Classical Economics and Say’s Law

On Classical Economics

Say’s Law in Classical economic involved six major propositions:

  1. The total factor payments received for producing a given volume (or value) of output are necessarily sufficient to purchase that volume (or value) of output.
  2. There is no loss of purchasing power anywhere in the economy, for people save only to the extent of their desire to invest and do not hold money beyond their transactions needs during the current period.
  3. Investment is only an internal transfer, not a net reduction, of aggregate demand. The same amount that could have been spent by the thrifty consumer will be spend by the capitalist and/or the workers in the investment good sector.
  4. In real terms, supply equals demand ex ante, since each individual produces only because of, and to the extent of, his demand for other goods (Sometimes this doctrine was supported by demonstrating that supply equals demand ex post).
  5. A higher rate of savings will cause a higher rate of subsequent growth in aggregate output.
  6. Disequilibrium in the economy can exist only because the internal proportions of output differ from consumers’ preferred mix – not because output is excessive in the aggregate. In short, this implied that there was no such thing as an equilibrium level of national income.

The first three proposition were never in dispute among any of the recognized economists of the classical period, orthodox or dissenting. These propositions served to refute popular fears that the rapidly growing output and sharp depression of that period implied that some absolute limit to economic growth had been reached. The general glut economists were as zealous in refuting these popular notions as were the supporters of Say’s Law…

…The last three propositions were the focus of controversy. The fundamental disagreement was over the classical denial of an equilibrium aggregate output (number 6).

References:

1. Sowell, Thomas. On Classical Economics. New Haven: Yale UP, 2006. Print. 26-27.

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