- How would you define Say’s Law? Provide context for your definition.
Say’s law also known as the law of markets is one of the most misinterpreted and misunderstood laws in economics. Say proposed that different industries do not consider production a problem and that the main problem is selling the commodities. Commodities would always be abundant if there was already a ready demand or market for them. There is no loss of purchasing power in the economy and people generally save to invest and not just to hold money. These sentiments were echoed by John Stuart Mill who held the idea that overproduction is impossible, but savings would create some form of disequilibrium. This paper provides a definitions of Say’s law while discussing John Stuart Mill’s “take” on Say’s Law. It also describes a country’s savings rate and its effect on the country’s growth rate.
According to Say, most industries assert that the main problem does not lie on the production of commodities but on the disposal of such commodities. Commodities would always be readily available if there is a ready demand or market for them. When there is little demand for produced goods, then producers would say that money is scarce. The consider demand as a consumption that is quick enough to accelerate sales and ensure that prices remain up. According to say, production and consumption are interrelated meaning that they are not two separate activities. There cannot be an economic downturn just because industries in an economy have produced everything in excess and that there is not enough demand for the produced commodities. This does not however mean that recessions or business downturns are impossible. Recessions are proportional in nature meaning that too much production of commodities in one sector of the economy more than consumers are able to consume could lead to a shortfall in the production of commodities in another sector (Anderson, 2009).
Say’s law is therefore about the relationship between production and the purchasing power of the produced goods. If two nations therefore decide to engage in trade, they have to produce commodities before they can purchase goods from each other in the spirit of exchange. If the two nations are not able to purchase from each other, it is mainly because of lack of supply and not the lack of desire to trade with each other.
In the proposal of the law, Say drew attention on the importance of the real sector of the economy which is production and how money was only used an instrument that would facilitate production and sales of commodities. Say also talked about savings whereby he said that excessive savings would not reduce demand of commodities while rejecting that little demand was a major threat to prosperity. Savings are meant for investment which leads to growth and development. However, the biggest threat to prosperity is the unwillingness of the economy to continue with production (Anderson, 2009).
1. What is John Stuart Mill’s “take” on Say’s Law?
John Stuart Mill was a British Philosopher and son to James Mill who was a proponent of Say’s Law. Mill also supported Say’s law by supporting the idea that overproduction in an economy was not possible. According to Mill, if money was a commodity, then a decrease or decrease in its demand would not lead to overproduction in the economy. Mill believed that an equilibrium aggregate income, a situation where there is overproduction of commodities, does not exist. If the equilibrium is distorted by any chance, then a new equilibrium will emerge to make a system stable. According to Stuart Mill, the value of everything in the economy usually gravitates towards an equilibrium point where it exchanges according to the ratio of the cost of production. Therefore, the market value of commodities is continually rising either above or below the natural value of things based on demand and supply. The fluctuations generally correct themselves with time through the forces of supply and demand. According to Stuart Mill, the purpose of commodities is to buy other commodities in the economy (Thweatt, 1980).
According to Say, money savings represent the investment capital for production and do not reduce the demand of commodities. There is nothing like too much savings as money follows the same pattern as commodities and that imbalances would correct themselves with time. John Stuart Mill however believed that unprofitable speculation and trade imbalances were the main reasons for recession. Mill suggested that holding money through savings would create excess demand for currency which would in turn lead to a reduced demand of commodities which result from production, and oversupply as majority of goods produced would remain unsold. This was another reason for economic recession. This means that Stuart Mill believed that there is a possibility of overproduction. Despite this, Stuart Mill defended Say’s law by going against the idea that there would be a permanent disequilibrium resulting from lack of demand. Disequilibrium could result from the lack of the will to purchase because commodities would only be purchased after basic needs of consumers are met (Thweatt, 1980).
2. How would you describe a country’s savings rate and its effect on the country’s growth rate?
In most countries, economies are based on the idea that savings drive growth and that the best policies to promote growth promote saving. The relationship between a country’s savings rate and its effect on the country’s growth rate can be axiomatic. In the Keynesian models, if the capital-output ratio (v) is fixed, the output (g) growth rate is equal to the capital growth rate. This means that the rate of growth is equal to the ratio of the investment in output to the capital output ration. More savings means that a country would be able to grow if there are no constraints in the labour market. One could also say that higher investment lead to higher growth if the saving rate is equal to the investment made (Carroll, & Weil, 1994).
Practically, for a country whose population is still growing, there are more young people than old people and so there would be more people saving for their old age than the people already using their savings. This means that the savings rate would generally remain positive. In a country that is not experiencing growth in population, one would expect zero savings rate because saving the young would offset the saving of the old. The country would therefore not experience an increase or decrease of assets over time. The more young savers there are in a country, the higher the country’s saving rate. The motive behind saving rate also determines whether the savings would affect the growth rate. In order for savings to positively impact the growth rate, savings should be spent on investments that later bring returns, hence growth. If more savings are used for investment, then a country’s growth rate would increase. According to Say’s law, a higher rate of saving means that there would be investment, which would increase the aggregate output growth rate (Carroll, & Weil, 1994).
In conclusion, Say’s law suggest that production creates a demand for products and that there would always be commodities if there is a ready demand. John Stuart Mill also supports this law by supporting that overproduction is not possible. When it comes to savings, they are meant for investment which is needed for growth and development. A country that can save more is therefore likely to have a high growth rate because the savings are used for investment.