SAY’S LAW OF MARKETS

SAY’S LAW OF MARKET Say’s law states that “supply creates its own

demand”. Every producer supplies his goods in market in

order to get other goods in exchange. Producer have to pay remuneration for the factor of

production. According to say, increase or decrease will bring

increase or decrease on purchasing power of the households.

DEFINITIONS :-

o According to J.B.SAY : supply creates its own demand.

o According to J.S.MILL : consumption cp-exists with production. Production is the cause, the sole cause of demand. It never furnishes supply without furnishing demand, both at the same time and to an equal extent.

ASSUMPTIONS OF SAY’S LAW OF MARKETS:

a) Perfectly Competitive Economy: The law assumes perfect competition in all markets. Under perfect competition if the demand and supply of factors and commodities are not equal than their prices will be change.

b) Money-a Veil : Another assumption of this law is that money is only medium of exchange. Infact, Goods are exchange for goods. In other words money is a only veil.

No Hoarding: the law further assumes that people spent all the money they get .i.e. nothing is hoarded. All income is spend either on consumption or capital goods. Savings is always equal to investment.State is Neutral : it is also assume that state does not interfere with the activities of the economy in any manner. Forces of demand and supply will bring out the equilibrium in the economy. There is automatic adjustment of economic parameters.Unlimited opportunities for labour and capital: supply of both labour and capital is perfectly elastic. Supply of labor can increase to any extent and in any proportion in an enterprise.

EXPLANATION :

a) Say’s law and barter economy :it is necessarily applies to barter economy. Where producer brings goods to the market for sale, he does so in order to get goods in exchange. Every production activity demand for some other goods. By supply reating its own demand is meant

N

MA

C

B D XO

45

IMPLICATIONS OF SAY’S LAW

FULL EMPLOYMENT IN THE ECONOMY The law is based on the proposition that

there is full employment in the economy. Increase in production means more employment to the factors of production. Production continues to increase until the level of full employment in reached. Under such a situation the level of production will be optimum

UTILIZATION OF RESOURCES & SAVING

Proper Utilization of

Resources If there is full

employment in the economy

then resources will be properly

utilized and generate more

and more

Saving as a Social Virtue All factor income is spent in buying which they help to produce. Whatever is saved is

automatically invested for further production. In other words, saving is a social virtue.

PERFECT COMPETITION SAY’S LAW OF MARKET IS BASED ON THE PROPOSITION OF PERFECT COMPETITION IN LABOUR AND PRODUCT MARKETS.

Size of the Market – According to Say’s Law, The size of the market is large enough to create demand for goods. Moreover, the size if the market is also influenced by the forces of demand and supply of various inputs.

Role of Money as Neutral – The law is based on the proposition of a barter system where goods are exchanged for goods. But it is also assumed that the role of money in neutral. Money does not affect the production process.

AUTOMATIC ADJUSTMENT MECHANISM there is automatic and self

adjusting mechanism in different markets. In capital market, the equality between saving and investment is maintained by rate of interest while in the labour market the adjustment between demand and supply of labour is maintained by the wage rate.

LAISSEZ FAIRE POLICY

The law assumes a closed capitalist economy which follows the policy of laissez faire. The policy of laissez faire is essential for an automatic and self-adjusting process of full employment equilibrium.

OVER PRODUCTION &UNEMPLOYMENT PARTIAL OVER PRODUCTION Anticipations of the producers regarding

demand for particular goods are not correct Then supply of it may be more or less than

the demand.

PARTIAL UNEMPLOYMENT It implies that if there is over production of

one good there may be under production of the other leads to partial unemployment.

SAY’S LAW IMPLICATIONS

Say’s himself drew 4 Implications of his law

Size of the market & employment go together

Wider the extent of the market , greater will be the demand for goods

PROSPERITY IS INDIVISIBLE

It means, if the income of one individual increases it will lead to increase in the income of the other individual, because expenditure of one is income of the other.

So we should take interest in the prosperity of the other people.

Imports do not harm

Imports do not harm the industries of a country rather increased imports encourage exports resulting in more production and more employment , therefore supported FREE TRADE POLICY

Production more Important

It’s the aim of good government to stimulate production and of bad government to encourage consumption

CRITICISM OF THE SAY’S LAW

1) General over-production is possible:

Lord Keynes has proved that general over-production is possible in economy. According to Keynes, aggregate demand is determined by consumption demand and investment demand. That part of income which is not consumed is saved. If the saving is fully invested, aggregate demand will be equal to aggregate supply. However , it is not likely, because those who save and those who invest are different persons. It may not be possible the investment-decision of those who invest and the saving decision of those who save should be identical.

2) General unemployment is possible:

The implication of say’s law that general unemployment is not possible has also been criticized by Lord Keynes. According to Keynes, general unemployment is possible. According to Keynes, wage-cut is a double edged sword. On the one hand, it reduced cost or price of the commodity produced and on the other hand, it reduced the income of the labourers as well which, in its turn, reduces effective demand. Fall in effective demand will cause fall in production and employment. Thus, instead of removing unemployment, wage-cut may actually aggravate unemployment situation.

3) Lack of automatic adjustment:

According to Keynes , there is automatic adjustment only when demand and supply adjust themselves or what is saved is fully invested. It is not necessary that change in price-level will invariably lead to change in demand and supply. Similarly, it is not necessary that whatever is saved out o9f current income must invariably be invested, because investment opportunities are always limited. Its is possible that a person may like to spend his saving in increasing his wealth or to hold it in liquid form. Hence, the implication of say’s law that every system is self-adjusting is wrong.

4) Say’s law is not logical:

Say’s law is logically incorrect. Its logic that aggregate demand will always be so much as to buy all the goods produced, is not correct. Proving this logic as wrong Keynes holds that aggregate demand can be divided into two parts: (i) consumption demand and (ii) investment demand. Both these parts of total demand depend upon different factors. It is not necessary that whe3n income increases, the consumption and investment should also increase in the same proportion. In reality, increase in income is followed by less than proportionate increase in consumption expenditure.

5) Equilibrium between saving and investment:

According to Keynes, it is not necessary that saving and investment decisions should always be identical. Keynes was of the opinion that equilibrium between saving and investment is not brought about by change in rate of interest but by change in the level of income. Thus, it is not necessary the planned savings should be equal to planned investment though ex –post savings are always equal to ex -post investment.

6) Money is not merely a medium of exchange:Say’s law is based on the assumption that money serves merely as a medium of exchange. It is no effect on economics activities. It is just a veil that helps in the exchange of goods. But Keynes and other economists do not agree with this line of argument. According to them, money is not merely a medium of exchange but also a store of value. Everybody stores wealth in the form of money. If wealth is hoarded the aggregate demand will fall short of aggregate supply. Thus, money is not a neutral parameter but an effective variable in an economy.

7) Need for state interference:According to Keynes, poverty and unemployment are the outcome of social and economic evils. On one side there is plenty of wealth and on the other there is abject poverty. It is because of inequality that the economy is in a state of disequilibrium, demand and supply are not equal, there is deficiency of investment and problems like over-production, and unemployment spring up in the economy. Government interference does not imply end of capitalism, but its reformation.

8) Long-term equilibrium :Say’s law is based on the assumption of long term equilibrium. In the long-run. It may be possible that aggregate demand may increase to become equal to aggregate supply. In the long-run, free forces of the market, under competition , may bring about equilibrium between demand and supply, but Keynes asserted that it is the short-run and not the long-run equilibrium that is of great significance in our life.

9) Trade cycles:If we go by say’s law, the economy should not suffer from any trade cycles. The economy should generally be in equilibrium. But in reality every economy is subject to fluctuations. Sometimes it has to pass through a period of boom and at another time through a period of depression. Say’s law fails to capture the impact of trade cycles on economic activity.

10) Application of partial equilibrium to general equilibrium:Say’s law in fact applies partial equilibrium analysis to the economy as a whole and that is the reason why its implications prove to be wrong. In the words of Hansen, “the fundamental fallacy in say’s doctrine is that partial equilibrium analysis which could apply to a particular industry, has been extended to an economy as a whole.”

For instance, a firm can increase employment by reducing the money-wages, because the demand for the products of that firm does not depend on the labourers working in the firm alone but also on the labourers working in other firms. But, if all firms reduce wages simultaneously, the total income of the labourers will go down. It will lead to fall in aggregate demand on the part of the labourers. Thus, a policy which is beneficial to a firm may prove detrimental if applied to the economy.

11) Under-employment equilibrium is possible:Say’s law holds equilibrium is possible only under full employment situation but Keynes maintains that equilibrium is possible even under less than full employment situation. As a matter of fact, under-employment equilibrium is a real situation.

In short, Hansen has rightly said about say’s law, “ As a broad generalisation, this statement presents in the large a picture of exchange economy. But the history of thought illustrates again and again how great living principles, tossed on the sea of controversy is likely to lose it vitality. Too often it may be applied, as a tool of analysis to highly complex problems for which it is unsuited, misleading conclusions inevitably emerge. This is what happened to say’s law.”

The End