Say’s Law, also known as the Law of Markets, is an important component of classical economics and formulated thus:
It is worthwhile to remark that a product is no sooner created than it, from that instant, affords a market for other products to the full extent of its own value. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus the mere circumstance of creation of one product immediately opens a vent for other products. (J.B. Say, 1803: p.138-9)
In other words:
- Products create a market for themselves
- They do this because producers are eager to exchange their products for their maximum value
- The value of products degrades over time, so the producer is eager to exchange as soon as possible
- The value of money degrades over time as well, so the producer is eager to exchange again for more product
- Since the value of money is arbitrary and tied to the production and exchange of products, the products create a market for themselves
This seems like it would hold in high-competition industries where the costs of learning about competing products are low (easy to shop around). Money is a powerful symbol, and in this interpretation the money stands for products. The relative rates of production determine the prices of products– implicitly creating demand.
Say’s law is a highly simplified view, according to modern detractors like Keynes. Some of the more convincing critiques I found against the law were:
- If prices don’t move freely up and down, then money becomes disengaged from the value of the product.
- Government intervention can create skewed supply. This can be through subsidies, taxation, pricing laws, etc.
- Speculation and investment in non-capital goods provide other places to “dispose of the money” besides acquiring a new, degradable product
That last point is a bit confusing– but consider the purchase of one media company by a conglomerate. The conglomerate is not investing strictly in the cameras, distribution capabilities, etc– it’s also investing in the talent, brand and audience the media company reaches (or has the potential to reach). These are intangibles which may or may not pay off– but they’re not a product in the sense that Say’s was talking about.
On the other hand, there are farmer’s markets, which operate a lot like Say’s law. In the morning the place is bustling, with the best products on the tables and money quickly changing hands. People look to diversify their diets, and they consider trade-offs of all the products in the market. I’m even eager to get rid of my money, as Say predicts, since I know the market has some of the best deals around. As the day goes on, the crowd wanes and sellers drop their prices unloading the rest of their goods. And money’s actually working like it should!