# Say's Law Explained: Market Theory & Implications for Economic Growth

> **Definition**
>
> Say's Law of Markets is a classical economic theory stating that the supply of a good or service creates demand for that good or service.

## What Is Say's Law of Markets?

Say's Law of Markets is an economic theory that links production to demand creation. The originator of the theory, French economist [Jean-Baptiste Say](https://www.investopedia.com/terms/j/jean-baptiste-say.asp), believed that production, not money, fuels economic demand and growth. That is, the income generated by past production and sale of goods is the source of spending that creates the demand to purchase current production. Say's Law is found in Say's 1803 book, "Treatise on Political Economy, Or, The Production, Distribution, and Consumption of Wealth."

### Key Takeaways

*   Say's Law suggests that production generates the income that fuels demand, challenging the idea that money alone drives economic growth.
*   Say's Law emphasizes production over consumption as a pathway to economic prosperity, advocating for minimal government interference in markets.
*   The theory holds that deficiencies in demand stem from failures in past production, not a lack of money.
*   Say's Law remains influential, especially among supply-side economists who support policy measures to boost production.
*   Keynesian economics critiques Say's Law, advocating for government intervention to stimulate demand during economic downturns.

## How Say’s Law Shapes Economic Thought

Say's Law of Markets was developed by the French classical economist and journalist, Jean-Baptiste Say. Say was influential because his theories addressed how a society creates wealth and the nature of economic activity. To have the means to buy, a buyer must first have sold something, Say reasoned. So, the source of demand is prior to the production and sale of goods for money, not money itself. In other words, a person's ability to demand goods or services from others is predicated on the income produced by that person's own past acts of production.

> **Important**
>
> Say's Law says that a buyer's ability to buy is based on the buyer's successful past production for the marketplace.

Say's Law opposes the mercantilist idea that [money](https://www.investopedia.com/terms/m/money.asp) is wealth's source. Under Say's Law, money functions solely as a medium to exchange the value of previously produced goods for new goods as they are produced and brought to market. In turn, by their sale, they produce money income that fuels demand to subsequently purchase other goods in an ongoing process of production and indirect exchange. To Say, money was simply a means to transfer real economic goods, not an end in itself.

Say's Law suggests that current demand shortfalls happen when past production didn't generate income to buy new goods. Say went on to state that such deficiencies of production of some goods would, under normal circumstances, be relieved before long by the inducement of profits to be made in producing the goods that are in short supply.

However, Say noted that ongoing disasters or government interference can cause lasting scarcity or surplus of goods. Say's Law supports minimal government interference in markets and favors [laissez-faire economics](https://www.investopedia.com/terms/l/laissezfaire.asp).

![Jean-Baptiste Say](https://www.investopedia.com/thmb/CZV_Gn2PUagH0Ypp20C-_aG12Uw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/jean-baptiste-say_round3-4b8d65fd5fde497296e774cb6f8008c4.png)

*— Investopedia / Alison Czinkota*

## The Economic Impact of Say's Law Today

Say drew four conclusions from his law. 

1.  More producers and diverse products boost an economy's prosperity. Conversely, non-producers drag it down.
2.  The success of one producer or industry will benefit other producers and industries whose output they subsequently purchase, and businesses will be more successful when they locate near or trade with other successful businesses. Encouraging production and investment in neighboring countries also benefits the domestic economy.
3.  The importation of goods, even at a trade deficit, is beneficial to the domestic economy.
4.  Encouraging consumption harms the economy. Policy should promote industry while letting market incentives guide specific production choices. 

Say's Law thus contradicted the popular [mercantilist](https://www.investopedia.com/terms/m/mercantilism.asp) view that money is the source of wealth, that the economic interests of industries and countries are in conflict with one another, and that imports are harmful to an economy.

## Say’s Law in Modern Economic Theories and Criticisms

Say's Law still lives on in modern neoclassical economic models, and it has also influenced [supply-side economists](https://www.investopedia.com/articles/05/011805.asp). Supply-side economists especially believe that tax breaks for businesses and other policies intended to spur production, without distorting economic processes, are the best prescription for economic policy, in agreement with the implications of Say's Law.

Austrian economists also hold to Say's Law. Say's recognition of production and exchange as processes occurring over time, focus on different types of goods as opposed to aggregates, emphasis on the role of the entrepreneur to coordinate markets, and conclusion that persistent downturns in economic activity are usually the result of government intervention are all particularly consistent with Austrian theory. 

Say’s Law was later simply (and misleadingly) summarized by economist John Maynard Keynes in his 1936 book "General Theory of Employment, Interest and Money" in the famous phrase, "supply creates its own demand," though Say himself never used that phrase. Keynes rewrote Say's Law, then argued against his own new version to develop his macroeconomic theories. 

Keynes reinterpreted Say's Law as a statement about macroeconomic aggregate production and spending, in disregard of Say's clear and consistent emphasis on the production and exchange of various particular goods against one another. Keynes then concluded that the [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp) appeared to overturn Say's Law. Keynes' revision of Say's Law led him to argue that an overall glut of production and deficiency of demand had occurred and that economies could experience crises that market forces could not correct.

[Keynesian economics](https://www.investopedia.com/terms/k/keynesianeconomics.asp) argues for economic policy prescriptions that are directly contrary to the implications of Say's Law. Keynesians recommend that governments should intervene to stimulate demand—through expansionary fiscal policy and money printing—because people hoard cash in hard times and during liquidity traps.

## What Does Say's Law Hold in Simple Terms?

Say's Law holds that production drives demand, as the production and sale of goods creates the income that makes the purchase of other goods possible. This differs from the idea that money itself is the source of demand.

## What Is Law of Supply?

In economics, the law of supply states that as prices for goods increase, so does the quantity produced. Conversely, as prices fall, so does supply.

## What Are Implications of Say's Law in Present?

Say's Law continues to hold influence in modern economics, particularly among supply-side economists. Supply-side economists typically contend that increased supply drives economic growth. As such, they support policies aimed at stimulating supply, such as reduced regulation or tax breaks.

## The Bottom Line

Say's Law, from Jean-Baptiste Say's 19th century economic theory, challenges mercantilist views by arguing against the notion that money itself is the source of wealth and instead prioritizes production and free market principles. It asserts that production is the primary driver of demand through the income it generates. Introduced in 1803, Say’s Law continues to influence modern economics, endorsed as it is by supply-side and Austrian economists who advocate for policies that bolster production. Keynesian economists criticize Say's Law for perceived limitations in addressing demand shortages, especially during economic downturns, like the Great Depression.

> **Article Sources**
>
> 1.  Jean Baptiste Say. "[A Treatise on Political Economy, Or, the Production, Distribution, and Consumption of Wealth](https://books.google.com/books?id=WkaPTSyM8E4C)," Page 136-144. Grigg & Elliot, 1834.
>     
> 2.  John Maynard Keynes. "[General Theory of Employment, Interest and Money](https://books.google.com/books/about/General_Theory_Of_Employment_Interest_An.html?id=xpw-96rynOcC)," Page 16-20. Atlantic Publishers & Dist, 2016.