How I learned to love Say's Law

[Seraphim]

Well said.

Increasing the supply of good A does not increase demand for good A. That is not what Say meant. Increasing one's supply of A at the same time increases one's aggregate demand for all other goods.

New products with a positive market value were created that did not exist before. Since the only thing that limits one's aggregate demand is ability to pay, not willingnes, increasing ability to pay for additional goods and services also increases demand for them. Thus producing stuff "worth" X (on the market) also increases demand for all the other goods by X.

 

[axiomata]

Another aspect of Say's Law that I appreciate is it's entrepreneurial importance. Nobody went to Steve Jobs and said "I demand an iPhone." They had no idea WTF an iPhone was before Apple supplied it. In that way also, supply creates it's own demand.

 

[Danan]

Another aspect of Say's Law that I appreciate is it's entrepreneurial importance. Nobody went to Steve Jobs and said "I demand an iPhone." They had no idea WTF an iPhone was before Apple supplied it. In that way also, supply creates it's own demand.

True, but I'd rather say it redirects demand, or changes its focus, when talking about the product itself. Obviously all the people buying iPhones would have bought other stuff instead, had Apple never invented the iPhone. And while it certainly increased their wellbeing to satisfy desires more important to them (otherwise they wouldn't have bought it), it didn't increase their aggregate demand in the economic sense.

The way Say viewed it was that only by producing more you increase what you can buy. So not Apple's customers' aggregate demand increased, but Apple's (or their shareholder's and employee's) demand (for other products) increased, because of the production of the iPhone.

 

[Carson]

Say's law, or the law of market,

http://en.wikipedia.org/wiki/Say%27s_law

 

[cubical]

"Supply creates it's own demand" is not Say's law. Listen to Rothbard briefly explain.

http://www.youtube.com/watch?v=gTczeSz5ISw

 

[Danan]

"Supply creates it's own demand" is not Say's law. Listen to Rothbard briefly explain.

http://www.youtube.com/watch?v=gTczeSz5ISw

You are right of course. "Supply creates it's own demand" implies that creating supply of a good increases the the demand for that product, which is, like I already pointed out, not true at all. So yeah, that phrase might be misleading. I didn't even know that it was Keynes who coined that phrase. Damn disingenuous bastard.

 

[seraphson]

If the other guy also doesn't like fish then catching more fish doesn't do any good for the economy. He can catch as many as he wants to but won't be able to get rid of any of them.

Let's say he does like fish. How many can he use a day? If the first person catches 100 fish a day, can the second person eat 100 fish a day? Supply was certainly increased. Can he get the other guy to eat more fish to use up the newly created supply?

Well the guy that may want the fish can sex up the misses and have a kid seeing as the extra food can support a small family. Perhaps he wouldn't hit the sack with the wench if the supplier only nabbed say 50 fish a day.

On a slightly more serious note though this is one of the reasons I don't see myself having a kid. We've been fed rubber fish coated with fish oil and are starting to realize all this "supply" is just a big phony scam. Not a pretty place to be in with a kid considering the corrections that would need to occur to right the ship (assuming anything's left of it).

 

[psi2941]

dont have time to read everything and have no idea what say's law is but zip u said something which i think is wrong.

u said if there is 100 people and ford decides to increase supply and makes 200 per year, woudn't that decrease the price of the cars increasing more demand for the ford cars?

 

[VIDEODROME]

I think Zippy is asking good questions here. Maybe the truth is in the middle somewhere.

If Ford over produced and caused the price of their cars to drop, wouldn't they be hurting themselves? Also, isn't a lower price a sign of less demand? I think having to much inventory is usually a bad thing.

 

[georgiaboy]

Say's position was the only accepted theory of exchange for centuries. "Mainstream"-economists would ridicule anybody suggesting that there can be demand without preceding production creating that demand. But this was the very intention of Keynes - refuting Say's law. Roger Garrison talks about that in his excellent lectures. There is also a brilliant essay written by Steven Kates on Say and Keynes: http://mises.org/journals/qjae/pdf/qjae13_4_1.pdf

For those who haven't taken the time, read the linked essay Danan provides above, which is is summary of a book on the topic entitled Say’s Law and the Keynesian Revolution (now on my reading list).

I don't think I have all the pieces put together yet, but the gist seems to be that the reason for recessions should never be looked at as a sudden reduction in overall (or aggregate) demand, for in the aggregate demand is always there. Therefore, artificially attempting to prop up demand via stimulus is fruitless and exacerbating.

Rather, recessions are due to various factors which have led to misappropriation/malinvestment on the supply side, and the only way to get out of the recession is for producers to regroup.

Although throughout the essay it's repeated that Say's Law is really a group of ideas about the business cycle in classical terms, there's a quote from some dude in 1820 named Ricardo, "Men err in their productions, there is no deficiency of demand," which seems to sum it up nicely.

There's also discussion in the essay about supply and demand both at the aggregate and the individual, or particular, level, that seems to indicate different mechanisms at work. Not sure I grasp all of that yet, but I think it's critical to understanding some of the debated points occurring in this thread.

 

[Zippyjuan]

Let us look closer at what Say's Law actually says.
http://www.investopedia.com/terms/s/says-law.asp#axzz2MmrtlpMI

Definition of 'Say's Law Of Markets'
An economic rule that says that production is the source of demand. According to Say's Law, when an individual produces a product or service, he or she gets paid for that work, and is then able to use that pay to demand other goods and services.
Read more: http://www.investopedia.com/terms/s/says-law.asp#ixzz2Mms8UWxB

It is not really the act of producing more goods which is increasing demand but the money received for producing goods which increases demand in his theory. It is the change in income- not the number of goods which is important. The producer of the goods must be able to sell the goods and receive money for those goods and in turn pass that money along to his workers who then have money to spend on other goods and services. Keynes took a look at this and asked why could not the government at times also give money to people (not necessarily in exchange for producing goods and services) and ALSO increase the money people have to spend on goods and services (greater demand).

Keynes and Says are really not that different on this subject. The net effect is getting more money to consumers to buy things with to in turn lead to more demand for other goods and services and increase jobs. Where they do differ is where the money can come from. Stimulus from whatever source (higher wages or government payments) does have a limited impact and their efffecs fade over time.

Basically "if people have more money to spend, they will buy (demand) more goods and services and that will create more jobs".

 

[nayjevin]

Basically "if people have more money to spend, they will buy (demand) more goods and services and that will create more jobs".

But if they don't, the money is saved. The demand will effect human interactions at a later time. Depends on what part of the economy one is observing to determine which of these semantic variations of understanding collective 'big pictures' is most helpful.

 

[enoch150]

why could not the government at times also give money to people (not necessarily in exchange for producing goods and services) and ALSO increase the money people have to spend on goods and services (greater demand)...
Basically "if people have more money to spend, they will buy (demand) more goods and services and that will create more jobs".

If products aren't paid for by products (with money as an intermediary) but, rather, products are paid for by simply handing out money to people... what happens when everyone takes a government handout and no one produces anything?

It doesn't work any other way than that products must be paid for by products, which is another way of saying the total value of the supply of something creates an equal value of demand for something else. Wants are unlimited, remember. Supply can saturate the demand for any particular product, but it isn't possible to satisfy aggregate demand because resources are scarce.

 

[axiomata]

Relevant discussion of production preceding consumption by the producer of those Hayek rap videos.

http://www.pbs.org/newshour/businessdesk/2013/03/consuming-our-way-to-prosperit-1.html

 

[Acala]

It is not really the act of producing more goods which is increasing demand but the money received for producing goods which increases demand in his theory.

No. This is where you Keynesians get all turned around. Money is simply a convenient stand in for production. It makes the demand created by production fungible and more easily accounted. If millions of goods of various kinds suddenly appeared in the homes of the people, total wealth would have increased. If, on the other hand, billions of dollars suddenly appeared in their bank accounts, total wealth would NOT have increased.

Keynesians are hypnotized by the illusion that money is something other than a kind of tool of accounting.

It is the change in income- not the number of goods which is important.

So increasing the minimum wage to a billion an hour will make everyone rich!

The producer of the goods must be able to sell the goods and receive money for those goods and in turn pass that money along to his workers who then have money to spend on other goods and services.

False. It is possible to produce goods with no currency whatsoever.

Keynes took a look at this and asked why could not the government at times also give money to people (not necessarily in exchange for producing goods and services) and ALSO increase the money people have to spend on goods and services (greater demand).

Exactly. Because he got confused (giving him credit for not being deliberately deceitful) as to the source of real demand. Creating money out of thin air creates the illusion of new demand but does so by stealing real demand from elsewhere.

Basically "if people have more money to spend, they will buy (demand) more goods and services and that will create more jobs".

False. This is just an accounting fraud. If not, please explain how this would work in a barter economy. Here's my version:
The maker of popular widgets starts putting his widgets in nice boxes before he takes them to market. He is able to trade his boxed widgets for all manner of other goods. Many of the people who trade for his widgets turn around and trade the widgets, still in the box, to others for some other goods. So the widget maker decides he can trade empty boxes as if they were widgets. Sure enough he is able to get people to give him goods in exchange for his empty widget boxes and his empty unopened widget boxes are traded far and wide. But eventually someone opens the box and finds that it is empty. The last person to regard the empty box as if it contained a widget was cheated.

That's what happens when you start to look at money as if it creates demand.

 

[Fox McCloud]

Zippy hit the nail on the head, more or less---Say's law is horrendously misinterpreted and often misstated; if you dig into a number of article or books put out by Mises Institute, they'll correctly point out that it's not necessarily the same supply+demand as in the supply and demand curves; it's a different concept....sadly, one that causes confusion as evidenced by this thread.

 

[enoch150]

Zippy hit the nail on the head, more or less---Say's law is horrendously misinterpreted and often misstated; if you dig into a number of article or books put out by Mises Institute, they'll correctly point out that it's not necessarily the same supply+demand as in the supply and demand curves; it's a different concept....sadly, one that causes confusion as evidenced by this thread.

A link is usually given more credibility than "google it". All I see are quotes that say Zippy is wrong/a Keynesian like these:

Jean Baptiste Say grasped the fundamental problem of economics, in that we live in a world of scarce means, but have unlimited desire or demands. Only such things as sunlight, air, or water are freely afforded to man. Thus man uses nature to transform goods that give utility to others. In conjunction, Say recognized that all men were both producers and consumers.

From these two basic truisms arises Say's Law. If individuals wish to procure a good they must give something in return that is also desirable to individuals. Therefore in order for one to be a consumer one must first be a producer of a good in which others find utility. Thus individuals desire the commodity of money not as an end in itself, but rather as a means to procure more desirable goods.

http://mises.org/daily/1264

What he [Say] described is an economy in which personal production creates the possibility of making a bid for the output of another person's production. Production creates demand, but this demand may not be sufficient demand to obtain an exchange....

It [Say's Law] says that, if markets are left free from coercion by the government, prices will fluctuate to clear prior production. At some price, there will be a buyer for just about anything.

It is not that production creates its own demand. It is that lack of production fails to create any demand. He who possesses no results of production cannot register economic demand. He can register a robber's demand: a gun in your belly. He can also register a political demand: a tax official's gun in your belly. But he cannot register economic demand.

All people have mouths. Most people have hands. Most people have functioning minds. By putting together minds and hands, people feed themselves. Their mouths consume production. The mere existence of mouths does not create demand. Neither does hunger. Hunger creates incentives, not demand.

http://www.lewrockwell.com/north/north195.html

 

[Fox McCloud]

A link is usually given more credibility than "google it". All I see are quotes that say Zippy is wrong/a Keynesian like these:

I don't agree with Zippy on a few things, but he's not out to be a Keynesian; likewise, I will give him credit where he gets things legitimate right and backs them up. The part we'd likely disagree on is the effects of inflationary stimulus in the over-arching scheme of things.

From the Mises wiki: http://wiki.mises.org/wiki/Say's_law

Mises.org: http://mises.org/daily/1264 and http://mises.org/daily/5985/Says-Law-of-Markets

 

[Aurave]

I'll paraphrase Hutt's formation of Say's- the source of demand for any singular economic input or output that is produced, is potentially any/all the of the other economic inputs or outputs produced that don't compete with it.

Because one of those goods will be exchanged for the other at some point. And don't get caught up with indirect exchange and money please. It just facilitates the exchange.

 

[Zippyjuan]

I don't agree with Zippy on a few things, but he's not out to be a Keynesian; likewise, I will give him credit where he gets things legitimate right and backs them up. The part we'd likely disagree on is the effects of inflationary stimulus in the over-arching scheme of things.

From the Mises wiki: http://wiki.mises.org/wiki/Say's_law

Mises.org: http://mises.org/daily/1264 and http://mises.org/daily/5985/Says-Law-of-Markets

Thank you. Stimulus can work- but only over a short period of time. It's effect is limited and fades quickly. To keep it going, you need progressively larger and larger stimuli at an exponential rate. I don't disagree with all of the Fed's moves at the start of the crisis to hit the brakes on the collapse, but as for everything after that, I think they are wasting time, money, and effort. They have introduced more market distortions and prevented the economy from trying to find its own way.