Say's law (in economics): an explanation and diagram

 Say's Law, a principle often associated with laissez-faire capitalism, posits that "supply creates its own demand." This means that the production of goods and services in an economy inherently generates enough income to purchase those goods and services. Essentially, by producing goods, individuals earn income, which they then use to buy other goods, ensuring that markets clear without the need for external intervention. This aligns with free-market principles, emphasizing minimal government interference and the self-regulating nature of markets to balance supply and demand efficiently. Say's Law fundamentally supports the idea of economic freedom and the importance of production in driving prosperity. 

Sources

1 Capitalism by George Reisman

2 Economic Thought Before Adam Smith by Murry Rothbard

3 Man, Economy, and State with Power and Market, Scholar's Edition, by Murray Rothbard

4 A Theory of Socialism and Capitalism by Hans-Hermann Hoppe

5 Human Action, Third Revised Edition by Ludwig Von Mises

6 Classical Economics by Murry Rothbard

Next:

A diagram of Say's Law could be structured as follows:

1. Central Concept: Say's Law

   • Definition: "Supply creates its own demand."

2. Key Components:

   • Production of Goods and Services
     • Generates income for individuals.
   • Income Utilization
     • Individuals use earned income to purchase goods and services.
   • Market Clearing
     • The economy balances supply and demand without external intervention.

3. Underlying Principles:

   • Laissez-Faire Capitalism
     • Emphasizes minimal government interference.
     • Supports the self-regulating nature of markets.
   • Economic Freedom
     • Importance of production in driving prosperity

Now

Here is a diagram illustrating Say's Law:

                      +---------------------+
                      |     Say's Law      |
                      |  "Supply creates    |
                      |    its own demand"  |
                      +---------------------+
                                |
                                |
                                v
                      +---------------------+
                      |   Production of     |
                      | Goods and Services  |
                      +---------------------+
                                |
                                |
                                v
                      +---------------------+
                      |      Income         |
                      |   Earned by        |
                      |   Individuals       |
                      +---------------------+
                                |
                                |
                                v
                      +---------------------+
                      |   Utilization of    |
                      |      Income         |
                      |   Purchasing Goods   |
                      |   and Services      |
                      +---------------------+
                                |
                                |
                                v
                      +---------------------+
                      |     Market Clearing  |
                      |   Balancing Supply   |
                      |      and Demand      |
                      +---------------------+
                                |
                                |
                                v
                      +---------------------+
                      |   Laissez-Faire     |
                      |     Capitalism      |
                      |   Minimal Government |
                      |     Interference     |
                      +---------------------+
                                |
                                |
                                v
                      +---------------------+
                      |   Economic Freedom   |
                      |   Importance of      |
                      |   Production in      |
                      |   Driving Prosperity  |
                      +---------------------+

This diagram captures the essence of Say's Law, illustrating how production leads to income, which fuels demand, all while aligning with the principles of laissez-faire capitalism and economic freedom. The interconnectedness of these concepts highlights the self-regulating nature of markets and the importance of minimal government intervention.

In addition:

Here's a summary of George Reisman's perspective on Say's Law:

Fundamental Premise of Say's Law: Reisman describes Say's Law as the principle that supply creates its own demand. Essentially, he argues that the production of goods and services generates the income needed to purchase those goods and services, thereby ensuring that there can be no general overproduction or underconsumption in a free market. 

Critique of Overproduction: Reisman uses Say's Law to challenge the notion of general overproduction, a common critique of capitalism. He explains that in a market economy, the act of producing goods provides the means (income) to consume other goods. The idea that goods might be produced without a corresponding demand for them is refuted by the fact that the act of production generates purchasing power.

Income and Demand: According to Reisman, the demand for goods derives from the income generated by the production of goods. He elaborates that when people produce, they earn money, which they then use to buy goods. Thus, production and consumption are inherently linked, with more production leading to more consumption via the distribution of income.

Savings and Investment: He also extends Say's Law to discuss savings and investment. Reisman argues against the Keynesian view that savings can lead to a shortfall in demand. Instead, he posits that savings are channeled into investments, which produce capital goods. These capital goods, in turn, lead to more production, hence more demand, thus maintaining economic balance without the need for government intervention to boost consumption.

Critique of Keynesian Economics: Reisman uses Say's Law to critique Keynesian economics, which he sees as fundamentally misunderstanding the relationship between production and consumption. Keynesians argue for government intervention to manage demand, especially during economic downturns, which Reisman believes is unnecessary and counterproductive under a properly understood capitalist system where Say's Law dictates that production creates its own demand.

Economic Coordination: Reisman emphasizes that in a capitalist system, the price mechanism, guided by Say's Law, ensures economic coordination without central planning. Prices adjust to balance supply and demand automatically, provided markets are free from significant government interference.

Unemployment: On the topic of unemployment, Reisman suggests that Say's Law implies that unemployment generally results from market rigidities, like government interventions (e.g., minimum wage laws, union activities, or other regulations), rather than from a lack of demand for labor. In a free market, according to Reisman, the supply of labor would match the demand for it, assuming no artificial barriers.

Reisman's treatment of Say's Law is integral to his defense of capitalism, showcasing how a laissez-faire economic system naturally balances production and consumption, thereby promoting economic growth and stability. His work aims to restore Say's Law to a central position in economic thought, challenging the prevalent post-Keynesian economic theories that advocate for active government management of economic demand.[1]

Sources

1 Capitalism by George Reisman

Furthermore:

Here are some practical examples to illustrate Say's Law, which asserts that supply creates its own demand:

Example 1: Farmer and Baker

Scenario: A farmer grows wheat and sells it to a baker. The farmer uses the money earned from selling wheat to buy bread from the baker.

Explanation: The act of producing wheat (supply) creates income for the farmer, which he then uses to demand bread. Conversely, the baker's production of bread (supply) creates the demand for wheat. Here, supply (wheat and bread) creates its own demand through the income generated from selling products.

Example 2: Software Developer and Freelancer

Scenario: A software developer creates an app and sells it to freelancers who need project management tools. The freelancers, in turn, use the income from their projects to purchase the app.

Explanation: The developer's supply of software creates demand for it by earning income for the freelancers, who in turn use this income to buy the software. This cycle illustrates how production (app development) leads to both income (for freelancers) and consumption (of the app).

Example 3: Clothing Manufacturer and Retailers

Scenario: A clothing manufacturer produces garments which are then sold to retailers. Retailers sell these clothes to consumers, and the money from these sales is used to pay for the clothes they buy from the manufacturer.

Explanation: The manufacturer's supply of clothes leads to demand for those clothes by retailers and consumers. The income from selling clothes at the retail level goes back into demand for new clothes from the manufacturer, creating a continuous cycle of supply and demand.

Example 4: Construction Company

Scenario: A construction company builds homes. The workers on the construction site earn wages, which they use to buy various goods and services in the economy, including potentially the homes built by their company or others.

Explanation: The construction of homes (supply) generates wages for the workers, which in turn fuels demand for housing and other products. This example shows how the supply of labor in construction creates demand for consumer goods.

Example 5: Educational Services

Scenario: A university educates students. These students, after graduating, enter the workforce, earning salaries which they partly use to pay back student loans, but also to consume goods and services.

Explanation: The supply of education (knowledge and skills) creates demand for consumer goods as educated individuals enter the workforce with higher earning potential, thus increasing their consumption capacity.

Key Points:

Income Generation: Every instance of production generates income for someone, which is then used to demand other goods and services.

Economic Cycle: Production and consumption are part of a continuous cycle where one's supply becomes another's demand.

Market Equilibrium: In theory, under Say's Law, markets should naturally balance out because the act of production inherently creates the demand for consumption.

These examples show how, in a free market without external interference, the act of supplying goods or services creates the demand for other goods or services through the mechanism of income distribution. However, Say's Law is often debated, especially in light of economic recessions or when considering factors like savings rates, technological unemployment, or market imperfections.