Say's Law - Assumptions and Critiques

Assumptions and Critiques

Say's law did not posit that (as per the Keynesian formulation of Say's law) "supply creates its own demand". Neither was it based on the idea that all that is saved will be exchanged. Rather, Say sought to refute the idea that production and employment were limited by low consumption.

Thus Say's law, in its original concept, was not intrinsically linked nor logically reliant on the neutrality of money (as has been alleged by those who wish to disagree with the law) because the key proposition of the Law is that no matter how much people save, production is still a possibility as it is the prerequisite for the attainment of any additional goods of consumption. Say's law states that in a market economy, goods and services are produced for exchange with other goods and services – 'employment multipliers' – therefore arise from production and not exchange alone-and in the process a sufficient level of real income is created to purchase the economy's entire output due to the truism that the means of consumption are limited ex vi termini by the level of production. That is to say, (with regard exchange of produce within a division of labour) the total supply of goods and services in a market economy will equal the total demand derived from consumption during any given time period – in modern terms, "general gluts cannot exist", although there may be local imbalances, with gluts in one market balanced by shortages in others.

Nevertheless, for some neoclassical economists, Say's law implies that economy is always at its full-employment level. This is not necessarily what was proposed by Say.

In the Keynesian interpretation, the assumptions of Say's law are:

• A barter model of money – "products are paid for with products;"
• Flexible prices – all prices can rapidly adjust upwards or downwards;
• No government intervention.

Under these assumptions, Say's law implies that there cannot be a general glut, so that a persistent state in which demand is generally less than productive capacity and high unemployment results, cannot exist. Keynesians therefore argued that the Great Depression demonstrated that Say's law is incorrect. Keynes, in his General Theory, argued that a country could go into a recession because of "lack of aggregate demand".

Since there have been a great many persisting economic crises historically, one may either reject one or more of the assumptions of Say's law, its reasoning, or its conclusions. Taking the assumptions in turn:

• Circuitists and some post-Keynesians dispute the barter model of money, arguing that money is fundamentally different from commodities, and that credit bubbles can and do cause depressions. Notably, debt owed does not change because the economy has changed.
• Keynes argued that prices are not flexible – for example, workers may not take pay cuts if the result is starvation.
• Laissez faire economists argue that government intervention is the cause of economic crises, and that left to its devices, the market will adjust efficiently.

Turning to the implication that dislocations cannot cause persistent unemployment, some theories of economic cycles accept Say's law, and seek to explain high unemployment in other ways, considering depressed demand for labor as a form of local dislocation. For example, Real Business Cycle Theory advocates argue that real shocks cause recessions, and that the market responds efficiently to these real economic shocks.