Jean Baptiste Say

bordsilver

bordsilver

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WARNING - This is an extremely dry topic and definitely won't be for most people's tastes

250 years ago (5 Jan 1767) the famous J.B. Say was born, so in tribute I thought should start a thread.

He is most famous for popularisation of the economic principles that underpin what eventually became known as "Say's Law" (noting that it wasn't actually called Say's Law until the 1920's).

There are many misunderstandings and repeated half- (or non-) truths about what he claimed to say and what Say's Law is included the much maligned "Supply creates it's own demand" piece of doggeral popularised by Keynes.

In brief, the underlying principle of Say's Law can be stated as: demand for goods and services is created by value-adding production and by nothing else.

In it's more original phrasing, J.B Say's interconnected principles lead to the conclusion that Demand is constituted by supply. In essence, 'Goods buy goods': to buy, one first has to produce goods of one's own, sell those goods for money and then use the money received to buy the goods produced by others; thus it is the production of one's own goods that leads to the ability to purchase someone else's, even though money is used as the medium of exchange. A further conclusion is that there is no such thing as a general glut.
 
Article

W. H. Hutt once referred to Say's Law as the most fundamental 'economic law' in all economic theory.[1] In its crude and colloquial form, Say's Law is frequently understood as supply creates its own demand, as if the simple act of supplying some good or service on the market was sufficient to call forth demand for that product. It is certainly true that producers can undertake expenses, such as advertising, to persuade people to purchase a good they have already chosen to supply, but that is not the same thing as saying that an act of supply necessarily creates demand for the good in question. This understanding of the law is obviously nonsensical as numerous business and product failures can attest to. If Say's Law were true in this colloquial sense, then we could all get very rich just by producing whatever we wanted.
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What Say Said

If we want to get a more accurate understanding of Say's Law, perhaps we should consult what Say himself had to say about his supposed law. In the passage where he gets at the insight behind the notion that supply creates its own demand, Say writes: "it is production which opens a demand for products. . . . Thus the mere circumstance of the creation of one product immediately opens a vent for other products."[2] Put another way, Say was making the claim that production is the source of demand. One's ability to demand goods and services from others derives from the income produced by one's own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher (lower) that productivity, the higher (lower) is my power to demand.

In his excellent book on Say's Law, Hutt states this as: "All power to demand is derived from production and supply. . . . The process of supplyingi.e., the production and appropriate pricing of services or assets for replacement or growthkeeps the flow of demands flowing steadily or expanding."[3] Later, Hutt was to be somewhat more precise with his definition: "the demand for any commodity is a function of the supply of noncompeting commodities."[4] The addition of the modifier noncompeting is important. If I sell my services as a computer technician, it is presumed that my resulting demands will be for goods and for services other than those of a computer technician (or something similar). The goods or services competing with those that I sell can always be obtained by applying my labor directly, so I am unlikely to demand them. The demand for my services as a computer technician is a result of the supplying activities of everyone but computer technicians.

This way of viewing Say's Law gets at the interconnections between the various sectors of a market economy. In particular, it makes sense of the claim that the employment of all is the employment of each. As each worker finds employment, he or she is able to turn around and demand goods and services from all other noncompeting suppliers, creating the opportunity for their employment. From this perspective, Say's Law has nothing to do with an equilibrium between aggregate supply and aggregate demand, but rather it describes the process by which supplies in general are turned into demands in general. It is always the level of production which determines the ability to demand.

Production Must Come First
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All Markets Are Money Markets

Because all market exchanges are of goods or services for money, all markets are money markets, and the only way there can be an excess supply or demand for goods is if there is an opposite excess supply or demand for money. Take the more obvious case of a glut of goods, such as one might find in a recession. Say's Law, properly understood, suggests that the explanation for an excess supply of goods is an excess demand for money. Goods are going unsold because buyers cannot get their hands on the money they need to buy them despite being potentially productive suppliers of labor. Conversely, a general shortage, or excess demand for goods, can only arise if there is an excess supply of the thing goods trade against, which can only be money. Recessions and inflations are, therefore, fundamentally monetary phenomena, as Say's Law points us in the direction of looking at what is going on in the production of money to explain the breakdown of the translation process of production into demand.
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For those interested in this topic (which is quite heavy reading), Steve Kates provides better discussions about what Say's Law is and isn't (better than W.H. Hutt's very turgid text book).

Steve summarises the inter-related propositions to:

1. Demand is created by supply and nothing else.

2. The process involved in purchase and sale is the conversion of one's own goods or services into money and then reconversion of the money one has received back into other goods and services. (There is no implication of a barter economy.) Money is intrinsic to the process involved.

3. Recessions are relatively common and result in high levels of involuntary unemployment.

4. Recessions are due to structural problems of one kind or another. In particular, recessions occur where the structure of supply does not match the structure of demand.

5. Overproduction of individual goods and services occurs continuously within economies and can lead to a general downturn in an economy.

6. Recessions are never due to demand deficiency.

7. Because recessions are not due to a failure of demand, practical solutions to recession do not encompass large increases in the level of public spending.
 
bordsilver said:
WARNING - This is an extremely dry topic and definitely won't be for most people's tastes

250 years ago (5 Jan 1767) the famous J.B. Say was born, so in tribute I thought should start a thread.

He is most famous for popularisation of the economic principles that underpin what eventually became known as "Say's Law" (noting that it wasn't actually called Say's Law until the 1920's).

There are many misunderstandings and repeated half- (or non-) truths about what he claimed to say and what Say's Law is included the much maligned "Supply creates it's own demand" piece of doggeral popularised by Keynes.

In brief, the underlying principle of Say's Law can be stated as: demand for goods and services is created by value-adding production and by nothing else.

In it's more original phrasing, J.B Say's interconnected principles lead to the conclusion that Demand is constituted by supply. In essence, 'Goods buy goods': to buy, one first has to produce goods of one's own, sell those goods for money and then use the money received to buy the goods produced by others; thus it is the production of one's own goods that leads to the ability to purchase someone else's, even though money is used as the medium of exchange. A further conclusion is that there is no such thing as a general glut.
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That would be fairly obvious, you don't have to be a rocket scientist to work it out.

Only problem now the socialist rain free money on most citizens/slaves
 
^ You would think it'd be considered a truism but apparently at least some schools of economics (particularly the socialist ones) find the concept difficult to grasp.
 
It's point 1 and 6 that sticks out. Fundamentally (I amateurish profer) you can in part, in some circumstances aid recessions through appropriate infrastructure deficit spending. Japan isn't good example, please don't go there.

Point one I may be mis reading, but it would seem that often demand drives supply...No? I'd be curious if a deeper reading of this.
 
How does Say's law relate with the need of consumption back in the 1760's with the glut of supply in this day and age ?

In brief, the underlying principle of Say's Law can be stated as: demand for goods and services is created by value-adding production and by nothing else.
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Demand is produced by necessity not production, IE you can produce all you want of product A but if no-one is needing it or buying it then it fails as a product.

You can have two or more competing products such as whiskey or tequila, both are produced, but if only one is bought as it is more palatable or has better marketing, only one will survive over the long run.

Competing products need demand, but first you need demand for any single product. A half starved pleb will not spend hard earned coin on an unnecessary product until they have the spare coin to waste over and above survival.

Fast forward 250 years or so and the amount of crap produced on TV is a witness to the mantra of production not meeting expectation. The amount of successful productions opposed to those that did not survive is very many to one.

It is demand that creates production, you first need a market to sell too, in order to produce for, if you do not have a market that will purchase, all you have is a product.
 
phrenzy said:
It's point 1 and 6 that sticks out. Fundamentally (I amateurish profer) you can in part, in some circumstances aid recessions through appropriate infrastructure deficit spending. Japan isn't good example, please don't go there.

Point one I may be mis reading, but it would seem that often demand drives supply...No? I'd be curious if a deeper reading of this.
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Good questions. They show why it is important to understand the nuances. Using W.H. Hutt's definitions: Demands - Offers for inputs or outputs which induce their providers to sell, or invest in them as prospectively profitable assets.

Essentially, he is using the word "demand" in the context of consumption rather than in the context of insisting that you are given it. Hence, you can only actually demand/obtain something that a supplier is willing to produce and trade with you at a mutually agreeable price. The most critical thing in the equation is "someone willing to produce it and trade with you". People can insist (demand) whatever they want. For example, I want a flying car that converts into both a submarine and a spaceship. Until someone actually can physically produce it, however, my demand is just mere wishing. Even then, an Elon Musk entrepreneur might say to me that he can build it for me, but it will take 10 years and will cost $100 million, to which I will probably say "Forget it, I don't want it that much.".

In terms of "demand driving supply", I would rephrase it as "demand guides supply". There are millions of people supplying (offering) things to the market, but it is only if what they are offering is deemed valuable by the consumers that what they supply will actually trade. (If it doesn't trade, then the supplier has, by definition, been the final consumer of their own output.) If it trades at a price that makes a profit for the seller, then it is "value-adding production".

In its entirety, the structure of supply needs to align with the structure of demand for a smoothly functioning economy. That is, what people are offering to the market is what the market actually wants. Things like technological or cultural changes (or even natural events) affect the structures matching neatly which is why a given item may be hard to get one day and be offered at twice the price of yesterday but then be on a fire sale next month.

Entrepreneurs (and to some extent managers) are an essential element in constantly changing the structure of supply to try to best meet the ever changing demand schedules given the availability of the inputs needed to supply them. One year they are raising money to build a new VHS cassette factory, the next they are converting that factory to produce DVDs. They are in constant competition with other entrepreneurs trying to anticipate what and how much people will demand next. If a consumer is kind enough to give a firm indication by, say, committing to buy an apartment off the plan (thereby stating what they wish to consume in the future), then this will lower the risks for the suppliers and will generally also lower the costs.

Throughout the economy there is constant creative-destruction happening. It is when a significant portion of suppliers mispredict what consumers will want in the future and it takes time to adjust to the new world order that we end up with recessions (i.e. the structure of supply does not meet the structure of demand). The recession is the mechanism whereby resources are freed up from the parts of the supply structure that are not wanted and moved towards the new parts of the economy. The US housing bubble in the lead-up to 2007/2008 is a good example. For whatever reasons, there were many, many suppliers convinced that people want more houses. Hence, the number of people employed as real estate agents, finance brokers, architects, builders, etc had been growing and growing until suddenly the demand evaporated. The recession is the mechanism whereby the builders, architects etc are "told" to stop supplying new houses and move into other areas of the economy if they wish to have "value-adding production" (rather than value-destroying production).
 
southerncross said:
It is demand that creates production, you first need a market to sell too, in order to produce for, if you do not have a market that will purchase, all you have is a product.
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I think I captured most of your thoughts in my previous response (let me know if I haven't). Just on this point, however, I would say that as long as there are other people then "No". People offer goods for sale first. The first meat pie/jar of vegemite/CD/car/or whatever was first made and priced in the hope that there would be a market for it. If the entrepreneur correctly anticipated other people's desires and found that there was a market then they would ramp up production and roll out the "meat pie" innovation more broadly.

southerncross said:
...you can produce all you want of product A but if no-one is needing it or buying it then it fails as a product.
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Exactly. If it fails as a product, then it becomes "own-consumption" on the part of the producer.
 
bordsilver said:
mmm....shiney! said:
http://forums.silverstackers.com/message-986244.html#p986244
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I wasn't a big fan of the way Mark Skousen explained things in this article (and I was annoyed that Steve Kates gushed so much about it). Some of the comments are good though.
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Would you be happier with this?

Mark Skousen should have* said:
Say's Law: Supply makes demand possible.
Keyne's Law: Demand determines supply.
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If not could you please explain your reason or point me to one or more the comments to the Skousen article that you think explains it better. And I'd prefer it in no more than 2 lines too. :P

*apologies for the grammar, I was trying to be clever.
 
bordsilver said:
Supply gives the power to demand (not the willingness to demand).
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The power of supply! Like a Bryce Courtney novel. ;)

Demand is always present, it is infinite, but it is not always achievable. For fear of anthropomorphising "supply", I think the willingness consumers have to satisfy demand hinges upon the capacity of supply to act effectively in creating a price point where the exchange of value takes place, or to paraphrase you, where consumers are empowered to satisfy demand. Without a supply of goods there can be no exchange of value, and consumers, whilst not powerless to meet their needs are certainly curtailed in doing so until a point in time when one or more of them decides to risk supplying a good. And the supply of one good is not enough, it must be a supply of many goods in order to empower consumers and meet demand. It's probably why individuals in centrally planned authoritarian countries are so demand impoverished.

With the exception of pot smokers in Nth Korea.
 
Just a rambled musing I had whilst driving to work:

Demand does not create supply, for if it did, then why don't we have Cat scanners in every hospital?
 
Say's Law: The Antidote to Countless Economic Fallacies[/quote said:
To understand the principle that has been called Say's Law, it is useful to start by thinking about what unhampered exchange is: the mutual offering of goods and services between people. Seeing exchange as a mutual offering shows demand-and-supply is not an unsolvable chicken-or-egg problem. People produce what in their best judgment they think others want, in the expectation that others are producing or will produce what they want. Production, in other words, is always speculative.

In small social settings, this speculation is usually not too difficult. Two people deserted on a tropical island, for example, can discuss beforehand what each one will make and offer to the other. In larger social settings this speculation is harder, so a money system develops to help people judge what others want using market prices as a signal of consumer preferences. But the essence does not change: people produce what they judge others want in expectation that others will provide what they want.

Say's Law, then, can be described as follows: The value of goods and services anyone can purchase is equal to the market value of what they supply. Or in an aggregate, macroeconomic sense, the value of goods and services any group of people can purchase in aggregate is equal to the market value of what they supply in aggregate.

Economist Paul Cwik more helpfully explains that Say's Law is simply the reality that "we produce in order to consume."

Say's Law is always true because it applies to the subjective conception of value. Supply into the marketplace always provides the means for the supplier to purchase other goods and services, but only to the extent of the subjective value placed by others on that supply at any given time. Even if supply failed to create any purchasing power at all for the supplier because it was considered utterly valueless in the marketplace like say, creating holes in the middle of nowhere this would not be a contravention of Say's Law but merely another manifestation of it. It also distinguishes Say's Law from the Marxists' labor theory of value in recognizing the crucial fact that the act of production alone is insufficient to create purchasing power, but rather the act of producing something which is valued by someone else who has also produced something valued in the marketplace. In short, it's not production that matters per se but what is produced and for whom.

We can now understand why David Ricardo said,

Men err in their productions, there is no deficiency of demand.
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Last week we cut back on our order of burger buns from the local bakery, trade is down due to the cyclone and floods and we haven't been producing as many hamburgers for sale. The bakery will cut back on its production of burger buns as a result of our declining production. We will also lower our demand for other products from other suppliers due to our declining levels of production.
 
Profits go to those who satisfy the most wants of consumers not currently met in the most useful and cheapest way.

Currently I am guessing there's a lot of consumers in the region whose most urgent wants have changed toward their house/business and contents. Luxury restaurants will presumably be cutting back their production even harder (which, ironically, may benefit the cheapest prepared/takeaway food options).
 
I'm reading Eamonn Butler's The Condensed Wealth of Nations and a piece of text of Adam Smith's struck me as being very much like the intention behind Say's law:

Adam Smith said:
Usually, of course, we estimate exchange value in terms of money, because money is far more tangible and easy to measure than labour. But it is not a perfect measure. The metals we use for coinage, such as gold and silver, fluctuate in value over the long term, depending, say, on the productivity of the mines and the cost of transportation. Labour remains the real price: money prices are just nominal prices. We buy in from others things that it would cost us more toil and trouble to do for ourselves. The real wealth that we obtain from exchanging with others is their labour, not their money.
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Smith is basically saying that we exchange the fruits of our productivity for the fruits of other's productivity. If therefore, productivity declines, we have less to exchange and the market either contracts, or slips into a recession. Which is what is happening now.
 
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