Say's law and its critisism

 What is Say’s Law of Market

Say’s Law of Markets is the core of the classical theory of employment. An early 19th-century French Economist, J.B. Say, enunciated the proposition that “supply creates its own demand.” Therefore, there cannot be general overproduction and the problem of unemployment in the economy.

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.



Criticisms of Say’s Law:

J.M. Keynes in his General Theory made a frontal attack on the classical postulates and Say’s law of markets.

He criticised Say’s law of markets on the following grounds:

1. Supply does not create its Demand:

Say’s law assumes that production creates market (demand) for goods. Therefore, supply creates its own demand. But this proposition is not applicable to modern economies where demand does not increase as much as production increases. It is also not possible to consume only those goods which are produced within the economy.

2. Self-adjustment not Possible:

According to Say’s law, full-employment is maintained by an automatic and self-adjustment mechanism in the long run. But Keynes had no patience to wait for the long period for he believed that “In the long-run we are all dead.” It is not the automatic adjustment process which removes unemployment. But unemployment can be removed by increase in the rate of investment.

Over Production is Possible:

Say’s law is based on the proposition that supply creates its own demand and there cannot be general over-production. But Keynes does not agree with this proposition. According to him, all income accruing to factors of production is not spent but some fraction out of it is saved which is not automatically invested. Therefore, saving and investment are always not equal and it becomes the problem of overproduction and unemployment.

5. Underemployment Situation:

Keynes regards full employment as a special case because there is underemployment in capitalist economies. This is because the capitalist economies do not function according to Say’s law and supply always exceeds its demand. For example, millions of workers are prepared to work at the current wage rate, and even below it, but they do not find work.

3. Money is not Neutral:

Say’s law of markets is based on a barter system and ignores the role of money in the system. Say believes that money does not affect the economic activities of the markets. On the other hand, Keynes has given due importance to money. He regards money as a medium of exchange. Money is held for income and business motives. Individuals hold money for unforeseen contingencies while businessmen keep cash in reserve for future activities.