Jean-Baptiste Say was one of the originators of classical economic thought.
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Jean-Baptiste Say did not coin his law, but he did set forth the ideas that other economists would credit to him. Say's law of economics asserts that production in one part of the economy creates a demand for another product elsewhere. The demand does not have to be for the same product, which is why other areas of production should create demand in even more areas of the economy. This thinking does have some assumptions of how the market should work, including the following.
- The relationship between businesses and private consumers should be cyclical where the money paid to a business for a product will be paid back to the consumer as part of the workforce producing goods.
- Supply creating its own demand should mean that there is almost 100% employment due to the demand for labor to create supply.
- There is equilibrium in the market because aggregate supply is the same as aggregate demand, thus an excess of one product supply is not the reason for a downturn.
- If output needs to increase, then production should increase rather than create more demand.
These observations helped to shape economics well into the 20th century, and some economists still consider facets of Say's law to be part of the modern free market.
Keynes' Law Interpretation
John Maynard Keynes had a different version of Say's "supply creates its own demand" after studying the effects of the Great Depression in the 1930s. The period of economic depression ran for a decent length of the 1930s, when there was high unemployment but the means to produce goods still existed and were just left unused. Keynes noted that this lack of change in production ability between potential labor and technology indicated that the issue was a lack of incentive from businesses to create more supply because they would not make money.
Keynes' law, as it would be known, essentially switched the wording of the simplified version of Say's law to note that demand creates its own supply. Keynes noted that Say's law works if the economy worked on a barter model where other goods could be exchanged for goods rather than money, pricing was flexible, and the government did not intervene in the market. In reality, the firms that produced goods and services did not practice these principles because they sought to hoard their money in the face of lower demand.
