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Subject Area: Political Theory

Say's Law of Markets - Leonard P. Liggio, Literature of Liberty, April/June 1978, vol. 1, No. 2 [1978]

Edition used:

Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.

Part of: Literature of Liberty: A Review of Contemporary Liberal Thought, 20 vols. 19781-982

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


Say's Law of Markets

William J. Baumol

  • Princeton and New York Universities

“Say's (at least) Eight Laws, or what Say and James Mill May Really Have Meant.” Economica (U.K.) 44 (May 1977): 145–161.

Say's Law—defending the market's self-regulating mechanisms of supply and demand as well as the superiority or productive investments over idle consumption—went unchallenged in pre-Keynesian analysis. Say's Law has recently been rehabilitated by several authors:

Thomas Sowell, Say's Law: An Historical Analysis (1972); and Classical Economics Reconsidered (1974);

Robert Clower and Axel Leijonhufvud, “Say's Principle, What It Means and What It Does Not Mean.” International Economic Review 4 (Fall 1973); and

William Hutt, A Rehabilitation of Say's Law (1974).

Part of Lord Keynes's misreading of Say's Law came from its unsatisfactory presentation in J.S. Mill's Principles of Political Economy. More accurately formulated, this economic law states that “demands in general” are “supplies in general”; or, the supply of one kind of goods creates the demand for whatever goods the supplier will acquire in exchange for the supplier's goods or their money price.

“Say's Identity” asserts that no one wants to hold money long, so that every offer (supply) of a quantity of goods automatically constitutes a demand for some other goods of equal market value. A general glut (overproduction of goods and services) is logically impossible.

“Say's Equality” holds that periods of disequilibrium where demand falls short of supply are only temporary and soon disappear with reliable equilibrating forces.

Say's Law had conceptual roots in the Physiocrats' writings, as in Mercier de la Rivière's L'Ordre Naturel (1767). [Cf. J.J. Spengler, “The Physiocrats and Say's Law of Markets,” Journal of Political Economy 53 (1945)]. The belief that Say's Law is incomplete in the first edition (1803) of Say's Traité d'économie politique and that James Mill's Commerce Defended (1807) contains a more explicit Say's Law, results from a superficial reading of Say's first edition. In that edition, much of Say's exposition appears further on in the Traité Vol. II, Book 4 and not in his chapter on débouchés Vol. I, Book 1. Also, Donald Winch's James Mill: Selected Economic Writings (1966) p. 34, shows that Mill both explicitly credits Say with the idea and cites him.

Say's chapter “Des Débouchés” should be translated “on outlets for goods” and denotes the availability of effective demand. Say stated that it is “the abundance of other products in general that facilitates sales. This is one of the most important truths of political economy.... When the exchanges have been completed, it will be found that one has paid for products with products.”

Say emphasized that a given investment expenditure stimulated the wealth of an economy far more than an equal amount of consumption. Say held that “the public interest is consequently not served by consumption, but it is served and served prodigiously by saving, ... the labouring class is served by it more than anyone else. [Savings] are consumed; they furnish markets for many producers; but they are consumed reproductively and furnish markets for the useful goods that are capable of engendering still others, instead of being evaporated in frivolous consumption.”

What needed encouragement and incentives, Say stressed, was the habit of savings; however, arbitrary acts against property as well as freely voted tax increases introduced powerful disincentives against savings.

Say in the Traité, Vol. II, Book 4, Chapter 5 (1803), held that the “demand for products in general is therefore always equal to the sum of the products available.... No glut occurs except when too large a quantity of factors of production is devoted to one type of production and not enough to another.... Means of production are consequently lacking for the former to the extent they are superabundant for the latter.... Inability to sell, therefore, arises not from overabundance but from the misallocation of the factors of production.” Say adds that the notes that Germain Garnier included in his translation of Smith (1802) indicated that “over-abundance of the annual product would ‘obstruct trade; if it were not absorbed by proportionate amounts of consumption’.” Say continued: “I realize that trade can be obstructed by the overabundance of particular products. It is an evil that can never be anything but temporary, for participation in the production of goods ... will instead be devoted to the production of goods that are sought after. But I cannot conceive that the products of the labour of an entire nation can ever be overabundant since one good provides the means to purchase the other.”

This statement of Say's Law seems to lack only a rationale. This is supplied first in Say's expanded chapter on débouchés in the second edition (1814): “every product is created only to be consumed ... as quickly as possible, since every value whose realization is delayed causes a loss to the individual who is currently its possessor of the interest earning corresponding to that delay.”

Keynesians have viewed Malthus's opposition to Say's Law as ‘progressive’. But Malthus defended the feudal landholders against the emerging capitalists (Marx saw such writings as “apologetics ..., partly for ‘strong governments’ whose expenditure is heavy, for the increase of State debts, for holders of sinecures, etc.”).

Say and Mill as proponents of saving and investment (productive consumption) opposed government expenditure such as military spending (unproductive consumption). Mill, following Say, insisted (1807): “it is the maintenance of great fleets and armies, which is always the most formidable weight in the scale of consumption.”