Thursday Theory: Say's Law of Markets

Say's Law of Markets states that there can be no demand without supply. The law is named for French economist Jean-Baptiste Say, who lived 1767-1832. Say was a classical liberal, who believed in free market, laissez-faire economics. The basic idea is that recessions occur when there is a lack of supply, not a lack of demand, and conversely, prosperity occurs when production is increased. Modern economists such as Thomas Sowell and Arthur Laffer, who developed Supply-Side economics, have advocated Say's Law.

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. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9) ^[1]

He also wrote:

It is not the abundance of money but the abundance of other products in general that facilitates sales... Money performs no more than the role of a conduit in this double exchange. When the exchanges have been completed, it will be found that one has paid for products with products.

Say's Law is in stark contradiction of Keynesian Economics, which believes that demand is more important than supply. John Maynard Keynes believed that government intervention was needed to smooth out the severity of boom and bust cycles by using fiscal and monetary policy to control the demand for products. However, advocates of Say's Law would say that without products to sell, no amount of government intervention will stop a recession. In fact, they argue further that such intervention will actually cause a recession by "crowding out" the private sector (through government purchases of goods, raising taxes which will increase costs, or increasing the money supply which will cause inflation). Therefore, Say's Law is a key to understanding laissez-faire economics, as well as supply-side economics (which is merely a restatement of laissez-faire).