Say's Law of Markets

Say's law of markets is a classical economic theory that says that production is the source of demand. According to Say's law, the ability to demand something is financed by supplying a different good.

The existence of markets is again based on division of labor, in which individuals seek to optimize their own performance through specialization. Instead of everyone making everything from scratch, each person does what he or she is best at. The shoemaker makes shoes while the potato-farmer grows potatoes. Then they meet in voluntary exchange to the benefit of both. Had they tried doing everything themselves, the total production would have been less.

This logic holds in the aggregate. The more people specialize, the more complex and valuable are the end results, provided everything is done voluntarily. This explains how we have smart phones and computers despite the fact that no single individual has the knowledge or capacity to make such devices from scratch. The raw materials are mined and produced by experts who know next to nothing about computer components. Components are made by experts who know very little about mining or software. Software is made by people who know very little about mining, computer components or marketing. The combined product is brought to market by truckers, sales people and the like.

What should be noted is that none of this can be optimized in any way by the introduction of a third entity. The state and its affiliated currency creating institutions do nothing to help in the above process. They merely complicate the process. Laws and regulations make it harder to do productive work. Taxation merely moves money from those who produce to those that do not produce. The creation of currency makes it harder to calculate prices, introducing errors and miss-allocations.

Finally, it should be noted that Keynes never refuted Say's law. He merely ignored it. He got hung up in the fact that someone may at times produce way too much of a product. But Say never said that all production must necessarily be valuable. He merely pointed out that exchange is always value for value, and that currency serves as nothing more than an exchange mechanism. No messing around with the currency supply can alter this fact. Currency production may trick people into making mistakes. It may benefit some at the expense of others. But it does not help the economy.

Jean-Baptiste Say

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