Say's law Essay examples

1131 Words Oct 19th, 2014 5 Pages

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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Thomas Malthus however, opposed this idea as he believed that the reverse is actually true, and an overall decline in effective demand will lead to an overall decrease in economic activity. Unlike David Ricardo and James Mill who believed that gluts of certain commodities could occur, but 'general' gluts could not, Malthus believed that a general glut could occur 'because the demand of those employed in productive activities can never alone furnish a motive to the accumulation of capital' (Vaggi and Groenewegen, 2003, p.132).

However, it was John Maynard Keynes who first coined the term 'supply creates its own demand' which has been glued to the assertion of Say's law ever since. The statement originally came from Keynes' General Theory in the passage –

'From the time of Say and Ricardo the classical economists have taught that supply creates its own demand; meaning by this in some significant, but not clearly defined sense that the whole of the costs of production must necessarily be spent in the aggregate, directly or indirectly, on purchasing the product' (Keynes, 1936, p.16).

In this definition of Say's law, it seems as though Keynes may have misinterpreted what the classical economists were trying to propose, but rather manufacture an argument that is capable of attacking the classical view of involuntary unemployment. Keynes believes Say's law to be the equilibrium level of the demand price and supply price for output, and this assumes equality between

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