Say's law Essay

1157 Words Nov 5th, 2014 5 Pages
ECOP2612 ESSAY

What is Say’s law? Compare and contrast the role that it plays in the Classical approach and Keynes’ approach. Draw the implications for the design of monetary and fiscal policies to stabilize an economy.

One of the most highly contested and controversial economic concepts is Say's law, or the law of markets, an economic theory associated with French economist and businessman Jean-Baptiste Say. The law itself is embedded in ambiguity, and is usually associated as being one of the underlying assumptions in classical economics. Say's law is frequently described as 'supply creates its own demand' which is a term that was made famous by John Maynard Keynes in his General Theory. This essay however, will use a
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They also believed that excessive levels of saving wouldn't reduce demand, as it would eventually be injected back into the economy in the form of investment, which would then lead to production, and ultimately wealth creation which would then create to purchasing power (Baumol, 1999, p. 196). Moreover, this meant that the role of Say's law in Classical economics was one which focused on the relationship between production and income. Skinner (1967, p.157) observes this and points out that the original formulation of Say's law was central to international trade. Say believed that if two nations are trading commodities, then those nations must first produce their own commodities before they have the power to purchase each others commodities. This is where one of the central points in Say's law comes into affect – the idea that if one nation is producing a greater quantity of goods then the other, then trade will be limited, not because of overproduction, but because of underproduction in the other country, thus creating a system where issues are caused by a failure of supply.

According to Say's law this principle can be applied to any market. Ultimately, what this implies is that the production of goods and services will generate enough income so that other commodities can be purchased, it is the idea that one must first produce before they can purchase. Therefore, general gluts that supposedly occur when supply exceeds demand cannot