Say’s Law of Markets

"The supply of a good or service creates demand for that good or service"

What is Say’s Law of Markets?

Say’s Law of Markets states that the supply of a good or service creates demand for that good or service. Jean Baptiste Say, a classical French economist, studied the nature of markets in his 1803 book “Treatise on Political Economy” and put forth the view that supply creates its own demand and that economic agents must first engage in production before they can demand goods and services in the market.

 

Say’s Law of Markets

 

Summary

  • Say’s Law of Markets states that the supply of a good or service creates demand for that good or service, i.e., supply creates its own demand.
  • According to Say’s Law, any economic agent must first produce goods and services that before they can consume, i.e., a person’s ability to demand goods and services is a direct result of the production activities they’ve undertaken.
  • Since production comes first and demand follows the wealth created from production, Say’s Law infers that it is important to look at the supply side if there is a fall in consumption.

 

Understanding Say’s Law of Markets

According to the Law of Markets, a person’s ability to demand goods and services is a direct result of production activities that they’ve undertaken. They earn an income either through the production and sale of physical assets or by supplying labor to capital owners. The productivity of the economic agent will influence the level of income they receive, which will, in turn, influence what goods and services they demand and how much of each good or service they demand.

By choosing to produce a certain good, they are indirectly creating the demand for those goods and services that they intend to buy with their earned income. Conversely, if one did not demand anything, they would not want to work. Thus, Say’s Law describes the unfolding market process, stating that “all purchasers must first be producers, as only production can generate the power to purchase.”

Since the production level drives the ability to demand, the most extensive demand will be found in areas where the maximum value is created. Thus, production comes first, and demand follows the wealth created from production. On this note, Say’s Law infers that it is important to look at the supply side if there is a fall in consumption.  There is no point in encouraging demand if there is nothing to supply.

 

Keynesian Criticism of Say’s Law

The colloquial expression for Say’s Law is that “supply creates its own demand.” It translates as Say saying that simply producing a good is enough to create a demand for it. Further, aggregate supply will always be equal to the aggregate demand of goods and services, and that we cannot deviate from full employment. John Keynes is one of the most important critics of Say’s Law.

Keynesians claim what Say meant was that if things are produced, the income generated from production is automatically spent to fulfill people’s demand. If it were true, then Say would’ve been wrong as some income is often saved for future consumption. However, Keynes focused on only a part of the complex idea behind Say’s Law and presented it as the whole concept.

In reality, while the law maintains that there cannot be a general absence of the ability to purchase what’s been produced (i.e., lack of demand for current supply) in the long run, it does not dismiss the existence of general gluts or recession.

In fact, given the existence of money, Say’s Law considers the possibility of aggregate demand being different from the aggregate supply. If the banking system is allowed to function freely, then the income that some people choose to save will be transferred to those who wish to borrow; thus, reallocating the demand, keeping the aggregate demand unchanged. Say’s Law essentially puts down the circular flow in markets.

Therefore, as opposed to the critique put forward by the Keynesians, the presence of deficient aggregate demand is not the result of market failure, and the occurrence of recessions does not contradict the Law of Markets. Looking at Say’s Law in its entirety provides insights into the market operations.

 

Learn More

CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and developing your knowledge base, please explore the additional relevant resources below:

  • Aggregate Supply and Demand
  • Keynesian Economic Theory
  • Milton Friedman
  • Demand Theory

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