If you still have questions or prefer to get help directly from an agent, please submit a request. Says Law of Markets is a theory in classical economic that states that product production is the reason why we have demand. According to this theory, being able to demand something is financed by the supply of a different product. So, the source of demand is prior to the production and sale of goods for money, not money itself.
In other words, a person's ability to demand goods or services from others is predicated on the income produced by that person's own past acts of production. Say's Law says that a buyer's ability to buy is based on the buyer's successful past production for the marketplace.
Say's Law ran counter to the mercantilist view that money is the source of wealth. Under Say's Law, money functions solely as a medium to exchange the value of previously produced goods for new goods as they are produced and brought to market, which by their sale then, in turn, produce money income that fuels demand to subsequently purchase other goods in an ongoing process of production and indirect exchange.
To Say, money was simply a means to transfer real economic goods, not an end in itself. According to Say's Law, a deficiency of demand for a good in the present can occur from a failure of the production of other goods which would otherwise have sold for sufficient income to purchase the new good , rather than from a shortage of money. Say went on to state that such deficiencies of production of some goods would, under normal circumstances, be relieved before long by the inducement of profits to be made in producing the goods that are in short supply.
However, he pointed out that the scarcity of some goods and glut of others can persist when the breakdown in production is perpetuated by ongoing natural disaster or more often government interference. Say's Law, therefore, supports the view that governments should not interfere with the free market and should adopt laissez-faire economics. Say drew four conclusions from his argument. Say's Law thus contradicted the popular mercantilist view that money is the source of wealth, that the economic interests of industries and countries are in conflict with one another, and that imports are harmful to an economy.
Say's Law still lives on in modern neoclassical economic models, and it has also influenced supply-side economists. Supply-side economists especially believe that tax breaks for businesses and other policies intended to spur production, without distorting economic processes, are the best prescription for economic policy, in agreement with the implications of Say's Law.
Austrian economists also hold to Say's Law. Say's recognition of production and exchange as processes occurring over time, focus on different types of goods as opposed to aggregates, emphasis on the role of the entrepreneur to coordinate markets, and conclusion that persistent downturns in economic activity are usually the result of government intervention are all particularly consistent with Austrian theory.
Keynes rewrote Say's Law, then argued against his own new version to develop his macroeconomic theories. However, you may visit "Cookie Settings" to provide a controlled consent.
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Hence, there is no possibility of the deficiency of aggregate demand and the mechanism through which it is maintained is the rate of interest. The government should, as far as possible, ensure a free market and there should be absolutely no regulation of wage rates. Because goods are exchanged for goods, money acts as a veil and has no independent role to play.
Money is only a medium of exchange to facilitate transactions. In a barter economy, where a person gets no money but only goods. In barter economy, people produce goods either with a view to consuming themselves or to trade them for some other goods required by them; in the process, they definitely create in aggregate the demand for goods which is always equal to aggregate supply of goods produced by them.
The price ratios are such as would clear the market of goods. If the price of one good is higher to that of another good, resources would shift from the production of low-priced goods to the production of high-priced goods.
As a result, the price of the first good will rise on account of decreased supply, while of the other goods would tend to fall due to increased supply.
In this way price equalization process starts till the equilibrium price comes to prevail in the market—which in a barter economy ensures that all goods are either consumed or exchanged at some positive price. In this early 19th century set up, saving was investment and not a separate or distinct process as it is today.
But the classical economists believed that the principle was equally valid if money were introduced into the analysis. If this is true, then money makes no difference and supply will continue to create demand. The introduction of money, made no difference because money was only a medium of exchange.
Only a miser will need money for its own sake than for what it will buy. The law states that income received is always spent on consumption and investment. It other words, money is never hoarded. The money or expenditure stream MV remains neutral. In a barter economy, every seller is essentially a buyer.
If they sell their produce for money, the money will promptly be spent against other goods. Money is merely a convenient medium of exchange avoiding the leakages of barter and nothing more. Thus, the law though framed in terms of a barter economy held true for an economy using money also. Money economy behaved in the same way as barter economy, because rational individuals will not hold idle money. In this sense, there is indeed an identity of selling and buying under barter economy and even under money economy.
This is logically wrong if he actually meant it. It has been completely given up by modern economists in their theoretical and practical work on money and business cycles. Under barter economy where production was primarily for consumption i. But today, when the production is based on future expectations and anticipations of demand, it has little validity, as there is bound to be some over-production, resulting in some type of glut in the market.
What he actually meant was that a good deal of production is always meant to be consumed and the rest which is saved is likely to be invested generally. This law is not as meaningless as some assume, under the influence of Keynes. In principle, the economy would always absorb all the commodities, it. The periodic unemployment associated with the trade cycle was an aberration, a consequence of the unbalanced structure of production caused by too rapid an expansion of the capital goods industries.
For example, many fear expansion of production in the underdeveloped countries.
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