


present can occur from a failure of the production of other goods
(which would otherwise have sold for sufficient income to purchase
the new good), rather than from a shortage of money. Say went on to
state that such deficiencies of production of some goods would, under
normal circumstances, be relieved before long by the inducement of
profits to be made in producing the goods that are in short supply.

However, he pointed out that the scarcity of some goods and glut of
others can persist when the breakdown in production is perpetuated
by ongoing natural disaster or (more often) government interference.
Say's Law, therefore, supports the view that governments should not
interfere with the free market and should adopt laissez-faire
economics.
Implications of Say's Law of Markets
Say drew four conclusions from his argument. 

1. The greater the number of producers and a variety of products in


an economy, the more prosperous it will be. Conversely, those
members of a society who consume and do not produce will be a
drag on the economy.
2. The success of one producer or industry will benefit other
producers and industries whose output they subsequently
purchase, and businesses will be more successful when they
locate near or trade with other successful businesses. This also
means that government policy that encourages production,
investment, and prosperity in neighboring countries will redound
to the benefit of the domestic economy as well. 
3. The importation of goods, even at a trade deficit, is beneficial to
the domestic economy.
4. The encouragement of consumption is not beneficial, but
harmful, to the economy. The production and accumulation of
goods over time constitutes prosperity; consuming without
producing eats away the wealth and prosperity of an economy.
Good economic policy should consist of encouraging industry
and productive activity in general, while leaving the specific
direction of which goods to produce and how up to investors,
entrepreneurs, and workers in accord with market incentives. 

Say's Law thus contradicted the popular mercantilist view that money


is the source of wealth, that the economic interests of industries and
countries are in conflict with one another, and that imports are harmful
to an economy.

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