Sunday, November 4, 2012

Say’s Law: Supply Creates its Own Demand? Nay, Nay!

Why is it that conventional wisdom depicts classical economist John Baptiste Say and Say’s Law as “supply creates it own demand”? Is the depiction correct?

“Say’s Law is best known in the form Keynes postulated it in The General Theory: “supply creates its own demand” . Despite the apparent eloquence and simplicity contained in this definition, it obscures the genuine meaning of the concept.”

“Instead, Say’s Law can be interpreted as saying that the ability to produce generates their ability to purchase other products. One can only fully grasp Say’s Law when analyzing the nature of the division of labor in a market economy. Individuals specialize in producing a limited range of goods or services, and in return receive income that they use to buy goods and services from others. The income one receives from production is their source of demand. In other words, “all purchasers must first be producers, as only production can generate the power to purchase” . This idea is intimately linked to the Smithian idea that the division of labor is limited by the extent of the market.“

The above quotes come from a most excellent essay by Garrett Watson of St. Lawrence University.His essay is entitled Misunderstanding Say’s Law of Markets.



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