Say Law, Is it still working ?

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Economics most wonderful science inside of the social science because of the diversity of the assumptions. Economics has been a lot of assumptions since it was born. This reality always reminds us how this science range is so long and infinite. For now, we accept too many assumptions with integrity of the past but any time these assumptions could be garbage. This is a dynamic of the economics which we must accept that. Today topics represent another old assumption, this assumption or law (for Classical Thought) coming back a stage time to time. Today we will talk about “Say’s Law”.

Say Law, Is it still working ? 1
Jean Baptiste Say

Say’s Law took name from by French Economist John Baptiste Say. Say was born Lyon and made a first study about differences between politics and economics. Say’s thoughts be based on “Economics depends on the Laws” and humans they could not change them for artificial. This law depends on nature of the goods and humans never could prevent them. After these thoughts, Say’s created own law which we say, “Say’s Law”. Say’s Law explain production and consumption side between economics actors. For Say’s Law, Every Supply always create own Demand, this idea based on “Production Side” of the economy. For this Economical Cycle, this law could be wonderful! When these laws created, Industrial Revolution just started. Economics Activities depend on restricted number of the good (Yarn, Wheat, Barley etc.) and limited production methods. International Economics is not important issue for this period because of the low transaction and trade. So, if we look inside of the logic, Say’s Law does not seem false Economics Actors and Trade of this period.

After death of the Say (d. 1832) Economics science gain too much stage on the World. Economics showed improvement with Industrial Revolution, goods gain diversity because of the developed production methods and innovation. International Trade became important topic and Comparative Advantage Theory (which is created by David Ricardo) gain value in trade. Production growing with Industrial Revolution simultaneously and some countries could not find all resources own by own. This Production and Innovation madness push the countries for make an International Trade and extinguish disadvantages of finding resources. And day by day, economics science gain deepness and far away from economic model which depends on Say’s Law.

At the same time, Classical Thought (which is favorite thought in this period) accept Say’s Law and carrying into action. This “Every Supply always create own Demand” idea sustain too long time. Economics Actors just focusing production side and whole economic arguments depend on producer side. Because everything was solving by Say’s Law and suppliers always could find a demander. Because of the this believes, World Economy activities ground on production side on this period (until 1930).

This idea did reason for the “Great Depression”. Classical Economists implement Say’s law on the Investment-Saving (IS) system and making this assumption ” Every Saving always create own Investment” and they believed economy always work on full-employment. These are doing not true because of the size of the world economy. We could not talk about small size downtown economy because of the deepened economics! People can miss out on own savings from the system and sometimes economies cannot work full-employment level. 1929 Great Depression will handle another article.

In 1929, savers lose all savings in financial markets. Because “Every Saving always create own Investment” and Production focused Economy idea was collapse. After one-point consumers did not prefer to buy extra good and demand fall, this situation decrease firms value in financial markets and triggered crisis. Say’s Law collapsed with this crisis and Keynesian Thought destroy classical thought and take the stage.

In 2008 Mortgage Crisis period, Say’s Law showed own like the belief. Mortgage’s created limitless because of the “Every mortgage always create own Bank Demand” belief. And again, we will handle it 2008 Great Recession another article.

As a result, Say’s Law still disputatious topic for the economics science like all other topics (sometimes this situation mad at me). We can say Say’s Law so viable for the own period economics cycle but when economics became deeper, This law loose own workableness. Economics have too much topic like that. We are always making assumptions and believe these until when we are making sure they are not true. I think this is good side of the economics, we must always be skeptical and make a test our assumptions. How much exciting isn’t it?

See you another article

Best Regards and Wishes

Ozan Kireççi

Istanbul University, Departmant of Economics, Interested Economics and Political Science.