Say’s law of market is the foundation of classical economics. It was named after French classical economist and journalist, J.B. Say. It was developed in 1803 AD.
According to him, "Supply creates its own demand". That means production of goods and services create demand for them too.
But there cannot be general overproduction or general unemployment on account of the excess of supply over demand because whatever is supplied or produced is automatically exchanged for money. Hence, Say's law of market applies both in barter as well monetary economy.
The theory of full employment of classical economists is based on J.B. Say's law of market.
Assumptions
Say's Law of market is based on following assumptions:
- There is existence of free market economy.
- There is no government intervention.
- There is presence of self-adjusting economy.
- Market size is flexible enough for expansion.
- Money is only a medium of exchange.
- There is presence of closed economy which means international trade.
- Perfect competition exists in both factor and product market.
- Wages and prices are flexible.
- Saving equals to investment.
Implications of Say's Law
Following are the implications of Say's Law:
1. Self-adjusting economy: According to J.B. Say, there is an automatic adjustment of each factor in the working of the economy. For example, if supply increases, demand also increases and adjustment takes between them. Hence, government intervention should not be there in the working of the economy.
2. No general over production: The general over production is impossible. When there is an increase in production, the income of factors of production (land, labour, capital,etc) also increases. With increases in income demand also increases.
3. No general unemployment: Since, economy is auto-adjusting in nature, there will no unemployment problem in economy. Unemployment is short term in nature and it will be adjusted to full employment automatically. Hence, there is no general unemployment.
4. Flexible in wages creates full employment: According to J.B. Say, wage cut creates the situation of full employment. Hence, the government should not adopt the policy of wage rigidity in the economy.
Criticism of Say's Law
Say's Law has been criticized on the following grounds:
1. Supply does not creates its own demand:
J.B. Say states that supply creates its own demand. If there is increase in income does not necessarily mean that all income will be spent, some portion of it may be saved. He believed that all the savings are invested and both becomes equal due to rate of interest but the main determinat of investment is marginal efficiency of capital not rate of interest. Hence, supply does not creates its own demand.
2. Money is only a medium of exchange:
Say's law assumes that money is only a medium of exchange and there is no store of value function of money. But Keynes says that money also functions as the store of value. People also demand money for speculative purpose to take benefit of rise in interest rate in future.
3. Economy is not self-adjusting:
According to J.B Say, economy is auto-adjusting and should not be intervened. But due to uneven distribution of income, there is difference in demand between rich and poor people. There may be deficiency in aggregate demand when there is gap between production and consumption. Hence, government intervention is required to regulate economy until full employment level in economy is obtained.
