As a matter of historical accuracy, it seems clear that Say never actually wrote down this law and that it oversimplifies his beliefs, but the law lives on as useful shorthand for summarizing a point of view. This income allows the owners to purchase the amount of output that was produced. While widget workers may not want to spend their entire paycheck on widgets, they will want to buy something , if not what they produced then something some other workers produced.
In the aggregate, supply creates its own demand, or more generally, aggregate supply drives the economy while aggregate demand responds passively. Figure 2. When Keynes wrote his great work The General Theory of Employment, Interest, and Money during the Great Depression in the s, he pointed out that during the Depression, the capacity of the economy to supply goods and services had not changed much.
Factories were closed and shuttered, but machinery and equipment had not disappeared. Technologies that had been invented in the s were not un-invented and forgotten in the s. Thus, Keynes argued that the Great Depression—and many ordinary recessions as well—were not caused by a drop in the ability of the economy to supply goods as measured by labor, physical capital, or technology. If supply always creates exactly enough demand at the macroeconomic level, then it is hard to understand why periods of recession and high unemployment should ever occur.
To be sure, even if total supply always creates an equal amount of total demand, the economy could still experience a situation of some firms earning profits while other firms suffer losses.
Nevertheless, a recession is not a situation where all business failures are exactly counterbalanced by an offsetting number of successes. A recession is a situation in which the economy as a whole is shrinking in size, business failures outnumber the remaining success stories, and many firms end up suffering losses and laying off workers.
Over periods of some years or decades, as the productive power of an economy to supply goods and services increases, total demand in the economy grows at roughly the same pace. However, over shorter time horizons of a few months or even years, recessions, or even depressions, occur in which firms, as a group, seem to face a lack of demand for their products.
Factories were closed and shuttered, but machinery and equipment had not disappeared. Technologies that had been invented in the s were not un-invented and forgotten in the s. This belief of the classical economists was based on the views of a French economist, J. Say Say made popular the ideas of Adam Smith in France and on the European continent. His law of markets which Galbraith described as having had the status of an article of faith with classical economists for over a hundred years is the formal expression of the idea that widespread and involuntary unemployment because of general over-production is impossible.
In other words, there cannot be any involuntary unemployment because of a deficiency of effective demand or total demand. In his analysis of the market mechanism, J. When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest the value should vanish in his hands.
Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.
He asserted that there cannot be any general over-production or general unemployment in the economy as whatever is produced is automatically consumed. In other words, every producer who brings goods lo the market does so only to exchange them for other goods. Say believed that people did not work for its own sake but to obtain other goods and services that go to satisfy their wants. The organisation of the economy was simple under which people spent on tools and consumer goods. Saving and investment were not separate processes.
The producer sold his product and not his labour. Products were exchanged for products. By producing, then tie necessarily becomes either the consumer of his own goods or the purchaser and consumer of the goods of some other person.
Productions are always bought by productions; money is only the medium by which the exchange is effected. Say believed that during the process of production necessary purchasing power is generated which absorbs the additional supply, for example, when a new car is manufactured, necessary purchasing power is simultaneously generated in the form of wages, profits etc. Hence there is no possibility of the aggregate demand becoming deficient.
So conceived, it illuminates the truth that the main source of demand is the How of factor incomes generated from the process of production itself. A new productive process, by paying out income to its employed factors, generates demand at the same time that it adds to supply.
He admitted that specific commodities might be overproduced but a general glut in the sense of a general depression was unthinkable, for the very process of production created the required effective demand necessary to absorb total output. If, however, due to some mistake, over-production comes to exist in respect of a particular industry, it will be corrected automatically when businessmen suffer losses and switch over from the production of goods they cannot sell to the production of goods they can sell.
Say was supported in his view by Ricardo and Mill for they also held the view that a general glut of the market could not occur. The orthodox statement as enunciated above is based, more or less, on the following assumptions:. The extent of the market is as big as the volume of products offered in exchange.
Mill took note of the depressed state of the market accompanying a crisis. It is a temporary derangement of markets caused by contraction of credit. Such maladjustments or disturbances do not prove that there are not powerful hidden forces tending to restore full employment equilibrium. Lack of confidence, Marshall felt, was the chief cause of depression. When confidence is shaken, though men have the power to purchase, they may not choose to use it. American orthodox economist, F. According to Prof.
Pigou, there cannot be any general unemployment in the labour market, if the labour is just prepared to accept a wage according to its marginal productivity.
In a free enterprise economy where there is free, perfect and thorough-going competition, if the labourers just accept low wages, unemployment would vanish completely except seasonal and frictional unemployment. According to classical school, basic determinant of the volume of employment at any given time is the level of wages.
If, however, there is unemployment, i. Classicals, therefore, held the view that if unemployment persisted for a long time, it must be ascribed to wage rigidity on account of the imperfections of labour market. Such conditions did prevail, according to Prof. Pigou, before the First World War and as a result there did not exist unemployment except in a temporary form after the War, however, circumstances have changed and certain new forces have arisen to weaken the competitive forces in the labour market, for example, minimum wage, laws, collective bargaining, growth of trade unions, unemployment insurance, arrangements between workers and employers, group pressures and government intervention.
These factors have gone a long way to make the labour markets imperfect and hence the chances of unemployment have multiplied. Therefore, reduction in wage rates cannot solve unemployment. In other words, every output brings along with it the necessary purchasing power in circulation which will lead to its sale, so that there is no over-production.
Since supply creates its own demand, hence general unemployment and over-production are impossible.
0コメント