What is Say’s law? Compare and contrast the role that it plays in the Classical approach and Keynes’ approach. Draw the implications for the design of monetary and fiscal policies to stabilize an economy.
One of the most highly contested and controversial economic concepts is Say's law, or the law of markets, an economic theory associated with French economist and businessman Jean-Baptiste Say. The law itself is embedded in ambiguity, and is usually associated as being one of the underlying assumptions in classical economics. Say's law is frequently described as 'supply creates its own demand' which is a term that was made famous by John Maynard Keynes in his General Theory. This essay however, will use a comparative study of both the the role of Say's law in a classical approach and a Keynes' approach to attempt to learn what classical economists such as J.B Say, Adam Smith, David Ricardo, and James Mill were actually trying to understand through the application of Say's law before Keynes' misinterpretation of the law made it a largely ambiguous term. To achieve this, firstly, this essay will analyse the law itself and the assertion that production creates demand, as the income generated from the original production of a good or service can then be used be used to finance other purchases in the market (Kates, 1998, p.2). Secondly, this essay will analyse what relationship Say's law has with recession, unemployment, and general gluts. Before finally, using the information that has been provided to make an informed judgement on what Say's law actually means, and how it can be used as a macroeconomic tool when looking to stabilise the economy.
The reason to why Say's law is so highly contested can be understood by realising its ambiguous nature. When the the Classical school created the theory, they were not creating a single, unique law, but rather a collection of complex ideas in response to mercantillism. The Classical economists...
Please join StudyMode to read the full document